<PAGE> 1
As filed with the Securities and Exchange Commission on August 12, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13 (e) (1)
OF THE SECURITIES EXCHANGE ACT OF 1934)
--------------------
TELE-COMMUNICATIONS, INC.
(NAME OF ISSUER)
TELE-COMMUNICATIONS, INC.
(NAME OF PERSON(S) FILING STATEMENT)
TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK AND
TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK
(TITLE OF CLASS OF SECURITIES)
87924V101 (SERIES A)
87924V200 (SERIES B)
(CUSIP NUMBER OF CLASS OF SECURITIES)
--------------------
STEPHEN M. BRETT, ESQ.
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111-3000
(303) 267-5500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF
OF THE PERSON(S) FILING STATEMENT)
--------------------
COPY TO:
ELIZABETH M. MARKOWSKI, ESQ.
BAKER & BOTTS, L.L.P.
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022-6030
(212) 705-5000
--------------------
AUGUST 12, 1997
(DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS)
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
====================================================================================================
TRANSACTION VALUATION(1) AMOUNT OF FILING FEE
====================================================================================================
<S> <C>
$3,576,508,311.00 $715,302.00
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</TABLE>
[ ] Check box if any part of the fee is offset as provided by Rule 0-11
(a) (2) and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration number, or the form or
schedule and the date of its filing.
Amount Previously Paid: N/A
Form of Registration No.: N/A
Filing Party: N/A
Date Filed: N/A
- -------------------------
(1) Estimated solely for purposes of calculating the fee in accordance
with Rule 0-11 under the Securities Exchange Act of 1934. Based upon (a) the
average of the high and low sales prices as of August 6, 1997 of the Series A
TCI Group Common Stock ($17.47), multiplied by the number of shares of such
series that the issuer, Tele-Communications, Inc. (the "Company"), is offering
to acquire (188,661,300 shares) and (b) the average of the high and low sales
prices as of August 6, 1997 of the Series B TCI Group Common Stock ($17.25),
multiplied by the number of shares of such series that the Company is offering
to acquire (16,266,400 shares).
<PAGE> 2
ITEM 1. SECURITY AND ISSUER.
(a) The issuer of the securities to which this statement relates
is Tele-Communications, Inc., a Delaware corporation (the "Company"). The
principal executive offices of the Company are located at Terrace Tower II,
5619 DTC Parkway, Englewood, Colorado 80111-3000.
(b) The Company is seeking to acquire shares of
Tele-Communications, Inc. Series A TCI Group Common Stock, par value $1.00 per
share (the "Series A TCI Group Common Stock"), and shares of
Tele-Communications, Inc. Series B TCI Group Common Stock, par value $1.00 per
share (the "Series B TCI Group Common Stock" and, together with the Series A
TCI Group Common Stock, the "TCI Group Common Stock"). The Company is offering
to exchange (i) one share of Tele-Communications, Inc. Series A TCI Ventures
Group Common Stock, par value $1.00 per share (the "Series A TCI Ventures Group
Common Stock"), for each share of Series A TCI Group Common Stock properly
tendered and not validly withdrawn, up to 188,661,300 shares of Series A TCI
Group Common Stock, and (ii) one share of Tele-Communications, Inc. Series B
TCI Ventures Group Common Stock, par value $1.00 per share (the "Series B TCI
Ventures Group Common Stock" and, together with the Series A TCI Ventures Group
Common Stock, the "TCI Ventures Group Common Stock"), for each share of Series
B TCI Group Common Stock properly tendered and not validly withdrawn, up to
16,266,400 shares of Series B TCI Group Common Stock, upon the terms and
subject to the conditions set forth in the Offering Circular of the Company,
dated August 7, 1997 (the "Offering Circular"), and the related Letters of
Transmittal (respectively, the "Series A Exchange Offer" and the "Series B
Exchange Offer" and together, the "Exchange Offers"). Copies of the Offering
Circular, the Letter of Transmittal relating to the Series A Exchange Offer and
the Letter of Transmittal relating to the Series B Exchange Offer are filed
herewith as Exhibits (a)(1), (a)(2) and (a)(3), respectively. Information with
respect to the numbers of shares of Series A TCI Group Common Stock and Series
B TCI Group Common Stock outstanding is set forth in the Offering Circular
under "THE EXCHANGE OFFERS--General--Series A Exchange Offer" and "--Series B
Exchange Offer," respectively, and is incorporated herein by reference.
Officers, directors and affiliates of the Company that own TCI Group Common
Stock may participate in the Exchange Offers on the same basis as all other
holders of TCI Group Common Stock. Definitive information with respect to
their participation in the Exchange Offers will not be available to the Company
until the consummation thereof.
(c) The information in the Offering Circular under "SUMMARY--Price
Range of Common Stock" is incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The consideration being offered in the Exchange Offers
consists of shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock of TCI as described in the Offering Circular under
"SUMMARY--The Exchange Offers--Certain Effects of
2
<PAGE> 3
the Exchange Offers," and "THE EXCHANGE OFFERS--General--Series A Exchange
Offer" and "--Series B Exchange Offer" which are incorporated herein by
reference.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
The information with respect to the purposes of the Exchange Offers is
set forth in the Offering Circular under the "THE EXCHANGE
OFFERS--General--Reasons for the Exchange Offers," which information is
incorporated herein by reference. The shares of TCI Group Common Stock
acquired by the Company in the Exchange Offers will be retired. The Company
presently has no plans or proposals which relate to or would result in any of
the events listed in Items 3(a) through 3(j) of Schedule 13E-4, except as set
forth below.
(a) The information in the Offering Circular under "THE EXCHANGE
OFFERS--Interests of Directors and Executive Officers; Transactions and
Arrangements Concerning TCI Group Common Stock" is incorporated herein by
reference.
(e) The capitalization of the Company will change as a result of
the issuance of TCI Ventures Group Common Stock. The information in the
Offering Circular on the Cover Page and under "SUMMARY--Capitalization of the
Company," "--Capitalization of the TCI Group," and "--Capitalization of the TCI
Ventures Group" and under "THE EXCHANGE OFFERS--Certain Effects of the Exchange
Offers" is incorporated herein by reference.
(g) The information in the Offering Circular under "DESCRIPTION OF
CAPITAL STOCK -- Common Stock" and "--Anti-Takeover Considerations" is
incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information in the Offering Circular under THE EXCHANGE
OFFERS--Interests of Directors and Executive Officers; Transactions and
Arrangements Concerning TCI Group Common Stock" is incorporated herein by
reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE ISSUER'S SECURITIES.
None, except as discussed in Item 4 above.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information in the Offering Circular under THE EXCHANGE OFFERS
- --Solicitation of Tenders; Fees and Expenses" is incorporated herein by
reference.
3
<PAGE> 4
ITEM 7. FINANCIAL INFORMATION.
(a) The information in the Offering Circular under
"SUMMARY--Selected Historical and Pro Forma Financial Data" and "FINANCIAL
INFORMATION" is incorporated herein by reference.
(b) The information in the Offering Circular under
"SUMMARY--Selected Historical and Pro Forma Financial Data" and "FINANCIAL
INFORMATION" is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.(2)
(a) The information in the Offering Circular regarding the
Revolving Credit Facility and the New Tax Sharing Agreement under "MANAGEMENT
AND ALLOCATION POLICIES" paragraphs (iii) and (ix) is incorporated herein by
reference. The information in the Offering Circular regarding the Telephony
Options, the Internet Options and the ownership by Mr. Tony Coelho of shares of
ETC under "THE EXCHANGE OFFERS--Interests of Directors and Executive Officers;
Transactions and Arrangements Concerning TCI Group Common Stock" is
incorporated herein by reference.
(b) The Company does not believe there are any material regulatory
approvals required in connection with the Exchange Offers.
(c) The information in the Offering Circular under "THE EXCHANGE
OFFERS--Certain Effects of the Exchange Offers" is incorporated herein by
reference.
(d) Not applicable.
(e) The information in the materials filed herewith as Item
9(a)(1) through Item 9(a)(11) is incorporated herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Form of Offering Circular, dated August 7, 1997.
(a)(2) Form of Letter of Transmittal relating to the Series A
Exchange Offer, along with guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
(a)(3) Form of Letter of Transmittal relating to the Series B
Exchange Offer, along with guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
- -------------------------
(2) Terms used in this Item 8 and not defined herein shall have the
meanings ascribed thereto in the Offering Circular.
4
<PAGE> 5
(a)(4) Letter to TCI Group Stockholders from John C. Malone, dated
August 7, 1997.
(a)(5) Form of Letter from the Company to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees relating to the
Series A Exchange Offer.
(a)(6) Form of Letter from the Company to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees relating to the
Series B Exchange Offer.
(a)(7) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients relating to the Series A
Exchange Offer.
(a)(8) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients relating to the Series B
Exchange Offer.
(a)(9) Form of Notice of Guaranteed Delivery relating to the Series A
Exchange Offer.
(a)(10) Form of Notice of Guaranteed Delivery relating to the Series B
Exchange Offer.
(a)(11) Form of Letter to Certain Unexchanged Holders.
(a)(12) Press Release, dated August 12, 1997.
(b) Not applicable.
(c)(1) Credit Agreement, effective as of the Expiration Date, between
Tele-Communications, Inc. and TCI Ventures Group, LLC.
(c)(2) Tax Sharing Agreement, among the TCI Ventures Group, the TCI
Group and the Liberty Media Group, effective for periods after
October 1, 1997.
(c)(3) Form of Option to Purchase Common Stock Agreement made as of
the 1st day of December 1996 by and among TCI Telephony
Services, Inc., Grantee and Tele-Communications, Inc.
(Incorporated herein by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-20421)).
(c)(4) Form of Option to Purchase Common Stock Agreement made as of
the 1st day of December 1996 by and among TCI Internet
Services, Inc., Grantee and Tele-Communications, Inc.
(Incorporated herein by reference to Exhibit 10.46 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-20421)).
(c)(5) Agreement Regarding Shares, as of April 3, 1996, among ETC
w/tci, Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc.
and Tony Coelho (Incorporated
5
<PAGE> 6
herein by reference to Exhibit 10.71 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-20421)).
(c)(6) Coelho Option Agreement, as of April 3, 1996, between ETC
w/tci, Inc. and Tony Coelho (Incorporated herein by reference
to Exhibit 10.73 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (Commission File No.
0-20421)).
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
6
<PAGE> 7
SIGNATURE
After due inquiry and to the best of the Company's knowledge and
belief, the undersigned certifies that the information set forth in this
Schedule 13E-4 is true, complete and correct.
Dated: August 12, 1997
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
---------------------------------------
Name: Stephen M. Brett
Title: Executive Vice President
7
<PAGE> 8
Index to Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
(a)(1) Form of Offering Circular, dated August 7, 1997.
(a)(2) Form of Letter of Transmittal relating to the Series A
Exchange Offer, along with guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
(a)(3) Form of Letter of Transmittal relating to the Series B
Exchange Offer, along with guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9.
(a)(4) Letter to TCI Group Stockholders from John C. Malone, dated
August 7, 1997.
(a)(5) Form of Letter from the Company to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees relating to the
Series A Exchange Offer.
(a)(6) Form of Letter from the Company to Brokers, Dealers,
Commercial Banks, Trust Companies and Nominees relating to the
Series B Exchange Offer.
(a)(7) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients relating to the Series A
Exchange Offer.
(a)(8) Form of Letter from Brokers, Dealers, Commercial Banks, Trust
Companies and Nominees to Clients relating to the Series B
Exchange Offer.
(a)(9) Form of Notice of Guaranteed Delivery relating to the Series A
Exchange Offer.
(a)(10) Form of Notice of Guaranteed Delivery relating to the Series B
Exchange Offer.
(a)(11) Form of Letter to Certain Unexchanged Holders.
(a)(12) Press Release, dated August 12, 1997.
(b) Not applicable.
(c)(1) Credit Agreement, effective as of the Expiration Date, between
Tele-Communications, Inc. and TCI Ventures Group, LLC.
(c)(2) Tax Sharing Agreement, among the TCI Ventures Group, the TCI
Group and the Liberty Media Group, effective for periods after
October 1, 1997.
(c)(3) Form of Option to Purchase Common Stock Agreement made as of
the 1st day of December 1996 by and among TCI Telephony
Services, Inc., Grantee and Tele-Communications, Inc.
(Incorporated herein by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-20421)).
(c)(4) Form of Option to Purchase Common Stock Agreement made as of
the 1st day of December 1996 by and among TCI Internet
Services, Inc., Grantee and Tele-Communications, Inc.
(Incorporated herein by reference to Exhibit 10.46 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-20421)).
(c)(5) Agreement Regarding Shares, as of April 3, 1996, among ETC
w/tci, Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc.
and Tony Coelho (Incorporated herein by reference to Exhibit 10.71
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-20421)).
(c)(6) Coelho Option Agreement, as of April 3, 1996, between ETC
w/tci, Inc. and Tony Coelho (Incorporated herein by reference
to Exhibit 10.73 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (Commission File No.
0-20421)).
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
</TABLE>
<PAGE> 1
OFFERING CIRCULAR
TELE-COMMUNICATIONS, INC.
OFFER TO EXCHANGE
SHARES OF SERIES A TCI VENTURES GROUP COMMON STOCK
FOR UP TO AN AGGREGATE OF 188,661,300 SHARES OF SERIES A TCI GROUP COMMON STOCK
AND
SHARES OF SERIES B TCI VENTURES GROUP COMMON STOCK
FOR UP TO AN AGGREGATE OF 16,266,400 SHARES OF SERIES B TCI GROUP COMMON STOCK
THE EXCHANGE OFFERS, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS THE EXCHANGE OFFERS
ARE EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE "EXPIRATION DATE").
TCI GROUP COMMON STOCK TENDERED PURSUANT TO THE EXCHANGE OFFERS MAY BE WITHDRAWN
AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
Tele-Communications, Inc., a Delaware corporation ( the "Company" or "TCI")
hereby offers, upon the terms and subject to the conditions set forth in this
Offering Circular and in the related Letter of Transmittal (which together
constitute the "Series A Exchange Offer") to issue shares of
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock (the "Series
A TCI Ventures Group Common Stock") in exchange for up to 188,661,300 shares
(the "Series A Maximum") of Tele-Communications, Inc. Series A TCI Group Common
Stock ("Series A TCI Group Common Stock"). Each share of Series A TCI Group
Common Stock validly tendered on or prior to the Expiration Date and not
properly withdrawn, up to the Series A Maximum, will be exchanged for one share
of Series A TCI Ventures Group Common Stock (the "Series A Exchange Ratio").
The Company also hereby offers, upon the terms and subject to the
conditions set forth in this Offering Circular and in the related Letter of
Transmittal (which together constitute the "Series B Exchange Offer") to issue
shares of Tele-Communications, Inc. Series B TCI Ventures Group Common Stock
(the "Series B TCI Ventures Group Common Stock" and, together with the Series A
TCI Ventures Group Common Stock, the "TCI Ventures Group Common Stock") in
exchange for up to 16,266,400 shares (the "Series B Maximum") of
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"). Each share of Series B TCI Group Common Stock validly
tendered on or prior to the Expiration Date and not properly withdrawn, up to
the Series B Maximum, will be exchanged for one share of Series B TCI Ventures
Group Common Stock (the "Series B Exchange Ratio" and, together with the Series
A Exchange Ratio, the "Exchange Ratio").
(Continued on next page)
---------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS OFFERING CIRCULAR HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Offering Circular is August 7, 1997.
<PAGE> 2
(Continued from preceding page)
The Series A Exchange Offer and the Series B Exchange Offer are
collectively referred to herein as the "Exchange Offers". Consummation of the
Exchange Offers is subject to the satisfaction of certain conditions, including,
but not limited to, stockholder approval, at the 1997 annual meeting of
stockholders to be held on August 28, 1997 (the "Annual Meeting"), of certain
amendments to the Company's Restated Certificate of Incorporation (the "Company
Charter") to, among other things, redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock ("Series A Telephony Group Common Stock")
and the Tele-Communications, Inc. Series B Telephony Group Common Stock ("Series
B Telephony Group Common Stock") as the Series A TCI Ventures Group Common Stock
and Series B TCI Ventures Group Common Stock, respectively, change the name of
the Telephony Group to the TCI Ventures Group, redefine the assets and
liabilities attributed to such Group and provide for the reservation of shares
of Series A TCI Ventures Group Common Stock for issuance upon conversion,
exercise or exchange of certain convertible notes and options (collectively, the
"Charter Amendments"). The Exchange Offers are not conditioned upon any minimum
number of shares of TCI Group Common Stock being tendered. See "THE EXCHANGE
OFFERS."
The TCI Ventures Group Common Stock is intended to reflect the separate
performance of the Company's TCI Ventures Group. The TCI Ventures Group includes
TCI's principal international assets and substantially all of TCI's non-cable
and non-programming domestic assets. Specifically, the assets that are
attributed to the TCI Ventures Group are comprised principally of (i) TCI's 85%
equity interest (representing a 92% voting interest) in Tele-Communications
International, Inc. ("International"), which is the Company's primary vehicle
for the conduct of its international cable, telephony and programming businesses
(other than those international programming businesses attributed to the Liberty
Media Group), (ii) TCI's principal interests in the domestic wireless and
wireline telephony businesses (the "Telephony Business"), consisting primarily
of the Company's investment 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 residential and
business customers nationwide under the Sprint(R) brand (a registered trademark
of Sprint Communications Company, L.P.), the Company's 30% equity interest
(representing a 37% voting interest) in Teleport Communications Group Inc.
("Teleport" or "TCG"), a competitive local exchange carrier, and the Company's
wholly owned subsidiary Western Tele-Communications, Inc. ("WTCI"), which
provides long distance transport of video, voice and data traffic and other
telecommunications services to telecommunications carriers on a wholesale basis
using primarily a digital broadband microwave network located throughout a 12
state region, (iii) TCI's 40% equity interest (representing an 85% voting
interest) in United Video Satellite Group, Inc. ("UVSG"), which provides
satellite-delivered video, audio, data and program promotion services to cable
television systems, satellite dish owners, radio stations and private network
users, primarily throughout North America, (iv) TCI's 39% equity interest
(representing a 72% voting interest) in At Home Corporation ("@Home"), a
provider of high speed multimedia Internet services, and the Company's interest
in other Internet-related assets, and (v) other assets, including National
Digital Television Center, Inc. ("NDTC"), a wholly owned subsidiary of the
Company that provides digital compression and authorization services to
programming suppliers and to video distribution outlets, ETC w/tci, Inc.
("ETC"), an 80% owned subsidiary of the Company that develops and distributes
for-profit education, training and communications services and products, and TCI
SUMMITrak of Texas, Inc. and TCI SUMMITrak LLC (collectively, "SUMMITrak"),
wholly owned subsidiaries of the Company that provide an integrated
network-based information management system currently to certain of TCI's cable
systems. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.) The stocks of International,
TCG, UVSG and @Home are traded on the National Market tier of The Nasdaq Stock
Market.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
ANY SECURITYHOLDER AS TO WHETHER TO TENDER OR REFRAIN FROM
(ii)
<PAGE> 3
TENDERING TCI GROUP COMMON STOCK PURSUANT TO THE EXCHANGE OFFERS. EACH
SECURITYHOLDER MUST MAKE HIS OR HER OWN DECISION, AND SHOULD REVIEW THIS
OFFERING CIRCULAR CAREFULLY BEFORE MAKING ANY DECISION, WITH RESPECT TO ANY
TENDER OF TCI GROUP COMMON STOCK PURSUANT TO THE EXCHANGE OFFERS. SEE "RISK
FACTORS."
The Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock, upon stockholder approval of the Charter Amendments, will be
series of the Company's common stock, $1.00 par value per share (the "Common
Stock"). The Company has four other authorized series of Common Stock of which
shares are outstanding: the Series A TCI Group Common Stock, the Series B TCI
Group Common Stock, the Tele-Communications, Inc. Series A Liberty Media Group
Common Stock ("Series A Liberty Media Group Common Stock") and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock ("Series B
Liberty Media Group Common Stock" and, together with the Series A Liberty Media
Group Common Stock, the "Liberty Media Group Common Stock"). In addition, the
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
have been authorized, but no shares have been issued. The TCI Group Common Stock
is intended to reflect the separate performance of the TCI Group, which prior to
the Expiration Date and the effectiveness of the Charter Amendments is comprised
of the Company's domestic cable and telephony distribution and communications
businesses (other than those attributed to the Telephony Group), international
cable, telephony and programming businesses, technology/venture capital
businesses, any other businesses and assets of the Company not attributed to
either the Liberty Media Group or the Telephony Group, and 100% of the common
stockholders' equity value of the Company attributable to the Telephony Group.
The Telephony Group presently consists of the Company's principal investments in
the Telephony Business. The assets to be attributed to the TCI Ventures Group
are currently included in the TCI Group and the Telephony Group. The Liberty
Media Group Common Stock is intended to reflect the separate performance of the
Liberty Media Group, which is presently comprised of the Company's businesses,
and investments in entities, that are engaged in the production, acquisition and
distribution through all available formats and media of branded entertainment,
educational and informational programming and software, including multimedia
products, and its investments in entities engaged in electronic retailing,
direct marketing, advertising sales relating to programming services,
infomercials and transaction processing, and the operation of UHF television
stations.
Upon effectiveness of the Charter Amendments, the TCI Ventures Group will
replace the Telephony Group and the assets and liabilities attributed to the TCI
Ventures Group will no longer be included in the TCI Group. Following the
issuance of shares of TCI Ventures Group Common Stock pursuant to the Exchange
Offers, the TCI Group Common Stock will be intended to reflect the separate
performance of the Company's domestic distribution and communications businesses
(other than the investments attributed to the TCI Ventures Group), and any other
businesses and assets of the Company not attributed to either the Liberty Media
Group or the TCI Ventures Group. The TCI Group, the Liberty Media Group and the
TCI Ventures Group are each referred to herein as a "Group" and, collectively,
as the "Groups."
Subject to certain conditions, the Company may at any time redeem all
outstanding shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock in exchange for shares owned by the Company of any
one or more Qualifying Subsidiaries of the Company that hold all of the assets
and liabilities then attributed to the TCI Ventures Group. Subject to certain
exceptions, if the Company disposes of all or substantially all of the assets of
the TCI Ventures Group (i.e., 80% on a current market value basis), the Company
will be required, at its option, either to (i) distribute to holders of the TCI
Ventures Group Common Stock an amount in cash and/or securities or other
property equal to their proportionate interest in the TCI Ventures Group Net
Proceeds of such disposition, either by special dividend or, subject to certain
restrictions, by redemption of all or part of the outstanding shares of TCI
Ventures Group Common Stock, or (ii) convert each outstanding share of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
into a number (or fraction) of shares of Series A TCI Group Common Stock and
Series B TCI Group Common Stock, respectively, equal in each case to 110% of the
average daily ratio over a specified trading period of the Market Value of one
share of Series A TCI Ventures Group Common Stock to the Market Value of one
share of Series A TCI Group Common Stock. Further, the
(iii)
<PAGE> 4
Company may in the sole discretion of its Board of Directors (the "Board of
Directors" or "Board") at any time convert each outstanding share of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
into a number (or fraction) of shares of Series A TCI Group Common Stock and
Series B TCI Group Common Stock, respectively, equal to the ratio of the value
(as determined on the basis of appraisals performed by investment banking firms)
of one share of TCI Ventures Group Common Stock to the average Market Value of
one share of Series A TCI Group Common Stock. Neither the Company Charter, nor
the Company Charter as amended by the Charter Amendments (the "Amended
Charter"), contains any provisions equivalent to the foregoing with respect to
the TCI Group Common Stock. The terms "Qualifying Subsidiaries," "TCI Ventures
Group Net Proceeds," and "Market Value" have the meanings ascribed to such terms
in "DESCRIPTION OF CAPITAL STOCK -- Common Stock."
Under the Amended Charter, each share of Series A TCI Ventures Group Common
Stock is entitled to one vote, and each share of Series B TCI Ventures Group
Common Stock is entitled to ten votes, generally voting as one class with the
TCI Group Common Stock, the Liberty Media Group Common Stock and any Preferred
Stock entitled to vote. Each share of Series B TCI Ventures Group Common Stock
is convertible at the option of the holder into one share of Series A TCI
Ventures Group Common Stock. The Series A TCI Ventures Group Common Stock is not
convertible into Series B TCI Ventures Group Common Stock. No shares of TCI
Ventures Group Common Stock have been issued as of the date of this Offering
Circular. The Company Charter and the Amended Charter include provisions
equivalent to the foregoing with respect to the Series A TCI Group Common Stock
and the Series B TCI Group Common Stock.
For a description of the TCI Ventures Group Common Stock, see
"SUMMARY -- Summary Comparison of Terms of TCI Group Common Stock and TCI
Ventures Group Common Stock," and "DESCRIPTION OF CAPITAL STOCK -- Common
Stock."
HOLDERS OF TCI GROUP COMMON STOCK, LIBERTY MEDIA GROUP COMMON STOCK AND TCI
VENTURES 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 AND FINANCIAL
CONDITION OF THE OTHER GROUPS. LIKEWISE, EVENTS AFFECTING ONE GROUP COULD AFFECT
THE MARKET PRICE OF THE TCI GROUP COMMON STOCK, THE LIBERTY MEDIA GROUP COMMON
STOCK OR THE TCI VENTURES GROUP COMMON STOCK.
SEE "RISK FACTORS" BEGINNING ON PAGE 35 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFERS.
There is no existing trading market for the TCI Ventures Group Common
Stock. Trading of the TCI Ventures Group Common Stock following the issuance
thereof may occur in the over-the-counter market. The Company has applied for
inclusion of the Series A TCI Ventures Group Common Stock and the Series B TCI
Ventures Group Common Stock in the National Market tier of The Nasdaq Stock
Market under the symbols "TCIVA" and "TCIVB," respectively.
IMPORTANT
A holder of TCI Group Common Stock desiring to participate in the Exchange
Offers must either (i) complete and sign the applicable Letter of Transmittal,
or a facsimile thereof, in accordance with the instructions in the Letter of
Transmittal and mail or deliver it, together with the certificates evidencing
the shares of the applicable series of TCI Group Common Stock and any other
required documents to The Bank of New York (the "Exchange Agent") or tender such
shares pursuant to the procedure for book-entry transfer set forth in "THE
EXCHANGE OFFERS -- Procedure for Tendering -- Book-Entry Delivery" or (ii)
request his or her broker, dealer, commercial bank, trust company or other
nominee to effect the transaction. A holder of TCI Group Common Stock whose
shares of TCI Group Common Stock are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such person if such
holder desires to participate in the Exchange Offers.
(iv)
<PAGE> 5
A holder of TCI Group Common Stock who desires to tender TCI Group Common
Stock in the Exchange Offers and whose certificates representing such shares are
not immediately available or who cannot comply with the procedure for book-entry
transfer on a timely basis must tender such shares of TCI Group Common Stock,
Letter of Transmittal and any other required documents pursuant to the
guaranteed delivery procedure set forth in "THE EXCHANGE OFFERS -- Procedure for
Tendering -- Guaranteed Delivery."
Questions and requests for assistance may be directed to Georgeson &
Company Inc. (the "Information Agent") at the address and telephone numbers set
forth on the back cover of this Offering Circular. Requests for additional
copies of this Offering Circular, the Letter of Transmittal and other related
documents may be directed to the Information Agent or to brokers, dealers,
commercial banks or trust companies.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER ANY HOLDER OF TCI GROUP COMMON STOCK SHOULD TENDER TCI
GROUP COMMON STOCK PURSUANT TO THE EXCHANGE OFFERS. NO PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN
THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS OFFERING CIRCULAR OR IN
THE RELATED LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATIONS,
INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR NOR ANY OFFERING
OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
This Offering Circular does not constitute an offer or solicitation with
respect to any securities other than the securities covered by this Offering
Circular, or an offer or solicitation to or by any person in any jurisdiction in
which such offer or solicitation would be unlawful and the Company will not
accept tenders from stockholders in any jurisdiction in which such acceptance
would not be in compliance with the securities or blue sky laws of such
jurisdiction.
The Exchange Offers are being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act") afforded by Section 3(a)(9) thereof. The Company
therefore will not pay any commission or other renumeration to any broker,
dealer, salesman or other person for soliciting tenders of TCI Group Common
Stock. Officers, directors and regular employees of the Company may solicit
tenders of TCI Group Common Stock but they will not receive additional
compensation therefor.
Capitalized terms used and not otherwise defined above have the meanings
ascribed to them elsewhere in this Offering Circular. See Annex A -- Index of
Certain Defined Terms.
AVAILABLE INFORMATION
The Company's 1996 Annual Report to Stockholders and its Proxy Statement
with respect to the Annual Meeting have been filed with the Securities and
Exchange Commission ("SEC"). Copies of such documents, as well as of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, as
amended by Amendment No. 1, Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, Current Reports on Form 8-K, dated January 22, 1997 and March 5,
1997, and documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Offering Circular and prior to
the Expiration Date, may be obtained from the SEC at the places and in the
manner provided below or from the Company as provided below.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information filed with the SEC can be
(v)
<PAGE> 6
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the following Regional Offices of the SEC: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary
Plaza, 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. Reports, proxy
statements, information statements and other information concerning the Company
can also be inspected at the offices of the National Association of Securities
Dealers, Inc. ("NASD"), Reports Section, at 1735 K Street, N.W., Washington,
D.C. 20006.
In accordance with Rule 13e-4 under the Exchange Act, the Company has filed
with the SEC an Issuer Tender Offer Statement on Schedule 13E-4 (the "Schedule
13E-4") with respect to the Exchange Offers. This Offering Circular does not
include all of the information set forth in the Schedule 13E-4, as permitted by
the rules and regulations of the SEC. The Schedule 13E-4, including any
amendments, schedules and exhibits filed or incorporated by reference as a part
thereof, are available for inspection and copying as set forth above (except
that such Schedule may not be available in the regional offices of the SEC).
Statements contained in this Offering Circular as to the contents of any
contract or other document referred to herein are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Schedule 13E-4, and each such statement
shall be deemed qualified in its entirety by such reference.
The Company will provide without charge to each person to whom an Offering
Circular is delivered, upon the written or oral request of such person, a copy
of any or all of the documents referenced above, other than certain exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into the documents referenced above). Such requests should be addressed to
Stephen M. Brett, Esq., Executive Vice President and General Counsel,
Tele-Communications, Inc., Terrace Tower II, 5619 DTC Parkway, Englewood,
Colorado 80111-3000; telephone (303) 267-5500.
(vi)
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... v
SUMMARY..................................................... 1
The Company............................................... 1
TCI Ventures Group........................................ 1
The TCI Group............................................. 6
Reasons for the Exchange Offers........................... 7
The Exchange Offers....................................... 7
Summary Comparison of Terms of TCI Group Common Stock and
TCI Ventures Group Common Stock........................ 12
No Initial Inter-Group Interest........................... 23
Risk Factors.............................................. 24
Forward-Looking Statements................................ 24
Selected Historical and Pro Forma Financial Data.......... 25
Price Range of Common Stock............................... 29
Capitalization of the Company............................. 32
Capitalization of the TCI Group........................... 33
Capitalization of the TCI Ventures Group.................. 34
RISK FACTORS................................................ 35
Considerations Relating to the TCI Ventures Group Common
Stock.................................................. 35
Considerations Relating to the TCI Ventures Group
Entities............................................... 45
THE EXCHANGE OFFERS......................................... 75
General................................................... 75
Extension, Termination and Amendment...................... 79
Procedure for Tendering................................... 80
Withdrawal Rights......................................... 82
Acceptance for Exchange; Delivery of Shares of TCI
Ventures Group Common Stock; Transfer Taxes............ 83
Certain Conditions to the Exchange Offers................. 84
Interests of Directors and Executive Officers;
Transactions and Arrangements Concerning TCI Group
Common Stock........................................... 86
Certain Effects of the Exchange Offers.................... 90
Exchange Agent and Information Agent...................... 92
Solicitation of Tenders; Fees and Expenses................ 92
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................... 93
Tax Implications to Stockholders.......................... 93
Tax Implications to the Company........................... 95
DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP....... 96
General................................................... 96
International Cable, Telephony and
Programming -- International........................... 100
Domestic Telephony........................................ 115
Diversified Satellite Communications...................... 134
Internet Services......................................... 141
Other Assets.............................................. 148
MANAGEMENT AND ALLOCATION POLICIES.......................... 152
</TABLE>
(vii)
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF CAPITAL STOCK................................ 159
General................................................... 159
Common Stock.............................................. 160
Preferred Stock........................................... 192
Anti-Takeover Considerations.............................. 193
NO INITIAL INTER-GROUP INTEREST IN THE TCI VENTURES GROUP... 195
DIVIDEND POLICY............................................. 199
FINANCIAL INFORMATION....................................... F-1
Index..................................................... F-1
Tele-Communications, Inc. Condensed Pro Forma Combined
Financial Statements................................... F-2
TCI Ventures Group Condensed Pro Forma Combined Financial
Statements............................................. F-9
TCI Group Condensed Pro Forma Combined Financial
Statements............................................. F-15
Tele-Communications, Inc. and Subsidiaries................ F-22
TCI Ventures Group........................................ F-95
ANNEX A -- INDEX OF CERTAIN DEFINED TERMS................... A-1
ANNEX B -- GLOSSARY OF SELECTED TERMS....................... B-1
ANNEX C -- ILLUSTRATION OF CERTAIN TERMS.................... C-1
</TABLE>
(viii)
<PAGE> 9
SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Offering Circular.
Capitalized terms used in this summary and not otherwise defined have the
meanings ascribed to them elsewhere in this Offering Circular. See Annex
A -- Index of Certain Defined Terms. In addition, certain technical and other
terms used in this Offering Circular to describe the businesses of the entities
in which the TCI Ventures Group has an interest are defined in Annex
B -- Glossary of Selected Terms. As used herein, the terms "TCI" and the
"Company" mean Tele-Communications, Inc. and its consolidated subsidiaries,
unless the context indicates otherwise. Unless indicated otherwise, the
information contained in this Offering Circular assumes (i) that the
stockholders of the Company approve the Charter Amendments at the Annual Meeting
to, among other things, (w) redesignate TCI's Telephony Group Common Stock as
the TCI Ventures Group Common Stock, change the name of the Telephony Group to
the TCI Ventures Group and redefine the assets and liabilities attributed to
such Group, (y) make corresponding changes to the terms of the TCI Group Common
Stock and the Liberty Media Group Common Stock to reflect the redesignation of
the Telephony Group Common Stock as TCI Ventures Group Common Stock, and (z)
provide for the reservation of shares of Series A TCI Ventures Group Common
Stock for issuance upon conversion, exercise or exchange of certain convertible
notes and options and (ii) assuming such approval at the Annual Meeting, that
the Charter Amendments have been filed with the Secretary of State of Delaware
and have become effective.
THE COMPANY
The Company, through its subsidiaries and affiliates, is principally
engaged in the construction, acquisition, ownership, and operation of cable
television systems and the provision of satellite-delivered video entertainment,
information and home shopping programming services to various video distribution
media, principally cable television systems. The Company also has investments in
cable and telecommunications operations and television programming in certain
international markets as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies. The Company is a Delaware corporation and was
incorporated in 1994. TCI Communications, Inc. ("TCIC"), a wholly owned
subsidiary of the Company, and its predecessors have been engaged in the cable
television business since the early 1950's. The Company is a Delaware
corporation, and its executive offices are located at Terrace Tower II, 5619 DTC
Parkway, Englewood, Colorado 80111-3000. Its telephone number at that address is
(303) 267-5500.
TCI VENTURES GROUP
The TCI Ventures Group includes TCI's principal international assets and
substantially all of TCI's non-cable and non-programming domestic assets.
Specifically, the TCI Ventures Group consists principally of the following
assets and their related liabilities: (i) TCI's 85% equity interest
(representing a 92% voting interest) in International, which is the Company's
primary vehicle for the conduct of its international cable, telephony and
programming businesses (other than those international programming businesses
attributed to the Liberty Media Group), (ii) TCI's principal investments in the
Telephony Business, consisting primarily of the Company's investment in a series
of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband PCS, to
residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.) (the "PCS
Ventures"), the Company's 30% equity interest (representing a 37% voting
interest) in Teleport, a competitive local exchange carrier, and WTCI, a wholly
owned subsidiary of the Company that provides long distance transport of video,
voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in @Home, a provider of high speed
1
<PAGE> 10
multimedia Internet services, and (v) other assets, including NDTC, a wholly
owned subsidiary of the Company that provides digital compression and
authorization services to programming suppliers and to video distribution
outlets, ETC, an 80% owned subsidiary of the Company that develops and
distributes for-profit education, training and communication services and
products, and SUMMITrak, which provides an integrated network-based information
management system currently to certain of TCI's cable systems. (Percentage
equity and voting interests provided above have been rounded to the nearest
whole number and calculated as of June 30, 1997, except for percentage interests
in entities that are not consolidated subsidiaries which have been calculated as
of March 31, 1997 and except that the percentage equity and voting interests in
@Home have been adjusted to reflect the closing of its initial public offering
on July 11, 1997). The stocks of International, TCG, UVSG and @Home are traded
on the National Market tier of The Nasdaq Stock Market.
International Cable, Telephony and Programming. The TCI Ventures Group's
international cable, telephony and programming assets consist primarily of the
Company's interests in International. International, through its subsidiaries
and affiliates, operates multi-channel video and telecommunications distribution
networks in, and provides diversified programming services to, selected markets
outside the United States ("U.S."). International's activities are concentrated
in Europe, Latin America and The Caribbean, and Asia, Australia and New Zealand,
with particular focus at present on the United Kingdom ("U.K."), Argentina and
Japan. International has ownership interests in companies operating broadband
networks that, at December 31, 1996, provided cable television service to an
aggregate of approximately 2.9 million basic subscribers and, in the U.K.,
provided telephone service over approximately 947,000 telephone lines (a
customer may have multiple telephone lines). As of December 31, 1996,
International also had ownership interests in or managed 39 cable and satellite
programming services which were received by subscribers in various countries
outside the U.S. The Company owns 85% of the common stock of International and,
due to the Company's ownership of all of International's Series B common stock,
$1.00 par value per share ("TINTA Series B Common Stock") (which has greater per
share voting rights), approximately 92% of the combined voting power of
International's common stock. International's Series A common stock, $1.00 par
value per share ("TINTA Series A Common Stock") is traded on the National Market
tier of The Nasdaq Stock Market under the symbol "TINTA".
Included among International's cable and telephony distribution assets are
an indirect 27% interest in Telewest Communications plc ("Telewest") and a 40%
interest in Jupiter Telecommunications Co., Ltd. ("Jupiter"). Telewest and
Jupiter provide cable television and residential and business cable telephony in
the United Kingdom and Japan, respectively. International also has a 51%
ownership interest in Cablevision S.A. and a 100% interest in TCI Cablevision of
Puerto Rico, Inc. which provide cable television service in and around Buenos
Aires, Argentina and Puerto Rico, respectively.
International's programming interests include a 36% equity interest
(representing a 50% voting interest) in Flextech p.1.c. ("Flextech"), a 33%
interest in MultiThematiques, S.A. ("MultiThematiques") and a 50% interest in
Jupiter Programming Co., Ltd. ("JPC"). Flextech provides multi-channel video
programming to cable television and direct-to-home ("DTH") satellite providers
in the United Kingdom through its interest in 14 programming channels.
MultiThematiques and JPC provide multi-channel programming to cable television
and DTH satellite providers in France and Japan, respectively. Certain of the
MultiThematiques channels are also carried in Germany and Spain.
Through certain other joint ventures with strategic partners, International
has cable and telephony distribution and/or programming interests in Chile,
Mexico, Brazil, Poland, Ireland, Malta, Israel, France, Dominican Republic,
Singapore, Australia and New Zealand.
For a description of certain proposed restructurings by International of
certain of its assets, see "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- International Cable, Telephony and Programming -- International."
As used herein, the term "International" means Tele-Communications
International, Inc. and its consolidated subsidiaries, unless the context
indicates otherwise.
2
<PAGE> 11
Domestic Telephony. The TCI Ventures Group's telephony assets consist
primarily of (a) TCI's investments, held through TCI Telephony Holdings, Inc.
(together with its consolidated subsidiaries, "TCI Telephony"), a Delaware
corporation and an indirect wholly owned subsidiary of TCI, in the PCS Ventures,
a series of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband PCS, to
residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.), and its investment
in Teleport, which is a competitive local exchange carrier ("CLEC"), and (b) the
Company's wholly owned subsidiary WTCI, which provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region. The PCS
Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P.
(collectively, "Sprint PCS" or the "Sprint PCS Partnerships"), and PhillieCo,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox") and TCI (collectively, the "Sprint PCS
Partners"). The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI.
TCI has a 30% interest as a partner in each of the Sprint PCS Partnerships and a
35% interest as a partner in PhillieCo. As of March 31, 1997, TCI had a 30%
equity interest (which represented a 37% voting interest) in the outstanding
common stock of Teleport. See "-- Policy of Evaluating Assets".
Sprint PCS has announced its intention to become a leading provider of
wireless communications products and services in the United States. Sprint PCS
believes that it is the largest broadband wireless PCS company in the United
States in terms of total license coverage of "Pops," with licenses (including
those owned by licensees that have affiliated or intend to affiliate with Sprint
PCS, including PhillieCo) to provide service in 33 Major Trading Areas ("MTAs")
(including eight of the nation's ten largest MTAs) covering over 190 million
Pops at December 31, 1996. The term "Pops" refers to the population of a
geographic area covered by a license or group of licenses and, as used in this
Offering Circular, is based on the Donnelley Marketing Service estimate of the
December 31, 1995 population of a geographic area. In addition to PhillieCo,
Sprint PCS has affiliated with American PCS, L.P. ("APC"), which operates a
broadband PCS system in the Washington D.C./Baltimore MTA, the nation's first
commercially operational PCS system, and Cox Communications PCS, L.P. ("Cox
PCS"), which operates a broadband PCS system in the Los Angeles/San Diego MTA.
Sprint PCS has a 49% limited partnership interest in each of APC and Cox PCS.
Sprint PCS commenced initial commercial PCS operations late in the fourth
quarter of 1996, and as of July 15, 1997, had launched service in over 50 cities
in the U.S. Upon completion of the first phase of its PCS launch, which
management of Sprint PCS expects to be completed by the end of 1997, Sprint PCS
service will be available in 65 cities in the U.S., including 35 of the top 50
U.S. markets. As used herein, the terms "Sprint PCS" and "Sprint PCS
Partnerships" include the consolidated subsidiaries of Sprint Spectrum Holding
Company, L.P., unless the context indicates otherwise.
The TCI Ventures Group's wireline telephony investments currently consist
primarily of its interest held through TCI Telephony, in Teleport. Teleport, the
largest CLEC in the United States as measured by route miles, 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"(R) (a registered service mark of Teleport) 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, hospitals and educational institutions,
governmental agencies, long distance carriers and resellers, Internet service
providers, disaster recovery service providers and wireless communications
companies. TCG believes that it offers these customers technologically advanced
telecommunications services, as well as superior customer service, flexible
pricing and vendor and route diversity. As of March 31, 1997, Teleport operated
high-capacity state-of-the-art digital networks in 53 metropolitan markets,
including 18 of the 20 largest metropolitan areas. As used herein, the terms
"Teleport" and "TCG" mean Teleport Communications Group Inc. and its
consolidated subsidiaries, unless the context indicates otherwise.
In addition to Teleport, the TCI Ventures Group's wireline telephony
investments include a 50% partnership interest in Kansas City Fiber Network,
L.P. and a 40% partnership interest in NHT Partnership,
3
<PAGE> 12
each owned through TCI Telephony, and a 79% interest in New Jersey Fiber
Technologies, L.P., and a 43% interest in Louisville Lightwave, each owned
through members of the TCI Group. The foregoing companies are competitive access
providers ("CAPs") serving the metropolitan areas of Kansas City, Buffalo,
Morristown and New Brunswick, New Jersey, and Louisville and Lexington,
Kentucky, respectively. The other 50% interest in Kansas City Fiber Network is
owned by Kansas City Cable Partners, a partnership that owns and operates cable
systems in the Kansas City area, in which the TCI Group holds a 50% interest.
TCI's indirect interest in Louisville Lightwave will increase to 50% upon the
closing of its acquisition of the balance of the other partner's interest in
TCI-TKR of Kentucky, Inc., which owns, among other assets, the interest in
Louisville Lightwave. TCI is negotiating to sell its interests in all of these
CAP partnerships for cash. There can be no assurance that any such sales will
occur on terms satisfactory to TCI, or at all; however, if a sale is
consummated, the proceeds will be attributed to the TCI Ventures Group.
The TCI Ventures Group also includes TCI's wholly owned subsidiary, WTCI, a
regional carrier of long distance telephony services, providing primarily
high-speed point-to-point private line, frame relay communications services on a
wholesale basis capable of offering audio, video and data transmission to
customers in a 12 state area in the northwestern region of the United States.
WTCI has the capability to expand its service to include two additional states
with minimal capital expenditures should its customer base dictate the need.
WTCI's customers are principally long distance carriers and other
telecommunications companies for whom WTCI primarily supplies digital
point-to-point private line, frame relay and data transport services. WTCI's
customers also include over 56 cable companies (including TCI) for whom WTCI
provides primarily video analog transmission services. WTCI uses a diversified
high-speed telecommunications network infrastructure, consisting primarily of
its 16,000 route mile owned and operated digital microwave network, together
with fiber transmission capacity leased by WTCI from other carriers. As used
here, the term "WTCI" means Western Tele-Communications, Inc. and its
consolidated subsidiaries, unless the context indicates otherwise.
Diversified Satellite Communications. The assets attributed to the TCI
Ventures Group also include the Company's 40% equity interest (representing an
85% voting interest) in UVSG. UVSG provides satellite-delivered video, audio,
data and program promotion services to cable television systems, DTH satellite
dish users, radio stations and private network users primarily throughout North
America, and software development and systems integration services to commercial
entities, the federal government and defense related agencies in locations
throughout the United States. UVSG operates the following related satellite
transmission businesses: (i) Prevue Networks, Inc., a wholly owned subsidiary
that develops and distributes on-screen television program promotion and guide
services, including Prevue Channel, the leading electronic programming guide in
the North American market, (ii) Superstar Satellite Entertainment, a division
that markets and distributes programming to C-band DTH satellite dish owners in
North America through Superstar/Netlink Group LLC ("SNG") and to other packagers
and marketers of programs to the home satellite dish industry through its
wholesale division; (iii) UVTV, a division that distributes three superstations,
including WGN, primarily to cable operators and (iv) SpaceCom Systems, Inc., a
wholly owned subsidiary that provides audio and data satellite transmission
services to the paging industry and others. UVSG also has a 70% interest in
SSDS, Inc. ("SSDS"), which provides information technology consulting and
software development services to large organizations with complex computer
needs. As used herein, the term "UVSG" means United Video Satellite Group, Inc.
and its consolidated subsidiaries, unless the context indicates otherwise.
Internet Services. The TCI Ventures Group's primary Internet service asset
is its investment in @Home, a provider of Internet services over the cable
television infrastructure to consumers and businesses. @Home was founded by the
Company and Kleiner, Perkins, Caufield & Byers ("KPCB"), a venture capital firm,
in March 1995. In August 1996, Comcast and Cox became investors in @Home, and in
April 1997, Rogers Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd.
("Shaw"), two of the leading cable operators in Canada, became investors in
@Home. On July 11, 1997, @Home consummated an initial public offering of @Home's
Series A Common Stock (the "@Home IPO"). Following the @Home IPO, the Company's
equity interest and voting power in @Home was approximately 39% and 72%,
respectively. @Home's stock is traded on the National Market tier of The Nasdaq
Stock Market under the symbol "ATHM."
@Home began commercial operation of the @Home service in September 1996 and
currently offers two Internet services: @Home for residential consumers and
@Work for businesses. @Home's primary offering,
4
<PAGE> 13
the @Home service, allows residential subscribers to connect their personal
computers via cable modem to a new high-speed network developed and managed by
@Home. This service enables subscribers to receive the "@Home Experience," which
includes Internet service over hybrid fiber-coaxial ("HFC") cable at peak data
transmission speeds 300 times faster than typical dial-up connections, "always
on" availability and rich multimedia programming through an intuitive graphical
user interface. The technology foundation of the @Home Experience is @Home's
scalable, distributed, intelligent network architecture (the "@Network"), a
"parallel Internet" that optimizes traffic routing, improves security and
consistency of service, and facilitates end-to-end network management, enhancing
@Home's ability to address performance bottlenecks before they affect the user
experience. The content foundation of the @Home Experience is provided by
@Home's @Media group, which aggregates content, sells advertising to businesses
and will provide premium services to @Home subscribers. For businesses, @Home's
@Work services provide a platform for Internet, intranet and extranet
connectivity solutions and networked business applications over both cable
infrastructure and leased digital telecommunications lines. By combining the
@Network's distributed architecture with cable, telephone and technology
relationships, the @Work services provide a compelling platform for nationwide
delivery of network-based business applications.
As of June 30, 1997, @Home had launched the @Home service through TCI,
Comcast, Cox and InterMedia Partners IV L.P. ("IP IV") in portions of 13 cities
and communities (of which 11 have revenue-paying subscribers) in the United
States and had more than 7,000 subscribers, and @Home was in the process of
converting to its @Home service approximately 5,000 subscribers currently
receiving the Wave interactive service provided by Rogers and Shaw in Canada.
In addition to its interests in @Home, the TCI Ventures Group's
Internet-related assets also include: TCI's 7% interest in Sportsline USA, Inc.,
an Internet provider of branded interactive sports information, programming and
merchandise; a 12% interest in iVillage, Inc., a developer, and an Internet and
on-line provider, of branded communities and information services pertaining to
parenting, careers and personal health; a 15% interest in Interzine Productions,
Inc., a provider of interactive sports programming and information services on
the Internet; and a 7% interest in KPCB Java Fund, L.P., a company which invests
in companies that develop Java applications for the Internet.
Other Assets. In addition to the ventures and businesses mentioned above,
the TCI Ventures Group contains other assets of TCI, including (i) NDTC, a
wholly owned subsidiary of TCI, which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets, (ii) an 80% interest in ETC, a developer and distributor of a wide
range of for-profit education, training and communication services and products,
and (iii) SUMMITrak, two wholly owned subsidiaries of the Company that provide
an integrated network-based information management system. NDTC and SUMMITrak
both currently provide their services to TCI, its subsidiaries and affiliates.
NDTC also markets its services to third parties. The Company is considering
certain strategic alternatives with respect to its investments in ETC and
SUMMITrak, including, in the case of ETC, additional investments from unrelated
entities and a restructuring of the ownership of ETC's assets that could result
in a change in control, and in the case of SUMMITrak, a sale of the assets of
SUMMITrak or the contribution of the stock or assets of SUMMITrak to a joint
venture with another investor. There can be no assurance that any such
transaction could be accomplished on terms satisfactory to TCI or at all. If any
such transaction occurs, the proceeds thereof would be attributed to the TCI
Ventures Group. The term "NDTC" as used herein means National Digital Television
Center, Inc. and its consolidated subsidiaries, and the term "ETC" means ETC
w/tci, Inc. and its consolidated subsidiaries, in each case unless the context
indicates otherwise.
For a more detailed description of the businesses and investments in the
TCI Ventures Group, see "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP."
Policy of Evaluating Assets. The Company has historically had a policy of
continually evaluating its various assets to determine ways in which to increase
shareholder value, whether by disposing of an asset to realize the appreciation
in its value, by acquiring additional assets in existing lines of business at
attractive prices or in new lines of business that have strategic potential or
by partnering with others to achieve economies of scale or pursue new
opportunities. This policy applies equally to the assets comprising the TCI
5
<PAGE> 14
Ventures Group, which include the international expansion of TCI's traditional
cable and programming businesses and TCI's domestic investments in new
telecommunications technologies. For example, after the Board of Directors
determined to create the TCI Ventures Group, the Company sold its investments in
Netscape Communications Corporation ("Netscape"), a developer of Internet and
intranet software, and in General Communication, Inc. ("GCI"), a
telecommunications provider in Alaska, in order to realize the substantial
appreciation in the values of such investments. (The Company's investment in
each of Netscape and GCI was attributed to the TCI Ventures Group and,
accordingly, the proceeds of such sales are attributed to the TCI Ventures
Group.) As described above and under "DESCRIPTION OF THE BUSINESS OF THE TCI
VENTURES GROUP", negotiations are ongoing and at various stages with respect to
sales of certain assets, exchanges of certain assets and the formation of joint
ventures to operate other assets. With respect to Sprint PCS, the Sprint PCS
Partners have from time to time discussed possible restructurings of their
investments in and the governance of Sprint PCS, and TCI has advised its
partners of its interest in monetizing a portion of its investment. Any direct
sale of all or a part of TCI's partnership interest would require the consent of
the Sprint PCS Partners, however, and no offer has been received and no
negotiations are ongoing. In addition, companies in which the TCI Ventures Group
holds a less than majority interest may engage in various transactions,
including mergers or acquisitions, that could affect the TCI Ventures Group's
interest in such company. For example, TCG participates from time to time in
discussions with third parties regarding a variety of potential transactions
with other companies; however, to the Company's knowledge, TCG has not reached
any agreement, in principle or otherwise, with respect to any material
transaction.
THE TCI GROUP
The assets attributed to the TCI Group following the Exchange Offers will
consist of TCI's domestic distribution and communications businesses
(principally its domestic cable business and its developmental stage businesses
of distributing telephony and Internet services over the Company's domestic
cable plant, but excluding the investments attributed to the TCI Ventures
Group), any other businesses and assets not included in either the Liberty Media
Group or the TCI Ventures Group, and any Inter-Group Interest (as described
below) that may hereafter be created in the Liberty Media Group or the TCI
Ventures Group. The domestic "distribution" businesses that would continue to be
attributed to the TCI Group would include, for example, the business of
distributing @Home's Internet service to customers through TCI's cable system.
The investment in @Home, however, will be attributed to the TCI Ventures Group.
The common stockholders' equity value of the Company attributable to the
TCI Ventures Group that, at any relevant time, is attributed to the TCI Group,
and accordingly, is not represented by outstanding TCI Ventures Group Common
Stock, is referred to as the "Inter-Group Interest" of the TCI Group in the TCI
Ventures Group. The aggregate number of shares of TCI Ventures Group Common
Stock being offered in the Exchange Offers is intended initially to represent
100% of the common stockholders' equity value of the Company attributed to the
TCI Ventures Group. Accordingly, if the Exchange Offers are fully subscribed,
the Inter-Group Interest of the TCI Group in the TCI Ventures Group would be
reduced to zero. If immediately following the consummation of the Exchange
Offers the TCI Group has any remaining Inter-Group Interest in the TCI Ventures
Group, the Company will extinguish such Inter-Group Interest in consideration of
the attribution to the TCI Group of a preferred equity interest in the TCI
Ventures Group with a stated liquidation value equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the Market Value
of the Series A TCI Group Common Stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum (which
dividends would accumulate and compound annually but not be payable currently
until the fifth anniversary of the closing of the Exchange Offers) and a
mandatory redemption obligation on the 15th anniversary of the closing of the
Exchange Offers (the "TCI Ventures Group Preferred Interest"). The TCI Ventures
Group Preferred Interest will also be redeemable at the discretion of the Board
of Directors in whole or in part at any time. See "No Initial Inter-Group
Interest".
6
<PAGE> 15
REASONS FOR THE EXCHANGE OFFERS
In recommending the approval of the Charter Amendments to the Company's
stockholders, the Company's Board of Directors stated its belief that the
creation and issuance of the TCI Ventures Group Common Stock would result in
greater market recognition of the value of the businesses and assets attributed
to the TCI Ventures Group, thereby enhancing stockholder value over the long
term. The authorization of separate series of Common Stock intended to track the
performance of the TCI Ventures Group would also provide the Company greater
flexibility with regard to raising capital for the TCI Ventures Group's
businesses and for making acquisitions and investments for the TCI Ventures
Group, including strategic partnering transactions, independently of the TCI
Group by using publicly traded equity securities specifically related to the TCI
Ventures Group. The issuance of TCI Ventures Group Common Stock would also
provide securityholders with the opportunity to invest in separate securities
intended specifically to reflect the TCI Ventures Group and would enable the
Company to more effectively tailor employee benefit plans to provide incentives
to the employees of the Company responsible for the conduct of the business and
affairs of the TCI Ventures Group. In addition, the TCI Group would be easier
for the market to understand and value once its businesses and assets were
largely confined to the distribution and communications businesses using the
Company's domestic cable plant. The foregoing benefits would be obtained by the
Company without forgoing the advantages of continued ownership of the businesses
and assets attributed to the TCI Ventures Group and of having such businesses
and assets be part of the consolidated enterprise. Unlike the case with a
separate publicly held corporation, however, holders of TCI Ventures 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
"RISK FACTORS." The Board determined that the businesses and assets, the
attribution of which was being shifted to the TCI Ventures Group from the TCI
Group, represented approximately 30% of the total value of the TCI Group prior
to such change in attribution. The Board then concluded that it would be
appropriate to seek to reduce the outstanding shares of TCI Group Common Stock
by an equivalent percentage, rather than distributing the TCI Ventures Group
Common Stock to the holders of TCI Group Common Stock as a dividend or
attempting to sell TCI Ventures Group Common Stock in a public offering and
attributing the offering proceeds to the TCI Group. See "THE EXCHANGE
OFFERS -- General -- Reasons for the Exchange Offers". Each of John C. Malone,
Chairman of the Board and Chief Executive Officer of the Company and Leo J.
Hindery, Jr., President and Chief Operating Officer of the Company, has advised
the Company of his desire to own substantially the same percentage equity and
voting interests in the TCI Ventures Group as he would own in the TCI Group
after giving effect to the Exchange Offers and accordingly each of Dr. Malone
and Mr. Hindery has stated his intention to tender approximately 30% of his
shares of Series A TCI Group Common Stock and approximately 30% of his shares of
Series B TCI Group Common Stock pursuant to the Exchange Offers.
THE EXCHANGE OFFERS
The following summarizes the terms of the Exchange Offers. For a more
complete description of the Exchange Offers, see "THE EXCHANGE OFFERS."
SERIES A EXCHANGE OFFER.... The Company is offering to issue one share of
Series A TCI Ventures Group Common Stock in
exchange for each share of Series A TCI Group
Common Stock validly tendered to the Company on or
prior to the Expiration Date and not properly
withdrawn, up to an aggregate of 188,661,300 shares
of Series A TCI Group Common Stock. See "THE
EXCHANGE OFFERS -- General -- Series A Exchange
Offer."
SERIES B EXCHANGE OFFER.... The Company is offering to issue one share of
Series B TCI Ventures Group Common Stock in
exchange for each share of Series B TCI Group
Common Stock validly tendered to the Company on or
prior to the Expiration Date and not properly
withdrawn, up to an aggregate of 16,266,400 shares
of Series B TCI Group Common Stock. See "THE
EXCHANGE OFFERS -- General -- Series B Exchange
Offer."
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<PAGE> 16
PRORATION.................. If shares of Series A TCI Group Common Stock in
excess of the Series A Maximum or shares of Series
B TCI Group Common Stock in excess of the Series B
Maximum are validly tendered and not properly
withdrawn, shares will be accepted for exchange on
a pro rata basis up to the Series A Maximum and
Series B Maximum as applicable, in conformity with
Rule 13e-4 under the Exchange Act.
EXPIRATION DATE............ The Exchange Offers, proration period and
withdrawal rights will expire at 5:00 p.m., New
York City time, on September 10, 1997, unless
extended, in which case the Expiration Date shall
be the last date and time to which the Exchange
Offers are extended. See "THE EXCHANGE
OFFERS -- General -- Expiration Date."
PROCEDURE FOR TENDERING IN
THE EXCHANGE OFFERS........ A holder of TCI Group Common Stock desiring to
participate in the Exchange Offers must either (i)
deliver a completed and signed Letter of
Transmittal or a facsimile thereof, in accordance
with the instructions in the Letter of Transmittal
(with signatures guaranteed, if required), or
provide an Agent's Message in connection with
book-entry delivery of shares of TCI Group Common
Stock, together with any other documents required
by the Letter of Transmittal, to the Exchange Agent
and either (a) deliver certificates evidencing the
shares of the applicable series of TCI Group Common
Stock to the Exchange Agent or (b) tender such
shares pursuant to the procedure for book-entry
transfer set forth in "THE EXCHANGE
OFFERS -- Procedure for Tendering -- Book-Entry
Delivery" or (ii) request his or her broker,
dealer, commercial bank, trust company or other
nominee to effect the transaction. A holder of TCI
Group Common Stock who desires to tender shares of
TCI Group Common Stock in the Exchange Offers and
whose certificates representing such shares are not
immediately available or who cannot comply with the
procedure for book-entry transfer by the Expiration
Date must tender such shares of TCI Group Common
Stock and related Letter of Transmittal pursuant to
the guaranteed delivery procedure set forth in "THE
EXCHANGE OFFERS -- Procedure for
Tendering -- Guaranteed Delivery." See "THE
EXCHANGE OFFERS -- Procedure for Tendering."
PERSONS HOLDING SHARES
THROUGH OTHERS............. Persons holding shares of TCI Group Common Stock
through a broker, dealer, commercial bank, trust
company or other nominee who desire to participate
in the Exchange Offers should promptly contact the
appropriate institution or nominee and request it
to effect the transactions for them. See "THE
EXCHANGE OFFERS -- Procedure for Tendering."
WITHDRAWAL RIGHTS.......... Tendered shares of TCI Group Common Stock may be
withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. Thereafter, such
tenders are irrevocable, except that they may be
withdrawn after the expiration of 40 business days
from the commencement of the Exchange Offers,
unless accepted for exchange prior to that date.
See "THE EXCHANGE OFFERS -- Withdrawal Rights."
8
<PAGE> 17
ACCEPTANCE OF TCI GROUP
COMMON STOCK AND DELIVERY
OF TCI VENTURES GROUP
COMMON STOCK............. Subject to the satisfaction or waiver of all
conditions to the Exchange Offers, shares of Series
A TCI Group Common Stock, up to the Series A
Maximum, and shares of Series B TCI Group Common
Stock, up to the Series B Maximum, validly tendered
and not properly withdrawn on or prior to the
Expiration Date will be accepted for exchange on or
promptly after the Expiration Date. Certificates
for shares of TCI Ventures Group Common Stock to be
issued in exchange for shares of TCI Group Common
Stock accepted in the Exchange Offers will be
mailed by the Exchange Agent promptly after
acceptance. All shares of TCI Group Common Stock
received by the Company in exchange for shares of
TCI Ventures Group Common Stock pursuant to the
Exchange Offers will be retired. Upon retirement,
such shares of Series A TCI Group Common Stock will
become authorized but unissued shares of Series A
TCI Group Common Stock, and such shares of Series B
TCI Group Common Stock will become authorized but
unissued shares of Series B TCI Group Common Stock.
See "THE EXCHANGE OFFERS -- General."
CONDITIONS OF EXCHANGE
OFFERS..................... The Exchange Offers are subject to the satisfaction
of certain conditions, including approval by
stockholders of the Charter Amendments at the
Annual Meeting. If the Exchange Offers are not
consummated for any reason, all tendered shares of
TCI Group Common Stock will be promptly returned to
the tendering securityholder. See "THE EXCHANGE
OFFERS -- Certain Conditions to the Exchange
Offers." The Exchange Offers are not conditioned on
any minimum number of shares being tendered.
AMENDMENTS................. The Company reserves the right to amend the terms
and conditions of the Exchange Offers although it
does not presently intend to do so. If the Company
amends the terms of the Series A Exchange Offer or
the Series B Exchange Offer, such amended terms
will be available to all holders of shares of
Series A TCI Group Common Stock or Series B TCI
Group Common Stock, as applicable, whether or not
their shares have been tendered prior to such
amendment. Any material amendments will be
disclosed in accordance with Rule 13e-4 under the
Exchange Act and, if required by such Rule the
Exchange Offers will be extended to permit
stockholders adequate time to consider such
amendment. See "THE EXCHANGE OFFERS -- Extension,
Termination and Amendment."
REGULATORY APPROVALS....... The Company does not believe there are any material
regulatory approvals required in connection with
its issuance of the TCI Ventures Group Common
Stock. See "THE EXCHANGE OFFERS -- Acceptance for
Exchange; Delivery of Shares of TCI Ventures Group
Common Stock; Transfer Taxes."
CERTAIN EFFECTS OF THE
EXCHANGE OFFERS............ If the Exchange Offers are fully subscribed, the
Company will acquire a maximum of 188,661,300
shares of Series A TCI Group Common Stock and
16,266,400 shares of Series B TCI Group Common
Stock (representing approximately 30% of the shares
of each such series outstanding at June 30, 1997,
excluding shares held by majority owned
subsidiaries of
9
<PAGE> 18
the Company) and will issue 188,661,300 shares of
Series A TCI Ventures Group Common Stock and
16,266,400 shares of Series B TCI Ventures Group
Common Stock, representing in the aggregate 100% of
the Inter-Group Interest of the TCI Group in the
TCI Ventures Group. If the aggregate number of
shares of Series A TCI Ventures Group Common Stock
or Series B TCI Ventures Group Common Stock issued
in the Exchange Offers is less than the Series A
Maximum or Series B Maximum, respectively, the
remaining Inter-Group Interest of the TCI Group
will be extinguished in consideration of the
attribution to the TCI Group of the TCI Ventures
Group Preferred Interest. Immediately after giving
effect to the foregoing, the TCI Group Common Stock
will cease to reflect any of the common
stockholders' equity value of the Company
attributable to the businesses and assets
comprising the TCI Ventures Group. The shares of
TCI Group Common Stock received by the Company in
the Exchange Offers would be retired, thereby
reducing the number of outstanding shares of TCI
Group Common Stock.
PRE-EXCHANGE OFFER
SECURITIES................. In addition to the shares of TCI Ventures Group
Common Stock to be issued in the Exchange Offers,
shares of Series A TCI Ventures Group Common Stock
are being reserved for issuance upon conversion,
exercise or exchange subsequent to the closing of
the Exchange Offers of certain outstanding
convertible notes issued by a subsidiary of the
Company in 1986 and held by a director of the
Company, members of his family and trusts for their
benefit (the "TCI-UA Notes") and certain options to
purchase shares of Series A TCI Group Common Stock
that are outstanding under the Company's existing
stock incentive plans for employees, consultants
and advisors immediately prior to the consummation
of the Exchange Offers (the "Adjustable Options").
In lieu of a number of shares of Series A TCI Group
Common Stock equal to 30% of the number of shares
of Series A TCI Group Common Stock currently
issuable upon exchange of TCI-UA Notes, an equal
number of shares of TCI Ventures Group Common Stock
would be issued upon the exchange thereof following
the consummation of the Exchange Offers. Similarly,
the Adjustable Options will be adjusted upon
consummation of the Exchange Offers by issuing to
each holder of such an option, in substitution
therefor and cancellation thereof, two new
options -- one for the purchase of a number of
shares of Series A TCI Ventures Group Common Stock
equal to 30% (rounded up to the nearest whole
number) of the number of shares of Series A TCI
Group Common Stock that would have been issuable
upon exercise of such holder's Adjustable Option
immediately prior to the consummation of the
Exchange Offers (the "Initial Ventures Options"),
and the other for the purchase of a number of
shares of Series A TCI Group Common Stock equal to
70% (rounded down to the nearest whole number) of
the number of shares of Series A TCI Group Common
Stock that would have been issuable upon exercise
of such Adjustable Option immediately prior to the
consummation of the Exchange Offers. The terms of
each of such options at the time of issuance will
be the same as the terms of the Adjustable Option
that they replace, including the exercise price per
share and vesting schedule. The proceeds received
upon the exercise of Initial Ventures Options will
be attributed to the TCI Ventures Group, as will
the liability for amounts payable upon the exercise
of any related stock appreciation rights. The
TCI-UA Notes will continue to be a liability of the
TCI
10
<PAGE> 19
Group. The TCI-UA Notes and the Initial Ventures
Options are referred to in the Charter Amendments
as the "Pre-Exchange Offer Securities."
MARKET FOR TCI VENTURES
GROUP COMMON STOCK......... Following the consummation of the Exchange Offers,
it is anticipated that the TCI Ventures Group
Common Stock will be traded in the over-the-counter
market, but there can be no assurance as to either
the establishment or continuity of any such trading
market. See "RISK FACTORS -- Considerations
Relating to the TCI Ventures Group Common
Stock -- No Assurance as to Market Price." The
Company has applied for inclusion of the Series A
TCI Ventures Group Common Stock and the Series B
TCI Ventures Group Common Stock in the National
Market tier of The Nasdaq Stock Market under the
symbols "TCIVA" and "TCIVB," respectively. See "THE
EXCHANGE OFFERS -- Certain Effects of the Exchange
Offers." The TCI Group Common Stock is traded on
the National Market tier of The Nasdaq Stock
Market. On July 31, 1997, the last sales prices for
the Series A TCI Group Common Stock and Series B
TCI Group Common Stock were 17 1/8 and 17 1/2,
respectively. See "Price Range of Common Stock".
In general, persons other than affiliates of the
Company whose tenders of shares of TCI Group Common
Stock are accepted will receive unrestricted and
freely transferable shares of TCI Ventures Group
Common Stock.
EXCHANGE AGENT............. The Bank of New York has been appointed as Exchange
Agent for the Exchange Offers. The Bank of New York
will also act as stock transfer agent for the TCI
Ventures Group Common Stock.
INFORMATION AGENT.......... Georgeson & Company Inc. has been appointed
Information Agent for the Exchange Offers. Requests
for additional copies of this Offering Circular,
the related Letters of Transmittal or any other
documents furnished herewith should be directed to
the Information Agent at its address and telephone
numbers set forth on the back cover page of this
Offering Circular.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........... The Company believes that no gain or loss would be
recognized by the Company or the stockholders of
the Company for federal income tax purposes on the
exchange, pursuant to the Exchange Offers, of TCI
Group Common Stock for TCI Ventures Group Common
Stock. This opinion is based on the Internal
Revenue Code of 1986, as amended to the date hereof
(the "Code"), Treasury Department regulations,
published positions of the Internal Revenue Service
(the "Service") and court decisions now in effect,
all of which are subject to change. Further, there
are no current court decisions bearing directly on
transactions similar to the Exchange Offers (i.e.,
an exchange offer involving stock with
characteristics of the TCI Ventures Group Common
Stock) and the Service has had under study from
time to time the federal income tax consequences of
transactions similar to the Exchange Offers. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS".
11
<PAGE> 20
SUMMARY COMPARISON OF TERMS OF TCI GROUP COMMON
STOCK AND TCI VENTURES GROUP COMMON STOCK
The following is a summary of certain selected terms of the TCI Group
Common Stock and the TCI Ventures Group Common Stock, which description is
qualified by reference to the more complete description of such terms contained
elsewhere in this Offering Circular and to the definitive terms of the TCI Group
Common Stock and the TCI Ventures Group Common Stock contained in the Amended
Charter. For additional information regarding the terms of the TCI Group Common
Stock and the TCI Ventures Group Common Stock, see "DESCRIPTION OF CAPITAL
STOCK -- Common Stock."
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
BUSINESSES............. The TCI Group consists of TCI's The TCI Ventures Group consists
domestic distribution and primarily of the following assets
communications businesses and their related liabilities: (i)
(principally its domestic cable TCI's 85% equity interest
business and its developmental (representing a 92% voting in-
stage businesses of distributing terest) in International, (ii)
telephony and Internet services TCI's principal interests in the
over the Company's domestic cable Telephony Business, consisting
plant, but excluding the primarily of the Company's
investments attributed to the TCI investments in the PCS Ventures
Ventures Group), any other and TCG, and its wholly owned
businesses and assets not included subsidiary WTCI, (iii) TCI's 40%
in either the Liberty Media Group equity interest (representing an
or the TCI Ventures Group, and any 85% voting interest) in UVSG, (iv)
Inter-Group Interest that may TCI's 39% equity interest (repre-
hereafter be created in the senting a 72% voting interest) in
Liberty Media Group or the TCI @Home, and (v) other assets,
Ventures Group. The Company could including TCI's interests in NDTC,
determine to pursue future ETC and SUMMITrak. See
business opportunities through one "DESCRIPTION OF THE BUSINESS OF
Group instead of the other Groups, THE TCI VENTURES GROUP." The
or jointly through more than one Company could determine to pursue
of the Groups. See "MANAGEMENT AND future business opportunities
ALLOCATION POLICIES." through one Group instead of the
other Groups, or jointly through
more than one of the Groups. See
"MANAGEMENT AND ALLOCATION
POLICIES."
The TCI Group Common Stock is The TCI Ventures Group Common
intended to reflect the separate Stock is intended to reflect the
performance of the TCI Group. separate performance of the TCI
However, holders of TCI Group Ventures Group. However, holders
Common Stock will continue to be of TCI Ventures Group Common Stock
subject to all of the risks will be subject to all of the
associated with an investment in risks associated with an
the Company and all of its investment in the Company and all
businesses, assets and of its businesses, assets and
liabilities. There is no assur- liabilities. There is no assurance
ance as to the degree to which the as to the degree to which the
market value of the TCI Group Com- market value of the TCI Ventures
mon Stock will reflect the Group Common Stock will reflect
separate performance of the TCI the separate performance of the
Group. TCI Ventures Group. At present,
there is no single entity, other
than TCI, that directly or
indirectly holds legal title to
all of the assets and liabilities
attributed to the TCI Ventures
Group. It is currently expected
that the assets and liabilities
initially attributed to the TCI
Ventures Group will eventually be
contributed to TCI
</TABLE>
12
<PAGE> 21
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
Ventures Group, LLC ("Ventures
LLC"), a direct wholly owned
subsidiary of TCI. No assurance
can be given, however, that
Ventures LLC will continue to hold
legal title to all of such assets
or liabilities (or to any addi-
tional assets or liabilities that
may be attributed to the TCI
Ventures Group) or that Ventures
LLC will not in the future hold
legal title to additional assets
or liabilities that are attributed
to one or more Groups other than
the TCI Ventures Group.
DIVIDENDS AND SHARE
DISTRIBUTIONS........ The Company has never paid cash The Company has never paid cash
dividends on its Common Stock and dividends on its Common Stock and
does not currently intend to pay does not currently intend to pay
cash dividends on any series of cash dividends on any series of
its Common Stock, including the its Common Stock, including the
TCI Group Common Stock. TCI Ventures Group Common Stock.
Dividends on the TCI Group Common Dividends on the TCI Ventures
Stock are payable out of the Group Common Stock are payable out
lesser of assets of the Company of the lesser of assets of the
legally available therefor and the Company legally available therefor
TCI Group Available Dividend and the TCI Ventures Group
Amount. If dividends on the TCI Available Dividend Amount. If
Group Common Stock are paid, dividends on the TCI Ventures
equivalent per share dividends Group Common Stock are paid,
will be concurrently paid on both equivalent per share dividends
the Series A TCI Group Common will be concurrently paid on both
Stock and the Series B TCI Group the Series A TCI Ventures Group
Common Stock. For this purpose, Common Stock and the Series B TCI
equivalent per share dividends Ventures Group Common Stock. For
include, in the case of distri- this purpose, equivalent per share
butions of securities, either dividends include, in the case of
distributions of identical distributions of securities,
securities or distributions of either distributions of identical
securities having differences in securities or distributions of
voting rights and in certain securities having differences in
related rights (which differences voting rights and in certain
are, in the case of distributions related rights (which differences
of securities of the Company or are, in the case of distributions
its subsidiaries (including stock of securities of the Company or
dividends consisting of any series its subsidiaries (including stock
of Common Stock), not greater than dividends consisting of TCI
the corresponding differences Ventures Group Common Stock), not
between the Series A TCI Group greater than the corresponding
Common Stock and the Series B TCI differences between the Series A
Group Common Stock). TCI Ventures Group Common Stock
and the Series B TCI Ventures
Group Common Stock).
Subject to the foregoing Subject to the foregoing
provisions, dividends may be provisions, dividends may be
declared and paid on the TCI Group declared and paid on the TCI Group
Common Stock, the TCI Ventures Common Stock, the TCI Ventures
Group Common Stock and/or the Group Common Stock and/or the
Liberty Media Group Common Stock Liberty Media Group Common Stock
in equal or unequal amounts, in equal or unequal amounts,
notwithstanding the relationship notwithstanding the relationship
among the TCI Group Available among the TCI Group Available
Dividend Amount, the TCI Ventures Dividend Amount, the TCI Ventures
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
Group Available Dividend Amount Group Available Dividend Amount
and the Liberty Media Group and the Liberty Media Group
Available Dividend Amount, the Available Dividend Amount, the
respective amounts of prior respective amounts of prior
dividends paid on, or liquidation dividends paid on, or liquidation
rights of, the TCI Group Common rights of, the TCI Group Common
Stock, the TCI Ventures Group Stock, the TCI Ventures Group
Common Stock or the Liberty Media Common Stock or the Liberty Media
Group Common Stock, or any other Group Common Stock, or any other
factor. factor.
Any decision to pay dividends in Any decision to pay dividends in
the future will depend on the the future will depend on the
financial condition, results of financial condition, results of
operations and business operations and business
requirements of the Company as a requirements of the Company as a
whole. In making a determination whole. In making a determination
as to the allocation of any future as to the allocation of any future
dividends among the TCI Group dividends among the TCI Group
Common Stock, the TCI Ventures Common Stock, the TCI Ventures
Group Common Stock and the Liberty Group Common Stock and the Liberty
Media Group Common Stock, the Media Group Common Stock, the
Board of Directors expects to Board of Directors expects to
follow a policy under which it follow a policy under which it
will consider, among other will consider, among other
factors, the relative financial factors, the relative financial
condition, results of operations condition, results of operations
and business requirements of the and business requirements of the
respective Groups. respective Groups.
DIVIDEND, REDEMPTION
AND CONVERSION RIGHTS
APPLICABLE ON DISPO-
SITION OF TCI VEN-
TURES GROUP ASSETS... No provisions comparable to the If the Company disposes of all or
dividend, redemption and substantially all of the assets
conversion rights applicable to attributed to the TCI Ventures
the TCI Ventures Group Common Group (defined as 80% or more on a
Stock will apply in the case of current market value basis), other
the disposition of all or than in a transaction referred to
substantially all of the in the following sentence, the
properties and assets attributed Company is required, at its
to the TCI Group. option, either to (i) distribute
to holders of the TCI Ventures
Group Common Stock an amount in
cash and/or securities or other
property equal to their propor-
tionate interest in the TCI
Ventures Group Net Proceeds of
such disposition, either by
special dividend or by redemption
of all or part of the outstanding
shares of TCI Ventures Group
Common Stock, or (ii) convert each
outstanding share of Series A TCI
Ventures Group Common Stock and
Series B TCI Ventures Group Common
Stock into a number (or fraction)
of fully paid and non-assessable
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-Trad-
</TABLE>
14
<PAGE> 23
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
ing Day period beginning on the
16th Trading Day after
consummation of the transaction of
the Market Value of one share of
Series A TCI Ventures Group Common
Stock to the Market Value of one
share of Series A TCI Group Common
Stock. The Company will not be
required to take any of the
foregoing actions if the
disposition of all or
substantially all of the assets
attributed to the TCI Ventures
Group occurs 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 or occurs
in connection with the disposition
of all of the assets of the
Company. The proportionate
interest in the TCI Ventures Group
Net Proceeds of a disposition that
would be distributed to holders of
TCI Ventures Group Common Stock
would be based on (a) in the case
of a special dividend or partial
redemption following the
disposition of less than all the
properties and assets of the TCI
Ventures Group, the TCI Ventures
Group Outstanding Interest
Fraction (a measure of the
percentage interest in the TCI
Ventures Group represented by
outstanding shares of TCI Ventures
Group Common Stock), or (b) in the
case of a complete redemption
following the disposition of all
of the properties and assets of
the TCI Ventures Group, the
Adjusted TCI Ventures Group
Outstanding Interest Fraction (a
similar measure that differs in
that it takes into account the
dilutive effect of the
Pre-Exchange Offer Securities).
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. A holder of shares of
TCI Ventures Group Common Stock
who had not disposed of such
shares prior to the applicable
record date or effective date of
such dividend, redemption or con-
version would be required to
participate in the distribution of
TCI Ventures Group Net Proceeds
(whether as a special dividend on
or redemption of TCI Ventures
Group Common Stock) or in the
conversion
</TABLE>
15
<PAGE> 24
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
of TCI Ventures Group Common Stock
into TCI Group Common Stock, as
applicable, described above,
unless, in the case of a partial
redemption effected in a manner
that was not pro rata (but was
otherwise permitted by the Amended
Charter), such holder's shares
were not selected for redemption.
To illustrate the foregoing,
assume that TCI disposed of all of
the assets of the TCI Ventures
Group for TCI Ventures Group Net
Proceeds of $4 billion and, in
accordance with the foregoing,
elected to redeem all of the
outstanding shares of TCI Ventures
Group Common Stock. Also assume
that at the time of the redemption
there were 90 million shares of
TCI Ventures Group Common Stock
outstanding, 10 million shares
were issuable on conversion,
exercise or exchange of the
Pre-Exchange Offer Securities, and
the TCI Group had no Inter-Group
Interest in the TCI Ventures
Group. Based on the foregoing the
Adjusted TCI Ventures Group
Outstanding Interest Fraction
immediately prior to the
redemption would be 90%:
(90 million)
---------------------------
(90 million + 10 Million + 0),
the aggregate redemption price
would be $3.6 billion ($4 billion
x 90%), and the redemption price
for each outstanding share of TCI
Ventures Group Common Stock would
be $40 per share, payable in cash
($3.6 billion divided by 90 million).
CONVERSION AT OPTION OF
HOLDER............... Shares of Series B TCI Group Com- Shares of Series B TCI Ventures
mon Stock are convertible at any Group Common Stock are convertible
time, at the option of the holder at any time, at the option of the
only, into the same number of holder only, into the same number
shares of Series A TCI Group of shares of Series A TCI Ventures
Common Stock. Shares of Series A Group Common Stock. Shares of
TCI Group Common Stock are not Series A TCI Ventures Group Common
convertible into shares of Series Stock are not convertible into
B TCI Group Common Stock. shares of Series B TCI Ventures
Group Common Stock.
CONVERSION AT OPTION OF
TCI.................. None. The Company may, in the sole
discretion of the Board of
Directors, elect at any time to
convert each outstanding share of
TCI Ventures Group Common Stock
into a number (or fraction)
</TABLE>
16
<PAGE> 25
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
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 TCI Ventures 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
TCI Ventures Group Common Stock
would be converted into Series A
TCI Group Common Stock and shares
of Series B TCI Ventures Group
Common Stock would be converted
into Series B TCI Group Common
Stock. A holder of shares of TCI
Ventures Group Common Stock who
had not disposed of such shares
prior to the conversion date would
be required to participate in such
conversion of TCI Ventures Group
Common Stock into TCI Group Common
Stock.
The Board of Directors has no
current intention of converting
any shares of TCI Ventures Group
Common Stock that may be
outstanding in the future into
shares of TCI Group Common Stock
in accordance with the foregoing.
There can be no assurance, how-
ever, that the Board will not
determine to exercise such right
at any time in the future. Any
decision to convert the
outstanding shares of TCI Ventures
Group Common Stock into TCI Group
Common Stock will be made by the
Board of Directors in its sole
discretion and could be based on
one or more of a variety of
factors, including among other
factors, the then appraised value
of a share of TCI Ventures Group
Common Stock and the then Market
Value of the Series A TCI Group
Common Stock. Under the Amended
Charter, the Company is required
to send notice of any such pro-
posed conversion to the holders of
the TCI Ventures Group Common
Stock not less than 35 Trading
Days nor more than 45 Trading Days
prior to the applicable conversion
date.
</TABLE>
17
<PAGE> 26
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
REDEMPTION IN EXCHANGE
FOR STOCK OF
SUBSIDIARY........... None. Subject to certain restrictions,
the Company could at any time, in
the sole discretion of the Board
of Directors, redeem (without
premium) all outstanding shares of
TCI Ventures 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 TCI Ventures 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 Adjusted TCI Ventures Group
Outstanding Interest Fraction. In
such a case, the Board 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 TCI Ventures Group
Common Stock and the Series B TCI
Ventures Group Common Stock. All
shares of any such Qualifying
Subsidiary so distributed would be
fully paid and non-assessable. A
holder of shares of TCI Ventures
Group Common Stock who had not
disposed of such shares prior to
the redemption date would be
required to participate in such
redemption of shares of TCI
Ventures Group Common Stock for
stock of such Qualifying
Subsidiary. 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 Service
for a distribution of the
Company's interest in such
subsidiary to holders of TCI
Ventures Group Common Stock to be
tax-free to such holders.
A Qualifying Subsidiary may
include an existing subsidiary of
TCI that may in the future hold
all of the assets and
</TABLE>
18
<PAGE> 27
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
liabilities attributed to the TCI
Ventures Group (other than
Ventures LLC which for tax reasons
would not be distributed) or any
future subsidiary that meets the
definition of Qualifying
Subsidiary and holds such assets
and liabilities, whether or not
created exclusively for such
purpose. To the extent that any
such Qualifying Subsidiary held
assets and/or liabilities in
addition to those attributed to
the TCI Ventures Group, it is
expected that in connection with
any such redemption such
additional assets or liabilities
would either be attributed to the
TCI Ventures Group or transferred
by such Qualifying Subsidiary to
the Company or to another
subsidiary of the Company
attributed to a Group other than
the TCI Ventures Group. In each
case, either (x) any then ex-
isting Inter-Group Interest of the
TCI Group in the TCI Ventures
Group would be appropriately
adjusted or (y) other
consideration that the Board may
determine in its discretion to be
appropriate would be paid by one
Group to the other Group. See
"MANAGEMENT AND ALLOCATION POLI-
CIES." The Company currently holds
the assets that are attributed to
the TCI Ventures Group through
several direct and indirect
subsidiaries, a number of which
own other subsidiaries that are
attributed to the TCI Group.
To illustrate the foregoing,
assume that the Company determined
to redeem all of the outstanding
shares of TCI Ventures Group
Common Stock in exchange for stock
of a Qualifying Subsidiary that
held all of the assets and
liabilities then attributed to the
TCI Ventures Group and at such
time there were 90 million shares
of TCI Ventures Group Common Stock
outstanding, 30 million shares of
TCI Ventures Group Common Stock
issuable upon conversion, exercise
or exchange of Pre-Exchange Offer
Securities, no Inter-Group
Interest of the TCI Group in the
TCI Ventures Group and 240 million
shares of common stock of such
Qualifying Subsidiary outstanding
and owned by the
</TABLE>
19
<PAGE> 28
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
Company. In such event, the TCI
Ventures Group Common Stock would
be redeemed in exchange for an
aggregate of 180 million shares of
the common stock of such
Qualifying Subsidiary
(representing the product of the
Adjusted TCI Ventures Group
Outstanding Interest Fraction and
the number of shares of common
stock of such Qualifying
Subsidiary owned by the Company).
Each outstanding share of TCI
Ventures Group Common Stock in
this example would be redeemed or
exchanged for two shares of common
stock of such Qualifying
Subsidiary and the Company would
retain 60 million shares to be
used in connection with any
conversion, exercise or exchange
of Pre-Exchange Offer Securities.
The Company does not currently
have any plans or proposals to
effect any redemption of the TCI
Ventures Group Common Stock in
exchange for shares of one or more
Qualifying Subsidiaries. Further,
the Board of Directors has not
determined under what
circumstances it might be
appropriate for the Company to do
so. The ability of the Company to
exercise its right to redeem the
outstanding shares of TCI Ventures
Group Common Stock in exchange for
a proportionate interest in shares
of one or more Qualifying Sub-
sidiaries may be limited by the
tax consequences to the Company in
recognizing certain deferred gains
as a result of such redemption and
by certain agreements relating to
its interests in the PCS Ventures
and to its equity interest in TCG,
which agreements generally require
that any entity which holds all or
part of such interests remain a
subsidiary of the Company, subject
to certain exceptions.
The Company believes that under
current law a holder of TCI
Ventures Group Common Stock
generally would not be entitled to
money damages or other remedies
against the Company or the Board
of Directors based on a decision
by the Board to redeem the
outstanding shares of TCI Ventures
Group Common Stock in accordance
</TABLE>
20
<PAGE> 29
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
with the procedures described
above unless such redemption
otherwise represented a breach by
such directors of their respective
fiduciary or other duties to the
stockholders of the Company as a
whole.
VOTING RIGHTS.......... The Series A TCI Group Common The Series A TCI Ventures Group
Stock will be entitled to one vote Common Stock will be entitled to
per share and the Series B TCI one vote per share and the Series
Group Common Stock will be B TCI Ventures Group Common Stock
entitled to ten votes per share, will be entitled to ten votes per
voting as one class with the TCI share, voting as one class with
Ventures Group Common Stock, the the TCI Group Common Stock, the
Liberty Media Group Common Stock Liberty Media Group Common Stock
and any Preferred Stock entitled and any Preferred Stock entitled
to vote, except to the extent to vote, except to the extent
separate class or series votes are separate class or series votes are
required by law or the Amended required by law or the Amended
Charter. The Amended Charter does Charter. The Amended Charter does
not provide for any rights for the not provide for any rights for the
TCI Group Common Stock to vote TCI Ventures Group Common Stock to
separately from the TCI Ventures vote separately from the TCI Group
Group Common Stock and the Liberty Common Stock and the Liberty Media
Media Group Common Stock. Group Common Stock.
Under the General Corporation Law Under the DGCL, the approval of
of the State of Delaware ("DGCL"), the holders of a majority of the
the approval of the holders of a outstanding shares of any class of
majority of the outstanding shares capital stock of a corporation,
of any class of capital stock of a voting separately as a class, is
corporation, voting separately as required to approve a proposed
a class, is required to approve a amendment to a corporation's
proposed amendment to a certificate of incorporation,
corporation's certificate of whether or not entitled to vote on
incorporation, whether or not such amendment by the certificate
entitled to vote on such amendment of incorporation, if the amendment
by the certificate of would increase or decrease the
incorporation, if the amendment aggregate number of authorized
would increase or decrease the shares of such class, increase or
aggregate number of authorized decrease the par value of the
shares of such class, increase or shares of such class, or alter or
decrease the par value of the change the powers, preferences or
shares of such class, or alter or special rights of the shares of
change the powers, preferences or such class so as to affect them
special rights of the shares of adversely. For this purpose, if a
such class so as to affect them proposed amendment would alter or
adversely. For this purpose, if a change the powers, preferences or
proposed amendment would alter or special rights of one or more
change the powers, preferences or series of any class so as to
special rights of one or more affect them adversely, but would
series of any class so as to not so affect the entire class,
affect them adversely, but would then only the shares of the series
not so affect the entire class, so affected by the amendment would
then only the shares of the series be entitled to vote as a separate
so affected by the amendment would class on the amendment.
be entitled to vote as a separate Accordingly, a proposed amendment
class on the amendment. Ac- the adverse effect of which on the
cordingly, a proposed amendment powers, preferences or special
the adverse effect of which on the rights of any series of Common
powers, preferences or special Stock does not differ from its
rights of any series of Common adverse effect on the powers,
Stock does not dif- preferences or
</TABLE>
21
<PAGE> 30
<TABLE>
<CAPTION>
---------------------------------- ----------------------------------
TCI GROUP TCI VENTURES GROUP
COMMON STOCK COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C>
fer from its adverse effect on the special rights of any other series
powers, preferences or special of Common Stock would not entitle
rights of any other series of such series to vote as a class
Common Stock would not entitle separately from the other series
such series to vote as a class of Common Stock.
separately from the other series
of Common Stock.
LIQUIDATION............ Holders of shares of Series A TCI Holders of shares of Series A TCI
Group Common Stock and Series B Ventures Group Common Stock and
TCI Group Common Stock will be Series B TCI Ventures Group Com-
entitled to share (on an equal per mon Stock will be entitled to
share basis) a portion of the share (on an equal per share
funds of the Company remaining for basis) a portion of the funds of
distribution to its common the Company remaining for
stockholders based on the average distribution to its common stock-
daily ratio over a period of 20 holders based on the average daily
Trading Days prior to the ratio over a period of 20 Trading
announcement of the liquidation, Days prior to the announcement of
dissolution or winding up of the the liquidation, dissolution or
Company of the aggregate Market winding up of the Company of the
Capitalization of the TCI Group aggregate Market Capitalization of
Common Stock to the aggregate the TCI Ventures Group Common
Market Capitalization of the TCI Stock to the aggregate Market
Group Common Stock, the TCI Capitalization of the TCI Group
Ventures Group Common Stock and Common Stock, the TCI Ventures
the Liberty Media Group Common Group Common Stock and the Liberty
Stock. Media Group Common Stock.
NO INITIAL INTER-GROUP
INTEREST............. The Board has determined that The aggregate number of shares of
neither the TCI Ventures Group nor TCI Ventures Group Common Stock
the Liberty Media Group should be being offered in the Exchange
allowed to create an Inter-Group Offers is intended initially to
Interest in the TCI Group represent all of the common
corresponding to the Inter-Group stockholders' equity value of the
Interest of the TCI Group in the Company attributable to the TCI
TCI Ventures Group or in the Ventures Group. Accordingly, if
Liberty Media Group. all of such shares are issued in
the Exchange Offers, the TCI Group
will not have any Inter-Group
Interest in the TCI Ventures
Group. If fewer than all of the
shares offered are issued, the re-
maining Inter-Group Interest would
be extinguished in consideration
of the attribution to the TCI
Group of the TCI Ventures Group
Preferred Interest. See "No
Initial Inter-Group Interest."
</TABLE>
For a more complete description of the TCI Group Common Stock and the TCI
Ventures Group Common Stock, see "DESCRIPTION OF CAPITAL STOCK -- Common Stock"
and "NO INITIAL INTER-GROUP INTEREST IN THE TCI VENTURES GROUP."
22
<PAGE> 31
NO INITIAL INTER-GROUP INTEREST
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent all of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares are issued in the Exchange
Offers, the TCI Group will not have any Inter-Group Interest in the TCI Ventures
Group. If fewer than all of the shares offered are issued, the remaining
Inter-Group Interest would be extinguished in consideration of the attribution
to the TCI Group of the TCI Ventures Group Preferred Interest. The TCI Ventures
Group Preferred Interest will have a stated liquidation value equal to the
market value of the shares of TCI Ventures Group Common Stock not issued in the
Exchange Offers (which shall be deemed to be the same, on a per share basis, as
the Market Value of the Series A TCI Group Common Stock as of the last trading
day preceding the closing of the Exchange Offers), a dividend rate of 5% per
annum and a mandatory redemption obligation on the 15th anniversary of issuance.
Accrued dividends on the TCI Ventures Group Preferred Interest would accumulate
and compound annually (but not be payable currently) until the fifth anniversary
of the closing of the Exchange Offers. On and after such fifth anniversary,
accrued dividends would be payable annually on each anniversary of the closing
of the Exchange Offers and would accumulate and compound to the extent not paid
on any such anniversary. When dividends become payable currently they could be
paid (i) through the transfer of cash or other assets from the TCI Ventures
Group to the TCI Group, (ii) through the reduction of amounts owed by the TCI
Group to the TCI Ventures Group, (iii) through the deemed transfer of taxable
losses of the TCI Ventures Group to the TCI Group pursuant to the tax sharing
agreement among the TCI Ventures Group, the TCI Group and the Liberty Media
Group, effective for periods after October 1, 1997 (in an amount equal to the
highest corporate tax rate in effect at the time of the dividend multiplied by
the amount of taxable losses deemed transferred), but only if such taxable
losses have not been utilized in any calculation under such tax sharing
agreement or (iv) through the cancellation of amounts owed by the TCI Group
under such tax sharing agreement with respect to utilized tax benefits of the
TCI Ventures Group. See "MANAGEMENT AND ALLOCATION POLICIES." The TCI Ventures
Group Preferred Interest will also be redeemable at the discretion of the Board
of Directors in whole or in part at any time.
After giving effect to the Exchange Offers and the attribution of the TCI
Ventures Group Preferred Interest, if necessary, the TCI Group will have no
Inter-Group Interest in the TCI Ventures Group. Thereafter, an Inter-Group
Interest in the TCI Ventures Group would be created only if a subsequent
transfer of cash or other property from the TCI Group to the TCI Ventures Group
is specifically designated by the Board of Directors as being made to create
such an Inter-Group Interest in the TCI Ventures 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 TCI Ventures Group Common Stock are
retired or otherwise cease to be outstanding following their purchase with funds
attributed to the TCI Group. The Board of Directors has determined that the TCI
Ventures Group should not be enabled to create an interest in the TCI Group
corresponding to the Inter-Group Interest of the TCI Group in the TCI Ventures
Group. In making this determination, the Board of Directors concluded that an
interest corresponding to the Inter-Group Interest held by the TCI Ventures
Group in the TCI Group could influence adversely the ability of the TCI Ventures
Group Common Stock to reflect the separate performance of the TCI Ventures
Group.
The amount of any Inter-Group Interest of the TCI Group in the TCI Ventures
Group would be expressed in terms of the "Number of Shares Issuable with Respect
to the TCI Ventures Group Inter-Group Interest", which is intended to provide a
measure of any Inter-Group Interest of the TCI Group in the TCI Ventures Group
on a basis comparable to an investment in shares of TCI Ventures Group Common
Stock. In general, if an Inter-Group Interest in the TCI Ventures Group is
created by a transfer of funds or other assets from the TCI Group to the TCI
Ventures Group, the resulting Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest would be 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 TCI Ventures Group Common Stock as of the date of such
transfer. Any subsequent decrease in the Number of Shares Issuable with Respect
to the TCI Ventures Group Inter-Group Interest resulting from a transfer of
funds or other assets from the TCI Ventures 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 TCI Ventures Group
Common
23
<PAGE> 32
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 TCI Ventures Group Inter-Group Interest would increase on a share
for share basis. Shares of TCI Ventures 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 create an Inter-Group
Interest in the TCI Ventures Group or increase any then existing Inter-Group
Interest but would represent an outstanding interest in the common stockholders'
equity value of the Company attributable to the TCI Ventures Group. Issuances or
sales of shares of TCI Ventures Group Common Stock designated by the Board of
Directors as being made in reduction of any then existing Inter-Group Interest
in the TCI Ventures Group would reduce the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest on a share-for-share
basis and the net proceeds of such issuances or sale would be reflected in the
combined financial statements of the TCI Group.
The "TCI Ventures Group Outstanding Interest Fraction" represents the
percentage interest in the common stockholders' equity value of the Company
attributable to the TCI Ventures Group that is represented at any time by the
outstanding shares of TCI Ventures Group Common Stock and the "TCI Ventures
Group Inter-Group Interest Fraction" represents any remaining percentage
interest in the common stockholders' equity value of the Company attributable to
the TCI Ventures Group that is attributed to the TCI Group by virtue of an
Inter-Group Interest. The sum of the TCI Ventures Group Outstanding Interest
Fraction and the TCI Ventures Group Inter-Group Interest Fraction would always
equal 100%. The "Adjusted TCI Ventures Group Outstanding Interest Fraction" is a
measure of the percentage interest in the TCI Ventures Group represented by
outstanding shares of TCI Ventures Group Common Stock that is similar to the TCI
Ventures Group Outstanding Interest Fraction but takes into account the dilutive
effect of the Pre-Exchange Offer Securities. See "RISK FACTORS -- Considerations
Relating to the TCI Ventures Group Common Stock -- Potential Dilution from
Issuances of TCI Ventures Group Common Stock upon Conversion, Exercise or
Exchange of Certain Outstanding Securities."
At the discretion of the Board of Directors, shares of TCI Ventures Group
Common Stock issued in respect of the TCI Group's Inter-Group Interest in the
TCI Ventures Group may be issued in the form of shares of Series A TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock (subject to there
being a sufficient number of authorized and unissued shares of the applicable
series of TCI Ventures Group Common Stock).
See Annex C for illustrations of the calculation of any Inter-Group
Interest of the TCI Group in the TCI Ventures Group and the effects of, among
other things, certain issuances of shares of TCI Ventures Group Common Stock.
RISK FACTORS
Prior to making an investment decision, prospective participants in the
Exchange Offers should consider all of the information set forth in this
Offering Circular and, in particular, should evaluate the factors set forth in
"RISK FACTORS."
FORWARD-LOOKING STATEMENTS
Certain statements included in this Offering Circular constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors, including, without limitation,
those risks, uncertainties and other factors described under the heading "RISK
FACTORS," that could cause the actual results, performance or achievements of
the Company, the TCI Ventures Group or the entities in which the TCI Ventures
Group has interests, to differ materially from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, among others: general economic
and business conditions and industry trends; the regulatory and competitive
environment of the industries in which the entities in which the TCI Ventures
Group has interests operate, including, but not limited to, the domestic
wireline, wireless and Internet services telecommunications
24
<PAGE> 33
businesses and the domestic satellite businesses of UVSG, international
multichannel video and telecommunications networks and the distribution and
production of programming for international multichannel video distribution; the
development and financing of the Sprint PCS network, Teleport's network, and
@Home's network and the acquisition, development and/or financing of
telecommunications networks and programming services for the entities in which
International has interests; uncertainties inherent in proposed business
strategies and development plans, anticipated capital requirements, future
financial performance, including availability, terms and deployment of capital;
the ability of vendors to deliver required equipment, software and services;
product launches; availability of qualified personnel; changes in the nature of
key strategic relationships with partners and joint venturers; competitor
responses to products and services of the entities in which the TCI Ventures
Group has interests, and the overall market acceptance of such products and
services, including acceptance of the pricing of such products and services; and
other factors. These forward-looking statements speak only as of the date of
this Offering Circular. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
TCI VENTURES GROUP
The following table supplementally sets forth selected historical combined
income statement data for the businesses that will initially comprise the TCI
Ventures Group for each of the three fiscal years in the period ended December
31, 1996 and for the three month periods ended March 31, 1997 and 1996.
Additionally, the following table supplementally sets forth selected historical
combined balance sheet data for the TCI Ventures Group as of March 31, 1997,
December 31, 1996 and December 31, 1995. The selected financial data as of March
31, 1997 and for the three month periods ended March 31, 1997 and 1996 are
derived from unaudited financial statements which have been prepared on the same
basis as the audited financial information and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations of the TCI Ventures Group as of March 31, 1997, and for the three
month periods ended March 31, 1997 and 1996. The table also sets forth selected
unaudited pro forma data for the TCI Ventures Group as of March 31, 1997 and for
the year ended December 31, 1996 and the three months ended March 31, 1997 which
assume the Exchange Offers were consummated prior to the beginning of the
periods presented and assume, solely for the purpose of this pro forma data,
that the Exchange Offers were fully subscribed. The pro forma data does not
purport to be indicative of the results of operations or financial position that
may be obtained in the future. The following information is qualified in its
entirety by, and should be read in conjunction with, the combined financial
25
<PAGE> 34
statements and notes thereto of the TCI Ventures Group and with the consolidated
financial statements and notes thereto of the Company included elsewhere in this
Offering Circular.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ -------------------------------------------
PRO PRO
FORMA FORMA
1997 1997 1996 1996 1996 1995 1994
-------- -------- -------- --------- --------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue........................ $247,020 247,020 160,262 925,676 925,676 325,991 103,844
Operating income (loss)........ $ (115) (115) 309 (50,557) (50,557) (32,941) (25,543)
Share of losses of Telewest.... $(41,708) (41,708) (30,597) (109,357) (109,357) (70,274) (42,520)
Share of losses of PCS
Ventures..................... $(63,536) (63,536) (19,208) (133,497) (133,497) (33,890) (992)
Share of losses of Teleport.... $(13,768) (13,768) (7,962) (50,543) (50,543) (29,975) (19,366)
Gain on sale of subsidiary
stock........................ $ -- -- -- -- -- 122,660 --
Gain on issuance of stock by
equity investees............. $ -- -- -- 12,668 12,668 164,900 161,481
Net earnings (loss)............ $(77,252) (77,252) (54,572) (258,422) (258,422) 60,040 12,650
Loss attributable to TCI
Ventures Group common
stockholders................. $(77,252) -- -- (258,422) -- -- --
Loss attributable to TCI
Ventures Group common
stockholders per common
share........................ $ (.38) -- -- (1.26) -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- -----------------------
PRO FORMA
1997 1997 1996 1995
---------- ---------- ---------- ----------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Summary Balance Sheet Data:
Investment in Telewest.................................. $ 426,810 426,810 488,495 550,216
Investment in PCS Ventures.............................. $ 728,246 728,246 829,651 689,062
Investment in Teleport.................................. $ 262,850 262,850 276,112 244,012
Total assets............................................ $3,863,562 3,863,562 4,259,703 3,447,169
Combined equity......................................... $2,433,997 2,433,997 2,551,516 2,378,722
Book value per share.................................... $ 11.88 -- -- --
</TABLE>
TCI GROUP
The following table sets forth selected historical data for the TCI Group
for each of the three fiscal years in the period ended December 31, 1996 and the
three month periods ended March 31, 1997 and 1996. The table also sets forth (i)
selected unaudited pro forma statement of operations data for the year ended
December 31, 1996, giving pro forma effect to the Company's distribution to the
holders of TCI Group Common Stock of TCI Satellite Entertainment, Inc. (the
"SatCo Spin-off"), the acquisition by the Company of all the common stock of a
subsidiary of Viacom, Inc. (the "VII Cable Acquisition") and the consummation of
the Exchange Offers, as if such transactions had occurred as of January 1, 1996,
(ii) selected unaudited pro forma statement of operations data for the three
months ended March 31, 1997, giving pro forma effect to the Exchange Offers as
if the same had occurred as of January 1, 1997, and (iii) selected unaudited pro
forma balance sheet data for the Company as of March 31, 1997 assuming the
Exchange Offers were consummated as of March 31, 1997. The pro forma amounts
also assume that the Exchange Offers are fully subscribed. The selected
financial data as of March 31, 1997 and for the three month periods ended March
31, 1997 and March 31, 1996 are derived from unaudited financial statements
which have been prepared on the same basis as the audited financial information
and, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of the TCI Group as of March 31, 1997 and for
the three month periods ended March 31, 1997 and March 31, 1996. The pro forma
financial data is not necessarily indicative of the financial position or
results of operations that would have been obtained had the SatCo Spin-Off, the
VII Cable Acquisition and the Exchange Offers been effective at or prior to such
assumed dates. The pro forma information does not purport to be indicative of
the results or financial position that may be obtained in the future. The
following
26
<PAGE> 35
information is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements and notes thereto of the Company
included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------
PRO FORMA PRO FORMA
1997 1997 1996 1996 1996 1995 1994
--------- ----- ----- --------- ----- ----- -----
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue............................ $1,544 1,791 1,469 5,767 6,790 5,145 4,068
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights............. $ 882 1,088 968 3,665 4,689 3,218 2,279
Operating income................... $ 330 330 150 796 546 653 788
Net earnings (loss)................ $ 3 (74) (136) (465) (778) (144) 113
Dividend requirements on preferred
stock........................... (10) (10) (9) (35) (35) (34) (14)
------ ----- ----- ----- ----- ----- -----
Earnings (loss) attributable to TCI
Group common stockholders....... $ (7) (84) (145) (500) (813) (178) 99
====== ===== ===== ===== ===== ===== =====
Loss attributable to TCI Group
common stockholder per common
share........................... $ (.01) (.12) (.22) (1.09) (1.22) (.16) --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------- DECEMBER 31,
PRO FORMA -----------------
1997 1997 1996 1995
---------- ------- ------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net............................ $ 6,933 7,678 7,518 7,205
Franchise costs, net................................... $14,985 15,911 15,436 12,230
Total assets........................................... $23,671 27,535 27,154 23,059
Total debt............................................. $14,478 15,049 14,924 12,960
Combined equity (deficit).............................. $ (439) 1,996 1,863 2,936
Book value per share................................... $ (.92) 2.92 -- --
</TABLE>
TELE-COMMUNICATIONS, INC.
The following table sets forth selected historical data for the Company for
each of the five fiscal years in the period ended December 31, 1996 and the
three month periods ended March 31, 1997 and 1996. The table also sets forth (i)
selected unaudited pro forma statement of operations data for the year ended
December 31, 1996, giving pro forma effect to the SatCo Spin-off, the VII Cable
Acquisition and the consummation of the Exchange Offers, as if such transactions
had occurred as of January 1, 1996, (ii) selected unaudited pro forma statement
of operations data for the three months ended March 31, 1997, giving pro forma
effect to the Exchange Offers as if the same had occurred as of January 1, 1997,
and (iii) selected unaudited pro forma balance sheet data for the Company as of
March 31, 1997 assuming the Exchange Offers were consummated as of March 31,
1997. The pro forma amounts also assume that the Exchange Offers are fully
subscribed. The selected financial data as of March 31, 1997 and for the three
month periods ended March 31, 1997 and March 31, 1996 are derived from unaudited
financial statements which have been prepared on the same basis as the audited
financial information and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of the
Company as of March 31, 1997 and for the three month periods ended March 31,
1997 and March 31, 1996. The pro forma financial data is not necessarily
indicative of the financial position or results of operations that would have
been obtained had the SatCo Spin-Off, the VII Cable Acquisition and the
27
<PAGE> 36
Exchange Offers been effective at or prior to such assumed dates. The pro forma
information does not purport to be indicative of the results or financial
position that may be obtained in the future. The following information is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements and notes thereto of the Company included
elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------
PRO PRO
FORMA FORMA
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ----- ----- ------ ----- ----- ----- ----- -----
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue............................ $1,827 1,827 1,861 7,925 8,022 6,506 4,682 3,977 3,463
Operating, selling, general and
administrative expenses.......... $1,089 1,089 1,328 5,549 5,746 4,518 2,884 2,119 1,826
Operating income................... $ 349 349 172 832 632 542 788 916 864
Earnings (loss) from:
Continuing operations............ $ (58) (58) (121) 333 278 (171) 62 (5) 8
Discontinued operations.......... -- -- -- -- -- -- -- -- (15)
------ ----- ----- ----- ----- ----- ----- ----- -----
(58) (58) (121) 333 278 (171) 62 (5) (7)
Dividend requirements on preferred
stock............................ (10) (10) (9) (35) (35) (34) (8) (2) (15)
------ ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) attributable to
common shareholders.............. $ (68) (68) (130) 298 243 (205) 54 (7) (22)
====== ===== ===== ===== ===== ===== ===== ===== =====
Earnings (loss) attributable to
common shareholders:
TCI Class A and Class B Common
Stock............................ $ -- -- -- -- -- (71) 54 (7) (22)
TCI Group Common Stock............. (7) (84) (145) (500) (813) (107) -- -- --
Liberty Media Group Common Stock... 16 16 15 1,056 1,056 (27) -- -- --
TCI Ventures Group Common Stock.... (77) -- -- (258) -- -- -- -- --
------ ----- ----- ----- ----- ----- ----- ----- -----
$ (68) (68) (130) 298 243 (205) 54 (7) (22)
====== ===== ===== ===== ===== ===== ===== ===== =====
Primary earnings (loss) from
continuing operations attributable
to common shareholders per common
and common equivalent share:
TCI Class A and Class B Common
Stock............................ $ -- -- -- -- -- (.11) .10 (.02) (.01)
TCI Group Series A and Series B
Common Stock..................... $ (.01) (.12) (.22) (1.09) (1.22) (.16) -- -- --
Liberty Media Group Series A and
Series B Common Stock............ $ .06 .06 .06 3.97 3.97 (.11) -- -- --
TCI Ventures Group Series A and
Series B Common Stock............ $ (.38) -- -- (1.26) -- -- -- -- --
Primary weighted average common and
common equivalent shares
outstanding:
TCI Class A and Class B Common
Stock............................ -- -- -- -- -- 648 541 433 424
TCI Group Series A and Series B
Common Stock..................... 473 678 659 460 665 656 -- -- --
Liberty Media Group Series A and
Series B Common Stock............ 250 250 247 266 249 246 -- -- --
TCI Ventures Group Series A and
Series B Common Stock............ 205 -- -- 205 -- -- -- -- --
</TABLE>
28
<PAGE> 37
<TABLE>
<CAPTION>
MARCH 31,
----------------
PRO DECEMBER 31,
FORMA ------------------------------------------
1997 1997 1996 1995 1994 1993 1992
------- ------ ------ ------ ------ ------ ------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net... $ 7,688 7,688 7,528 7,409 5,876 4,935 4,562
Franchise costs, net.......... $15,911 15,911 15,436 12,230 9,444 9,197 9,300
Total assets.................. $30,676 30,676 30,244 25,577 19,276 16,527 16,315
Total debt.................... $15,049 15,049 14,926 13,211 11,162 9,900 10,285
Stockholders' equity.......... $ 4,422 4,422 4,253 4,550 2,655 2,116 1,728
Shares outstanding (net of
shares held by
subsidiaries):
Class A common stock....... -- -- -- -- 491 403 382
Class B common stock....... -- -- -- -- 85 47 48
TCI Group Series A Common
Stock.................... 409 598 579 572 -- -- --
TCI Group Series B Common
Stock.................... 69 85 85 85 -- -- --
Liberty Media Group Series
A Common Stock........... 229 229 228 225 -- -- --
Liberty Media Group Series
B Common Stock........... 21 21 21 21 -- -- --
TCI Ventures Group Series A
Common Stock............. 189 -- -- -- -- -- --
TCI Ventures Group Series B
Common Stock............. 16 -- -- -- -- -- --
Book Value Per Share:
TCI Class A and Class B
common stock............. $ -- -- -- -- 4.61 4.70 4.02
TCI Group Common Stock..... $ (.92) 2.92 2.81 4.47 -- -- --
Liberty Media Group Common
Stock.................... $ 9.73 9.73 9.63 6.56 -- -- --
TCI Ventures Group Common
Stock.................... $ 11.88 -- -- -- -- -- --
</TABLE>
PRICE RANGE OF COMMON STOCK
On August 3, 1995, the stockholders of the Company authorized the Board of
Directors to issue two new series of common stock, the Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock which are
intended to reflect the separate performance of the Liberty Media Group.
Additionally, the stockholders of the Company approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group Common Stock and Series B TCI Group Common Stock. On August 10, 1995, the
Company distributed, in the form of a dividend, one share of Liberty Media Group
Common Stock for each four shares of TCI Group Common Stock owned. Such
distribution (the "Liberty Media Group Distribution") represented 100% of the
common stockholders' equity value of the Company attributable to Liberty Media
Group. The issuance of the Liberty Media Group Common Stock did not result in
any transfer of assets or liabilities of the Company or any of its subsidiaries
or affect the rights of holders of the Company's or any of its subsidiaries'
debt. At December 31, 1996, the TCI Group Common Stock was intended to reflect
the performance of those businesses of the Company not attributed to the Liberty
Media Group. On January 14, 1997, the Company distributed one share of Series A
Liberty Media Group Common Stock for every two shares of Series A Liberty Media
Group Common Stock, and one share of Series A Liberty Media Group Common Stock
for every two shares of Series B Liberty Media Group
29
<PAGE> 38
Common Stock (the "Liberty Group Stock Dividend") then owned by holders of
Liberty Media Group Common Stock.
Prior to the Liberty Media Group Distribution, shares of the Company's
Class A and Class B common stock were traded on the National Market tier of The
Nasdaq Stock Market under the symbols "TCOMA" and "TCOMB," respectively.
Subsequent to the Liberty Media Group Distribution, shares of Series A TCI Group
Common Stock and Series B TCI Group Common Stock and Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock are traded on
the National Market tier of The Nasdaq Stock Market under the symbols "TCOMA,"
"TCOMB," "LBTYA" and "LBTYB," respectively. The table below sets forth the range
of high and low sales prices in United States dollars of shares of common stock
of the Company for the periods indicated as furnished by Nasdaq. The prices have
been rounded up to the nearest eighth, and do not include retail markups,
markdowns, or commissions. On July 31, 1997, the last sales prices for the
Series A TCI Group Common Stock and Series B TCI Group Common Stock were $17 1/8
and $17 1/2, respectively.
TELE-COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1995:
First quarter............................................... 23 3/4 19 7/8 25 20 3/4
Second quarter.............................................. 24 1/2 17 1/4 24 18 1/4
Third quarter (through the Liberty Media Group
Distribution)............................................. 26 1/4 22 5/8 26 1/4 22 1/4
</TABLE>
TCI GROUP COMMON STOCK
<TABLE>
<CAPTION>
SERIES A SERIES B
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1995:
Third quarter (from the Liberty Media Group Distribution
through September 30, 1995)............................... 20 16 7/8 20 17 1/2
Fourth quarter.............................................. 21 1/4 16 5/8 21 1/4 16 3/4
1996:
First quarter............................................... 22 3/8 18 3/8 22 3/4 18 1/2
Second quarter.............................................. 20 1/8 17 3/8 20 1/2 17 1/2
Third quarter............................................... 18 1/2 13 1/8 18 13 3/4
Fourth quarter.............................................. 15 11 3/8 15 11 5/8
1997:
First quarter............................................... 14 7/8 11 7/8 14 3/4 12
Second quarter.............................................. 17 1/8 10 3/4 18 10 1/4
</TABLE>
30
<PAGE> 39
LIBERTY MEDIA GROUP COMMON STOCK
<TABLE>
<CAPTION>
SERIES A SERIES B
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1995:
Third quarter (from the Liberty Media Group Distribution
through September 30, 1995)............................... 18 3/4 15 3/4 19 3/4 16 1/4
Fourth quarter.............................................. 18 3/4 15 1/4 19 3/8 16
1996:
First quarter............................................... 19 1/2 17 1/8 20 3/4 17 3/8
Second quarter.............................................. 20 3/4 17 1/4 21 18
Third quarter............................................... 19 5/8 13 3/4 19 7/8 15 3/8
Fourth quarter.............................................. 19 7/8 14 3/4 19 1/2 15 3/4
1997:
First quarter............................................... 23 3/4 17 7/8 23 1/4 18 1/2
Second quarter.............................................. 27 18 5/8 26 3/4 18 1/2
</TABLE>
31
<PAGE> 40
CAPITALIZATION OF THE COMPANY
The following table sets forth the unaudited consolidated capitalization of
the Company as of March 31, 1997 (i) as reported and (ii) as adjusted to reflect
the Exchange Offers, assuming the Exchange Offers were consummated as of March
31, 1997 and assuming, solely for the purpose of these adjusted amounts, that
outstanding shares of Series A TCI Group Common Stock equal to the Series A
Maximum and outstanding shares of Series B TCI Group Common Stock equal to the
Series B Maximum were tendered for exchange for shares of the corresponding
series of TCI Ventures Group Common Stock. The following should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
AS REPORTED AS ADJUSTED
----------- -----------
IN MILLIONS
<S> <C> <C>
Debt........................................................ $15,049 15,049
Minority interests in equity of consolidated subsidiaries... 1,349 1,349
Redeemable preferred stocks................................. 655 655
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debt securities of TCI Communications,
Inc....................................................... 1,502 1,502
Stockholders' equity:
Series A TCI Group Common Stock........................... 715 526
Series B TCI Group Common Stock........................... 85 69
Series A Liberty Media Group Common Stock................. 229 229
Series B Liberty Media Group Common Stock................. 21 21
Series A TCI Ventures Group Common Stock.................. -- 189
Series B TCI Ventures Group Common Stock.................. -- 16
Additional paid-in capital................................ 3,904 3,904
Cumulative foreign currency translation adjustment, net of
taxes.................................................. 5 5
Unrealized holding gains for available-for-sale
securities, net of taxes............................... 11 11
Accumulated deficit....................................... (234) (234)
TCI stock held by subsidiaries............................ (314) (314)
------- ------
Total stockholders' equity........................... 4,422 4,422
------- ------
Total capitalization.............................. $22,977 22,977
======= ======
</TABLE>
32
<PAGE> 41
CAPITALIZATION OF THE TCI GROUP
The following table sets forth the unaudited combined capitalization of the
TCI Group as of March 31, 1997 (i) as reported and (ii) as adjusted to reflect
the creation of the TCI Ventures Group and the consummation of the Exchange
Offers, as if such transactions were consummated as of March 31, 1997, and
assuming, solely for the purpose of these adjusted amounts, that outstanding
shares of Series A TCI Group Common Stock equal to the Series A Maximum and
outstanding shares of Series B TCI Group Common Stock equal to the Series B
Maximum were tendered for exchange for shares of the corresponding series of TCI
Ventures Group Common Stock. The following should be read in conjunction with
the Company's consolidated financial statements and the notes thereto included
elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
AS REPORTED AS ADJUSTED
----------- -----------
IN MILLIONS
<S> <C> <C>
Debt........................................................ $15,049 14,478
Minority interests in equity of consolidated subsidiaries... 1,298 1,080
Redeemable preferred stocks................................. 655 655
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debt securities of TCI Communications,
Inc. ..................................................... 1,502 1,502
Combined Equity:
Combined equity (deficit)................................. 2,039 (518)
Cumulative foreign currency translation adjustment, net of
taxes.................................................. 5 --
Unrealized holding gains for available-for-sale
securities, net of taxes............................... 11 4
Due from Liberty Media Group.............................. (59) (59)
Due to TCI Ventures Group................................. -- 134
------- -------
Total combined equity (deficit)...................... 1,996 (439)
------- -------
Total capitalization.............................. $20,500 17,276
======= =======
</TABLE>
33
<PAGE> 42
CAPITALIZATION OF THE TCI VENTURES GROUP
The following table sets forth the unaudited combined capitalization of the
TCI Ventures Group at March 31, 1997, as if the TCI Ventures Group had been
created and the Exchange Offers were consummated as of March 31, 1997. The
following should be read in conjunction with the TCI Ventures Group's combined
financial statements and the notes thereto and with the Company's consolidated
financial statements and the notes thereto included elsewhere in this Offering
Circular.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
IN THOUSANDS
<S> <C>
Revolving Credit Facility(1)................................ $ --
Capital lease obligations................................... 193,832
Debt........................................................ 512,757
Minority interests in equity of consolidated subsidiaries... 218,147
Combined equity............................................. 2,433,997
----------
Total capitalization.............................. $3,358,733
==========
</TABLE>
- ---------------
(1) The Company has agreed to provide a revolving loan facility (the "Revolving
Credit Facility") to the TCI Ventures Group for a five-year period
commencing on the closing of the Exchange Offers. Such facility would permit
aggregate borrowings at any one time outstanding of up to $500 million
(subject to reduction as provided below), which borrowings would bear
interest at a rate per annum equal to The Bank of New York's prime rate (as
in effect from time to time) plus 1% per annum, payable quarterly. A
commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Revolving Credit Facility would be payable by the TCI
Ventures Group to the TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Revolving Credit Facility will be reduced on
a dollar-for-dollar basis by up to $300 million if and to the extent that
the aggregate amount of any additional capital that TCI Telephony
contributes or is required to contribute to the Sprint PCS Partnerships
subsequent to the closing of the Exchange Offers is less than $300 million.
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RISK FACTORS
Prior to tendering any shares of TCI Group Common Stock in exchange for TCI
Ventures Group Common Stock, stockholders should carefully consider the
following factors in addition to the other information contained in this
Offering Circular.
CONSIDERATIONS RELATING TO THE TCI VENTURES GROUP COMMON STOCK
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 Ventures Group, the TCI Group and the Liberty
Media Group, the change in the capital structure of the Company resulting from
the issuance of shares of TCI Ventures Group Common Stock will not affect legal
title to such assets or responsibility for such liabilities of the Company or
any of its subsidiaries. Holders of Series A TCI Ventures 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.
The financial results of 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 Ventures Group Common Stock, the TCI Group Common Stock and the Liberty
Media Group Common Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Ventures Group Common Stock, the
TCI Group Common Stock or the Liberty Media 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 Ventures Group Common
Stock, the TCI Group Common Stock and the Liberty Media Group Common Stock. The
combined financial statements of the TCI Ventures Group, the TCI Group and the
Liberty Media Group should be read in conjunction with the consolidated
financial statements of TCI. 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
Holders of TCI Ventures Group Common Stock do not have any legal rights
specifically related to the assets attributed to the TCI Ventures Group or have
any right to vote on matters as a separate class, other than (i) as set forth in
the provisions relating to dividend and liquidation rights and requirements for
mandatory dividend, redemption or conversion of TCI Ventures Group Common Stock
upon the disposition of all or substantially all of the properties and assets of
the TCI Ventures Group as described under "DESCRIPTION OF CAPITAL
STOCK -- Common Stock -- Conversion and Redemption" and (ii) separate voting
rights in limited circumstances as required by the DGCL. Separate meetings for
the holders of TCI Ventures Group Common Stock will not be held.
Holders of TCI Ventures Group Common Stock, TCI Group Common Stock, Liberty
Media Group Common Stock, and any Preferred Stock having general voting rights,
vote as one class on all matters coming before any meeting of stockholders and
do 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
increase or decrease the aggregate number of authorized shares of such class,
increase or decrease the par value of the shares of such class, or alter or
change the powers, preferences or special rights of the shares 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
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on the powers, preferences or special rights of any series of Common Stock does
not differ from its adverse effect on the powers, preferences or special rights
of any other series of Common Stock would not entitle such series to vote as a
class separately from the other series of Common Stock.
Certain matters on which holders of TCI Ventures Group Common Stock, TCI
Group Common Stock and Liberty Media Group Common Stock might vote together as a
single class could involve a divergence or the appearance of a divergence of
interests among 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." Immediately following the
issuance of shares of TCI Ventures Group Common Stock upon the closing of the
Exchange Offers, assuming all shares of Series A TCI Ventures Group Common Stock
and Series B TCI Ventures Group Common Stock offered are issued, 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.
The Series A TCI Ventures Group Common Stock has one vote per share and the
Series B TCI Ventures Group Common Stock has ten votes per share. The Series A
TCI Group Common Stock and Series A Liberty Media Group Common Stock have one
vote per share and the Series B TCI Group Common Stock and Series B Liberty
Media Group Common Stock have ten votes per share. See "DESCRIPTION OF CAPITAL
STOCK -- Common Stock -- Voting Rights."
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
The existence of the TCI Ventures Group Common Stock may give rise to
occasions when the interests of the holders of TCI Ventures 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 TCI Ventures Group Common Stock into shares of
TCI Group Common Stock, (ii) approve the disposition of all or substantially all
of the properties and assets of the TCI Ventures 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) if and to the extent the TCI Group has an
Inter-Group Interest in the TCI Ventures Group, allocate the proceeds of
issuances of TCI Ventures Group Common Stock either to the TCI Group in respect
of a reduction in its Inter-Group Interest in the TCI Ventures Group or to the
equity of the TCI Ventures Group, (vi) pay or omit dividends on the TCI Ventures
Group Common Stock, the TCI Group Common Stock or the Liberty Media 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. See also "Considerations
Relating to the TCI Ventures Group Entities -- Potential Conflicts with Owners."
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 Ventures Group Common Stock, TCI Group
Common Stock and Liberty Media 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
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<PAGE> 45
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 TCI Ventures Group Common Stock into TCI Group
Common Stock. The Board of Directors may determine to convert each outstanding
share of Series A TCI Ventures Group Common Stock into shares of Series A TCI
Group Common Stock and each outstanding share of Series B TCI Ventures Group
Common Stock into shares 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 TCI Ventures
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 TCI Ventures Group Common
Stock determined by appraisal differs significantly from the market value of the
TCI Ventures 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 TCI Ventures 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 TCI Ventures Group
Common Stock. For example, a conversion could be considered dilutive of the
interests of the holders of the TCI Ventures Group Common Stock if the Market
Value of the TCI Group Common Stock is greater 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 TCI Ventures Group Common
Stock were used. Such a conversion would also have the effect of precluding
holders of TCI Ventures Group Common Stock from retaining their investment in a
security intended to reflect separately the businesses and assets attributed to
the TCI Ventures Group.
Disposition of Group Assets. As long as the assets attributed to 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 attributed to 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 Company as a whole. The
Amended Charter, however, contains provisions which, in the event of a
Disposition of all or substantially all of the properties and assets attributed
to the TCI Ventures Group in one transaction or a series of related
transactions, other than in certain specified transactions, including 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 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 TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock an amount in
cash and/or securities or other property equal to their proportionate interest
in the TCI Ventures Group Net Proceeds of such Disposition or (ii) convert
outstanding shares of Series A TCI Ventures Group Common Stock into a number (or
fraction) of shares of Series A TCI Group Common Stock and convert outstanding
shares of Series B TCI Ventures 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 TCI Ventures
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
TCI Ventures 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 TCI Ventures 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 TCI Ventures Group. In addition,
although the Amended Charter contains comparable provisions relating to a
disposition of all or substantially all of the properties and assets of the
Liberty Media Group, the Amended Charter does not contain comparable provisions
relating to a disposition of all or substantially all of the properties and
assets of the TCI Group. See "DESCRIPTION OF CAPITAL
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<PAGE> 46
STOCK -- 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 the exercise of its fiduciary duties. See "-- Fiduciary Duties of the Board
of Directors Are to All Stockholders Regardless of Class or Series."
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
Ventures Group Common Stock, TCI Group Common Stock and Liberty Media 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. For example, because both the Liberty
Media Group and the TCI Ventures Group (through International) have significant
interests in entities which provide programming services to markets outside the
United States, and also have business strategies which anticipate further
expansion into international markets, it is likely that the Board of Directors
of the Company will be presented with opportunities which could be pursued
through either the TCI Ventures Group (through International) or the Liberty
Media Group, or jointly through both Groups. See "MANAGEMENT AND ALLOCATION
POLICIES."
Allocation of Proceeds Upon Issuance of TCI Ventures Group Common Stock. If
and to the extent that the TCI Group has an Inter-Group Interest in the TCI
Ventures Group at the time of any sale by the Company of shares of TCI Ventures
Group Common Stock subsequent to the Exchange Offers, the Board of Directors
would determine the allocation of the proceeds of such sale between the TCI
Group and the TCI Ventures Group. In such case, the Board of Directors could
allocate up to 100% of the net proceeds of such sale of TCI Ventures Group
Common Stock to the TCI Group or to the TCI Ventures Group, and such net
proceeds would be attributed entirely to and 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 any then existing
Inter-Group Interest in the TCI Ventures 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 Ventures Group Common Stock, the TCI Group
Common Stock or the Liberty Media Group Common Stock. Any dividends on the TCI
Ventures 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 TCI Ventures 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 Ventures Group Common Stock, the TCI Group Common Stock
or the Liberty Media 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 Ventures Group Common Stock, the
TCI Group Common Stock and the Liberty Media 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 Ventures Group Common Stock, the TCI Group
Common Stock and the Liberty Media Group Common Stock in equal or unequal
amounts, or may decide not to declare and pay such dividends, notwithstanding
the relationship among the TCI Ventures Group Available Dividend Amount, the TCI
Group Available Dividend Amount and the Liberty Media Group Available Dividend
Amount, the respective amounts of prior dividends paid on, or liquidation rights
of, the TCI Ventures Group Common Stock, the TCI Group Common Stock or
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<PAGE> 47
the Liberty Media Group Common Stock or any other factor. See "DESCRIPTION OF
CAPITAL STOCK -- 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."
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 Ventures Group Common Stock, TCI Group Common Stock and Liberty
Media Group Common Stock. The existence of the TCI Ventures Group Common Stock,
the TCI Group Common Stock and the Liberty Media 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 a material divergence of interests among 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 Ventures Group Common Stock, the
holders of TCI Group Common Stock and the holders of Liberty Media 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 Ventures Group Common Stock, the
TCI Group Common Stock or the Liberty Media 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 Ventures Group Common Stock, the TCI Group Common Stock and the
Liberty Media Group Common Stock or disparate values of the TCI Ventures Group
Common Stock, the TCI Group Common Stock and the Liberty Media 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 Ventures Group Common Stock, TCI Group Common
Stock and Liberty Media Group Common Stock were disproportionate or had
disparate values.
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TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS FROM THE TCI GROUP
All debt incurred or preferred stock issued by the Company and its
subsidiaries following the issuance by the Company of TCI Ventures Group Common
Stock in the Exchange Offers will be (unless the Board of Directors otherwise
provides) 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 in 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
TCI Ventures Group or the Liberty Media Group, reflected as the creation of an,
or an increase in any then existing, Inter-Group Interest of the TCI Group in
such Group or, in the case of a transfer from either the TCI Ventures Group or
the Liberty Media Group to the TCI Group, reflected as a reduction in any then
existing Inter-Group Interest of the TCI Group 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, the TCI Ventures Group is expected to require additional
advances from the TCI Group for some period of time. To satisfy this need, the
Company has agreed to provide the Revolving Credit Facility to the TCI Ventures
Group for a five-year period commencing on the closing of the Exchange Offers.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction as provided below), which borrowings
would bear interest at a rate per annum equal to The Bank of New York's prime
rate (as in effect from time to time) plus 1% per annum, payable quarterly. A
commitment fee equal to 3/8% per annum of the average unborrowed availability
under the Revolving Credit Facility would be payable by the TCI Ventures Group
to the TCI Group on a quarterly basis. The maximum amount of borrowings
permitted under the Revolving Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Telephony contributes or is
required to contribute to the Sprint PCS Partnerships subsequent to the closing
of the Exchange Offers is less than $300 million.
Except as described above with respect to the Revolving Credit Facility,
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.
Although the creation of or any increase in an Inter-Group Interest of the
TCI Group in the TCI Ventures Group resulting from an equity contribution by the
TCI Group to the TCI Ventures Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the TCI Ventures Group to the TCI Group
would be determined by reference to the Market Value of the Series A TCI
Ventures Group
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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 Ventures Group Common Stock, TCI Group Common Stock
or Liberty Media 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 TCI Ventures Group Common
Stock, there can be no assurance as to the market price of the TCI Ventures
Group Common Stock following the closing of the Exchange Offers. If a relatively
small number of shares of either or both of the Series A TCI Ventures Group
Common Stock or the Series B TCI Ventures 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. Further, if an active trading market does
develop, there can be no assurance that it will be maintained. Moreover, it is
not possible to predict the impact of the issuance of the TCI Ventures Group
Common Stock on the market price of the TCI Group Common Stock. See
"SUMMARY -- Price Range of Common Stock."
The market prices of the TCI Ventures Group Common Stock after consummation
of the Exchange Offers would be determined in the trading markets and could be
influenced by many factors, including the combined results of the TCI Ventures
Group and the consolidated results of the Company and of the various companies
attributed to the TCI Ventures Group, as well as the performance of the TCI
Ventures Group and such companies relative to investors' expectations, 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 TCI Ventures Group Common Stock based on the reported financial
results or other measures of performance or prospects of the TCI Ventures Group
or such other companies. 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 TCI Ventures Group Common Stock. In addition, the Company cannot
predict the impact on the market price of the TCI Ventures 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 TCI Ventures Group
are sold in a Disposition on the TCI Ventures Group Net Proceeds of such
Disposition, the ability of the Company to convert shares of TCI Ventures Group
Common Stock into TCI Group Common Stock at a conversion ratio based on an
appraised value determination for the TCI Ventures 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
TCI Ventures Group Common Stock will be included in any stock market index in
which the TCI Group Common Stock is now included, or that the TCI Group Common
Stock will continue to be included in such index. Not being included in an index
could adversely affect demand for the TCI Ventures Group Common Stock or the TCI
Group Common Stock and, consequently, the market price thereof.
POTENTIAL CONVERSION OF TCI VENTURES GROUP COMMON STOCK
Solely at the Company's option, all of the outstanding shares of TCI
Ventures Group Common Stock may be converted into TCI Group Common Stock upon
the terms described under "DESCRIPTION OF CAPITAL STOCK -- Common
Stock -- Conversion and Redemption." The Company cannot predict the
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impact on the market prices of the TCI Ventures Group Common Stock or the TCI
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 Ventures Group Common Stock or the TCI Group Common
Stock prevailing at such time. See "-- Potential Divergence of Interests; No
Specific Procedures for Resolution."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS OF THE TCI VENTURES GROUP
The terms of the TCI Ventures Group Common Stock provide that if the
Company were to dispose of all or substantially all of the properties and assets
of the TCI Ventures 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 of the assets of the Company, the Company would be
required, at its option, either to (i) distribute to holders of TCI Ventures
Group Common Stock an amount equal to their proportionate interest in the TCI
Ventures Group Net Proceeds of such Disposition, either by special dividend or
by redemption of all or part of the outstanding shares of TCI Ventures Group
Common Stock, or (ii) convert outstanding shares of TCI Ventures 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 TCI Ventures Group Common Stock to the Market Value of a
share of Series A TCI Group Common Stock over a specified period following such
Disposition. "TCI Ventures Group 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
and in respect of the TCI Ventures Group Preferred Interest) attributed to the
TCI Ventures Group. If the TCI Ventures 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 TCI Ventures Group Net
Proceeds that would be received by holders of TCI Ventures Group Common Stock if
all or substantially all of the properties and assets of the TCI Ventures Group
were sold. In addition, no assurance can be given that the TCI Ventures Group
Net Proceeds per share of TCI Ventures Group Common Stock to be received in
connection with a Disposition of all or substantially all of the properties and
assets of the TCI Ventures Group will be equal to or more than the market value
per share of TCI Ventures Group Common Stock prior to or after announcement of
such Disposition. See "-- Potential Conversion of TCI Ventures Group Common
Stock" and "-- No Assurance as to Market Price" above and "DESCRIPTION OF
CAPITAL STOCK -- Common Stock -- Conversion and Redemption."
POTENTIAL DILUTION FROM ISSUANCES OF TCI VENTURES GROUP COMMON STOCK UPON
CONVERSION, EXERCISE OR EXCHANGE OF CERTAIN OUTSTANDING SECURITIES
After the consummation of the Exchange Offers, the TCI-UA Notes that remain
outstanding will be adjusted, in accordance with their terms, so that if such
TCI-UA Notes were exchanged immediately following the closing of the Exchange
Offers there would be delivered upon such exchange a number of shares of Series
A TCI Ventures Group Common Stock equal to 30% of the number of shares of Series
A TCI Group Common Stock that would have been deliverable upon such exchange if
effected immediately prior to the closing of the Exchange Offers. Further, the
shares of Series A TCI Group Common Stock that would have been issuable upon
such exchange if effected immediately prior to the closing of the Exchange
Offers will be reduced by the number of shares of TCI Ventures Group Common
Stock so issuable. Similarly, the Adjustable Options will be divided into
options to purchase shares of Series A TCI Ventures Group Common Stock and
options to purchase shares of Series A TCI Group Common Stock, with 30% of the
shares originally subject to the option being allocated to the option to
purchase shares of TCI Ventures Group Common Stock. The issuance of shares of
Series A TCI Ventures Group Common Stock upon such conversion, exercise or
exchange of Pre-Exchange Offer Securities will not result in any transfer of
funds or other assets from the TCI Group to the TCI Ventures Group, or a
reduction in any Inter-Group Interest that
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then may exist, in consideration of such issuance. The proceeds received upon
the exercise of Initial Ventures Options will be attributed to the TCI Ventures
Group, as will the liability for amounts payable upon the exercise of any
related stock appreciation rights. The TCI-UA Notes will continue to be a
liability of the TCI Group.
If Pre-Exchange Offer Securities remain outstanding at the time of any
redemption of all outstanding shares of TCI Ventures Group Common Stock
following the Disposition of all (not merely substantially all) of the
properties and assets of the TCI Ventures Group (see "DESCRIPTION OF CAPITAL
STOCK -- Common Stock -- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of TCI Ventures Group Common Stock"), the proportionate
interest in the TCI Ventures Group Net Proceeds of the Disposition to be
distributed to the holders of TCI Ventures Group Common Stock will be determined
on the basis of the Adjusted TCI Ventures Group Outstanding Interest Fraction.
Such determination will result in the allocation to the TCI Group of a portion
of such TCI Ventures Group Net Proceeds, in addition to the portion attributable
to any Inter-Group Interest, sufficient to provide for the delivery of the
portion of the consideration (if any) deliverable by the Company on any
post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group Common Stock
that would have been issuable upon such conversion, exercise or exchange if it
had occurred prior to the redemption. Likewise if Pre-Exchange Offer Securities
remain outstanding at the time of any redemption of all the outstanding shares
of TCI Ventures Group Common Stock in exchange for stock of any one or more
Qualifying Subsidiaries of the Company which hold all of the assets and
liabilities of the TCI Ventures Group (see "DESCRIPTION OF CAPITAL
STOCK -- Common Stock -- Conversion and Redemption -- Redemption in Exchange for
Stock of Subsidiary"), the number of shares of such subsidiaries deliverable in
redemption of the outstanding shares of TCI Ventures Group Common Stock will be
determined on the basis of the Adjusted TCI Ventures Group Outstanding Interest
Fraction, resulting in the allocation to the TCI Group of a portion of the
shares of such subsidiaries, in addition to the number of shares so allocated in
respect of any Inter-Group Interest, sufficient to provide for the delivery of
the portion of the consideration (if any) deliverable by the Company upon any
post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group Common Stock
that would have been issuable upon such conversion, exercise or exchange if it
had occurred prior to such redemption. If Pre-Exchange Offer Securities remain
outstanding at the time of any conversion at the option of the Company of all
outstanding shares of TCI Ventures Group Common Stock into TCI Group Common
Stock (see "DESCRIPTION OF CAPITAL STOCK -- Common Stock -- Conversion and
Redemption -- Conversion at the Option of the Company"), the determination of
the value (as determined on the basis of appraisals performed by investment
banking firms) of one share of TCI Ventures Group Common Stock used in
calculating the conversion ratio will be made on a basis that assumes the
conversion, exercise or exchange, as applicable, of all Pre-Exchange Offer
Securities.
As of June 30, 1997, the TCI-UA Notes in the aggregate were exchangeable
for 34,853,145 shares of Series A TCI Group Common Stock and 13,069,918 shares
of Series A Liberty Media Group Common Stock, and the Adjustable Options in the
aggregate were exercisable for 18,993,639 shares of Series A TCI Group Common
Stock. As a result of the adjustments described above, immediately following the
closing of the Exchange Offers, the TCI-UA Notes will be exchangeable for
24,397,201 shares of Series A TCI Group Common Stock, 13,069,918 shares of
Series A Liberty Media Group Common Stock and 10,455,944 shares of Series A TCI
Ventures Group Common Stock, and the Adjustable Options will be replaced by
options to purchase an aggregate of 5,698,093 shares of Series A TCI Ventures
Group Common Stock and options to purchase an aggregate of 13,295,546 shares of
Series A TCI Group Common Stock. On July 23, 1997, the Board of Directors
approved the grant of Adjustable Options exercisable for 3,850,000 shares of
Series A TCI Group Common Stock and on August 7, 1997, the Board ratified the
additional grant of Adjustable Options exercisable for 6,000,000 shares of
Series A TCI Group Common Stock. Immediately following the closing of the
Exchange Offers, the options referred to in the preceding sentence will be
replaced by options to purchase an aggregate of 2,955,000 shares of Series A TCI
Ventures Group Common Stock and options to purchase an aggregate of 6,895,000
shares of Series A TCI Group Common Stock.
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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 TCI Ventures Group Common Stock is
designed to reflect the separate performance of the TCI Ventures Group, a person
interested in acquiring only the TCI Ventures Group without negotiation with the
Company's management would still be required to seek control of the voting power
represented by all of the outstanding capital stock of the Company, including
the TCI Ventures Group Common Stock, the TCI Group Common Stock and the Liberty
Media Group Common Stock. See "DESCRIPTION OF CAPITAL STOCK -- 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 TCI Ventures 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 TCI Ventures 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 Amended 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" for a period of three years following the time that
such stockholder became an "interested stockholder" unless certain conditions
are met. The Amended 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 "DESCRIPTION
OF CAPITAL STOCK -- Anti-Takeover Considerations." In addition, the existence of
the TCI Ventures Group Common Stock will 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 TCI Ventures Group Common Stock.
The provisions of the DGCL, the Amended Charter and the Company's Bylaws and the
existence of the TCI Ventures 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 "DESCRIPTION OF CAPITAL
STOCK -- Anti-Takeover Considerations."
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CONSIDERATIONS RELATING TO THE TCI VENTURES GROUP ENTITIES
SIGNIFICANT CAPITAL REQUIREMENTS.
A significant number of the entities the ownership of which, or the
investment in which, has been attributed to the TCI Ventures Group
(individually, a "TCI Ventures Group Entity" and, collectively, the "TCI
Ventures Group Entities") will require significant additional capital in order
to develop their respective businesses and assets, to fund future operating
losses and to fund future growth. In certain cases, principally with respect to
the Sprint PCS Partnerships, the Company has existing contractual commitments
pursuant to which (subject to certain conditions) it may be required to make
significant additional capital contributions to certain of the TCI Ventures
Group Entities. Without regard to whether the Company has a specific contractual
or other similar commitment to provide additional capital to any or all of the
TCI Ventures Group Entities, the Company's investment in certain of the TCI
Ventures Group Entities that are joint venture corporations or partnerships with
other investors will be subject to dilution as a result of the additional
capital requirements of such TCI Ventures Group Entities unless, and only to the
extent that, TCI makes the additional capital contributions that would be
required in order for TCI to maintain its percentage interest in such TCI
Ventures Group Entities at current levels.
International. The businesses of International, its subsidiaries and
affiliates consist of the acquisition, ownership, development and operation of
broadband cable television and telephony distribution networks and programming
services, all of which require substantial capital investment. Many of
International's subsidiaries and affiliates are incurring substantial costs as
they build or rebuild their cable networks or develop and acquire programming.
Until such companies begin generating profits and positive cash flow, they will
need additional capital to fund capital expenditures and working capital
requirements. International has commitments under various partnership and other
funding agreements to contribute capital or loan money to fund capital
expenditures and other capital requirements of certain affiliates. At March 31,
1997, International had outstanding contractual commitments to make additional
contributions or loans to various of its equity affiliates in the aggregate
amount of approximately $37.0 million (including its obligation to
MultiThematiques, S.A.) (using the spot rate for exchange of the applicable
currency as of March 31, 1997) and anticipates being required to make additional
contributions of approximately $45.8 million in the aggregate over the next
three years to certain strategic ventures that are in the process of being
formed. International also anticipates contributing $29 million to another
equity affiliate. International and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of various of International's affiliates in
the aggregate amount of approximately $16.6 million, the liability with respect
to which guarantees will be attributed to the TCI Ventures Group. International
has also guaranteed the obligations of certain of its affiliates with respect to
the payment of license fees (with International's liability in the event of
breach being approximately $55 million). Subsequent to March 31, 1997,
International agreed to fulfill certain financial obligations of an affiliate to
provide credit facilities in an aggregate amount of $209 million in the event
such affiliate fails to fulfill such obligations. The Company believes that most
of International's existing contractual commitments (other than guarantees), as
well as those being negotiated with respect to certain strategic ventures, will
be required to be funded during the three years ended December 31, 2000.
International also has significant contractual commitments with respect to
programming agreements, transponder leases and other arrangements. In addition,
the Company believes that International's actual future cash requirements in
order to fund the capital expenditures and working capital requirements of its
subsidiaries and affiliates will exceed the sum of the amounts that
International and its consolidated subsidiaries are currently contractually
obligated to fund and the amount of additional funding commitments currently
under negotiation. Further, International's business strategy requires that it
have the ability to access or raise sufficient funds to allow it to take
advantage of new acquisition and joint venture opportunities as they arise,
which management of International believes will require the availability of
substantial additional funds.
Although International had, as of March 31, 1997, $134.5 million of
proceeds remaining from the sale of its 4 1/2% Convertible Subordinated
Debentures due 2006 which were issued in February 1996 (the "International
Debentures") (which remaining proceeds have been loaned to TCI pursuant to an
unsecured promissory note pending its use by International), International's
ability to otherwise obtain debt financing from unaffiliated entities at other
than the subsidiary level to assist its operating companies and to meet its
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capital obligations will be limited because International does not conduct any
operations directly. See "-- Substantial Leverage," and "-- Investments with
Holding Company Structures." No assurance can be given that International will
be able to meet its commitments to its subsidiaries and affiliates or to fund
its operations or liquidity requirements through the receipt of cash
distributions or other advances from its subsidiaries or affiliates. See
"-- Limitations on Control of Affiliated Companies; Limitations on Liquidity of
Investments; Risk of Deadlock." The only subsidiary of International from which
it presently is able to obtain funds is the subsidiary which owns
International's interest in the Puerto Rico cable systems, which had operating
income before depreciation and amortization ("operating cash flow") of $2.3
million during the three months ended March 31, 1997, and $8.1 million during
the year ended December 31, 1996. A substantial portion of that operating cash
flow will be used to pay interest expense of and make capital expenditures for
that subsidiary. The Company believes that the remaining consolidated operating
activities of International will produce net cash flow deficits for the
foreseeable future. Accordingly, the Company anticipates that International will
be dependent upon its current levels of cash and cash equivalents (approximately
$4.3 million at March 31, 1997 exclusive of amounts held by its subsidiaries),
the remaining proceeds from the sale of the International Debentures and
borrowings under a $200 million credit facility with the TCI Ventures Group (the
"International Credit Facility") to meet its liquidity requirements, including
its commitments to its subsidiaries and its affiliates, for the foreseeable
future. The TCI Ventures Group intends to meet its obligations under the
International Credit Facility through borrowings from TCI under the Revolving
Credit Facility. To the extent that International seeks to make significant
additional acquisitions or significant new investments or is required to meet
significant future liquidity requirements, it will need to obtain additional
financing. See "-- Substantial Leverage."
Sprint PCS. The Sprint PCS Partners, including TCI Telephony, have agreed
to contribute up to an aggregate of approximately $4.2 billion of equity to
Sprint PCS from inception through fiscal 1999 (of which TCI Telephony's share is
approximately $1.3 billion) if and to the extent required by annual budgets of
Sprint PCS for fiscal years in such period approved by the Sprint PCS Partners
or requested during such period by the affirmative vote of Sprint PCS Partners
with percentage interests in Sprint PCS of 75% or more in the aggregate. As of
March 31, 1997, approximately $3.0 billion of such $4.2 billion had been
contributed to Sprint PCS. The Company currently expects that the remaining
approximately $1.2 billion of such amount (of which TCI Telephony's share would
be approximately $360 million) will be contributed by the Sprint PCS Partners by
the end of the first quarter of 1998 (although there can be no assurance that
any additional capital will be contributed by any or all of the Sprint PCS
Partners). As of June 30, 1997, TCI Telephony had contributed approximately
$954.5 million to Sprint PCS. In addition, in connection with certain debt
financings by Sprint Spectrum L.P., a subsidiary of the Sprint PCS Partnerships
("Sprint Spectrum"), the corporate parents of the Sprint PCS Partners (TCI, Cox,
Comcast and Sprint, collectively, the "Sprint PCS Parents") entered into a
capital contribution agreement with Sprint Spectrum (the "Capital Contribution
Agreement"), of which the secured creditors in such debt financings are
beneficiaries, pursuant to which each Sprint PCS Parent agreed to make certain
contributions, or cause contributions to be made, to Sprint Spectrum from time
to time upon the occurrence of certain events (including a payment default under
or acceleration of Sprint Spectrum's obligation pursuant to the debt financing
agreements), up to a maximum aggregate amount determined in accordance with a
formula. The obligations of TCI under the Capital Contribution Agreement have
been attributed to the TCI Ventures Group. As of March 31, 1997, approximately
$800 million of such agreed contributions under the Capital Contribution
Agreement had been contributed directly or indirectly to Sprint Spectrum (of
which TCI contributed approximately $240 million), thereby reducing the Sprint
PCS Parents' respective obligations under the Capital Contribution Agreement by
such amount and reducing TCI's obligation to approximately $150 million as of
March 31, 1997. Based on the currently expected timing of additional
contributions to Sprint PCS (including the currently expected timing of Sprint
PCS's expected capital contributions to its affiliates and to its subsidiaries
other than Sprint Spectrum and its subsidiaries), TCI 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 TCI Telephony's pro rata portion of the balance of the $4.2 billion
that the Sprint PCS Partners have agreed to contribute.
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The buildout of Sprint PCS's network and the development, marketing and
distribution of its products and services will require substantial capital.
Sprint PCS currently estimates that its capital requirements (capital
expenditures, the cost of its existing licenses, working capital, debt service
requirements and anticipated operating losses) for the period from inception
through the end of 1998 (based on Sprint PCS's current plans for its network
buildout in its current license areas), but excluding any obligations in respect
of its interest in APC or Cox PCS, will total approximately $8.9 billion (of
which approximately $5.1 billion had been expended as of March 31, 1997). Sprint
PCS also has commitments under various agreements to contribute capital or loan
money to fund capital expenditures and general working capital requirements of
APC and Cox PCS. In addition, the other partner in each of APC and Cox PCS is
entitled to require Sprint PCS to purchase specified portions of its interest in
APC or Cox PCS, as applicable, during specified periods during each calendar
year for an amount in cash determined by reference to the appraised fair market
value of the applicable partnership. In addition, under certain circumstances
the other partner in Cox PCS may receive an additional equity interest in Sprint
PCS in lieu of cash in exchange for such interest. It is currently expected that
the rights of the other partner in each of APC and Cox to "put" its interest in
APC or Cox, as applicable, to Sprint PCS will first become exercisable in the
fourth quarter of 1997, with respect to APC, and the first quarter of 1998, with
respect to Cox PCS, in each case as to 20% of such other partner's interest. Due
to, among other things, the necessity of governmental approvals in connection
with such transactions, if such rights were exercised at such times, the
consummation of either of such transactions would not be expected to occur until
the second or third quarter of 1998. Sprint PCS will also require substantial
additional capital after 1998, for coverage expansion, volume-driven network
capacity and other capital expenditures for existing and new license areas (if
any), working capital, debt service requirements and anticipated further
operating losses. Sprint PCS is generating substantial operating losses, and has
no internal sources of funds (other than cash or cash equivalents) in order to
meet its current and expected capital requirements. In addition to the equity
that the Sprint PCS Partners have agreed to contribute to Sprint PCS, Sprint
Spectrum has 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 the public offering of
senior notes and senior discount notes (collectively, the "Sprint Spectrum
Notes"). There can be no assurance that all of the committed amounts under such
secured financings will be made available to Sprint PCS or that, if made
available, Sprint PCS will be able to generate sufficient funds to meet fixed
charges or other obligations. Due to its highly leveraged capital structure,
there can be no assurance that Sprint PCS will be able to arrange additional
financing to fund capital requirements until Sprint PCS achieves positive
operating cash flow or at all, or that such financing will be available on a
timely basis and on terms acceptable to Sprint PCS and within limitations
contained in the agreements governing its existing indebtedness and any new
financing arrangements. Sprint PCS anticipates that it will be dependent on
additional capital contributions from the Sprint PCS Partners and borrowings
from Sprint Spectrum's vendor financing and credit facility to fund its capital
requirements for the foreseeable future. The Company anticipates that the actual
future cash requirements of Sprint PCS will exceed the sum of the amounts that
the Sprint PCS Partners have agreed to contribute and the banks and vendors have
agreed to lend.
In addition to the contributions to the Sprint PCS Partnership described
above, TCI Telephony had contributed a total of approximately $51.9 million in
capital to PhillieCo as of June 30, 1997, and expects to contribute an
additional approximately $73 million in capital to PhillieCo prior to December
31, 1998.
TCG. Although Teleport has been operating networks for over ten years, its
continuous acquisition, development and expansion of existing and new networks
and services also require significant additional capital expenditures. Teleport
made capital expenditures of approximately $358.2 million for the year ended
December 31, 1996 and anticipates that capital expenditures will be
approximately $500 million in the aggregate in 1997. Teleport expects to fund
the acquisition, development and expansion of its existing and new networks and
services with available cash and cash equivalents (approximately $155.6 million
at March 31, 1997), internally generated cash flow, the proceeds from existing
and future credit facilities and other borrowings (subject to compliance with
the covenants contained therein), and the proceeds from sales (or other
issuance) of additional debt and equity securities. Teleport's ability to incur
long-term indebtedness or to issue equity is subject to the approval of the New
York Public Service Commission and the New Jersey Board
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of Public Utilities. TCI Telephony has no obligation to contribute capital to or
otherwise increase its investment in Teleport.
As of March 31, 1997, TCI Telephony had made a total of approximately $28.1
million in aggregate capital contributions to Kansas City Fiber Network, L.P.
("Kansas City Fiber Network"), NHT Partnership, Louisville Lightwave and New
Jersey Fiber Technologies, L.P., and expects to make an aggregate additional $3
million in capital contributions to such entities. TCI currently is negotiating
to sell its interests in these CAP partnerships. See "DESCRIPTION OF THE
BUSINESS OF TCI VENTURES GROUP -- Domestic Telephony."
@Home. @Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is at a very early stage of development. As of
June 30, 1997, there were only approximately 7,000 subscribers to the @Home
service and there can be no assurance that the anticipated growth will
materialize in the time frame envisioned by @Home, or at all. @Home believes
that the net proceeds of $101,067,750 (before deduction of expenses) from its
initial public offering on July 11, 1997, together with existing cash, cash
equivalents, short-term cash investments and capital lease financing, will be
sufficient to meet its working capital and capital expenditure requirements for
at least the next 18 months. @Home may, however, require additional funds if its
estimates of working capital and/or capital expenditure and/or lease financing
requirements change or prove inaccurate or in order for @Home to respond to
unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities. Over the longer term, it is likely that @Home will
require substantial additional funds to continue to fund its infrastructure
investment, product development, marketing, sales and customer support needs.
There can be no assurance that any such funds will be available at the time or
times needed, or available on terms acceptable to @Home. If adequate funds are
not available, or are not available on acceptable terms, @Home may not be able
to continue its network implementation, to develop new products and services or
otherwise to respond to competitive pressures. Such inability could have a
material adverse effect on @Home's business, operating results and financial
condition.
Limited Sources of Funds. The TCI Ventures Group's sources of funds to meet
its requirements for capital contributions to the Sprint PCS Partnerships and
other entities in which it has investments are limited. WTCI and NDTC are the
only wholly owned subsidiaries attributed to the TCI Ventures Group that are
operating companies, and such companies are currently the TCI Ventures Group's
only source of cash from operating activities. As a result, the TCI Ventures
Group has limited ability to generate funds internally to fund capital
requirements and limited cash flow to support external financings. The other
operating companies attributed to the TCI Ventures Group have other investors,
public or private, and the payment of dividends or other distributions, or the
making of loans or advances by any one of such TCI Ventures Group Entities to
any other of such TCI Ventures Group Entities would be subject to various
business considerations, as well as any legal restrictions, including pursuant
to agreements among the investors. See "-- Investments with Holding Company
Structures." Initially, therefore, the TCI Ventures Group will be relying on
borrowings under the Revolving Credit Facility to meet its capital requirements.
Of the $500 million available under the Revolving Credit Facility, $200 million
would be required to support the TCI Ventures Group's lending commitment to
International and the balance would be available to fund capital contributions
to Sprint PCS and other requirements. If and to the extent that the aggregate
amount of any additional capital that TCI Telephony contributes or is required
to contribute to Sprint PCS subsequent to the Expiration Date is less than $300
million, the amount available to be borrowed under the Revolving Credit Facility
would be reduced accordingly. If the available borrowings under the Revolving
Credit Facility are not sufficient to fund the TCI Ventures Group's capital
requirements, no assurance can be given that the TCI Ventures Group will be able
to obtain any required additional financing on terms acceptable to it, or at
all. TCI could raise additional capital for the TCI Ventures Group by, among
other things, engaging in public offerings or private placements of TCI Ventures
Group Common Stock or through issuance of debt securities or preferred equity
securities attributed to the TCI Ventures Group. The Company anticipates,
however, that for the foreseeable future the TCI Ventures Group will continue to
be dependent upon funding from the TCI Group. See "TCI Ventures
Group -- Management's Discussion and Analysis of Financial Condition and Results
of Operations, Years Ended December 31, 1996, 1995 and 1994 -- Liquidity and
Capital Resources" and the historical combined
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financial statements, including the notes thereto, of the TCI Ventures Group
included in this Offering Circular. The TCI Ventures Group's failure to meet its
contractual and other capital requirements could have significant adverse
consequences to the TCI Ventures Group. See "-- Consequences of Failure to Meet
Capital Commitments."
There can also be no assurance that any of the TCI Ventures Group Entities
will be successful in generating sufficient cash flow from operating activities
or raising debt or equity capital in sufficient amounts or on terms acceptable
to it to be able to meet their respective capital requirements. Moreover, there
can be no assurance that the anticipated capital requirements described above
will not significantly increase due to changing circumstances, such as
unanticipated opportunities, technological or marketing hurdles, unanticipated
expenses, and the like. The failure to generate sufficient cash flow from
operating activities or to raise sufficient funds may require a TCI Ventures
Group Entity to delay or abandon some or all of its development and expansion
plans or in certain instances could result in the failure to meet certain
regulatory requirements, any or all of which could have a material adverse
effect on such TCI Ventures Group Entity's growth, its ability to compete in its
industry and its ability to service its debt. See "TCI Ventures Group --
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years Ended December 31, 1996, 1995 and 1994 -- Liquidity and
Capital Resources."
CONSEQUENCES OF FAILURE TO MEET CAPITAL COMMITMENTS
Many of International's interests in its subsidiaries and affiliates are
governed by partnership and other agreements that require it to contribute
capital or make loans to such subsidiaries or affiliates. See "-- Significant
Capital Requirements." The failure of International to meet its capital
commitments to a particular operating company may have adverse consequences to
it and therefore to the TCI Ventures Group. Such consequences may include, among
others, (i) a breach of contract action for damages against International, (ii)
the dilution of International's interest in such operating company, (iii) the
loss of any management rights in such entity (such as a right to elect one or
more directors), (iv) the right of the other investors in such operating company
to force International to sell its interest at less than fair value or (v) the
forced dissolution of such operating company.
Similarly, with respect to Sprint PCS, if TCI Telephony fails to make any
portion of its required additional capital contributions to Sprint PCS (other
than an additional capital contribution that TCI Telephony is entitled to
decline to make), and does not cure such failure within the time periods
specified in the Amended and Restated Agreement of Limited Partnership of Sprint
Spectrum Holding Company L.P., dated as of January 31, 1996 (the "Sprint PCS
Partnership Agreement"), such failure would constitute an Adverse Act and TCI
Telephony would become an Adverse Partner (each such term, as defined in the
Sprint PCS Partnership Agreement). If TCI Telephony were to become an Adverse
Partner, it would lose its right to appoint a representative to the governing
body of Sprint PCS (the "Sprint PCS Partnership Board"), and the Sprint PCS
Partnership Board, by action of the representatives of the other Sprint PCS
Partners that are not Adverse Partners, would be entitled to elect (i) to
commence procedures for the purchase by such other Sprint PCS Partners of TCI
Telephony's interest in Sprint PCS at a discount (which purchase price in the
case of a failure to make a required capital contribution would be the lower of
90% of the net equity of TCI Telephony's interest in Sprint PCS and 80% of TCI
Telephony's prior capital contributions (less any distributions paid to TCI
Telephony)) and/or (ii) to cause Sprint PCS to seek to obtain specific
performance of TCI Telephony's obligations or to sue for money damages. TCI
Telephony could also become an Adverse Partner through, among other things, the
disposition of its interest in Sprint PCS other than in accordance with the
Sprint PCS Partnership Agreement or a material breach of a material covenant in
the Sprint PCS Partnership Agreement.
The failure by TCI Telephony to make its pro rata portion of any additional
capital contributions validly requested to be made to Sprint PCS (whether or not
required under the applicable provisions of the Sprint PCS Partnership
Agreement) would result in a decrease in TCI Telephony's current 30% percentage
interest in Sprint PCS. Such dilution would be calculated on the basis of the
relative amount of capital contributions made by the Sprint PCS Partners until
an aggregate of $5.0 billion had been contributed; thereafter, the dilution
formula would take into account the fair market value of each Sprint PCS
Partner's interest in Sprint
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PCS, subject to certain exceptions. In the event TCI Telephony's percentage
interest were to decrease below the 8% minimum ownership requirement set forth
in the Sprint PCS Partnership Agreement, TCI Telephony's interest in Sprint PCS
would convert into that of an "Exclusive Limited Partner" and TCI Telephony
would lose the right to designate a representative to the Sprint PCS Partnership
Board.
LIABILITY AS A GENERAL PARTNER
Certain of International's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general partnership
could be liable, depending on the applicable partnership law, for all debts of
that partnership to the extent that liabilities of that partnership were to
exceed its assets. Similarly, a subsidiary of TCI Telephony is a general partner
in the Sprint PCS Partnerships and, as such, shares joint and several liability
with each other general partner of the Sprint PCS Partnerships for all of the
liabilities and other obligations of Sprint PCS (other than those that have been
expressly made nonrecourse).
SUBSTANTIAL LEVERAGE
At March 31, 1997, the TCI Ventures Group had combined debt of $512.8
million, which includes the combined debt of International at such date of
$490.5 million. Such amounts do not include the inter-company borrowings of the
TCI Ventures Group at such date, all of which are reflected as a component of
combined equity. Such amounts also do not reflect the substantial leverage of
those TCI Ventures Group Entities that are equity affiliates, notably Sprint
Spectrum, which had consolidated long-term debt at March 31, 1997 of $1.3
billion, and Teleport, which at such date had consolidated debt of $1.1 billion.
Each of such companies has historically incurred substantial operating losses
and the Company anticipates that they will continue to incur such losses in the
future. There can be no assurance that such companies will be able to meet their
respective debt service obligations. See "-- History of Operating Losses."
The degree to which a TCI Ventures Group Entity is leveraged could have a
material adverse effect upon it. For example: (i) such company's ability to
obtain additional financing in the future for capital expenditures,
acquisitions, working capital or general corporate or other purposes may be
limited, (ii) a substantial portion of such company's cash flow from operations
will be dedicated to the payment of the principal of, and interest on, its debt
and (iii) such company's substantial leverage may make it more vulnerable to
economic downturns, limit its ability to withstand competitive pressures and
reduce its flexibility in responding to changing business, technological and
economic conditions. In addition, certain of the agreements pursuant to which
the indebtedness described above was incurred contain, and any additional
financing agreements may contain, certain restrictive covenants which affect,
and in some cases limit or prohibit significantly, among other things, the
ability of the entity incurring the debt to incur additional indebtedness
(beyond specified amounts), make prepayments of certain indebtedness, pay
dividends, make investments, engage in transactions with equity holders and
affiliates, issue equity of subsidiaries, create liens, sell assets and engage
in mergers and consolidations. In addition to the restrictive covenants
described above, in many instances such financing agreements require the entity
incurring the debt to maintain certain financial ratios and to comply with other
operating performance tests or other covenants. The failure of such companies to
maintain such ratios or comply with such other tests or covenants would
constitute events of default under such agreements (allowing the creditors to
accelerate the maturity of the indebtedness thereunder and may limit the
availability of funds under such agreements to amounts less than the stated
maximum committed amounts thereunder), notwithstanding the ability of such
companies to meet their respective debt service obligations.
HISTORY OF OPERATING LOSSES
A significant number of the TCI Ventures Group Entities have a history of
operating losses, and TCI anticipates that such entities will continue to incur
operating losses in the future.
International sustained operating losses of $23.4 million, $11.2 million
and $26.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Although International had operating income for the first quarter
of 1997 and the first quarter of 1996 of $9.4 million and $4.7 million,
respectively, it had a net loss in each such quarter in the amount of $33.5
million and $26.4 million, respectively. At March 31, 1997,
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International's accumulated deficit was $238.9 million. Most of International's
affiliates have incurred net losses since their respective inception dates and
are expected to continue to incur net losses for the foreseeable future.
International's share of the losses of its affiliates was $179.4 million and
$64.1 million for the year ended December 31, 1996 and the three months ended
March 31, 1997, respectively. International expects to continue to incur
operating losses and net losses for the foreseeable future due, in part, to the
relatively high level of depreciation and amortization that is common to growth
oriented companies operating within the capital intensive cable industry and to
the amortization of the high costs associated with acquiring programming rights.
Any improvements in the results of operations of International are largely
dependent upon the ability of International's operating subsidiaries and
affiliates to increase their respective subscriber bases. No assurance can be
given that any such subscriber base increases will occur.
As of March 31, 1997, Sprint PCS had incurred cumulative operating losses
since its inception in October 1994 of approximately $773.9 million and had an
accumulated deficit at that date in the same amount. It is expected that Sprint
PCS will continue to incur significant operating losses and to generate
significant negative cash flow from operating activities during the next several
years while it develops and constructs its PCS network and builds its customer
base. If and when Sprint PCS has successfully completed its network buildout,
Sprint PCS's operating profitability will depend upon many factors, including,
among others, its ability to market its products and services successfully,
achieve its projected market penetration, manage customer turnover rates
effectively and price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.
Teleport sustained operating losses of $53.4 million, $15.3 million, $15.8
million, and $23.6 million for the years ended December 31, 1996, 1995 and 1994
and for the three months ended March 31, 1997, respectively. Teleport's
accumulated deficit as of March 31, 1997 was $326.0 million. Teleport has
incurred operating losses in recent years due to the capital expenditures
associated with the acquisition, installation, development and expansion of its
existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established and may
also incur additional operating losses in connection with the expansion of such
networks. TCI expects that Teleport will continue to incur net losses for the
foreseeable future as it acquires, installs, develops and expands its existing
and new telecommunications networks. There can be no assurance that Teleport
will achieve or sustain profitability or generate sufficient positive cash flow
to service its debt.
@Home has incurred substantial net losses in each fiscal period since the
date of its incorporation in March 1995, with cumulative operating losses
totaling $38.9 million as of March 31, 1997. At March 31, 1997, @Home had an
accumulated deficit of $38.2 million. As of June 30, 1997, such numbers
increased to $51.1 million and $50.1 million, respectively. In addition, @Home
currently intends to increase its capital expenditures and operating expenses in
order to expand its network to support, and to market and provide @Home's
services to, a growing number of potential subscribers. As a result, @Home
expects to incur additional substantial operating and net losses for the
foreseeable future. The profit potential of @Home's business model is unproven,
and, to be successful, @Home must, among other things, develop and market
products and services that are widely accepted by consumers and businesses at
prices that will yield a profit. The @Home service has only recently been
launched in portions of 13 cities and communities (of which 11 have
revenue-paying subscribers) in the United States, and there can be no assurance
that it will achieve broad consumer or commercial acceptance.
There can be no assurance that any of the foregoing entities or any of the
other TCI Ventures Group Entities will be successful in achieving operating
profitability or in generating sufficient cash flow to service their debt and
other obligations. See the historical combined financial statements of the TCI
Ventures Group and the related Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein.
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INVESTMENTS INCLUDE DEVELOPMENT STAGE COMPANIES IN INDUSTRIES WITH LIMITED
COMMERCIAL OPERATING HISTORY
Each of Sprint PCS and @Home commenced offering their products and services
commercially in the fourth quarter of 1996. In addition to the substantial funds
required to develop, construct, test and operate the respective network
infrastructures of Sprint PCS and @Home, and for marketing, sales and customer
support, as described above under "-- Significant Capital Requirements," such
activities are expected to place significant demands on the respective
managerial, operational and financial resources of Sprint PCS and @Home. Each of
such companies' future performance will depend, in part, on its ability to
implement its operational and financial systems, to expand its employee base and
to train and manage its employees, including engineering, customer support,
marketing and sales personnel. There can be no assurance that either Sprint PCS
or @Home will be able to manage its operations successfully. Failure by the
management of either company to guide and control growth effectively (including
implementing adequate systems, procedures and controls in a timely manner) could
have a material adverse effect on such company.
Neither PCS systems nor the delivery of Internet services over the cable
infrastructure have any significant commercial operating history in the United
States, and there can be no assurance that operation of either of these
businesses will become profitable. Neither Sprint PCS nor @Home can estimate
with any degree of certainty the potential demand for their services. The
inability of either Sprint PCS or @Home to obtain the necessary equipment for
its systems could have a material adverse effect on its financial condition and
results of operations. Both Sprint PCS and @Home are relying on new products and
technologies to operate their services which have only recently been introduced
on a commercial basis, including products, such as CDMA handsets for Sprint
PCS's services and cable modems for @Home's services, which are available from
only a limited number of suppliers. Failure of such products and technologies to
operate in the manner expected by such entity, or any delay or inability to
obtain a sufficient quantity of such products at acceptable price and
performance levels could delay or impair the expansion of such entity's
business.
The CDMA (or Code Division Multiple Access) frequency management technology
or "protocol" selected by Sprint PCS for its network has only recently been
deployed in the United States or internationally and is incompatible with other
PCS technologies. Although Sprint PCS believes that CDMA technology will offer
several advantages over other technologies and will ultimately become the
dominant PCS technology in North America, there can be no assurance that this
will be the case. Sprint PCS's digital PCS network will not directly connect
with existing analog cellular networks because it operates in a different
frequency and uses a different technology. Accordingly, for a Sprint PCS
subscriber to access another provider's cellular or PCS system in an area not
served by a CDMA-based PCS system, it would require a dual-mode, dual-band
handset, which is not currently available. If such handsets become available
they are expected to be more expensive than single-mode handsets. The foregoing
factors may impede Sprint PCS's ability to attract current cellular subscribers
or potential new wireless communications subscribers. See "-- Competition."
Further, the wireless telecommunications industry in which Sprint PCS operates
is experiencing significant technological change, as evidenced by the increasing
prevalence of digital upgrades in existing analog cellular systems, evolving
industry standards, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new products and enhancements and
changes in end-user requirements and preferences. There is uncertainty as to the
extent of customer demand as well as the extent to which airtime and monthly
access rates may continue to decline. As a result, the future prospects of the
industry and Sprint PCS and the success of PCS and other competitive services
remain uncertain.
With respect to @Home, market acceptance of @Home's services is
substantially dependent upon the adoption of the Internet for commerce,
entertainment and communications. The markets for consumer and business Internet
access services and online content are characterized by rapid technological
developments, frequent new product introductions and evolving industry
standards. As is typical in the case of an emerging industry with the foregoing
characteristics, demand for and market acceptance of recently introduced
products and services are subject to a high level of uncertainty. In addition,
the emerging nature and rapid evolution of Internet products and services will
require that @Home continually improve the performance, features and reliability
of its network, Internet content and consumer and business services,
particularly in response to competitive offerings. The widespread adoption of
new Internet or telecommuting technologies or standards,
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cable-based or otherwise, could require substantial expenditures by @Home to
modify or adapt its network, products and services and could fundamentally
affect the character, viability and frequency of Internet-based advertising, any
of which could have a material adverse effect on @Home's business, operating
results and financial condition. Critical issues concerning the commercial use
of the Internet also remain unresolved and may impact the growth of Internet
use, especially in the consumer markets targeted by @Home. Despite growing
interest in the many commercial uses of the Internet, many businesses and
consumers have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed service, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, the need to deal with multiple and frequently incompatible
vendors, inadequate protection of the confidentiality of stored data and
information moving across the Internet and a lack of tools to simplify Internet
access and use. There can be no assurance that @Home's service will be able to
meet any or all of these concerns. If @Home's market fails to develop or
develops more slowly than expected, or if market competition increases, @Home's
business, operating results and financial condition may be materially adversely
affected.
NDTC also operates a development stage business in an emerging industry and
accordingly faces challenges similar to those described above. NDTC began
offering its "Headend in the Sky" or "HITS" services directly to cable systems
commercially during the fourth quarter of 1996. The HITS services consist of the
transport of compressed and encrypted digital television programming signals to
addressable set-top boxes and the authorization of such boxes. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC (which is presently utilizing HITS in a few of TCIC's major markets), but
there can be no assurance that such contracts will be finalized or will be
finalized on terms which will enable NDTC to be profitable. Cable systems are in
an early stage of rolling out digital services to their customers, and customer
acceptance of such services and accordingly, the demand for NDTC's HITS
services, is uncertain. In addition, the HITS service utilizes statistical
multiplexing of digitally compressed video signals, a new technology which has
not been tested or distributed on a large scale and accordingly, the
effectiveness of such technology is uncertain.
NETWORK BUILDOUT AND SYSTEM IMPLEMENTATION RISKS
International. Many of the cable operations in which International has an
interest, or in which it may acquire an interest, are or will be engaged in the
process of constructing cable networks or rebuilding all or a portion of their
existing broadband distribution network. The successful completion of such
construction will depend on, among other things, the ability of such companies
to successfully design network routes, install cable and equipment and maintain
and comply with government licensing requirements (which may include compliance
with technical parameters and agreed-upon construction schedules or
"milestones"). Construction will also be dependent on the ability of such
operating company to obtain the necessary financing to fund the construction or
rebuilding, and there can be no assurance that such funding will be available on
reasonable terms. Construction projects are subject to cost overruns and delays
not within the control of the operating company or its subcontractors, such as
those caused by acts of governmental entities and catastrophic occurrences.
Delays can also be caused by design changes and material or equipment shortages
or delays in delivery. Services to buildings passed by a cable system can be
delayed if the operating companies or their subcontractors have difficulty in
obtaining easements from private parties. Failure to complete construction on a
timely basis could jeopardize a system's subscriber contracts, franchises and
licenses or the system's competitive position. The construction of cable
networks in certain countries poses special risks due to the relatively nascent
stage of cable television development in those countries and the lack of
comprehensive cable regulations. Significant costs and delays may be incurred in
situations where there is no legal requirement that local utility companies
allow cable companies to attach cable to their poles or such permission is
dependent on negotiation with the utility company, or where government permits
are required to be obtained to cross roads, dig ditches or otherwise traverse
public or private property on other than an expedited basis. Although
International believes that the broadband networks that its operating companies
have in place, or are in the process of installing or rebuilding, have been
designed to be sufficiently flexible to permit the delivery of a variety of
existing television and telephony services to its customers and advanced,
interactive and integrated entertainment, telecommunications and information
services as they become available in the future, the effect
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of any future technological changes on the viability or competitiveness of
International's cable operating companies cannot be predicted.
Sprint PCS. Although Sprint PCS has successfully developed its network and
launched service in over 50 cities, as it continues to expand its network,
Sprint PCS must continue to successfully (i) relocate microwave paths that may
affect its operations, (ii) lease, acquire or otherwise attain rights to a
sufficient number of cell sites for the location of its base station equipment
(including receipt of related zoning or other state and local regulatory
approvals), (iii) complete the radio frequency ("RF") design, including cell
site design, frequency planning and network optimization, for each of its
markets, (iv) complete the fixed network design, which encompasses engineering
network switching systems, radio systems, interconnecting facilities and systems
and operating support systems, (v) establish sufficiently broad population and
geographic coverage across the continental United States and (vi) develop and
implement sophisticated information systems. There can be no assurance that
these actions will be taken on a timely basis or on the cost basis assumed by
Sprint PCS or at all. Implementation of the network involves various risks and
contingencies, many of which are not within the control of Sprint PCS and all of
which could have a material adverse effect on the implementation of Sprint PCS's
system should there be delays or other problems. Such risks include, without
limitation, changes in general and local economic conditions, availability of
equipment necessary to operate the PCS system, changes in communications service
rates charged by others, fluctuations in the supply and demand for PCS and the
commercial viability of PCS systems as a result of competition with wireline and
wireless operators in the same geographic area, demographic changes that might
affect negatively the potential market for PCS, changes in federal and state
regulation of PCS systems (including the enactment of new statutes and the
promulgation of changes in the interpretation or enforcement of existing or new
rules and regulations) and advancements in technology that have the potential of
rendering obsolete the technology and equipment that Sprint PCS is using to
construct its PCS system. There can be no assurance that the occurrence of one
or more of these factors will not have a material adverse effect on Sprint PCS's
financial condition and results of operations and, accordingly, on the TCI
Ventures Group's interest in Sprint PCS.
TCG. TCG's continued expansion and development of its network will depend
on, among other things, its ability to assess markets, design fiber network
backbone routes, install facilities, acquire rights-of-way and building access,
obtain any required governmental authorizations and permits and implement
interconnection with local exchange carriers, all in a timely manner, at
reasonable costs and on terms and conditions acceptable to TCG. In addition, to
the extent TCG's expansion is carried out through acquisitions, there can be no
assurance that any such acquired network could be successfully integrated into
TCG's operations. The telecommunications industry has been experiencing
significant changes in technology. As alternative technologies for providing
services to customers are developed, TCG may be required to select one in
advance in connection with the development of its network without the benefit of
knowing which technology will ultimately prove to be the most economic,
efficient or capable of attracting customer usage.
@Home. @Home has entered into distribution arrangements for the @Home
service with affiliates of TCI, Comcast, Cox, Rogers, Shaw, Marcus Cable
Operating Company, L.P. and IP IV (collectively, the "@Home Cable Partners") and
is expecting them to provide through certain of their cable systems the
principal distribution network for @Home services to residential subscribers.
Transmission of the @Home service over cable is dependent on the availability of
high-speed two-way hybrid fiber-coaxial cable infrastructure. However, only a
small portion of existing cable plant in the United States has been upgraded to
HFC cable and even less is capable of high-speed two-way transmission. The @Home
Cable Partners and other cable system operators have announced and begun to
implement major infrastructure investments in order to deploy two-way HFC cable.
However, cable system operators have limited experience with these upgrades, and
these investments have placed a significant strain on the financial, managerial,
operating and other resources of the @Home Cable Partners and other cable system
operators, most of which are already highly leveraged, and thus have been, and
@Home expects will continue to be, subject to change, delay or cancellation.
Although @Home's commercial success depends on the successful and timely
completion of these infrastructure upgrades, the @Home Cable Partners are under
no obligation to @Home to upgrade systems or to roll out, market or promote
@Home's services. In addition, none of the @Home Cable Partners
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has agreed to any specific schedule for rolling out two-way HFC infrastructure
improvements, and the @Home Cable Partners are not contractually required to
achieve any specific rollout schedule. Because of the very substantial capital
cost of upgrading cable systems for high-speed two-way data transmission, there
has been uncertainty in recent months as to the rate at which the @Home Cable
Partners and other cable system operators will upgrade their systems. For
example, to increase television programming capacity to compete with other modes
of multichannel entertainment delivery systems such as direct broadcast
satellite, the @Home Cable Partners may choose to increase channel capacity by
rolling out digital set-top boxes, which do not support high-speed Internet
access services, rather than to upgrade their cable infrastructures to two-way
HFC cable. The upgrade necessary to increase channel capacity through the use of
digital set-top boxes generally is not sufficient to support delivery of the
@Home service. The failure of the @Home Cable Partners to complete the upgrade
to two-way HFC cable in a timely and satisfactory manner, or at all, would
prevent @Home from delivering high-performance Internet access services and
would have a material adverse effect on @Home's business, operating results and
financial condition. To the extent that @Home is required (because of the lack
of upgraded two-way HFC cable plant), or together with the local cable operators
otherwise chooses, to distribute @Home's services through cable systems to the
home with a telephone return path for data from the home, @Home's services may
not achieve the high speed and quality of experience necessary to attract and
retain subscribers to the @Home service. Subscribers using a telephone return
path will experience the upstream data transmission speeds provided by their
analog modems (typically 28.8 kilobits per second ("Kbps")). In addition, @Home
will be highly dependent on the @Home Cable Partners and any future cable
partners to continue to maintain their cable infrastructure in such a manner
that @Home will be able to provide consistently high performance and reliable
service. Therefore, in addition to @Home's business being subject to general
economic and market conditions and factors relating to Internet service
providers and online services specifically, the success and future growth of
@Home's business will also be subject to economic and other factors affecting
the cable television industry generally, particularly its ability to finance
substantial capital expenditures.
Due to the limited deployment of @Home's services, the ability of @Home's
network to connect and manage a substantial number of online subscribers at high
transmission speeds is as yet unknown and @Home faces risks related to its
network's ability to be scaled up to its expected subscriber levels while
maintaining superior performance. While peak downstream data transmission speeds
across HFC cable approach 27 megabits per second ("Mbps") in each 6 MHz channel,
the actual downstream data transmission speeds over @Home's network could be
significantly slower and will depend on a variety of factors, including type and
location of content, Internet traffic, the number of active subscribers on a
given cable network node, the number of 6 MHz channels allocated by the local
cable operators (in their discretion) to carry @Home's services, the capability
of cable modems used and the service quality of the cable operators' two-way HFC
cable infrastructures. As subscriber penetration increases, it may be necessary
for the local cable operators to add additional nodes in order to maintain
adequate downstream transmission speeds, although there is no obligation for the
local cable operators to do so. The upstream transmission data carrier is
located in a range not used for broadcast by traditional cable infrastructures
and is more susceptible to interference than the downstream channel, resulting
in a slower peak upstream transmission speed. In addition to the factors
affecting downstream data transmission speeds, actual upstream data transmission
speeds over @Home's network can be materially affected by the level of
interference in the cable operators' upstream data broadcast range. The actual
data delivery speeds that can be realized by subscribers will be significantly
lower than peak data transmission speeds due to the subscriber's hardware,
operating system and software configurations. There can be no assurance that
@Home's network will be able to achieve or maintain such a high speed of data
transmission, especially as the number of @Home's subscribers grows, and @Home's
failure to achieve or maintain high-speed data transmission would significantly
reduce consumer demand for its services and have a material adverse effect on
its business, operating results and financial condition.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
Teleport. Teleport has substantial business relationships with a few large
customers, including the major long distance carriers. During 1996, TCG's top 10
customers accounted for approximately 52% of TCG's total revenue on a pro forma
basis after giving effect to the consolidation of the ownership of Teleport and
certain
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partnerships managed by Teleport, which occurred during 1996 in connection with
Teleport's initial public offering (the "TCG Reorganization"). Sprint accounted
for more than 10% of such revenue; however, no customer accounted for 15% or
more of such revenue. A significant reduction in the level of services TCG
performs for any of these customers could have a material adverse effect on
Teleport's results of operations or financial condition. Most of Teleport's
customer arrangements are subject to termination on short notice and do not
provide TCG with guarantees that service quantities will be maintained at
current levels, and there can be no assurance that such arrangements will be
continued at the same service quantity levels. TCG believes that certain of the
major long distance carriers are pursuing alternatives to their current
practices with regard to obtaining local telecommunications services, including
construction of their own facilities and/or acquisitions of CLECs. This type of
activity could accelerate as a result of the Telecommunications Act of 1996 (the
"1996 Act") which limits the authority of states to impose legal restrictions
that have the effect of prohibiting a company, including an interexchange
carrier ("IXC") (such as AT&T Corporation and MCI Communications Corporation)
from providing any telecommunications service. In addition, the 1996 Act
requires ILECs to unbundle their network facilities and to offer their services
for resale by other companies at wholesale discounts. Accordingly, long distance
carriers are now or soon will be able to provide local service by reselling the
facilities or services of an ILEC, which may be more cost-effective for an IXC
than using the services of Teleport or another CAP or CLEC.
WTCI. WTCI's customers for the transmission of long distance telephone
service historically have been primarily IXCs, as well as major ILECs and other
telecommunications companies. For the year ended December 31, 1996, WTCI's six
largest customers accounted in the aggregate for approximately 70% of WTCI's
consolidated gross revenue. WTCI provides such services pursuant to master
service contracts which provide for transmission services pursuant to individual
service orders. As a general rule, the master service contracts expire when the
last service order in effect thereunder has terminated. WTCI's six largest
customers' master service contracts all contain many service orders (in some
cases, in excess of 100 service orders) with remaining terms varying from 1
month to approximately 15 months. A significant reduction in the level of
services WTCI provides for any of these customers could have a material adverse
effect on WTCI's results of operations or financial condition, unless WTCI
located replacement customers willing to lease the vacated channels on similar
terms. In particular, WTCI's largest carrier customer has the right to terminate
its contract for use of the entire capacity of a core backbone of WTCI's network
between the Seattle and Denver areas in October 1997, subject to certain
conditions. Although this area has been overbuilt with fiber, management of WTCI
does not believe such termination would have a material adverse effect on WTCI
because it believes that it is likely that it would be able to re-lease all of
such capacity based on current demand in the area for its long distance
transport services.
NDTC. A significant number of NDTC's major customers are affiliates of TCI,
such as Encore Media Corporation, Liberty/Fox Regional Sports, L.L.C. and
Discovery Communications, Inc., each of which is owned in part by Liberty Media
Corporation, a wholly owned subsidiary of the Company ("Liberty"), and NDTC
derives a substantial portion of its revenue from such affiliated companies. For
the year ended December 31, 1996, revenue from services provided to TCI and its
consolidated subsidiaries accounted for 34% of NDTC's total revenue for 1996.
Although NDTC has been seeking, and intends to continue to seek, to expand its
customer base to increase the number of unaffiliated customers over time, there
can be no assurance that it will be successful.
LIMITATIONS ON CONTROL OF AFFILIATED COMPANIES; LIMITATIONS ON LIQUIDITY OF
INVESTMENTS; RISK OF DEADLOCK
Many of the assets attributed to the TCI Ventures Group consist of
noncontrolling interests in other entities, such as the investments in Sprint
PCS and Teleport. In addition, International has invested in most of its
subsidiaries and affiliates with strategic and local partners, and financial and
operational considerations, as well as laws that limit foreign equity positions,
will likely require International to continue to invest with partners. Many
foreign countries limit foreign investment to a minority equity position or
require the board of directors to be largely independent, which can result in
International having diminished ability to implement strategies that
International may favor, or cause dividends or distributions to be paid. For the
most part, the Company has attempted to structure its investments in a manner
that allows it to participate in management
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decisions (including through representation on the board of directors or other
governing body and veto rights (alone or with one or more of the other
investors) over significant business decisions); however, as is the case with
the Company's interests in Sprint PCS, Teleport and many of the operating
companies in which International has interests, TCI will often be unable to
direct the operations, strategies, and financial decisions of the companies in
which it has acquired, or will acquire, an interest without the concurrence of
one or more of its partners or other co-investors. With respect to @Home,
although the Company has a majority of the voting power of @Home, its designees
on the @Home board of directors do not currently constitute a majority of the
Board, and although the Company has the unilateral power to obtain a majority by
increasing the size of the board and filling the resulting vacancies with its
designees, the Company's power to control all @Home board decisions were it to
exercise such power is subject to certain supermajority and unanimous vote
requirements and certain limitations with respect to the approval of related
party transactions. Moreover, the ability of the Company (directly or
indirectly) to pledge, sell or otherwise dispose of its interest in many of the
operating companies in which it has investments is subject to shareholder or
similar agreements that severely limit the ability of the parties to transfer
their equity interests. Accordingly, the Company may not be able to cause its
subsidiaries or affiliates that are attributed to the TCI Ventures Group to make
distributions when the TCI Ventures Group may have a need for such distributions
and may not be able to timely dispose of its investment in many of such
companies if required for financial or other reasons.
In addition, in the case of Sprint PCS, the failure of the Sprint PCS
Partners to agree on certain issues may give rise to a "deadlock event," which,
if unresolved after a certain period of time, may require the dissolution or
liquidation of Sprint PCS. Specifically, the Sprint PCS Partnership Agreement
provides that Sprint PCS will be dissolved upon the failure of the Sprint PCS
Partners to resolve a "Deadlock Event," which is deemed to occur (i) if the
Sprint PCS Partnership Board fails to approve a proposed annual budget or
business plan for two consecutive fiscal years or (ii) if the position of chief
executive officer remains vacant for 60 days after a candidate has been proposed
by at least two Sprint PCS Partners having an aggregate of at least 33% of the
voting percentage interests. Upon the occurrence of a Deadlock Event, the Sprint
PCS Partners that are general partners first are required for a period of 20
days to use their good faith efforts to try to resolve the Deadlock Event. If
the general partners are unable to resolve the matter, such matter will be
referred to the chief executive officers of the Sprint PCS Parents. In the event
the chief executive officers fail to reach a resolution, the matter will be
referred to a mediation service. If the mediator and the Sprint PCS Partners
fail to resolve the Deadlock Event, Sprint PCS will be liquidated unless the
Sprint PCS Partnership Board, by a majority vote of 75%, determines not to
dissolve or the buy-sell arrangements contained in the Sprint PCS Partnership
Agreement are employed.
As of the date of this Offering Circular, the Sprint PCS Partners had not
yet approved an annual budget or business plan for the fiscal year of Sprint PCS
that commenced January 1, 1997. In the event that no budget or business plan for
Sprint PCS is approved for the fiscal year that commenced January 1, 1997 and no
such budget or business plan for the fiscal year commencing January 1, 1998 is
approved by January 1, 1998, a Deadlock Event will be deemed to have occurred
under the Sprint PCS Partnership Agreement. No assurance can be given that an
annual budget or business plan will be approved or that the failure of the
Sprint PCS Partners to approve such annual budget or business plan, or the
possible occurrence of a Deadlock Event, will not cause material disruption in
the business and affairs of Sprint PCS or have a material adverse effect on the
business, financial condition or results of operations of Sprint PCS and,
accordingly, on the value of the TCI Ventures Group's investment therein.
INVESTMENTS WITH HOLDING COMPANY STRUCTURES
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group Entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group Entities. See "-- Significant Capital
Requirements." In addition, International and certain of the other TCI Ventures
Group Entities, such as Teleport and Sprint PCS, are holding companies, the
assets of which consist solely or primarily of investments in their subsidiaries
and affiliates. As such, the ability of such holding companies to
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meet their respective financial obligations and their funding and other
commitments to their respective subsidiaries and affiliates is dependent upon
the earnings of such subsidiaries and affiliates and the distribution or other
payment of such earnings to such holding companies in the form of dividends,
loans or other advances, payment or reimbursement for management fees and
expenses from their respective subsidiaries and affiliates, or repayment of
loans and advances from such holding companies. Accordingly, such holding
companies' ability to meet their respective liquidity requirements, including
debt service, is severely limited as a result of their dependence upon the
distribution of earnings and advances of funds by their respective subsidiaries
and affiliates. The payment of dividends or the making of loans or advances to
such holding companies by their respective subsidiaries and affiliates may be
subject to statutory, regulatory or contractual restrictions, are contingent
upon the earnings of those subsidiaries and affiliates, and are subject to
various business considerations. For example, the restrictions contained in the
existing Sprint Spectrum financing agreements affect, and in some cases limit or
prohibit significantly, among other things, the ability of Sprint PCS to incur
additional indebtedness (beyond specified amounts), make prepayments of certain
indebtedness, pay dividends, make investments, engage in transactions with
equity holders and affiliates, issue equity of subsidiaries, create liens, sell
assets and engage in mergers and consolidations. See "-- Significant Capital
Requirements." In the case of International, distributions or other payments
from foreign subsidiaries and affiliates may also be subject to restrictions on
expatriation of funds or adverse currency exchange rates and, in the case of
subsidiaries or affiliates that are located in countries where the United States
does not have a tax treaty, to increased withholding taxes. See "-- Risks of
Foreign Investments." Moreover, International does not have voting control over
many of the entities in which it has ownership interests and such entities will
have no obligation, contingent or otherwise, to make any funds available to
International, whether by dividends, advances, loans or other payments. See
"-- Limitations on Control of Affiliated Companies; Limitations on Liquidity of
Investments; Risk of Deadlock." Certain of the subsidiaries or affiliates of
such holding companies are, or may in the future be, subject to loan agreements
that prohibit or limit the transfer of funds to such holding companies in the
form of dividends, loans, or advances and/or require that any indebtedness of
such subsidiaries or affiliates to such holding companies be subordinate to the
indebtedness under such loan agreements. Further, any right of any of such
holding companies as an equity holder to participate in the distribution of the
assets of any of its subsidiaries upon liquidation or reorganization will be
subject to the prior claims of the creditors (including trade creditors) of such
subsidiary. To date, International, for example, has not received any
significant distributions or advances from any of its subsidiaries or
affiliates. Accordingly, it has had to rely, and expects to rely for the
foreseeable future, on outside sources for financing. See "-- Significant
Capital Requirements" and "-- Substantial Leverage."
RESTRICTIONS ON COMPETITIVE ACTIVITIES
Certain of the agreements relating to the investments of TCI and its
subsidiaries and affiliates in the TCI Ventures Group Entities contain
restrictions on the ability of TCI and its affiliates to compete in the business
of such entities.
International has agreed not to compete in various countries and/or in
various businesses with certain entities in which it has interests. For example,
subject to certain conditions and exceptions, International and TCI have agreed
not to compete, and not to own more than a 20% equity interest in any entity
that competes, with the channels operated by the BBC Joint Ventures, two joint
ventures between Flextech and BBC Worldwide Limited ("BBC Worldwide"), and
International has agreed to give a right of first refusal to Flextech with
respect to all offers made to International relating to English language cable
and satellite programming in the U.K. and Europe. Further, International has
agreed not to compete in certain geographic areas of Chile with Cordillera
Communicaciones, Limitada, an affiliate that owns an interest in cable systems
in Chile. International has also agreed with Telewest that neither it, nor TCI
or any of TCI's controlled affiliates, will own assets comprising, or acquire
entities owning, cable television or cable telephony systems in the U.K. without
the consent of Telewest or without first offering Telewest such opportunity, and
International has agreed with the other investor in Jupiter not to invest in, or
otherwise participate to the extent of 10% or more of the equity of, any cable
television, telephony or related business in Japan without first offering such
opportunity to Jupiter. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- International Cable, Telephony and Programming -- International."
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Subject to certain exceptions, the Sprint PCS Partnership Agreement
restricts any Sprint PCS Partner and its controlled affiliates (including TCI
Telephony 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 using or permitting
its name to be used in connection with, any business or enterprise that engages
in any Wireless Business or in the bidding for or acquisition of any Wireless
Business license or that provides, offers, promotes or brands wireless
communications services that use radio spectrum for cellular, PCS, paging or
other voice or data wireless services. A "Wireless Business" includes, subject
to certain exceptions, all wireless communications services conducted in the
U.S. that use radio spectrum for cellular, PCS, enhanced specialized mobile
radio ("ESMR"), paging, mobile telecommunications and any other voice or data
wireless services, whether fixed or mobile. Teleport currently may not engage in
the business of providing certain wireless communications services (subject to
certain exceptions) without the affirmative vote of holders of a majority of the
Teleport Class B Common Stock ("Teleport Class B Stock") until the earlier of
June 2001 and the date on which the Teleport Class B Stock ceases to represent
at least 50% of the voting power of the outstanding common stock of Teleport. If
following the expiration of such provisions and while TCI held an equity
interest in Teleport, Teleport were to determine to engage in a Wireless
Business, TCI Telephony would be in breach of the covenants in the Sprint PCS
Partnership Agreement described above (thereby becoming an Adverse Partner),
unless at that time and thereafter Teleport was not a controlled affiliate of
TCI within the meaning of the Sprint PCS Partnership Agreement and TCI had used
its commercially reasonable efforts (including voting its equity interest in
Teleport) to cause Teleport either to offer to enter into an affiliation
agreement with Sprint PCS or not to engage in such Wireless Business. The
foregoing provisions will act as a deterrent to the TCI Ventures Group's
acquiring additional interests in Teleport that would result in its becoming a
controlled affiliate of the TCI Ventures Group.
Pursuant to an agreement with Sprint, the ability of TCI and its controlled
affiliates (including the TCI Ventures Group) to offer or promote, act as a
sales agent for, or package certain of its cable television services with,
certain local or long distance telephony services offered under the brand of
certain ILECs and IXCs other than Sprint is restricted. Such agreement also
limits the ability of TCI and its controlled affiliates to make its cable plant
available to such ILECs and IXCs for the provision of local telephony services
on an exclusive basis without making such facilities similarly available to
Sprint on comparable terms. Such agreement has a five-year term that commenced
January 31, 1996; however, under certain circumstances such agreement may
terminate on January 31, 1999. See "DESCRIPTION OF THE BUSINESS OF THE TCI
VENTURES GROUP -- Domestic Telephony -- Sprint PCS -- Competitive Activities."
COMPETITION
International Cable and other Multi-Channel Television. The various cable
operators in which International has interests directly compete for customers
and advertisers in local markets with other providers of entertainment, news and
information. Their competitors include broadcast television and radio,
newspapers, magazines and other printed material, motion picture theaters, video
cassette rental stores and other sources of entertainment and information. Such
cable operators also compete with companies who use alternative methods of
distributing the same or similar video programming offered by cable television
systems such as terrestrial (over the air) broadcast stations, multi-channel
multi-point distribution systems ("MMDS"), DTH satellite services, satellite
master antenna television systems ("SMATV") and in some instances, digital
terrestrial services and certain narrowband providers. The most significant
competition for cable operators, including Telewest, in the U.K. multi-channel
television market currently comes from providers of DTH satellite television
services and, in particular, British Sky Broadcast Group plc ("BSkyB"). DTH
satellite services are widely available in the U.K. and are increasing in
popularity there. In those countries where, by regulation or policy, cable
operators do not have an exclusive franchise, International's cable operators
compete with other cable operators, and if permitted by regulation or policy,
with telephone companies providing video services in their franchises. The
extent of competition with the services provided by International's cable
subsidiaries or affiliates in any particular market depends, among other
factors, on price (including up-front and service costs), the amount and quality
of the programming offered, customer
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satisfaction and quality of the system network. The full extent to which other
media or home delivery services will compete with cable television systems may
not be known for some time and there can be no assurance that existing, proposed
or as yet undeveloped technologies will not become dominant in the future.
International also competes with similar operators of broadband distribution
networks for franchises, the acquisition of existing cable operators and
financing.
Cable television has a limited operating history in many regions of the
world outside the United States. Although International operates cable systems
in markets where it believes there is consumer demand for multi-channel
television services, International is unable to predict with certainty how
consumer demand for the services provided by its cable television subsidiaries
and affiliates will develop over time. International's prospects depend in large
part on the development of consumer preference for cable television over other
in-home entertainment alternatives in the markets where International competes.
Certain of International's cable systems, particularly in the United Kingdom,
have experienced significant churn in their franchise areas. There can be no
assurance that churn rates will decrease over time, or that International's
cable systems will not experience higher churn rates in the future. Higher
levels of churn could have a material adverse effect on International. See
"DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP -- International Cable,
Telephony and Programming -- International -- Competition."
International Cable Telephony. The Company believes that it is preferable
for International's cable subsidiaries and affiliates to offer a wide range of
cable services, including telephony services where permitted under the
applicable statutory and regulatory framework and where business conditions
permit. Currently, the U.K. and Japan are the only countries in which
International is providing both television and telephony services to
subscribers. In the U.K., such services are being provided through Telewest. In
Japan, Jupiter commenced offering telephony services commercially in July 1997
in its Suginami franchise. Although no assurances can be given, International
anticipates that legal restrictions on the provision of telephony services by
its cable subsidiaries and affiliates in certain other countries will be relaxed
or eliminated over the next few years. In markets in which International is
allowed to offer cable telephony services, the primary competitor is the
national public telephone companies. International believes that the established
public telephone operators generally benefit from their long-standing
relationships with customers, substantial technical and financial resources and
established ubiquitous networks. The success of the telephony operations of a
cable operator is dependent upon its ability to convince long-time customers of
the national public telephone providers to switch to its telephony network.
Telewest and Jupiter are both relatively new entrants to the telephony business,
and have sought to compete with the more well established telephone operators by
pricing cable telephony call charges below those of the established telephone
operators. In both the U.K. and Japan, the ability of the established public
telephone operators to respond to such price competition has been restricted by
their license obligation not to show undue preference to or unduly discriminate
against different classes of customers and to offer uniform rates nationally.
There can be no assurance that either Telewest or Jupiter will be able to
continue to price its telephony services below those charged by the national
public telephone providers, or that future price reductions will not adversely
impact the profitability of its telephony operations. The ability to provide
viable cable telephony services is also dependent on the ability of
International's cable subsidiaries and affiliates to interconnect with the local
telephone network of the public telephone company in order to complete calls
that originate from a customer on the cable network of such subsidiary or
affiliate but terminate off its network, or that originate from a caller off its
cable network and terminate on its network. Regulations in the U.K. provide a
unique means by which disputes over pricing and other terms of interconnection
can be determined by a government representative. In Japan, under interim rules
the national public telephone provider currently is required to enter into
interconnection agreements. There can be no assurance that similar rights will
be afforded to cable operators in other countries that eventually permit the
delivery of cable telephony services. The inability to obtain interconnection at
reasonable rates could prevent International's subsidiaries or affiliates from
offering telephony services at competitive rates. No assurance can be given that
International's experience with offering telephony services in the United
Kingdom can or will be replicated in Japan or in any of the other countries in
which International's subsidiaries and affiliates eventually provide telephony
services. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- International Cable, Telephony and
Programming -- International -- Competition."
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International Programming. The business of distributing programming for
cable television is highly competitive. International's programming subsidiaries
and affiliates (the "Programming Companies") directly compete with other
programming services for distribution on a limited number of cable television
channels and, when distribution is obtained, the programming offered by the
Programming Companies competes, in varying degrees, for viewers and advertisers
with other cable programming services and off-air broadcast television
programming services, as well as with other entertainment media described above
under "-- Competition -- International Cable and other Multi-Channel
Television." The Company believes that important competitive factors include the
prices charged for programing, the quantity, quality and variety of the
programming offered and effectiveness of marketing efforts. With the advent of
new compression technologies, which are intended to increase channel capacity,
competition for channel capacity may substantially decrease, although additional
competitors may have the opportunity to enter the marketplace. No predictions
can be made with respect to the viability of these technologies or the extent to
which they will ultimately impact the availability of new channels. In addition
to competition for cable distributors, viewers and advertisers, the Programming
Companies also compete, to varying degrees, for product with other programming
companies that distribute similar types of programs, many of which have greater
financial resources than International and its Programming Companies. See
"DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP -- International Cable,
Telephony and Programming -- International -- Competition."
Domestic Wireless Telephony. There is substantial competition in the
domestic wireless telecommunications industry, and Sprint PCS has stated its
expectation that such competition will intensify as a result of the entrance of
new competitors and the development of new technologies, products and services.
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. Sprint PCS also expects that existing cellular
providers will upgrade their systems and provide expanded and digital services
to compete with Sprint PCS's PCS system.
Continuing technological advances in telecommunications and policies of the
Federal Communications Commission (the "FCC") 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's ability to compete in the domestic wireless industry is also
affected by its current inability to offer customers the ability to use their
handsets in areas outside of Sprint PCS's network. Because Sprint PCS's network
operates at a different frequency and uses a different technology than cellular
systems, Sprint PCS's network will not be able to connect directly with existing
cellular networks. In order for Sprint PCS's subscribers to use their handsets
in areas outside Sprint PCS's network, another CDMA-based PCS provider must
operate in such area or the subscriber must have a dual-mode, dual-band handset
which would allow access to analog cellular or other digital cellular or PCS
systems and, in either case, as with other wireless carriers, Sprint PCS or its
subscribers, on an individual basis, must have arrangements with such other
cellular or PCS providers permitting Sprint PCS's subscribers to access their
respective services. Although Sprint PCS expects to enter into affiliation
agreements with Sprint and PhillieCo which would give Sprint PCS nationwide
coverage, Sprint PCS currently does not have a license or any affiliation
agreement enabling it to provide coverage for 27% of the Pops in the United
States, including those in several major cities and surrounding regions. While
several major PCS providers have publicly announced that they intend to deploy
CDMA-based PCS systems, there can be no assurance that such providers will do
so. As of June 30, 1997, PCS PrimeCo L.P. ("PrimeCo") and GTE Wireless Inc. were
the only PCS providers other than Sprint PCS that have
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commercially deployed a 1900 MHz CDMA system in the United States. Further,
there can be no assurance that such dual-mode, dual-band handsets will be
available. This lack of interoperability may impede Sprint PCS's ability to
attract current cellular subscribers or potential new wireless communications
subscribers that desire the ability to access different service providers in the
same market. Although Sprint PCS has entered into a few roaming agreements,
there can also be no assurance that, should Sprint PCS determine that it desires
roaming agreements with other providers, such agreements can be obtained on
terms acceptable to Sprint PCS.
The Company anticipates that market prices for two-way wireless services
generally will decline in the future based upon increased competition. Sprint
PCS's ability to compete successfully will depend on, among other things, its
ability to complete the buildout of its wireless network and offer its products
and services to customers on a timely basis and on its ability to anticipate and
respond to various competitive factors affecting the industry, including new
services that may be introduced, changes in consumer preferences, demographic
trends, economic conditions and discount pricing strategies by competitors, all
of which could adversely affect Sprint PCS's operating margins, its ability to
meet its debt service requirements and the value of the TCI Ventures Group's
investment in Sprint PCS. There can be no assurance that Sprint PCS will be able
to compete successfully in this environment or that new technologies and
products that are more commercially effective than Sprint PCS's technologies and
products will not be developed. See "DESCRIPTION OF THE BUSINESS OF THE TCI
VENTURES GROUP -- Domestic Wireless Telephony -- Competition."
Domestic Wireline Telephony. Teleport operates in an increasingly
competitive environment. Services substantially similar to those offered by
Teleport are also offered by the ILECs and other CLECs and/or CAPs serving the
metropolitan markets currently served or intended to be served by Teleport.
ILECs have long-standing relationships with their customers, have financial and
technical resources substantially greater than those of Teleport, have the
potential to subsidize services of the type offered by Teleport from service
revenues not subject to effective competition and benefit from federal and state
laws and regulations that, Teleport believes, generally favor the ILECs over
CAPs and CLECs. Under certain circumstances, the FCC and state regulatory
authorities provide the ILECs with an ability to lower selectively the price of
certain services within the areas in which Teleport operates. In addition, as a
result of the 1996 Act and the FCC's access charge reform initiatives, ILECs are
likely to obtain additional pricing flexibility with regard to services that
compete with those offered by Teleport. Increased price competition from ILECs
could have a material adverse effect on Teleport's financial condition and
results of operations and, accordingly, on the TCI Ventures Group's investment
therein. Also, under the 1996 Act, ILECs formerly subject to restrictions on the
provision of cable television service and interLATA (interexchange) long
distance services are no longer restricted from entry into these businesses,
subject to certain requirements in the 1996 Act and rules and policies to be
implemented by the FCC and the states. When a regional Bell operating company
(an "RBOC") (such as NYNEX) obtains authority to provide interLATA services, it
will be able to offer customers local and long distance telephone services.
"InterLATA services" are telecommunications which originate in one and terminate
in another local access and transport area. Given the market power the RBOCs
currently possess in the local exchange market, the ability to provide both
local and long distance services could further strengthen the RBOCs' already
strong competitive positions.
To the extent Teleport interconnects with and uses the ILECs' networks to
service Teleport's customers, Teleport is dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of Teleport's
customers and to maintain its service standards. Teleport will become
increasingly dependent on interconnection with ILECs as switched services become
a greater percentage of Teleport's business. Teleport has experienced increasing
difficulties in obtaining high quality, reliable and reasonably priced service
from certain ILECs over the last two years, and the attractiveness of Teleport's
services to customers (and its related competitive position) may be impaired as
a result. The 1996 Act imposes interconnection obligations on ILECs, but there
can be no assurance that Teleport will be able to obtain the services it
requires at rates, and on terms and conditions, that permit Teleport to offer
switched services at rates that are both profitable and competitive.
In most of the metropolitan areas in which Teleport operates, at least one
(and in many markets several) other CAPs or CLECs offer many of the same local
telecommunications services provided by Teleport,
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generally at similar prices. Potential and actual new market entrants in the
local telecommunications services business include other CAPs and CLECs, ILECs
entering new geographic markets, cable television companies, electric utilities,
long distance and international carriers, microwave carriers, wireless telephone
system operators and private networks built by large end users, many of which
may have financial, personnel and other resources substantially greater than
those of Teleport. In addition, the current trend of business combinations and
alliances in the telecommunications industry, including mergers between RBOCs
and between CLECs and IXCs, may create significant new competitors or may
increase the competitiveness of Teleport's existing competitors.
The 1996 Act also will increase competition in the local telecommunications
business. The 1996 Act requires all local exchange providers, including new
entrants, to offer their services for resale and requires ILECs to offer their
network facilities on an unbundled basis. These requirements potentially
facilitate entry by new competitors without substantial capital risk or
investment. However, there can be no assurance that any unbundled rates or
facilities offered by ILECs to Teleport will be economically attractive or
technically viable.
Similar competitive factors to those described above as affecting Teleport
affect the other CAPs included in the TCI Ventures Group. See "DESCRIPTION OF
THE BUSINESS OF THE TCI VENTURES GROUP -- Domestic Telephony -- Teleport and
other Wireline Investments -- Competition."
WTCI. WTCI faces growing competition from long distance carriers using
fiber optic cable. Traditionally, the area served by WTCI was remote and
sparsely populated and consequently fiber optic cables have only recently been
laid in the region. However, during the last few years, the network has been
largely overbuilt with fiber by MCI Communications Corporation. A second
overbuild by various IXCs is currently underway. According to current plans,
such second overbuild of the network will likely be completed by the end of the
second quarter of 1998. Such fiber optic networks are expected to compete
directly with WTCI's network for many of the same customers along a significant
portion of the same routes. The recurring operating costs associated with
maintaining WTCI's microwave network facilities are greater than those
associated with a fiber optic network. Although WTCI has taken certain actions
in response to such competition, such as developing more cost effective methods
of conducting its business and new uses for its microwave facilities, there can
be no assurance that such efforts will be successful or that the increased
competition from other long distance carriers overbuilding the region with fiber
will not have a material adverse effect on the business, financial condition,
results of operations and prospects of WTCI.
UVSG's Diversified Satellite Communications Businesses. Each of the
businesses in which UVSG operates is highly competitive. In general, UVSG faces
competition from numerous other companies offering video, audio, data, and
program promotion and guide services, as well as from companies offering
alternative products and services that perform similar functions. UVSG's Prevue
products compete with printed program guides and other on-screen program guides.
UVSG anticipates that its Prevue Networks subsidiary will face competition from
a number of other companies that are attempting to develop viable interactive
television technologies which may be accessed through cable television systems
or otherwise. UVSG's UVTV division, which markets and distributes superstations
WGN, WPIX and KTLA, as well as other services, faces competition from over 100
cable networks suppliers, including other superstations, for limited channel
capacity on cable television systems.
In addition, UVSG's Superstar Satellite Entertainment division competes,
through SNG, with several other large C-band DTH satellite dish program
packagers, some of which are affiliated with well-known, large programmers and
cable television system operators. In addition, the C-Band DTH satellite dish
market faces competition from cable television as well as technologies such as
direct broadcast satellite ("DBS") services, which were launched in 1994. Many
of SNG's competitors have substantially greater financial, marketing,
distribution and other resources than those available to SNG. DBS uses Ku-band
frequencies that can be received by significantly smaller and less expensive
receive terminals than those home satellite dishes that receive C-band
frequencies. Because of the smaller dish size, DBS may be more widely accepted
than C-band DTH satellite dish systems in urban markets. UVSG believes that the
entry of DBS will serve to decrease the size of the C-band market (which UVSG
reported decreased 4% to 2.3 million subscribers in 1996) in the
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short-term and the long-term. There can be no assurance that SNG will compete
successfully against its competitors in the future, although UVSG believes that
for the near future more programming will be available for the C-band DTH
satellite dish market than the DBS market because the majority of programming
for cable television systems is transmitted on C-band frequencies. Given the
initial investment costs and life of a C-band DTH satellite dish system, UVSG
believes that a significant portion of current C-band DTH satellite dish owners
will continue to use home satellite dish services rather than invest in a DBS
system. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- Diversified Satellite Communications."
Internet Services. The markets for consumer and business Internet services
and online content are extremely competitive, and the Company expects that
competition will intensify in the future. @Home's most direct competitors in
these markets are Internet service providers ("ISPs"), national long distance
carriers and local exchange carriers, wireless service providers, online service
providers ("OSPs") and Internet content aggregators. Many of these competitors
are offering (or may soon offer) technologies that will attempt to compete with
some or all of @Home's high-speed data service offerings. Such technologies
include Integrated Services Digital Network ("ISDN") and Digital Subscriber Line
("xDSL"). @Home also competes with other cable-based data services that are
seeking to contract with cable system operators to bring their services into
geographic areas that are not covered by an exclusive relationship with @Home.
The bases of competition in these markets include transmission speed,
reliability of service, ease of access, price/performance, ease-of-use, content
quality, quality of presentation, timeliness of content, customer support, brand
recognition, operating experience and revenue sharing. Many of @Home's
competitors and potential competitors have substantially greater resources than
@Home, and there can be no assurance that @Home will be able to compete
effectively in its target markets. Further, as a strategic response to changes
in the competitive environment, @Home may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on @Home's business, operating results or financial
condition. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- Internet Services -- Competition."
NDTC. There are a number of well-established competitors located on both
the east and west coasts to both NDTC's uplinking and satellite transmission
services and to its production and post-production services, many of which
competitors have been in existence significantly longer than NDTC and which may
have an established customer base. NDTC's HITS authorization and transport
services compete with locally operated authorization controllers, purchased from
the same vendor that supplies set-top terminals to cable operators, and with
programmers who provide their own digital signal transport. There can be no
assurance that the HITS service will achieve significant market penetration
beyond the TCI affiliated companies.
GOVERNMENT REGULATION
International, Cable, Telephony and Programming. Substantially every
country in which International has, or proposes to make, an investment
regulates, in varying degrees, (i) the granting of cable and telephony
franchises, the construction of cable and telephony systems and the operations
of cable, other multi-channel television operators and telephony operators and
service providers as well as the acquisition of, and foreign investments in,
such operators and service providers and (ii) the broadcast and content of
programming and Internet services and foreign investment in programming
companies. Regulations or laws may cover wireline and wireless telephony,
satellite and cable communications and Internet services, among others.
Regulations or laws that exist at the time International makes an investment in
a subsidiary or affiliate may thereafter change, and there can be no assurance
that material and adverse changes in the regulation of the services provided by
International's subsidiaries and affiliates will not occur in the future.
Regulation can take the form of price controls, service requirements and
programming and other content restrictions, among others. Moreover, some
countries do not provide exclusive licenses to provide multi-channel television
services within a geographic area, and in those instances International may be
adversely affected by an overbuild by a competing cable operator. See
"-- Competition -- International Cable and Other Multi-Channel Television." In
certain countries where multi-channel television is less developed, there is
minimal regulation of cable television, and hence the protections of the cable
operator's investment available in the United States and
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other countries (such as rights to renewal of franchises and utility pole
attachment) may not be available in these countries. See "DESCRIPTION OF THE
BUSINESS OF THE TCI VENTURES GROUP -- International Cable, Telephony and
Programming -- International."
Domestic Wireless Telephony. The licensing, construction, operation, sale,
resale and interconnection arrangements of domestic wireless telecommunications
systems are regulated to varying degrees by the FCC and, depending on the
jurisdiction, state and local regulatory agencies. The FCC, in conjunction with
the Federal Aviation Administration (the "FAA"), also regulates tower marking
and lighting. In addition, FCC environmental rules may cause certain PCS network
facilities to become subject to regulation under the National Environment Policy
Act. The 1996 Act imposes funding obligations on PCS licensees for universal
service support and requires telecommunications services to be accessible to and
usable by persons with disabilities, subject to certain exceptions. In addition,
the Communications Assistance for Law Enforcement Act of 1994 ("CALEA") requires
all telecommunications carriers, including wireless carriers, as of October
1998, to ensure that their equipment is capable of permitting the government,
pursuant to a court order or other lawful authorization, to intercept any wire
and electronic communications carried by the carrier to or from its subscribers
and to access certain call-identifying information that is reasonably available
to the carriers. There can be no assurance that either the FCC, the FAA or other
federal, state or local agencies having jurisdiction over Sprint PCS's business
will not adopt regulations or take other actions that would adversely affect the
business of Sprint PCS, including making additional spectrum available for use
in the provision of services that may compete with Sprint PCS service offerings.
FCC licenses to provide PCS services are subject to renewal and revocation.
Sprint PCS's existing PCS licenses will expire in 2005. There may be competition
for the licenses held by Sprint PCS upon their expiration, and there can be no
assurance that Sprint PCS's licenses will be renewed. FCC rules require all A
and B Block PCS licensees to meet certain requirements including, without
limitation, coverage to one-third of the population of their service area(s)
within the first five years and to two-thirds of the population within the first
ten years of the award of a license. There can be no assurance that Sprint PCS
will be able to obtain the requisite coverage in all of its licensed service
areas. Failure to comply with these requirements could cause revocation or
forfeiture of Sprint PCS's licenses or the imposition of fines on Sprint PCS by
the FCC. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP -- Domestic
Telephony -- Government Regulation -- Regulation of PCS and Other Wireless
Activities."
The Communications Act of 1934, as amended (including as amended by the
1996 Act) (the "Communications Act") restricts foreign investment in and
ownership of certain FCC radio licensees, including PCS licensees. If an entity
fails to comply with the foreign ownership requirements, the FCC may order the
entity to divest alien ownership to bring the entity into compliance with the
Communications Act. Other potential sanctions include fines, a denial of
renewal, or revocation of the license. On March 13, 1997, the Sprint PCS
Partners filed a petition with the FCC seeking clarification regarding the
application of the foreign ownership restrictions to Sprint PCS and PhillieCo.
PCS licensees may use common carrier point-to-point microwave and
traditional landline facilities to connect cell sites and to link them to their
respective main switching offices. The FCC separately licenses these microwave
facilities, as well as the microwave transmission facilities of WTCI, and
regulates the technical parameters and service requirements of these facilities.
In providing interstate transmission services to its non-carrier customers, WTCI
also is subject to the streamlined tariffing and other requirements applicable
to "nondominant carriers" under the current federal regulatory regime. See
"DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP -- Domestic
Telephony -- Government Regulation -- Regulation of Wireline Telephony
Activities." WTCI's provision of intrastate transmission services may also be
subject to regulatory requirements at the state level, similar to those
described in the discussion of "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- Domestic Telephony -- Government Regulation -- Regulation of Wireline
Telephony Activities." In addition, WTCI's placement of facilities is subject to
applicable state and local laws and regulations.
Domestic Wireline Telephony. Teleport and the CAPs in which the TCI
Ventures Group has interests are subject to federal and state regulation. In
most states, Teleport is subject to certification and tariff filing requirements
with respect to intrastate services. In some instances, the certificate obtained
by Teleport in a
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particular state limits the services that it is permitted to provide in that
state. Teleport believes that these current restrictions on the services that
may be provided by it should be eliminated as a result of the 1996 Act, which
prohibits states from imposing legal restrictions that effectively prohibit the
provision of any telecommunications service. States will, however, under the
1996 Act, retain authority to impose on Teleport and other telecommunications
carriers requirements to preserve universal service, protect public safety,
ensure quality of service and protect consumers. In addition, state and local
governments are permitted to manage public rights of way and to require fair and
reasonable compensation from telecommunications providers, on a competitively
neutral and non-discriminatory basis, so long as the compensation required is
publicly disclosed by the governmental entity. States are also responsible under
the 1996 Act for mediating and arbitrating interconnection arrangements between
CLECs and ILECs if the carriers fail to agree on such arrangements.
Teleport is permitted, but not required, to file tariffs for interstate
access services with the FCC pursuant to streamlined tariff requirements that
are less restrictive than those imposed on ILECs offering similar services.
Tariffs filed with the FCC must contain the rates, terms and conditions under
which service is generally available from TCG. Challenges by third parties to
Teleport's tariff filings, rates or related contractual arrangements may cause
TCG to incur substantial legal and administrative expenses. An October 1996 FCC
ruling would have eliminated the federal tariff requirement for domestic
interstate, interexchange services as of September 22, 1997, but such order has
been temporarily stayed pending judicial review and a number of parties have
filed petitions with the FCC seeking reconsideration of the FCC's decision. As a
result, the tariff obligation remains applicable to any Teleport interstate long
distance services. Teleport must offer its interstate services on a
nondiscriminatory basis, at just and reasonable rates and subject to the
complaint provisions of the Communications Act. Teleport 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, Teleport is subject to certain federal regulatory
obligations when it provides local exchange service in a market. All local
exchange carriers, including CLECs, must interconnect with other carriers, make
their services available for resale by other carriers, provide
non-discriminatory access to rights-of-way, offer reciprocal compensation for
termination of traffic and provide dialing parity and telephone number
portability. The 1996 Act also requires all telecommunications carriers to
ensure that their services are accessible to and usable by persons with
disabilities, and Teleport and other CLECs are required to contribute to the
support of the significantly expanded universal service programs provided for in
the 1996 Act. In addition, recent FCC orders grant ILECs increased pricing
flexibility in the provision of interstate access and contemplate further
flexibility as access competition continues to develop. Another recent FCC order
revising the federal price cap regime is expected to result in a significant
reduction in ILEC rates for interstate access services.
The 1996 Act contains other provisions that may be subject to FCC
rulemaking and judicial interpretation, including a provision that limits the
ability of a cable television operator and its affiliates to acquire more than a
10% financial interest or any management interest in a local exchange carrier
which provides telephone exchange service in such cable operator's franchise
area. While this provision does not affect acquisitions made prior to enactment
of the 1996 Act, any construction or application of this provision by the FCC or
the courts which limits TCI's or TCG's ability to acquire interests in existing
CLECs or CAPs or other service providers could have an adverse impact on TCG and
the TCI Ventures Group's activities in this area. Teleport and TCI's other
wireline activities also will be subject to certain requirements of CALEA
described above under "-- Government Regulation -- Regulation of PCS and other
Wireless Activities."
In addition, no assurance can be given that changes to current regulations
or the adoption of new regulations by the FCC or state or local regulatory
authorities or legislative initiatives would not have a material adverse effect
on Teleport. The regulatory issues affecting the other CAPs included in the TCI
Ventures Group are similar to those described above. See "DESCRIPTION OF THE
BUSINESS OF THE TCI VENTURES GROUP -- Domestic Telephony -- Government
Regulation -- Regulation of Wireline Telephony Activities."
Diversified Satellite Communications. The satellite transmission, cable and
telecommunications industries are subject to federal regulation, including FCC
licensing and tariff requirements. The cable and telecommunications industries
are also subject to extensive regulation by local and/or state authorities.
While
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most cable and telecommunications industry regulations do not apply directly to
UVSG, they affect programming distributors, the primary customers for UVSG's
products and services. In the past, uncertainty about proposed or even rumored
regulations has occasionally caused UVSG's programming distributor customers to
postpone purchasing decisions and actions.
Under the "cable compulsory license" provisions of the Copyright Act of
1976 (the "Copyright Act"), programming distributors are required to pay
copyright fees that arise from their reception and retransmission of
satellite-transmitted television broadcasts such as WGN and other superstations.
These compulsory copyright fees (which are paid to the Copyright Office and
distributed by the Copyright Royalty Tribunal to copyright owners) are in lieu
of separately negotiated copyright payments between the programmers and the
programming distributors. These provisions also grant an exemption which allows
UVTV and other "passive carriers" to transmit and market its superstations
without agreements with, or copyright payments to, the broadcast station
transmitted.
The Copyright Act and U.S. Copyright Office regulations generally impose a
significantly higher copyright fee on cable television systems in certain
markets for carrying more than two distant independent television stations. This
copyright fee structure limits the extent to which cable television systems are
able to carry superstations. A reduction in competitive superstations within the
industry could increase distribution for UVTV's superstations, as a replacement
product, without increasing a cable operator's overall copyright payments.
The Satellite Home Viewer Act of 1988 (the "SHVA") provides for a "home
satellite dish compulsory copyright license" for the retransmission of network
and superstation signals and programming directly to subscribers with a home
satellite dish. Under the terms of the SHVA, satellite carriers, such as SNG,
are responsible for paying compulsory copyright fees to the Copyright Office for
the sale of superstation signals. Currently, a proceeding regarding a potential
change in the compulsory copyright fees under SHVA is pending before the
Copyright Arbitration Royalty Panel, with a decision expected sometime this
fall. Any change in such rates could be applied retroactively as of July 1,
1997. The Satellite Home Viewer Act of 1994 extended the home satellite dish
compulsory license through the end of 1999.
Legislation has been introduced from time to time to repeal the cable
compulsory license provision, although no such legislation has been passed by
Congress. At Congress' request, the Copyright Office conducted a review of
compulsory licensing for both the cable and satellite industries and issued its
report and legislative proposals to Congress on August 1, 1997. Among other
things, the Copyright Office's report urges Congress to: (1) eliminate the
current December 31, 1999 sunset for the satellite compulsory license and
refrain from imposing any further sunset; (2) maintain the satellite and cable
compulsory licenses as separate licenses, but eliminate, wherever possible, any
differences between the two licenses; and (3) extend the satellite compulsory
license to the retransmission by satellite carriers, such as SNG, of local
broadcast signals in their local area. The report also suggests changes to the
cable and satellite copyright rate structures which, if enacted, could result in
increased copyright payments by cable systems and satellite carriers. Finally,
the report suggests that Congress further study whether the passive carrier
exemption should continue to apply to satellite carriers, such as UVTV, in cases
where the carrier is retransmitting a signal on which national advertising has
been substituted by the broadcaster for the local advertising on the
over-the-air signal. Enactment of reform legislation which eliminates or limits
the scope of the current exemption could hinder or prevent UVTV from marketing
superstation services such as WGN.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"), which established substantial rate regulation for certain
services and equipment provided by most cable television systems in the United
States, may impair UVSG's ability to offer competitive rates and volume
discounts on certain of its products and services and may affect the rates
charged by SNG to home satellite dish programming packagers and other
programming distributors. For example, the FCC's "program access" rules prohibit
certain satellite programmers which are "affiliated" (under the FCC's
affiliation rules) with certain types of programming distributors (such as cable
operators) from, among other things: (1) discriminating in prices, terms, or
conditions between various programming distributors; and (2) entering into
agreements with certain programming distributors which provide for exclusivity,
except in limited circumstances. To the extent
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UVSG's programming is deemed to be affiliated with programming distributors
covered by these rules, such programming is also subject to these pricing and
marketing limitations.
Internet Services. The law relating to liability of online service
providers and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. A number of lawsuits
have sought to impose liability for defamatory speech and infringement of
copyrights. Some courts have held OSPs/ISPs liable for the copyright
infringement of others accomplished using the OSP/ISP's facility, while other
courts have held that such providers would be liable only upon taking
affirmative steps in furtherance of the infringement. Because materials will be
downloaded and redistributed by subscribers and cached or replicated by @Home in
connection with @Home's offering of its services, there is a possibility that
claims may be made against @Home or the @Home Cable Partners under both United
States and foreign law for defamation, negligence, copyright or trademark
infringement, or other theories based on the nature and content of such
materials. Such types of claims have been brought, and sometimes successfully
pressed, against OSPs in the past. In particular, copyright and trademark laws
are evolving both domestically and internationally, and there is uncertainty
concerning how broadly the rights afforded under these laws will be applied to
online environments. The current Congress likely will address OSP/ISP copyright
liability during its consideration of legislation to implement the World
Intellectual Property Organization ("WIPO") Copyright Treaty (the "Treaty"). The
Treaty states that entities that merely provide transmission facilities are not
liable for violating certain exclusive rights. The U.S. Senate Judiciary
Committee is expected to hold hearings during the latter part of 1997 on the
issue of OSP/ISP copyright liability. The U.S. House Judiciary Committee will
consider the issue in tandem with the Committee's consideration of WIPO
implementation. The Chairman of the House Subcommittee on Courts and
Intellectual Property has introduced two bills, one that would limit OSP/ISP
copyright liability and another that would implement the Treaty. The U.S.
Supreme Court recently declared unconstitutional the provision in the 1996 Act
which prohibited, and imposed criminal penalties and civil liability for, using
an interactive computer service to knowingly transmit "indecent" and "patently
offensive" communications to minors (i.e., any recipient under 18 years of age).
The Court upheld the Act's prohibition on the knowing transmission of obscene
communications to minors, on the basis that obscene speech enjoys no First
Amendment protection. Thus, an OSP or ISP may still be liable under the 1996 Act
if it knowingly permits, and intends for, a telecommunications facility under
its control to be used for the transmission of obscene material to minors. The
imposition upon ISPs or OSPs of potential liability for materials carried on or
disseminated through their systems could require @Home to implement measures to
reduce its exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain product or service
offerings. In addition, the imposition of liability on @Home for information
carried on the @Home network could have a material adverse effect on @Home's
business, operating results and financial condition.
Although @Home's services are not directly subject to current regulations
of the FCC or any other federal or state communications regulatory agency,
changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes that, directly or indirectly, affect
telecommunications costs, limit usage of subscriber-related information or
increase the likelihood or scope of competition from the RBOCs or other
telecommunications companies, could affect the prices at which @Home may sell
its services. For example, the FCC has adopted rules requiring discounts on
Internet connectivity rates for qualifying schools and libraries, although @Home
may be eligible for reimbursements from the FCC for the amount of such
discounts. In addition, regulation of cable television rates may affect the
speed at which cable operators who have agreed or will agree in the future to
provide the @Home service will be able to upgrade their cable systems as
necessary to carry @Home's services. Similarly, enactment of proposed privacy
legislation currently pending in Congress, which would restrict the use of
subscriber information by interactive computer services for marketing and other
purposes, could adversely affect the marketing of @Home's services as well as
its revenue from advertising. The @Home Cable Partners have advised @Home that
their local cable operators typically have elected to classify the provision of
all or some of the @Home services as "additional cable services" under their
respective local franchise agreements, and to pay franchise fees in accordance
therewith. Local franchise authorities may attempt to subject cable systems to
higher or other franchise fees or taxes or otherwise seek to require cable
operators to obtain additional franchises, in connection with their distribution
of the @Home service. There are thousands of franchise authorities, and
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thus it will be difficult or impossible for @Home or such cable operators to
operate under a unified set of franchise requirements. It is possible that
governmental authorities may attempt to impose some type of additional
regulation on cable systems carrying the @Home services. In the event that the
FCC or another governmental agency were to classify @Home or such cable
operators as "common carriers" of Internet services, or cable operators were to
seek such classification as a means of protecting themselves against
liabilities, @Home's rights as the exclusive Internet service provider over the
systems of TCI, Cox and Comcast could be lost. In addition, if @Home, the @Home
Cable Partners or such cable operators were classified as common carriers, they
could be subject to government-regulated tariff schedules for the amounts they
could charge for their services and would likely be required to pay higher rates
to ILECs for carrying @Home traffic. Alternatively, such local cable operators
or federal or state regulators could attempt to treat the provision of @Home's
services as "information services" under federal law. While the FCC does not, at
present, regulate the provision of information services, such services could, in
the future, be the subject of federal regulation, state regulation and/or
special fees or taxes. Given the close relationship of the information services
classification to the "enhanced services" classification established years ago
in the common carrier context, a classification of @Home as an information
service may also increase the risk that common carrier regulation would be
imposed on cable operators distributing the @Home service. Such regulation could
affect the willingness of such local cable operators to offer @Home's services.
To the extent @Home increases the number of foreign jurisdictions in which it
offers its services, @Home will be subject to additional governmental
regulation. See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES
GROUP -- Internet Services -- Government Regulation."
RISKS OF FOREIGN INVESTMENT
General. Currently International is the only TCI Ventures Group Entity that
has significant businesses outside the United States. International's
subsidiaries and affiliates operate solely outside the United States (with the
exception of TCI Cablevision of Puerto Rico, Inc. and TCI Music, Inc.). @Home
currently has distribution agreements with two of Canada's leading cable
operators, although such operators have not yet begun commercial distribution of
@Home's services. @Home's business strategy includes expansion into Canada and
other international markets; however, there can be no assurance that @Home will
be successful in expanding its product and service offerings into foreign
markets because of its extremely limited experience in developing localized
versions of its products and services and in developing relationships with
international cable system operators. If @Home does commence significant
international operations, or in the event any of the other TCI Ventures Group
Entities determines to expand into international markets, such entities (along
with International) will be subject to the risks inherent in doing business on
an international level, such as regulatory requirements and loss of revenue,
property and equipment from expropriation, nationalization and confiscatory
taxation. International is and such other TCI Ventures Group Entities would also
be exposed to the risk of changes to laws and policies that govern foreign
investment in countries where they have operations, as well as, to a lesser
extent, changes in United States laws and regulations relating to investing in
or trading with countries in which International and such other TCI Ventures
Group Entities may have investments.
Certain of the countries in which International has operating companies or
in which International, @Home or another TCI Ventures Group Entity may operate
in the future, may be subject to a substantially greater degree of social,
political and economic instability than is the case in other countries. Such
instability may result from, among other things, (i) authoritarian governments
or military involvement in political and economic decision making, and changes
in government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of any
subsidiary or affiliate of International or any other TCI Ventures Group Entity
located within such country or that has significant operations there (and
thereby have a potentially material adverse effect on the results of operations
or financial condition of International or such entity) and could result in the
loss of International's or such other TCI Ventures Group Entity's investment in
such subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
Tax Risks. In general, a United States corporation may claim a foreign tax
credit against its federal income tax expenses for foreign taxes paid and
accrued. Because International must calculate its foreign tax
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credit separately for dividends received from each foreign corporation in which
International owns 10% to 50% of the voting stock and because of certain other
limitations (including those resulting from International's reporting of U.S.
taxable income on a consolidated basis with TCI), International's ability to
claim a foreign tax credit may be limited. This limitation and the inability of
International to offset losses in one foreign jurisdiction against income in
another foreign jurisdiction could result in a high effective tax rate on
International's earnings. International has acquired direct and indirect
ownership interests and may acquire additional ownership interests in operating
companies located in countries with which the United States does not have income
tax treaties, in which case International may be subjected to increased
withholding taxes on distributions and other payments from those operating
companies and also may be subject to double taxation with respect to income
generated in such countries. @Home, or any other TCI Ventures Group Entity which
may have international operations or investments, would be subject to similar
tax risks with respect to its international operations or investments.
Foreign Currency Exchange Rates; Repatriation. The results of operations
and the value of the assets of the overseas operating companies of International
and any of the other TCI Ventures Group Entities which may in the future have
international operations are partially a function of the currency exchange rates
between the U.S. dollar and the applicable local currency. Certain countries in
which International has interests have in the past experienced hyperinflationary
economies, with volatile currencies and periodic currency devaluations. As a
result, International may experience an economic loss solely as a result of
foreign currency exchange rate fluctuations, which include foreign currency
devaluations against the dollar. Conversely, International may have capital
commitments to a subsidiary or affiliate that are payable in a local functional
currency, and any increase in the value of such local functional currency
against the dollar will increase the cost to International of meeting such
capital commitments. Additionally, certain subsidiaries and affiliates of
International may have debt obligations payable or receivable that are
denominated in a currency other than their own functional currency, or loans
denominated in U.S. dollars. In general, International and its subsidiaries and
affiliates do not execute currency hedge transactions to reduce International's
exposure to foreign currency exchange rate risks. Although the countries in
which International's operating companies now conduct business generally do not
restrict the removal or conversion of local or foreign currency, International
may in the future acquire interests in companies that operate in countries where
the removal or conversion of currency is restricted. There can also be no
assurance that countries that do not currently have such restrictions will not
impose them in the future, especially in situations where there is a
deterioration in a country's balance of payments or where the local currency is
being heavily converted into other currencies. Such risks would also be
applicable to any international operations or investments of @Home or any other
TCI Ventures Group Entity.
INTELLECTUAL PROPERTY; LITIGATION.
Certain of the TCI Ventures Group Entities, most significantly, UVSG and
@Home, rely on a significant amount of proprietary technology in their
businesses and believe that the success of their operations will depend in part
on their ability to protect their intellectual property.
UVSG's technology development strategy has generally been to focus on
rapidly developing, introducing and upgrading its services rather than on
creating and preserving a broad patent portfolio. As a result, UVSG may be
vulnerable to competitors who attempt to copy its services or technology or gain
access to its trade secrets and know-how. UVSG has obtained two patents with
respect to certain transmission methods employed by its SpaceCom Systems, Inc.
subsidiary. In addition, UVSG has been issued two patents and has applied for
several additional patents covering certain limited features of its interactive
technology, although UVSG does not believe that these patents are or will be
significant to its business. Some of the businesses in which UVSG is engaged are
highly patent-intensive. Many of UVSG's competitors have obtained, and may be
expected to obtain in the future, patents that cover or affect products and
services directly or indirectly related to those offered by UVSG.
@Home regards its technology as proprietary and attempts to protect it with
copyrights, trademarks, trade secret laws, restrictions on disclosure and other
methods. In addition, @Home has filed two patent applications and is in the
process of preparing additional patent applications with respect to aspects of
its high-bandwidth network technology and online advertising. There can be no
assurance that any patent will issue
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from these applications or that, if issued, any claims allowed will be
sufficiently broad to protect @Home's technology.
There can be no assurance that any patents that may be issued to any of the
TCI Ventures Group Entities will not be challenged, invalidated or circumvented,
or that any rights granted thereunder would provide proprietary protection to
such TCI Ventures Group Entity. Failure of any patents to provide protection to
any of the TCI Ventures Group Entities' technology may make it easier for such
TCI Ventures Group Entity's competitors to offer technology equivalent or
superior to such TCI Ventures Group Entity's technology. Although certain of the
TCI Ventures Group Entities, including @Home, generally enter into
confidentiality or license agreements with their employees and consultants, and
generally control access to and distribution of their documentation and other
proprietary information, despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use such TCI Ventures Group Entity's
products, services or technology without authorization, or to develop similar
technology independently. In addition, particularly with respect to @Home,
effective copyright, trademark and trade secret protection may be unavailable or
limited in certain foreign countries, and the global nature of the Internet
makes it virtually impossible to control the ultimate destination of @Home's
content offerings. Policing unauthorized use of @Home's content offerings is
difficult. There can be no assurance that the steps taken by @Home or any of the
other TCI Ventures Group Entities will prevent misappropriation or infringement
of their respective technology.
From time to time, both UVSG and @Home have received, and may receive in
the future, notice of claims of infringement of other parties' proprietary
rights. UVSG is currently engaged in litigation with respect to claims of
infringement of certain patents held by StarSight Telecast, Inc. ("StarSight")
relating to certain functions performed by interactive program guide services.
If this litigation is resolved in StarSight's favor, it could have a material
adverse effect on UVSG's interactive operations. @Home has received claims for,
among other things, infringement resulting from the downloading of materials by
the online or Internet services operated or facilitated by @Home. There can be
no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against any of the TCI Ventures Group Entities or that any assertions
or prosecutions will not materially adversely affect the business, operating
results and financial condition of any of the TCI Ventures Group Entities.
Irrespective of the validity or the successful assertion of such claims, a TCI
Ventures Group Entity would incur significant costs and diversion of management
time and resources with respect to the defense thereof, which could have a
material adverse effect on the business, operating results and financial
condition of such TCI Ventures Group Entity, and accordingly, of the TCI
Ventures Group. If any claims or actions are asserted against a TCI Ventures
Group Entity, such TCI Ventures Group Entity may be required to cease developing
or marketing such services, to obtain a license under a third party's
intellectual property rights or to redesign such services in such a way as to
avoid infringing the intellectual property claims. There can be no assurance,
however, that under such circumstances a license would be available on
commercially reasonable terms, or at all.
DEPENDENCE ON KEY PERSONNEL.
Many of the TCI Ventures Group Entities are highly dependent upon the
efforts of their respective management teams. The loss of the services of any
one of these individuals from a TCI Ventures Group Entity could impede the
achievement of product development and marketing objectives of such entity. The
TCI Ventures Group Entities are also highly dependent upon their ability to
attract and retain qualified technical and marketing personnel. There is often
intense competition for technical and marketing personnel in the industries in
which the TCI Ventures Group Entities operate. There can be no assurance that
the TCI Ventures Group Entities will be able to attract and retain the personnel
necessary for the development of their respective businesses. Delays in hiring
such personnel could delay the achievement of development and marketing
objectives.
INVESTMENT COMPANY ACT CONSIDERATIONS
International's operations are conducted through subsidiaries and
affiliates, and certain of its investments in those companies were made with
strategic and local partners where International has a less than 50% voting
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interest. Under the Investment Company Act of 1940 (the "1940 Act"), a
non-exempt entity that is deemed to be an "investment company" is required to
register under the 1940 Act. Registered investment companies are subject to
extensive, restrictive and potentially adverse regulation relating to, among
other things, operating methods, management, capital structure, dividends and
transactions with affiliates. Section 3(a)(1)(c) of the 1940 Act provides that a
company is an "investment company" if it holds "investment securities" having a
value in excess of 40% of the value of its total assets (exclusive of U.S.
government securities and cash items) on an unconsolidated basis. "Investment
securities" means all securities except U.S. government securities, securities
issued by employees' securities companies and securities issued by majority
owned subsidiaries (companies with respect to which an issuer owns voting
securities entitled to cast 50% or more of the aggregate votes entitled to be
cast for the election of directors) which are not themselves investment
companies. The 1940 Act and related rules of the SEC provide for certain
exclusions from the definition of "investment company," including an exclusion
applicable if not more than 45% of the value of an issuer's assets (exclusive of
U.S. government securities and cash items) consists of, and not more than 45% of
its net income after taxes (for the last four quarters combined) is derived
from, securities other than U.S. government securities, securities issued by
employees' securities companies, securities issued by majority owned
subsidiaries (which are not themselves investment companies) and securities
issued by companies (which are not themselves investment companies) that are
primarily controlled by the issuer. International's current holdings in its
subsidiaries and affiliates are structured such that it should not be considered
an "investment company" and International intends to conduct its business in a
manner designed to avoid being subject to regulation under the 1940 Act. These
considerations could require International to dispose of otherwise desirable
assets at disadvantageous prices, structure transactions as joint ventures or in
a manner that assures International has a majority interest or primary control
(which might not be the most favorable or strategic structure), or avoid
otherwise economically desirable transactions (including the addition of
strategic partners in International's current investments). In addition, certain
events beyond the control of International, including a significant decline in
the market value of certain of its publicly-traded subsidiaries or affiliates
(including Telewest and/or Flextech), could result in International becoming an
inadvertent investment company. If it were established that International is an
unregistered investment company there would be a risk, among other material
adverse consequences, that International would be subject to monetary penalties
and injunctive relief in an action brought by the SEC, that International would
be unable to enforce contracts with third parties and that third parties could
seek to obtain rescission of transactions undertaken during the period it was
established International was an unregistered investment company. As of March
31, 1997, International held "investment securities" having a value of
approximately 15% of the value of the total assets of International (exclusive
of U.S. government securities and cash items). International has applied to the
SEC for an exemption from the requirements of the 1940 Act in those instances
where International has a substantial interest in a venture to which it provides
active developmental assistance. No assurance can be given that such waiver will
be obtained from the SEC.
POTENTIAL CONFLICTS WITH OWNERS
Certain of the owners or partners of or other entities which have interests
in, the TCI Ventures Group Entities are in the telecommunications business and
may, now or in the future, provide services which are the same or similar to
those provided by the TCI Ventures Group Entity in which it has an interest.
Except in certain cases where such owners, partners or other entities have
entered into agreements not to compete with such TCI Ventures Group Entity (see
"-- Restrictions on Competitive Activities"), no assurance can be given that
such owner, partner or other entity will not compete with such TCI Ventures
Group Entity in certain markets or in the provision of certain
telecommunications services.
International. TCI owns or has interests in satellite delivered programming
entities both through Liberty, which is in the Liberty Media Group, and through
International, which is in the TCI Ventures Group. The presence of entities from
more than one Group in this industry could give rise to potential conflicts of
interest between such entities and for the management and Board of Directors of
TCI, including conflicts which may arise with respect to business dealings
between such entities and when they may both be pursuing the same business
opportunity. 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
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the holders of TCI Ventures Group Common Stock, TCI Group Common Stock and
Liberty Media Group Common Stock. See "-- Potential Divergence of Interests; No
Specific Procedures for Resolution."
Teleport. As of March 31, 1997, subsidiaries of TCI, Cox, Comcast and Media
One, Inc. ("Media One" (formerly Continental Cablevision, Inc.)) (collectively,
the "Teleport Cable Stockholders") owned shares of Teleport representing
approximately 30%, 24%, 17% and 8%, respectively, of the outstanding common
stock of Teleport. All of such Teleport Cable Stockholders are in the
telecommunications business and may, now or in the future, provide services
which are the same or similar to those provided by Teleport. No assurance can be
given that the Teleport Cable Stockholders will not compete with Teleport in
certain markets or in the provision of certain telecommunications services. In
this regard, Teleport's Restated Certificate of Incorporation provides that
Teleport may not provide certain (i) wireless communications services (other
than products and services delivered via point-to-point microwave and milliwave
transmissions) or (ii) telecommunications services to residences until, in each
case, the earlier of June 2001 and the date on which the holders of Teleport
Class B Stock no longer represent at least 50% of the voting power of the
outstanding common stock of Teleport, without the affirmative vote of the
holders of a majority of the Teleport Class B Stock, subject to certain
exceptions.
UVSG. The TCI Group has agreements with UVSG for the carriage of UVSG's
Prevue Networks and superstation programming on certain of the cable systems
attributed to the TCI Group and for UVSG's subscriber management services, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment in UVSG is attributed to the TCI Ventures Group,
situations may arise where the entity attributed to one Group may make a
decision which adversely affects one of the other Groups. For example, UVSG's
UVTV division markets and distributes superstation WGN (Chicago) to several of
the Company's cable systems attributed to the TCI Group. TCI recently canceled
WGN in certain of its wholly owned systems. Such cancellation was the primary
cause for the number of WGN subscribers decreasing by 3.5 million or 9% from
March 1996 to March 1997 (which decrease was partially offset by new system
launches and existing system subscriber growth aggregating approximately 1.1
million subscribers).
@Home. Because TCI's investment in @Home is attributed to the TCI Ventures
Group while the entity which will distribute the @Home service to subscribers of
TCI's cable systems is attributed to the TCI Group, certain conflicts of
interest between the TCI Group and the TCI Ventures Group may result, in that
actions taken by the TCI Group, such as the speed at which TCI's cable
television systems are upgraded to the level necessary to support distribution
of the @Home service, will have a direct impact upon the value of the TCI
Ventures Group's interest in @Home. Similarly, the extent to which TCI elects to
use @Home as the provider of certain services which are not covered by TCI's
exclusivity obligations to @Home, rather than another third party, may have an
effect upon the business of @Home. For example, TCI's exclusivity obligations do
not extend to work-related services. TCI.NET, Inc., the entity in the TCI Group
that has responsibility for the provision of Internet services, may elect to use
@Home as the provider of such work-related services or a third party. TCI is
under no obligation to use @Home as the provider of such services. To the extent
TCI does determine to use @Home as such provider, the terms upon which @Home
would provide such services will be subject to separate negotiations and would
not necessarily be upon the terms upon which @Home provides high-speed
residential Internet services.
During the period in which each of TCI, Cox and Comcast have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
(approximately 23 million), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems which have in the aggregate approximately 2.5
million homes passed. In addition, TCI has announced that it is considering
various plans and proposals that may result in the disposition of other of its
cable systems. In the event that such cable systems continue to be exclusive to
@Home, such cable systems and their homes passed would continue to be included
in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion
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of its equity interest in @Home to the other @Home Cable Stockholders, even
though such cable systems are no longer owned or controlled by TCI. If TCI does
not require that such cable systems remain exclusive to @Home, the TCI Ventures
Group could be required to sell shares to Cox, Comcast and KPCB. There can be no
assurance that, if the TCI Ventures Group is required to sell shares of @Home,
the price paid to the TCI Ventures Group would represent adequate consideration
to the TCI Ventures Group because such fair market value may not adequately
reflect the TCI Ventures Group's expectation of the long term value of such
investments in @Home.
In addition, although TCI, Cox and Comcast are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
See "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP -- Internet
Services -- @Home -- @Home Service." In addition to the exceptions to the
general exclusivity obligations, Cox and Comcast have the right to terminate the
exclusivity provisions with respect to TCI, Cox and Comcast in the event TCI
does not attain certain subscriber penetration levels for the @Home service
relative to the subscriber penetration levels of Cox and Comcast, as of June 4,
1999, and each anniversary thereafter until 2002. Such termination could have a
material adverse effect on @Home and the value of the TCI Ventures Group's
interest in @Home. Further, TCI, Cox and Comcast compete to some extent with
@Home for advertising and certain other revenues because @Home retains 100% of
all national advertising revenue delivered on the @Home service, while the local
cable operators of TCI, Cox and Comcast retain 100% of revenue generated from
local service offerings that do not require access to an Internet backbone or
that relate to programming within the local areas of the browser for the @Home
service, such as revenue from local advertising.
ENVIRONMENTAL RISKS
Teleport. In connection with its management of the Teleport satellite earth
station complex in Staten Island, New York, TCG monitors electromagnetic
radiation levels in the vicinity of the Teleport facility on a quarterly basis.
The quarterly monitoring reports provided to TCG indicate that the type and
level of electromagnetic radiation being emitted into publicly accessible areas
do not violate any laws, rules or regulations of which TCG is aware. In
addition, Teleport and its contractors are subject to various laws and
regulations governing hazardous or environmentally sensitive materials or
conditions which may occur in connection with the construction, installation,
operation or maintenance of Teleport's facilities. There can be no assurance
that hazardous materials or conditions, including electromagnetic radiation
emitted from the Teleport satellite earth station complex or any of TCG's other
facilities, might not expose Teleport to tort or other claims that could have a
material adverse effect on TCG.
Sprint PCS. Studies are ongoing to determine whether wireless
communications technologies pose health concerns and cause interference with
hearing aids, cardiac pacemakers and other medical devices. See "DESCRIPTION OF
THE BUSINESS OF TCI VENTURES GROUP -- Domestic Telephony -- Government
Regulation." There can be no assurance that the findings of any of such studies
will not lead to additional governmental regulations that will have an adverse
effect on Sprint PCS.
Certain interests groups have requested that the FCC investigate claims
that wireless communications technology poses health concerns and causes
interference with hearing aids and other medical devices. One group studying the
matter, which group was founded with funds from the wireless industry, has
released results from the first phase of its study (which focused on worst case
(operation at full-power) interaction) that indicate that the three wireless
technologies tested, including CDMA, caused interference in some instances, but
not all, with hearing aids. Phase II of this research study is expected to be
completed by January 1998. In addition, the Personal Communications Industry
Association ("PCIA") has been undertaking an industry-wide study to gather
information on possible PCS interference with medical devices for all PCS
protocols, and results from researchers working under the guidance of the
Wireless Technology Research LLC indicate that wireless telephones cause
interference to some users of cardiac pacemakers, and that the risk of
clinically significant interference is greater for pacemaker-dependent patients
who use digital (as opposed to analog) telephones. There can be no assurance
that the findings of any of the foregoing studies will not lead to additional
governmental regulations that will have an adverse effect on Sprint PCS.
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Media reports have suggested that certain RF (or radio frequency) emissions
from wireless telephones or facilities might be linked to certain forms of
cancer or other health problems. Concerns over the potential health effects of
RF emissions may have the effect of discouraging the use of wireless telephones
and other wireless communication services, including PCS, which could have an
adverse effect upon Sprint PCS and on the value of the TCI Ventures Group's
investment therein. In August 1996, the FCC adopted revised guidelines and
methods for evaluating the environmental effects of RF transmitters, including
cellular and PCS antennas and telephones, based on recommendations by several
federal agencies, including the Environmental Protection Agency and the Food and
Drug Administration. The new requirements are generally more stringent than the
requirements in effect prior to the FCC's action for cellular operations
(previously exempt from some environmental evaluation obligations now
applicable) and for PCS (the requirements for which previously in effect
permitted fractionally higher levels of exposure). The owners of facilities and
manufacturers of telephones are responsible for compliance with the regulatory
requirements. In response to requests by PCIA and other affected industry
groups, the FCC in December 1996 issued an order extending the transition period
for applicants and station licensees to conform with the FCC's new requirements.
For most radio services, including commercial mobile radio service ("CMRS"), the
old requirements will apply to station applications filed prior to September 1,
1997; the new guidelines and methods will apply to applications filed
thereafter. The new guidelines and requirements for evaluation of hand-held
devices are already in effect. The FCC has issued a draft revision of its OET
Bulletin No. 65 describing in greater detail the procedures to be used in
determining compliance with the new requirements. The FCC is currently
considering petitions for reconsideration seeking further clarification of the
compliance obligations of wireless carriers, and requesting that the deadline
for compliance with the new guidelines be extended until one year after the
final version of the FCC's revised OET Bulletin No. 65 is released.
Satellite and microwave transmission facilities owned and/or operated by
UVSG, NDTC, and WTCI also must comply with applicable FCC RF radiation rules.
There can be no assurance that the operation of such facilities may not expose
these entities to tort claims or other liability arising from violations of the
FCC rules or other environmental regulations.
THE EXCHANGE OFFERS
GENERAL
Reasons for the Exchange Offers. In recommending the approval of the
Charter Amendments to the Company's stockholders, the Company's Board stated its
belief that the creation and issuance of the TCI Ventures Group Common Stock
would result in greater market recognition of the value of the businesses and
assets attributed to the TCI Ventures Group, thereby enhancing stockholder value
over the long term. The authorization of separate series of Common Stock
intended to track the performance of the TCI Ventures Group would also provide
the Company greater flexibility with regard to raising capital for the TCI
Ventures Group's businesses and for making acquisitions and investments for the
TCI Ventures Group, including strategic partnering transactions, independently
of the TCI Group by using publicly traded equity securities specifically related
to the TCI Ventures Group. The issuance of TCI Ventures Group Common Stock would
also provide securityholders with the opportunity to invest in separate
securities intended specifically to reflect the TCI Ventures Group and would
enable the Company to more effectively tailor employee benefit plans to provide
incentives to the employees of the Company responsible for the conduct of the
business and affairs of the TCI Ventures Group. In addition, the TCI Group would
be easier for the market to understand and value once its businesses and assets
were largely confined to the distribution and communications businesses using
the Company's domestic cable plant. The foregoing benefits would be obtained by
the Company without forgoing the advantages of continued ownership of the
businesses and assets attributed to the TCI Ventures Group and of having such
businesses and assets be part of the consolidated enterprise. Unlike the case
with a separate publicly held corporation, however, holders of TCI Ventures
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 "RISK FACTORS -- Considerations Relating to the TCI Ventures Group Common
Stock."
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The Exchange Offers are intended to give holders of TCI Group Common Stock
the opportunity to invest in a separate security whose value is intended to
track the value of the businesses included in the TCI Ventures Group. In
determining to distribute the TCI Ventures Group Common Stock in the Exchange
Offers, the Board determined that the businesses and assets, the attribution of
which was being shifted to the TCI Ventures Group from the TCI Group,
represented approximately 30% of the total value of the TCI Group prior to such
change in attribution. The Board then concluded that it would be appropriate to
seek to reduce the outstanding shares of TCI Group Common Stock by an equivalent
percentage, rather than distributing the TCI Ventures Group Common Stock to the
holders of TCI Group Common Stock as a dividend or attempting to sell TCI
Ventures Group Common Stock in a public offering and attributing the offering
proceeds to the TCI Group.
The Series A Maximum and Series B Maximum and the exchange ratio of one
share of TCI Ventures Group Common Stock for each share of TCI Group Common
Stock validly tendered and not properly withdrawn were determined by the Board,
based on its view of the common stockholders' equity value of the Company
attributable to the TCI Ventures Group and the percentage that such value
represents of the common stockholders' equity value of the Company attributable
to the TCI Group and the TCI Ventures Group as a whole. In reaching its view as
to the common stockholders' equity value of the Company attributable to the TCI
Ventures Group, the Board took into account a number of factors (including
recent trading prices of those assets that are publicly traded and of public
companies in the same industry as other assets that are not publicly traded, the
amount of capital invested in such assets by the Company and, where applicable,
by third parties, and the recent financial performance of the various assets),
and compared such factors to the trading prices of the TCI Group Common Stock
and the financial performance of the TCI Group (as it exists before giving
effect to the attribution of assets to the TCI Ventures Group). The Board also
considered the relative amounts of debt to which the assets attributed to each
such Group were subject, the capital expenditure requirements of each Group and
the relative prospects of the assets attributed to each such Group.
Neither the Company nor its Board of Directors makes any recommendation to
any securityholder as to whether to tender or refrain from tendering TCI Group
Common Stock pursuant to the Exchange Offers. Each securityholder must make his
or her own decision, and should review this Offering Circular carefully before
making any decision with respect to the Exchange Offers. Each of John C. Malone,
Chairman of the Board and Chief Executive Officer of the Company and Leo J.
Hindery, Jr., President and Chief Operating Officer of the Company, has advised
the Company of his desire to own substantially the same percentage equity and
voting interests in the TCI Ventures Group as he would own in the TCI Group
after giving effect to the Exchange Offers and accordingly each of Dr. Malone
and Mr. Hindery has stated his intention to tender approximately 30% of his
shares of Series A TCI Group Common Stock and approximately 30% of his shares of
Series B TCI Group Common Stock pursuant to the Exchange Offers. Other officers
and directors of the Company may also tender all or a portion of their TCI Group
Common Stock. The decision by any director or executive officer of the Company
to tender, refrain from tendering or sell all or any of his or her shares of TCI
Group Common Stock may be influenced by personal, financial or tax
considerations that may not be applicable to other securityholders. See
"Interests of Directors and Executive Officers; Transactions and Arrangements
Concerning TCI Group Common Stock."
Series A Exchange Offer. The Company hereby offers, upon the terms and
subject to the conditions set forth in this Offering Circular and in the related
Letter of Transmittal to issue shares of Series A TCI Ventures Group Common
Stock in exchange for up to 188,661,300 shares of Series A TCI Group Common
Stock. Each share of Series A TCI Group Common Stock validly tendered on or
prior to the Expiration Date and not properly withdrawn, up to the Series A
Maximum, will be exchanged for one share of Series A TCI Ventures Group Common
Stock.
On June 30, 1997, 628,870,996 shares of Series A TCI Group Common Stock
were issued and outstanding (excluding shares held by majority owned
subsidiaries) and 125,616,994 shares of Series A TCI Group Common Stock were
reserved for issuance upon the conversion, exercise or exchange of outstanding
convertible or exchangeable securities and options (excluding any such
securities held by majority owned subsidiaries.) The Series A Maximum represents
approximately 30% of the shares of Series A TCI Group
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Common Stock outstanding at June 30, 1997, other than shares held by majority
owned subsidiaries of the Company which will not participate in the Exchange
Offers. The Series A Maximum was calculated without regard to, and will not
change as a result of, transactions occurring subsequent to June 30, 1997 and
prior to the Expiration Date. Accordingly, at the Expiration Date the Series A
Maximum may be greater or less than 30% of the outstanding shares of Series A
TCI Group Common Stock. On July 25, 1997, the record date for the Annual
Meeting, an aggregate of 621,724,731 shares of Series A TCI Group Common Stock
were issued and outstanding (excluding shares held by majority owned
subsidiaries). On July 31, 1997, the Company consummated the acquisition of all
of the capital stock of Kearns-Tribune Corporation ("Kearns-Tribune") by merger
(the "Kearns-Tribune Merger"), in consideration of the issuance of an aggregate
of 47,186,232 shares of Series A TCI Group Common Stock. Kearns-Tribune's assets
at the closing of the Kearns-Tribune Merger included 8,792,490 shares of Series
A TCI Group Common Stock and 9,112,500 shares of Series B TCI Group Common
Stock, as well as other securities of the Company. If the Kearns-Tribune Merger
had been consummated on July 25, 1997, the number of shares of Series A TCI
Group Common Stock that would have been outstanding on that date after giving
effect to the Kearns-Tribune Merger, exclusive of shares held by majority owned
subsidiaries, would have been 660,118,473 shares.
Series B Exchange Offer. The Company also hereby offers, upon the terms and
subject to the conditions set forth in this Offering Circular and in the related
Letter of Transmittal to issue shares of Series B TCI Ventures Group Common
Stock in exchange for up to 16,266,400 shares of Series B TCI Group Common
Stock. Each share of Series B TCI Group Common Stock validly tendered on or
prior to the Expiration Date and not properly withdrawn, up to the Series B
Maximum, will be exchanged for one share of Series B TCI Ventures Group Common
Stock.
On June 30, 1997, 54,221,314 shares of Series B TCI Group Common Stock were
issued and outstanding (excluding treasury stock). The Series B Maximum
represents approximately 30% of the shares of Series B TCI Group Common Stock
outstanding at June 30, 1997. The Series B Maximum was calculated without regard
to, and will not change as a result of, transactions occurring subsequent to
June 30, 1997 and prior to the Expiration Date. Accordingly, at the Expiration
Date the Series B Maximum may be greater or less than 30% of the outstanding
shares of Series B TCI Group Common Stock. On July 25, 1997, the record date for
the Annual Meeting, there were 61,517,638 shares of Series B TCI Group Common
Stock outstanding. If the Kearns-Tribune Merger had been consummated on July 25,
1997, there would have been 52,405,138 shares of Series B TCI Group Common Stock
outstanding on that date after giving effect to the Kearns-Tribune Merger
(exclusive of shares held by majority owned subsidiaries).
SUBJECT TO THE TERMS AND CONDITIONS OF THE EXCHANGE OFFERS, TCI WILL ACCEPT
FOR EXCHANGE ALL SHARES OF TCI GROUP COMMON STOCK PROPERLY TENDERED ON OR PRIOR
TO THE EXPIRATION DATE AND NOT THERETOFORE VALIDLY WITHDRAWN UP TO THE SERIES A
MAXIMUM AND SERIES B MAXIMUM, AS APPLICABLE. THE EXCHANGE OFFERS ARE NOT
CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES OF TCI GROUP COMMON STOCK BEING
TENDERED.
Convertible Securities. In order to participate in the Exchange Offers,
holders of securities that are convertible into or exercisable or exchangeable
for TCI Group Common Stock (other than the Pre-Exchange Offer Securities), who
do not otherwise hold shares of TCI Group Common Stock, would have to convert,
exercise, or exchange such securities in accordance with the terms thereof and
then tender the shares of TCI Group Common Stock issued upon such conversion,
exercise, or exchange pursuant to the Exchange Offers on or prior to the
Expiration Date in accordance with the procedures described under "Procedure for
Tendering" below. A CONVERSION OR EXERCISE OF CONVERTIBLE SECURITIES CANNOT BE
REVOKED IF THE EXCHANGE OFFERS THEREAFTER EXPIRE OR TERMINATE WITHOUT THE
PURCHASE OF ANY SHARES OF TCI GROUP COMMON STOCK.
Expiration Date. The Exchange Offers will expire at 5:00 p.m., New York
City time, on September 10, 1997, the Expiration Date, unless the Company shall,
in its sole discretion, extend the period of time for which the Exchange Offers
are to remain open, in which event the Expiration Date shall mean the latest
time and date on which the Exchange Offers as so extended by the Company shall
expire. See "Extension, Termination and Amendment."
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Proration. The Company shall not be obligated to accept for exchange more
than 188,661,300 shares of Series A TCI Group Common Stock or more than
16,266,400 shares of Series B TCI Group Common Stock. In the case of
oversubscription, shares of Series A TCI Group Common Stock properly tendered
and not validly withdrawn on or prior to the Expiration Date will be accepted on
a pro rata basis up to the Series A Maximum, and shares of Series B TCI Group
Common Stock properly tendered and not validly withdrawn on or prior to the
Expiration Date will be accepted on a pro rata basis up to the Series B Maximum,
in each case in conformity with Rule 13e-4 under the Exchange Act. In the event
of proration, because of the difficulty of determining the precise number of
shares of TCI Group Common Stock validly tendered and not properly withdrawn,
TCI does not expect to be able to announce the final proration factor until at
least five Nasdaq trading days after the Expiration Date.
This Offering Circular and the appropriate related Letter of Transmittal
will be mailed to holders of Series A TCI Group Common Stock and Series B TCI
Group Common Stock and will be furnished to brokers, banks and similar persons
whose names, or the names of whose nominees, appear on the stockholder list or,
if applicable, who are listed as participants in a clearing agency's position
listing for subsequent transmittal to beneficial owners of TCI Group Common
Stock.
Undersubscription; TCI Ventures Group Preferred Interest. After the
Expiration Date, if fewer than 188,661,300 shares of Series A TCI Ventures Group
Common Stock or 16,266,400 shares of Series B TCI Ventures Group Common Stock
have been subscribed for pursuant to the Exchange Offers, the Company will
extinguish the remaining Inter-Group Interest in consideration of the
attribution to the TCI Group of the TCI Ventures Group Preferred Interest. The
TCI Ventures Group Preferred Interest will have a stated liquidation value equal
to the market value of the shares of TCI Ventures Group Common Stock not issued
in the Exchange Offers (which shall be deemed to be the same, on a per share
basis, as the Market Value of the Series A TCI Group Common Stock as of the last
trading day preceding the closing of the Exchange Offers), a dividend rate of 5%
per annum and a mandatory redemption obligation on the 15th anniversary of
issuance. Accrued dividends on the TCI Ventures Group Preferred Interest would
accumulate and compound annually (but not be payable currently) until the fifth
anniversary of the closing of the Exchange Offers. On and after such fifth
anniversary, accrued dividends would be payable annually on each anniversary of
the closing of the Exchange Offers and would accumulate and compound to the
extent not paid on any such anniversary. When dividends become payable currently
they could be paid (i) through the transfer of cash or other assets from the TCI
Ventures Group to the TCI Group, (ii) through the reduction of amounts owed by
the TCI Group to the TCI Ventures Group, (iii) through the deemed transfer of
taxable losses of the TCI Ventures Group to the TCI Group pursuant to the tax
sharing agreement among the TCI Ventures Group, the TCI Group and the Liberty
Media Group, effective for periods after October 1, 1997 (in an amount equal to
the highest corporate tax rate in effect at the time of the dividend multiplied
by the amount of taxable losses deemed transferred), but only if such taxable
losses have not been utilized in any calculation under such tax sharing
agreement or (iv) through the cancellation of amounts owed by the TCI Group
under such tax sharing agreement with respect to utilized tax benefits of the
TCI Ventures Group. See "MANAGEMENT AND ALLOCATION POLICIES." The TCI Ventures
Group Preferred Interest will also be redeemable at the discretion of the Board
of Directors in whole or in part at any time.
Miscellaneous. The Company is not aware of any jurisdiction in which the
making of the Exchange Offers or the exchange of securities pursuant thereto
would not be in compliance with the laws of such jurisdiction. If the Company
becomes aware of any jurisdiction in which the making of the Exchange Offers or
the exchange of securities pursuant thereto would not be in compliance with
applicable law, the Company will make a good faith effort to comply with such
law. If, after such good faith effort, the Company cannot comply with such law,
the Exchange Offers will not be made to, and the Company will not acquire shares
of TCI Group Common Stock from, or issue shares of TCI Ventures Group Common
Stock in exchange therefor to, or on behalf of, holders of TCI Group Common
Stock in such jurisdiction.
BEFORE TENDERING ANY SHARES OF TCI GROUP COMMON STOCK PURSUANT TO THE
EXCHANGE OFFERS, INVESTORS ARE URGED TO READ CAREFULLY THE INFORMATION SET FORTH
UNDER "RISK FACTORS."
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EXTENSION, TERMINATION AND AMENDMENT
The Company expressly reserves the right, in its sole discretion, at any
time or from time to time, and regardless of whether or not any of the events
referred to under "Certain Conditions to the Exchange Offers" below shall have
occurred or shall be deemed by the Company to have occurred, to extend the
period of time during which the Exchange Offers remain open by giving oral or
written notice of such extension to the Exchange Agent, which extension must be
publicly announced no later than 9:00 a.m., New York City time on the next
business day after the previously scheduled Expiration Date. The Company has no
present intention of extending the Exchange Offers and there can be no assurance
that it will exercise its right to do so. The Exchange Offers will not be
extended independently -- if one Exchange Offer is extended, the other Exchange
Offer will be extended for the same period. During any extension of the Exchange
Offers, all shares of TCI Group Common Stock previously tendered pursuant
thereto and not exchanged or withdrawn will remain subject to the Exchange
Offers and may be accepted for exchange by the Company at the expiration of the
Exchange Offers subject to the right of a tendering holder to withdraw his or
her TCI Group Common Stock. See "Withdrawal Rights."
Subject to the applicable rules of the SEC, the Company also expressly
reserves the right, in its sole discretion at any time or from time to time by
oral or written notice to the Exchange Agent, to (i) delay acceptance for
exchange of or, regardless of whether such shares of TCI Group Common Stock were
theretofore accepted for exchange, exchange of any shares of TCI Group Common
Stock pursuant to the Exchange Offers, (ii) terminate the Exchange Offers and
not accept for exchange any shares of TCI Group Common Stock not theretofore
accepted for exchange and return all TCI Group Common Stock to the tendering
holders thereof upon the occurrence of any of the conditions referred to under
"Certain Conditions to the Exchange Offers", and (iii) amend the terms of the
Exchange Offers. Any delay, termination or amendment will be publicly announced
no later than 9:00 a.m., New York City time on the next business day following
such delay, termination or amendment.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, delay, termination or amendment of the Exchange
Offers, the Company shall not, unless otherwise required by law, have any
obligation to publish, advertise or otherwise communicate any such public
announcement other than by making a release to the Dow Jones News Service. If
the Company extends the Exchange Offers, or if the Company (whether before or
after its acceptance for exchange of shares of TCI Group Common Stock) is
delayed in making the exchange for the tendered shares of TCI Group Common Stock
pursuant to the Exchange Offers for any reason, then the Exchange Agent may
retain on behalf of the Company all shares of TCI Group Common Stock previously
tendered and not theretofore withdrawn, and such shares may not be withdrawn
except to the extent tendering stockholders are entitled to withdrawal rights as
described in this Offering Circular. See "Withdrawal Rights." The reservation by
the Company of the right to delay acceptance for exchange or exchange of shares
of TCI Group Common Stock is subject to the provisions of Rules 13e-4(f) and
14e-1(c) under the Exchange Act, which require that the Company either pay the
consideration offered, or return the tendered shares, promptly after the
termination or withdrawal of the Exchange Offers.
If the Company makes a material change in the terms of the Exchange Offers
or in the information concerning the Exchange Offers or if it waives a material
condition of the Exchange Offers, it will disseminate additional Exchange Offer
materials informing holders of TCI Group Common Stock of such material changes
in accordance with the requirements of Rule 13e-4 under the Exchange Act and
will extend the period during which the Exchange Offers remain open, to the
extent required by applicable law, in order to permit holders of TCI Group
Common Stock adequate time to consider such changes. The SEC has taken the
position that the minimum period during which an offer must remain open
following material changes in the terms of the offer or information concerning
the offer will depend upon the facts and circumstances, including the relative
materiality of such terms or information, except that an offer must remain open
for a minimum of ten business days after notice is first published, sent or
given to securityholders with respect to an increase or decrease in the
percentage of securities being sought or the consideration offered. Although the
Company does not intend to increase or decrease the percentage of TCI Group
Common Stock being sought or the consideration being offered therefor, in the
event the Company should increase the consideration offered in
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exchange for each share of TCI Group Common Stock tendered in the Exchange
Offers, such increased consideration will be paid to all holders whose shares of
TCI Group Common Stock are accepted in the Exchange Offers, including those
shares of TCI Group Common Stock tendered before the announcement of the
increase. For purposes of the Exchange Offers, a "business day" means any day
other than a Saturday, Sunday or federal holiday, and consists of the time
period from 12:01 a.m. through midnight, New York City time.
PROCEDURE FOR TENDERING
Proper Tender of Securities. For a holder of TCI Group Common Stock who
wishes to participate in the Exchange Offers to validly tender shares of TCI
Group Common Stock, a properly completed and duly executed Letter of Transmittal
(or a manually signed facsimile thereof), together with any required signature
guarantees or, in the case of book-entry transfer of the tendered shares, an
Agent's Message (as defined below) and, in either case, any other documents
required by the instructions to the Letter of Transmittal, must be received by
the Exchange Agent prior to 5:00 p.m., New York City time on the Expiration Date
at one of its addresses set forth on the back cover page of this Offering
Circular. In addition, either (i) the Exchange Agent must receive at one of such
addresses prior to such time the certificates for the tendered shares of TCI
Group Common Stock or (ii) such shares must be tendered pursuant to the
procedure for book-entry transfer described below and confirmation of such
book-entry transfer ("Book-Entry Confirmation"), must be received by the
Exchange Agent at one of such addresses prior to 5:00 p.m., New York City time
on the Expiration Date. A holder of TCI Group Common Stock who desires to
participate in the Exchange Offers but cannot comply with the procedures set
forth herein for tender on a timely basis or whose shares are not immediately
available must comply with the guaranteed delivery procedure described below.
The term "Agent's Message" means a message, transmitted by a Book-Entry
Transfer Facility (as defined below) to, and received by, the Exchange Agent
forming a part of a Book-Entry Confirmation, which states that such Book-Entry
Transfer Facility has received an express acknowledgment from the participant in
such Book-Entry Transfer Facility tendering the TCI Group Common Stock, that
such participant has received and agrees to be bound by the terms of the Letter
of Transmittal and that the Company may enforce such agreement against such
participant.
Persons holding shares of TCI Group Common Stock through a broker, dealer,
commercial bank, trust company or other nominee should promptly contact the
appropriate institution or nominee and request it to effect the transactions in
connection with the Exchange Offers for them. Likewise, those who hold shares of
TCI Group Common Stock for the account of others should notify the respective
beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Exchange Offers.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR SHARES
OF TCI GROUP COMMON STOCK, THE RELATED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS, IS AT THE ELECTION AND RISK OF THE TENDERING SECURITYHOLDER.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED AND SUFFICIENT TIME TO ENSURE TIMELY RECEIPT SHOULD BE
ALLOWED.
NO LETTERS OF TRANSMITTAL, NO CERTIFICATES REPRESENTING SHARES OF TCI GROUP
COMMON STOCK AND NO CONFIRMATIONS OF, OR AGENT'S MESSAGES WITH RESPECT TO,
BOOK-ENTRY TRANSFERS SHOULD BE SENT TO THE COMPANY. SUCH DOCUMENTS SHOULD ONLY
BE SENT TO THE EXCHANGE AGENT.
Book-Entry Delivery. The Exchange Agent will make a request to establish
accounts with respect to the shares of TCI Group Common Stock at The Depository
Trust Company and the Philadelphia Depository Trust Company (collectively, the
"Book-Entry Transfer Facilities") for purposes of the Exchange Offers, promptly
after the date of this Offering Circular. Any financial institution that is a
participant in a Book-Entry Transfer Facility's system may make book-entry
delivery of the shares of TCI Group Common Stock by causing such Book-Entry
Transfer Facility to transfer such shares of TCI Group Common Stock into the
Exchange Agent's account in accordance with such Book-Entry Transfer Facility's
procedure for such transfer. However, although delivery of shares of TCI Group
Common Stock may be effected through book-
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entry transfer to the Exchange Agent's account at a Book-Entry Transfer
Facility, a properly completed and duly executed Letter of Transmittal (or a
manually signed facsimile thereof), with any required signature guarantees, or
an Agent's Message, and any other documents required by the Letter of
Transmittal, must, in any case, be transmitted to and received or confirmed by
the Exchange Agent at the appropriate address set forth on the back cover of
this Offering Circular prior to 5:00 p.m., New York City time, on the Expiration
Date, or the guaranteed delivery procedure described below must be complied
with. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH
ITS PROCEDURE DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Signature Guarantees. No signature guarantee is required (i) if the Letter
of Transmittal is signed by the registered holder of the shares of TCI Group
Common Stock tendered therewith who has not completed either the box entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" in the Letter of Transmittal or (ii) if the shares of TCI Group
Common Stock are tendered for exchange for the account of a member firm of a
registered national securities exchange, a member of the NASD or a commercial
bank or trust company having an office or correspondent in the United States or
by any other "eligible guarantor institution" as defined in Rule 17Ad-15 under
the Exchange Act (each of the foregoing being an "Eligible Institution"). In all
other cases all signatures on the Letter of Transmittal must be guaranteed by an
Eligible Institution. See Instruction 1 to the Letter of Transmittal. If the
certificate representing shares of TCI Group Common Stock tendered for exchange
is registered in the name of a person other than the person executing the Letter
of Transmittal, or if certificates for the TCI Ventures Group Common Stock
issuable in exchange therefor are to be issued to, or a certificate representing
shares of TCI Group Common Stock not tendered for exchange are to be issued to,
a person other than the registered holder of such shares of TCI Group Common
Stock, then such certificate must be endorsed or accompanied by an appropriate
stock power bearing the signature of the registered holder or holders exactly as
the name or names appeared on the certificate(s), with such signature(s)
guaranteed as described above and as provided in the Letter of Transmittal.
If the Letter of Transmittal or any other certificates, stock powers or
proxies are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
Guaranteed Delivery. If a holder of TCI Group Common Stock desires to
tender shares of TCI Group Common Stock for exchange pursuant to the Exchange
Offers and the holder's certificates for such shares are not immediately
available or time will not permit the Letter of Transmittal and other required
documents to reach the Exchange Agent on or prior to the Expiration Date, or the
procedure for book-entry transfer cannot be completed on a timely basis, tender
may nevertheless be effected if all of the following conditions are met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company herewith, is
received by the Exchange Agent, as provided below, prior to 5:00 p.m., New
York City time on the Expiration Date; and
(iii) (A) the certificates for all shares of TCI Group Common Stock
tendered for exchange, in proper form for transfer, or a Book-Entry
Confirmation of the book-entry transfer of such shares of TCI Group Common
Stock into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities as described above, (B) a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof), with any
required signature guarantees (or, in the case of book-entry transfers, an
Agent's Message), and (C) any other documents required by the Letter of
Transmittal, are received by the Exchange Agent within three Nasdaq trading
days after the date of execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or by mail or
transmitted by telegram, telex or facsimile transmission to the Exchange Agent
at one of the addresses set forth on the back cover page
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of this Offering Circular and must include a guarantee by an Eligible
Institution in the form set forth in such Notice.
Notwithstanding any other provision hereof, shares of TCI Ventures Group
Common Stock will be issued in exchange for shares of TCI Group Common Stock
tendered and accepted for exchange pursuant to the Exchange Offers only after
timely receipt by the Exchange Agent of (i) certificates for such shares of TCI
Group Common Stock (or a Book-Entry Confirmation of the book-entry transfer of
such shares into the Exchange Agent's account at a Book-Entry Transfer
Facility), (ii) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or in the case of book-entry transfer, an
Agent's Message and (iii) any documents required by the Letter of Transmittal.
Tender Constitutes an Agreement. The valid tender of shares of TCI Group
Common Stock pursuant to one of the procedures described above will constitute
the tendering securityholder's acceptance of the terms and conditions of the
Exchange Offers as set forth herein and in the Letter of Transmittal. The
Company's acceptance for exchange of TCI Group Common Stock validly tendered
pursuant to the Exchange Offers and not properly withdrawn will constitute a
binding agreement between the tendering securityholder and TCI upon the terms
and subject to the conditions of the Exchange Offers.
Determination of Validity; Rejection of Shares; Defects. All questions as
to the validity, form, eligibility (including time of receipt) and acceptance of
shares of TCI Group Common Stock tendered for exchange and all questions as to
the interpretation of the terms and conditions of the Exchange Offers will be
determined by the Company in its sole discretion, whose determination will be
final and binding on all parties. The Company reserves the absolute right to
reject any or all tenders determined by it not to be in proper form or the
acceptance of or exchange for which may, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive, in
whole or in part, any of the conditions of the Exchange Offers or any defect or
irregularity in any tender with respect to any particular shares of TCI Group
Common Stock or any particular securityholder. No tender of shares will be
deemed to have been validly made until all defects and irregularities have been
cured or waived. Neither the Company, the Exchange Agent, nor any other person
will be under any duty to give notification of any defects or irregularities in
such tenders nor shall any of them incur any liability for failure to give any
such notification.
WITHDRAWAL RIGHTS
Tenders of shares of TCI Group Common Stock for exchange will be
irrevocable, except that such tendered shares may be withdrawn at any time prior
to 5:00 p.m., New York City time on the Expiration Date or, if such shares have
not yet been accepted for exchange by TCI pursuant to the Exchange Offers, at
any time after the expiration of 40 business days from the commencement of the
Exchange Offers.
For a revocation and withdrawal to be effective, a written notice of
withdrawal, delivered by mail, by hand delivery or by telex, telegraphic or
facsimile transmission, must be timely received by the Exchange Agent at one of
its addresses set forth on the back cover of this Offering Circular. Any such
notice of withdrawal must specify the name of the person who tendered the shares
of TCI Group Common Stock to be withdrawn, the number of tendered shares of each
series of TCI Group Common Stock to be withdrawn and the name of the registered
holder of the tendered shares, if different from that of the person who tendered
such shares. If the certificates have been delivered or otherwise identified to
the Exchange Agent, then prior to the release of such certificates, the
withdrawing securityholder must also submit the serial numbers shown on the
particular certificates evidencing the shares of TCI Group Common Stock to be
withdrawn. If shares of TCI Group Common Stock have been delivered pursuant to
the procedures for book-entry transfer as set forth under the caption,
"Procedure for Tendering -- Book-Entry Delivery", the notice of withdrawal must
name the Book-Entry Transfer Facility and specify the name and number of the
account at such Book-Entry Transfer Facility to be credited with the withdrawn
shares. Any notice of withdrawal must be signed by the holder in the same manner
as the original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the shares of the TCI Group Common Stock being withdrawn.
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All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company, in its sole discretion,
which determination will be final and binding on all parties. Neither the
Company, the Exchange Agent, nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification. Any shares of TCI
Group Common Stock properly withdrawn will thereafter be deemed not tendered for
purposes of the Exchange Offers. Withdrawals of tenders may not be rescinded.
Withdrawn shares may, however, be retendered prior to the Expiration Date by
again following the procedures described under the caption "Procedure for
Tendering."
EXCEPT AS OTHERWISE DESCRIBED ABOVE, THE TENDER OF TCI GROUP COMMON STOCK
WILL BE IRREVOCABLE.
ACCEPTANCE FOR EXCHANGE; DELIVERY OF SHARES OF TCI VENTURES GROUP COMMON STOCK;
TRANSFER TAXES
The Company shall not be obligated to accept for exchange more than
188,661,300 shares of Series A TCI Group Common Stock or 16,266,400 shares of
Series B TCI Group Common Stock. If more shares of Series A TCI Group Common
Stock than the Series A Maximum or more shares of Series B TCI Group Common
Stock than the Series B Maximum are validly tendered for exchange and not
properly withdrawn, the Company will accept validly tendered and not properly
withdrawn shares of Series A TCI Group Common Stock up to the Series A Maximum
and validly tendered and not properly withdrawn shares of Series B TCI Group
Common Stock up to the Series B Maximum, on a pro rata basis in conformity with
Rule 13e-4 under the Exchange Act.
Upon the terms and subject to the conditions of the Exchange Offers, the
acceptance for exchange and the exchange of shares of TCI Group Common Stock
validly tendered and not theretofore properly withdrawn will be made promptly
after the Expiration Date. See "Extension, Termination and Amendment" for a
discussion of the Company's reservation of the right to delay acceptance for
exchange or the exchange of shares of TCI Group Common Stock. In the event of
proration, because of the difficulty of determining the precise number of shares
of TCI Group Common Stock validly tendered and not properly withdrawn, TCI does
not expect to be able to announce the final proration factor until at least five
Nasdaq trading days after the Expiration Date.
For purposes of the Exchange Offers, the Company will be deemed to have
accepted for exchange and thereby acquired shares of TCI Group Common Stock as,
if and when the Company gives oral or written notice to the Exchange Agent of
the Company's acceptance of such shares for exchange. Delivery of the shares of
TCI Ventures Group Common Stock in exchange for shares of TCI Group Common Stock
that TCI has accepted for exchange will be made by the Exchange Agent as soon as
practicable after receipt of such notice. The Exchange Agent will act as agent
for the tendering holders of TCI Group Common Stock for the purpose of receiving
TCI Ventures Group Common Stock from the Company and will transmit the same to
such tendering securityholders.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of shares of TCI Group Common Stock acquired pursuant to the
Exchange Offers. If, however, the shares of TCI Ventures Group Common Stock, or
(in the circumstances permitted by the Letter of Transmittal) any untendered or
unaccepted shares of TCI Group Common Stock, are to be delivered to or issued or
registered in the name of any person other than the registered holder of the TCI
Group Common Stock tendered, or if the certificates for shares of TCI Group
Common Stock tendered are registered in the name of any person other than the
person signing the Letter of Transmittal, then the amount of all stock transfer
taxes, if any (whether imposed on the registered holder or such other person),
payable on account of the transfer to such person shall be payable by the person
tendering the TCI Group Common Stock. Satisfactory evidence of the payment of
such stock transfer taxes or of exemption therefrom must be submitted to the
Exchange Agent.
If any tendered shares of TCI Group Common Stock are not accepted for
exchange pursuant to the Exchange Offers for any reason, or if certificates are
submitted for more shares of TCI Group Common Stock than are tendered,
certificates for such unaccepted or untendered shares of TCI Group Common Stock
will be returned without expense to the tendering securityholder (or, in the
case of shares tendered by book-entry
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transfer within a Book-Entry Transfer Facility, such shares will be credited to
the account maintained within such Book-Entry Transfer Facility by the
participant therein who so delivered such shares) as promptly as practicable
following the expiration, termination or withdrawal of the Exchange Offers.
CERTAIN CONDITIONS TO THE EXCHANGE OFFERS
The Exchange Offers are conditioned upon approval by the stockholders of
the Company of the Charter Amendments at the Annual Meeting. In addition,
notwithstanding any other provisions of the Exchange Offers, but subject to any
applicable rules or regulations of the SEC, the Company shall not be required to
accept for exchange any tendered shares of TCI Group Common Stock, may postpone
the acceptance for exchange of, and exchange of, shares of TCI Group Common
Stock tendered, and may terminate or amend the Exchange Offers, if at any time
on or after the date hereof and prior to the issuance of shares of TCI Ventures
Group Common Stock, any of the following events shall have occurred (or shall
have been determined by the Company to have occurred) which, in the Company's
sole judgment in any such case and regardless of the circumstances (including
any act or omission to act by the Company), makes it inadvisable to proceed with
the Exchange Offers:
(a) there shall have been threatened, instituted or pending any action
or proceeding by any government or governmental, regulatory or
administrative agency or authority or tribunal or any other person,
domestic or foreign, or before any court or governmental, regulatory or
administrative agency or authority or tribunal, domestic or foreign
(collectively, "Governmental Body"), which:
(i) challenges, seeks to restrain or delay or seeks to obtain
material damages with respect to the making of the Exchange Offers, the
acquisition by the Company of shares of TCI Group Common Stock or the
issuance by the Company of shares of TCI Ventures Group Common Stock
pursuant to the Exchange Offers, or otherwise relates to the Exchange
Offers;
(ii) in the Company's sole judgment (based on advice of the
Company's legal counsel), could make the exchange of TCI Group Common
Stock for TCI Ventures Group Common Stock taxable to the Company or to
the holders of TCI Group Common Stock participating in the Exchange
Offers;
(iii) in the Company's sole judgment, could, directly or indirectly
(x) make the acceptance for exchange of or exchange of some or all of
the shares of TCI Group Common Stock pursuant to the Exchange Offers
illegal or otherwise restrict or prohibit consummation of the Exchange
Offers or otherwise adversely affect, in any material manner, the
Exchange Offers, (y) delay or restrict the ability of the Company, or
render the Company unable, to accept for exchange or exchange some or
all of the shares of TCI Group Common Stock, or (z) materially impair
the contemplated benefits of the Exchange Offers or any other
transaction contemplated hereby to the Company or its subsidiaries,
taken as a whole, or to the TCI Group or the TCI Ventures Group; or
(iv) in the Company's sole judgment, could materially affect the
business, condition (financial or otherwise), results of operations or
prospects of the Company and its subsidiaries, taken as a whole, or of
the TCI Group or the TCI Ventures Group, or otherwise materially impair
in any way the contemplated future conduct of the business of the
Company or any of its subsidiaries, taken as a whole, or of the TCI
Group or the TCI Ventures Group; or
(b) there shall have been any action threatened, pending or taken, or
approval withheld, or any statute, rule, regulation, judgment, order or
injunction threatened, proposed, sought, promulgated, enacted, entered,
amended, enforced or deemed to be applicable to the Exchange Offers, the
other transactions contemplated hereby, or to the Company, its
subsidiaries, the TCI Group or the TCI Ventures Group, by any Governmental
Body which, in the Company's sole judgment, could directly or indirectly
result in any of the consequences referred to in (a) above; or
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(c) there shall have occurred:
(i) the declaration of any banking moratorium or suspension of
payments in respect of banks in the United States;
(ii) any general suspension of trading in, or limitation on prices
for, securities on any United States national securities exchange or in
the over-the-counter market;
(iii) the commencement of war, armed hostilities or any other
national or international crisis directly or indirectly involving the
United States;
(iv) any limitation (whether or not mandatory) by any Governmental
Body on, or any event which, in the Company's sole judgment, might
affect, the extension of credit by banks or other lending institutions
in the United States;
(v) any significant decline in the market price of the shares of
TCI Group Common Stock or any change in the general political, market,
economic or financial conditions in the United States or abroad that
could have a material adverse effect on the Company's, the TCI Group's,
or the TCI Ventures Group's business, operations, prospects or ability
to obtain financing generally or the trading in the shares of TCI Group
Common Stock or TCI Ventures Group Common Stock; or
(vi) in the case of any of the foregoing existing at the time of
commencement of the Exchange Offers, in the Company's sole judgment, a
material acceleration or worsening thereof; or
(d) there shall have occurred or be likely to occur any event
affecting the business, condition (financial or otherwise), results of
operations, equity ownership or prospects of the Company, any of its
subsidiaries, the TCI Group, or the TCI Ventures Group which, in the
Company's sole judgment, is or may be material to the Company, the TCI
Group, or the TCI Ventures Group, would or might prohibit, prevent,
restrict or delay consummation of the Exchange Offers, or that will, or is
reasonably likely to, materially impair the contemplated benefits to the
Company of the Exchange Offers, or otherwise result in the consummation of
the Exchange Offers not being or not reasonably likely to be in the best
interests of the Company; or
(e) the Company shall not have received from any federal, state or
local governmental, regulatory or administrative agency or instrumentality,
any approval, authorization or consent that, in the sole judgment of the
Company, is necessary to effect the Exchange Offers; or
(f) any tender or exchange offer with respect to some or all of the
TCI Group Common Stock (other than the Exchange Offers), or a merger,
acquisition, business combination or other similar transaction with or
involving the Company, shall have been proposed, announced or made by any
person or entity; or
(g) any entity, "group" (as that term is used in Section 13(d)(3) of
the Exchange Act) or person (other than entities, groups or persons, if
any, who have filed with the SEC on or before the date of this Offering
Circular a Schedule 13G or a Schedule 13D with respect to any of the shares
of TCI Group Common Stock) shall have acquired or proposed to acquire
beneficial ownership of more than 5% of the outstanding shares of any
series of TCI Group Common Stock.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition (including any action or inaction by the Company) or may be waived by
the Company in whole or in part at any time and from time to time in its sole
discretion. The failure by the Company at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right; the waiver of
any such right with respect to particular facts and circumstances shall not be
deemed a waiver with respect to any other facts or circumstances; and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Company concerning the events
described above shall be final and binding on all parties.
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INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS; TRANSACTIONS AND ARRANGEMENTS
CONCERNING TCI GROUP COMMON STOCK
Except as described below, since June 1, 1997, neither the Company nor, to
its knowledge, any of its subsidiaries, any of its or any of its subsidiaries'
executive officers or directors or any associate of any such officer or director
has engaged in any transaction involving the TCI Group Common Stock.
On June 16, 1997, the Estate of Bob Magness (the "Estate") sold to each of
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and LB I
Group (an affiliate of Lehman Brothers, Inc.) ("Lehman"), pursuant to separate
stock purchase agreements, 16,034,294 shares of Series A TCI Group Common Stock
for an average purchase price of $16.52 (the "Initial Price"). Of the 32,068,588
shares of Series A TCI Group Common Stock in the aggregate so sold by the
Estate, 30,545,864 shares were acquired by the Estate from TCI through an
exchange for an equal number of shares of Series B TCI Group Common Stock owned
by the Estate (the "Estate Swap").
Pursuant to a letter agreement dated June 17, 1988 (the "1988 Agreement"),
the late Mr. Bob Magness and Kearns-Tribune each granted Dr. Malone certain
rights with respect to the then Class B Common Stock of the Company owned by
them. On June 16, 1997, in consideration of Dr. Malone's agreement to forgo the
exercise of such rights in connection with the Estate Swap, TCI granted to Dr.
Malone the right to acquire directly from the Company, at any time and from time
to time prior to June 30, 1999, the 30,545,864 shares of Series B TCI Group
Common Stock acquired by TCI from the Estate (or a portion thereof) for either
(or any combination of) (i) shares of Series A TCI Group Common Stock owned by
Dr. Malone, on a one-for-one basis, or (ii) cash based on the closing sales
price of the Series B TCI Group Common Stock on The Nasdaq Stock Market for a
specified period prior to the acquisition of shares by Dr. Malone (the
"TCI-Estates Agreement").
Pursuant to separate ISDA Master Agreements, dated June 16, 1997 (together
with the related Schedule and confirmations, the "Master Agreements"), TCI has
the right to acquire up to 16,034,294 shares of Series A TCI Group Common Stock
from affiliates of each of Merrill Lynch and Lehman (or 32,545,864 shares in the
aggregate) at June 30, 1999, and at the end of each calendar quarter prior
thereto, for a purchase price equal to the Initial Price per share. During any
period that such affiliates are obligated to sell to TCI shares of Series A TCI
Group Common Stock, TCI is required to pay such affiliates an amount to
compensate them for their carrying costs. Also, at the end of each quarter TCI
is required to pay to such affiliates, or post a letter of credit for, an amount
equal to any decline in the market value of the shares of Series A TCI Group
Common Stock subject to the Master Agreements below the Initial Price per share.
Any appreciation in the market value of such shares will be for the account of
TCI. If TCI determines not to purchase all of such shares, it will be required
to pay to such affiliates on June 30, 1999 an amount, if any, equal to the
product of (i) the number of shares not purchased by TCI and (ii) an amount
equal to the difference between the price at which such shares can be sold in
the public market and the Initial Price. Settlement of amounts payable by TCI
may be in cash or with additional shares of Series A TCI Group Common Stock. The
shares of Series A TCI Group Common Stock that may be acquired by TCI under the
foregoing arrangement may or may not be the same shares as Merrill Lynch and
Lehman purchased from the Estate, and the latter shares may be sold by Merrill
Lynch and Lehman at any time to any person. However, during the period that
Merrill Lynch and Lehman own such shares, they will be voted at any shareholder
meeting on any matter in the same percentage as all other shares of Series A TCI
Group Common Stock (other than those owned by officers and directors of TCI) are
voted on such matter.
On July 31, 1997, the Company consummated the Kearns-Tribune Merger in
consideration of the issuance of 47,186,232 shares of Series A TCI Group Common
Stock. John W. Gallivan, a director of the Company, was an officer and a
stockholder of Kearns-Tribune and received 65,136 shares of Series A TCI Group
Common Stock in the Kearns-Tribune Merger. At the time of its acquisition by the
Company, Kearns-Tribune held an aggregate of 8,792,490 shares of Series A TCI
Group Common Stock and 9,112,500 shares of Series B TCI Group Common Stock, as
well as other securities of the Company. The Series A TCI Group Common Stock was
valued at $15.50 per share (the average of the trading prices for the 20-trading
day period ending on July 28, 1997) for purposes of determining the value of the
shares of Series A TCI Group Common Stock held by Kearns-Tribune and for
purposes of determining the number of shares of such series issuable in payment
of the merger consideration.
On July 23, 1997, in consideration of Dr. Malone's agreement to forgo the
exercise of his rights under the 1988 Agreement and under a later agreement with
Kearns-Tribune dated April 18, 1997 in connection with the
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Kearns-Tribune Merger, TCI agreed (the "TCI-KT Agreement") that Dr. Malone would
have the right to acquire directly from the Company, at any time and from time
to time prior to July 30, 1998, up to 9,112,500 shares of Series B TCI Group
Common Stock and 2,278,125 shares of Series B Liberty Media Group Common Stock
in exchange for equal numbers of shares of Series A TCI Group Common Stock and
Series A Liberty Media Group Common Stock, respectively. On July 24, 1997, Dr.
Malone acquired 7,284,496 shares of Series A TCI Group Common Stock from
Knight-Ridder Cablevision, Inc. for a purchase price of $15.11 per share in
cash. Pursuant to the TCI-KT Agreement, Dr. Malone then acquired from the
Company an aggregate of 7,296,324 shares of Series B TCI Group Common Stock and
2,278,125 shares of Series B Liberty Media Group Common Stock, in exchange for a
like number of shares of Series A TCI Group Common Stock and Series A Liberty
Media Group Common Stock, respectively, held by Dr. Malone. Effective on the
closing of the Kearns-Tribune Merger, Dr. Malone and the Company agreed to
terminate his right to acquire the balance of the shares of Series B TCI Group
Common Stock under the TCI-KT Agreement.
On June 10, 1997 (the "Phase I Closing Date"), the Company entered into a
definitive Partnership Interest Purchase Agreement for (a) the acquisition (i)
from InterMedia CM -- LP ("Old ICM I") of a 1.103% limited partner interest (the
"IP I Interest") in InterMedia Partners, a California limited partnership ("IP
I"), which the Company would contribute immediately after such acquisition to
InterMedia Capital Management, L.P. ("New ICM I") for a 99.998% limited partner
interest in New ICM I, (ii) of a .001% general partner interest (which would
convert to a limited partner interest) in New ICM I, and (iii) of a 75% limited
partner interest in Old ICM I (with each of Old ICM I and New ICM I holding,
directly or indirectly, partner interests in IP I) (collectively, the "ICM I
Transaction") and (b) the acquisition of all of the partner interests (other
than a .001% general partner interest and a .001% special limited partner
interest) in InterMedia Capital Management III, L.P. ("ICM III") (the "ICM III
Transaction"). On August 5, 1997 (the "Phase II Closing Date"), the Company
entered into a definitive Partnership Interest Purchase Agreement for the
acquisition of all of the partner interests (other than a .002% general partner
interest and a .001% special limited partner interest) in InterMedia Capital
Management IV, L.P. ("ICM IV") (the "ICM IV Transaction"). The total
consideration paid for the ICM I Transaction, the ICM III Transaction and the
ICM IV Transaction was 2,545,455 shares (the "TCI Shares") of Series B TCI Group
Common Stock and cash and assumption of certain liabilities in an aggregate
amount of $21,300,000 (subject to certain adjustments). Each of the entities in
which the Company agreed to acquire an interest in the foregoing transactions
has an indirect interest in cable television operations. On the Phase I Closing
Date, a partial closing of the ICM I Transaction and the ICM III Transaction
occurred (the "Phase I Closing") pursuant to which the Company acquired (i) the
IP I Interest which the Company immediately contributed to New ICM I for a
99.998% limited partner interest in New ICM I, (ii) a 75% limited partner
interest in Old ICM I and (iii) a 99.998% limited partner interest in ICM III,
in exchange for total consideration of 139,513 shares of Series B TCI Group
Common Stock, $5,443,024 in cash, and assumption of $405,000 of current
liabilities of Old ICM I that were paid by the Company on the Phase I Closing
Date. On the Phase II Closing Date, the balance of the ICM I Transaction and the
ICM III Transaction closed, with the Company receiving a .001% general partner
interest (which converted to a limited partner interest) in New ICM I, and the
ICM IV Transaction was consummated. At such closing, the Company delivered the
balance of the consideration for such transactions consisting of 2,405,942
shares of Series B TCI Group Common Stock and $15,451,976 in cash and the
assumption of liabilities in the aggregate. Mr. Hindery, an executive officer of
the Company, was the beneficial owner of a 66.3% interest in Old ICM I (which
was increased to a 99.999% interest in connection with the Phase I Closing as a
result of a non pro rata redemption of the partner interests of all partners in
Old ICM I other than Mr. Hindery and InterMedia Management, Inc.), a 94.0%
interest in ICM III, and a 80.9% interest in ICM IV, and Donne F. Fisher, a
director of the Company, was the beneficial owner of a 1.6% interest in ICM IV.
On completion of the ICM IV Transaction, Mr. Fisher received a consulting fee in
the amount of $400,000 in cash and 31,030 shares of Series B TCI Group Common
Stock. Mr. Peter Kern, son of Mr. Jerome H. Kern, a director of the Company,
received an advisory fee in the amount of 36,364 shares of Series B TCI Group
Common Stock in connection with the foregoing transactions, of which 6,017
shares were paid on the Phase I Closing Date and the balance were paid on the
Phase II Closing Date. The foregoing fees were paid by the entities receiving
payments from the Company in the foregoing transactions. After giving effect to
the Phase I Closing and the Phase II Closing, the general partner interests in
New ICM I, ICM III and
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ICM IV are each held by an entity all of the beneficial interests in which are
owned, directly or indirectly, by Robert J. Lewis. Mr. Hindery continues to hold
a 24.999% general partner interest and Mr. Lewis indirectly holds a .001%
general partner interest in Old ICM I. Mr. Lewis is an experienced cable
executive who was an officer of a subsidiary of the Company from May 1987
through April 1993.
The Company also has agreed in principle that if InterMedia Partners VI,
L.P. ("IP VI") is formed and fully funded on terms and conditions agreed by the
Company (the "IP VI Effective Date"), the Company will acquire all of the
partner interests (other than a .001% general partner interest) of InterMedia
Capital Management VI, L.P. ("ICM VI") in exchange for a number of shares of
Series B Liberty Media Group Common Stock (the "Contingent TCI Shares")
determined by dividing $5,000,000 by the average of the closing prices of the
Series A Liberty Media Group Common Stock for the 20 trading days preceding the
IP VI Effective Date and $1,000,000 in cash (the "ICM VI Transaction"). Mr.
Hindery is the beneficial owner of 100% of ICM VI. It is anticipated that the
ICM VI Transaction will be consummated in late 1997 or early 1998. The general
partner interests in ICM VI will also be held by an entity owned by Mr. Lewis.
Dr. Malone, an executive officer and director of the Company, will have the
power to direct the voting of the TCI Shares and, if they are issued, the
Contingent TCI Shares pursuant to a voting agreement, and Dr. Malone also will
have a right of first refusal with respect to any proposed transfer of the TCI
Shares and, if they are issued, the Contingent TCI Shares. That right of first
refusal may be exercised by Dr. Malone either by the payment of cash or, subject
to certain exceptions, by exchanging shares of Series A TCI Group Common Stock
for the TCI Shares and Series A Liberty Media Group Common Stock for the
Contingent TCI Shares to be acquired by him. If not exercised by Dr. Malone, the
right of first refusal may be exercised by the Company.
In May 1997, Mr. Jerome H. Kern, a director of the Company, exercised in
full stock appreciation rights granted in tandem with options with respect to
1,500,000 shares of Series A TCI Group Common Stock with an exercise price of
$14.625 per share. Pursuant to such exercise, Mr. Kern received 150,000 shares
of Series A TCI Group Common Stock and $3,618,750 in cash. The certificates
evidencing such shares were issued in July 1997. On July 23, 1997, the Board of
Directors approved the grant to Mr. Kern of options to acquire 1,500,000 shares
of Series A TCI Group Common Stock at an exercise price of $14.625 per share,
and 562,500 shares of Series A Liberty Media Group Common Stock at an exercise
price of $22.25 per share, and a restricted stock award of 200,000 shares of
Series A TCI Group Common Stock. Also on July 23, 1997, the Board of Directors
approved the grant to certain executive officers and key employees of the
Company of options (and tandem stock appreciation rights) to acquire an
aggregate of 2,350,000 shares of Series A TCI Group Common Stock at an exercise
price of $15.69 per share, and approved a restricted stock award of 200,000
shares of Series A TCI Group Common Stock to an executive officer. On August 7,
1997, the Board of Directors ratified the additional grant, from a pool of
options authorized on July 23, 1997, of options (and tandem stock appreciation
rights) to acquire an aggregate of 6,000,000 shares of Series A TCI Group Common
Stock at an exercise price of $15.69 per share to certain key employees and one
executive officer of the Company.
During 1996, Mr. Brendan Clouston, an executive officer of the Company, and
another employee were each granted an option to acquire 1.0% of the Company's
common equity in TCI Telephony Services, Inc. ("TTS-Delaware"), an indirect
wholly owned subsidiary of TCI Telephony Holdings, Inc., through which the
Company holds the TCI Telephony assets (the "Telephony Options") and an option
to acquire 1.0% of the Company's common equity in TCI Wireline, Inc. ("TCI
Wireline"), a wholly owned subsidiary of the Company through which the Company
operates its developmental stage cable telephony business (the "Wireline
Options"). The aggregate exercise price for each Telephony Option, which is
payable to TTS-Delaware, is equal to 1.0% of (i) the Company's cumulative
investment in TCI Telephony as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise, less (ii) the sum of (x) $500 million (representing the aggregate
initial liquidation price of certain preferred stock of TTS-Delaware) and (y)
the amount of the tax benefits generated by TCI Telephony (up to $500 million)
as and when used by TCI. The per share exercise price on the date of grant was
$850,029. Any exercise by one of such employees of all or part of the Telephony
Options would need to be accompanied by the exercise by such employee of a pro
rata portion of the Wireline Option held by such employee. The Telephony Options
will vest and become exercisable in five equal annual installments, with the
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first annual installment vesting on February 1, 1997, and will expire on
February 1, 2006. The aggregate exercise price for each Wireline Option, which
is payable to TCI Wireline, is equal to 1.0% of the Company's cumulative
investment in TCI Wireline as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise. The per share exercise price on the date of grant was $12,502. The
Wireline Options will vest and become exercisable in five equal annual
installments, with the first annual installment vesting on February 1, 1997, and
will expire on February 1, 2006. Such options must be exercised on a pro rata
basis with the Telephony Options. Mr. Clouston, Mr. Larry Romrell (another
executive officer of the Company) and another employee of TCI were each granted
an option during 1996 to acquire 1.0% of the Company's common equity in TCI
Internet Services, Inc. ("TCI Internet"), through which the Company owns certain
of its Internet services investments and businesses (the "Internet Options").
The aggregate exercise price for each Internet Option, which is payable to TCI
Internet, is equal to 1.0% of the Company's cumulative investment in TCI
Internet as of December 1, 1996, adjusted for a 6% per annum interest factor
from the date each such investment was made to the date of such exercise. The
per share exercise price on the date of grant was $55,070. All of such options
will vest and become exercisable in five equal annual installments, with the
first annual installment vesting on February 1, 1997, and will expire on
February 1, 2006. The Company is in the process of transferring the Internet
services distribution business currently conducted through subsidiaries of TCI
Internet to TCI.NET, Inc. ("TCI.NET"), another subsidiary of the Company. In
anticipation of such transfer, during 1997 the Company replaced the options to
acquire stock of TCI Internet held by Messrs. Clouston and Romrell and another
employee with an option to acquire a number of shares equal to 1.0% of the
common equity of TCI.NET at December 1, 1996 and a stock appreciation right with
respect to a number of shares equal to 1.0% of the common equity of TCI Internet
at December 1, 1996. The material terms of the option to acquire shares of
TCI.NET are the same as those of the Internet Option, except that the exercise
price, which will be payable to TCI.NET, is an allocated portion of the current
exercise price under the Internet Option based on the Company's cumulative
investment in the Internet services distribution business relative to the
balance of its cumulative investment in TCI Internet at December 1, 1996. The
stock appreciation right entitles the holder to the excess of the value of the
shares subject to the stock appreciation right (based on the percentage that
such shares represent of the total value of the common equity of TCI Internet as
of the exercise date) over 1% of the Company's cumulative investment in TCI
Internet at December 1, 1996, plus a 6% per annum interest factor from the date
when each such investment was made to the date of exercise. Amounts payable upon
exercise of the stock appreciation right may be paid in cash or, at the
Company's election, Series A TCI Group Common Stock or, following stockholder
approval of the Charter Amendments, Series A TCI Ventures Group Common Stock.
Any exercise by the holder of all or part of the TCI.NET option must be
accompanied by the exercise by such holder of a pro rata portion of the TCI
Internet stock appreciation right, and vice versa. Mr. Tony Coelho, a director
of the Company, owns 1,500 shares of ETC, representing 15% of such subsidiary's
common equity, and under certain circumstances will be entitled to increase his
percentage ownership to up to 20%.
The Company and Mr. Clouston have entered into a letter agreement, as
amended (the "Agreement"). Mr. Clouston has notified the Company that a
financial institution may lend him certain amounts of money (the "Loan"), which
Loan may be secured in whole or in part, by the Agreement. Pursuant to the
Agreement, TCI agrees to purchase from Mr. Clouston, at his request or by the
request of such financial institution upon a default as provided under the
relevant agreements evidencing the Loan, all, but not less than all of Mr.
Clouston's grants of options and restricted stock awards as of April 7, 1997
(the "Grants") at a price of $10 million. The $10 million purchase price shall
decrease upon the exercise of any options and the vesting of any restricted
stock awards included in the Grants, by the amount of the difference between the
exercise price and the fair market value of the exercised options at the
respective time of such exercise and by the fair market value of any of the
restricted stock awards that vest at the time of such vesting. Additionally, Mr.
Clouston will apply an amount equal to such reduction in the purchase price,
less only applicable taxes, to prepay the Loan. The Agreement expires on March
31, 2002.
Except as set forth in this Offering Circular, neither the Company, nor to
the best of the Company's knowledge, any of its affiliates, directors or
executive officers, or any of the directors or executive officers of any
subsidiary of the Company, is a party to any contract, arrangement,
understanding or relationship with any other person relating directly or
indirectly to the Exchange Offers with respect to any securities of the Company
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(including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or the voting of any such securities, joint
ventures, loan or option arrangements, puts or calls, guarantees of loans,
guarantees against loss or the giving or withholding of proxies, consents or
authorizations).
CERTAIN EFFECTS OF THE EXCHANGE OFFERS
General. Following the Exchange Offers, cash management, taxes and
allocation of principal corporate activities among the Groups will be based upon
methods that management of the Company believes to be reasonable and would be
reflected in the respective Group financial information as set forth in
"MANAGEMENT AND ALLOCATION POLICIES" below. Except as disclosed below and
elsewhere in this Offering Circular, the Company has no present plans or
proposals that would result in (i) the acquisition by any person of any
additional securities of the Company, or the disposition of any securities of
the Company, (ii) an extraordinary corporate transaction, such as a merger,
reorganization, liquidation or sale or transfer of a material amount of assets
involving the Company or any of its subsidiaries, (iii) any change in the
present Board of Directors or management of the Company, including, but not
limited to, a plan or proposal to change the number or term of the directors, to
fill any existing vacancy on the Board of Directors or to change any material
term of the employment contract of any executive officer, (iv) any material
change in the present dividend rate or policy or indebtedness or capitalization
of the Company, (v) any material change in the Amended Charter, By-Laws or
instruments corresponding thereto or any other actions which may impede the
acquisition or control of the Company by any person.
If the Exchange Offers are fully subscribed, the Company will acquire a
maximum of 188,661,300 shares of Series A TCI Group Common Stock and 16,266,400
shares of Series B TCI Group Common Stock and will issue 188,661,300 shares of
Series A TCI Ventures Group Common Stock and 16,266,400 shares of Series B TCI
Group Common Stock, representing in the aggregate 100% of the Inter-Group
Interest of the TCI Group in the TCI Ventures Group. The actual numbers of
shares of each series of TCI Ventures Group Common Stock to be issued in the
Exchange Offers will depend on the numbers of shares of Series A TCI Group
Common Stock and Series B TCI Group Common Stock that are tendered. If the
aggregate number of shares of Series A TCI Ventures Group Common Stock or Series
B TCI Ventures Group Common Stock issued in the Exchange Offers is less than the
Series A Maximum or Series B Maximum, respectively, the remaining Inter-Group
Interest of the TCI Group will be extinguished in consideration of the
attribution to the TCI Group of the TCI Ventures Group Preferred Interest.
Immediately after giving effect to the foregoing, the TCI Group Common Stock
will cease to reflect any of the common stockholders' equity value of the
Company attributable to the businesses and assets comprising the TCI Ventures
Group. The shares of TCI Group Common Stock received by the Company in the
Exchange Offers would be retired and, consequently, the number of outstanding
shares of TCI Group Common Stock would be reduced accordingly.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange of the
Pre-Exchange Offer Securities. Upon consummation of the Exchange Offers, the
TCI-UA Notes that remain outstanding will be adjusted, in accordance with their
terms, so that if such TCI-UA Notes were exchanged immediately following the
closing of the Exchange Offers there would be delivered upon such exchange a
number of shares of Series A TCI Ventures Group Common Stock equal to 30% of the
number of shares of Series A TCI Group Common Stock that would have been
deliverable upon such exchange if effected immediately prior to the closing of
the Exchange Offers. Further, the shares of Series A TCI Group Common Stock that
would have been issuable upon such exchange if effected immediately prior to the
closing of the Exchange Offers will be reduced by the number of shares of TCI
Ventures Group Common Stock so issuable. Similarly, the Adjustable Options will
be divided into Initial Ventures Options to purchase shares of Series A TCI
Ventures Group Common Stock and options to purchase shares of Series A TCI Group
Common Stock, with 30% (rounded up to the next whole number) of the shares that
were issuable upon exercise of the Adjustable Option immediately prior to the
consummation of the Exchange Offers being allocated to the Initial Ventures
Options and 70% (rounded down to the next whole number) of such shares being
allocated to the option to purchase shares of Series A TCI Group Common Stock.
The issuance of shares of Series A TCI Ventures Group Common Stock upon
conversion, exercise or exchange of Pre-Exchange Offer Securities will not
result in any transfer of funds or other assets from the TCI Group to the TCI
Ventures Group, or a reduction in any Inter-Group Interest that then may exist,
in consideration of such issuance. The proceeds
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received upon the exercise of Initial Venture Options will be attributed to the
TCI Ventures Group, as will the liability for amounts payable upon the exercise
of any related stock appreciation rights. The liability with respect to the
TCI-UA Notes will remain a liability of the TCI Group.
As of June 30, 1997, Mr. Robert Naify, a director of the Company, holds
TCI-UA Notes exchangeable for 22,446,926 shares of Series A TCI Group Common
Stock and 8,417,597 shares of Series A Liberty Media Group Common Stock. 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 TCI-UA
Notes exchangeable for 341,606 shares of Series A TCI Group Common Stock and
128,102 shares of Series A Liberty Media Group Common Stock.
As of June 30, 1997, the TCI-UA Notes in the aggregate were exchangeable
for 34,853,145 shares of Series A TCI Group Common Stock and 13,069,918 shares
of Series A Liberty Media Group Common Stock, and the Adjustable Options in the
aggregate were exercisable for 18,993,639 shares of Series A TCI Group Common
Stock. As a result of the adjustments described above, immediately following the
closing of the Exchange Offers, the TCI-UA Notes will be exchangeable for
24,397,201 shares of Series A TCI Group Common Stock, 13,069,918 shares of
Series A Liberty Media Group Common Stock and 10,455,944 shares of Series A TCI
Ventures Group Common Stock, and the Adjustable Options will be replaced by
options to purchase an aggregate of 5,698,093 shares of Series A TCI Ventures
Group Common Stock and options to purchase an aggregate of 13,295,546 shares of
Series A TCI Group Common Stock. On July 23, 1997, the Board of Directors
approved the grant of Adjustable Options exercisable for 3,850,000 shares of
Series A TCI Group Common Stock and on August 7, 1997, the Board ratified the
additional grant of Adjustable Options exercisable for 6,000,000 shares of
Series A TCI Group Common Stock. Immediately following the closing of the
Exchange Offers, such options will be replaced by options to purchase an
aggregate of 2,955,000 shares of Series A TCI Ventures Group Common Stock and
options to purchase an aggregate of 6,895,000 shares of Series A TCI Group
Common Stock.
TCI Group. All shares of TCI Group Common Stock received by the Company in
exchange for shares of TCI Ventures Group Common Stock pursuant to the Exchange
Offers will be retired. Upon retirement, such shares of Series A TCI Group
Common Stock will become authorized but unissued shares of Series A TCI Group
Common Stock, and such shares of Series B TCI Group Common Stock will become
authorized but unissued shares of Series B TCI Group Common Stock. The Company's
acquisition of shares of TCI Group Common Stock pursuant to the Exchange Offers
will reduce the number of shares of each series of TCI Group Common Stock that
might otherwise trade publicly. Nonetheless, it is anticipated that there will
be a sufficient number of shares of Series A TCI Group Common Stock and Series B
TCI Group Common Stock outstanding and publicly traded following the Exchange
Offers to ensure a continued trading market in the shares of each such series.
Based on the published guidelines of the NASD, the Company's acquisition of
shares of TCI Group Common Stock pursuant to the Exchange Offers is not expected
to cause the remaining shares of TCI Group Common Stock to cease to be eligible
for quotation on the National Market tier of The Nasdaq Stock Market.
Following the Company's acquisition of shares of TCI Group Common Stock
pursuant to the Exchange Offers, it is anticipated that the shares of each
series of TCI Group Common Stock will continue to be "margin securities" for
purposes of the Federal Reserve Board's margin regulations. Further, the
acquisition of shares of TCI Group Common Stock by the Company in the Exchange
Offers is not expected to result in the shares of either series of TCI Group
Common Stock becoming subject to deregistration under the Exchange Act or in the
suspension of the Company's obligations to file reports under the Exchange Act.
TCI Ventures Group. Prior to the date hereof, there has been no trading
market for the TCI Ventures Group Common Stock. Following the consummation of
the Exchange Offers, it is anticipated that the TCI Ventures Group Common Stock
will be traded in the over-the-counter market. No assurance can be given,
however, as to either the establishment or continuity of any such trading
market. See "RISK FACTORS -- Considerations Relating to the TCI Ventures Group
Common Stock -- No Assurance as to Market Price." The Company has applied for
inclusion of the Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock on the National Market tier of The Nasdaq Stock
Market under the symbols "TCIVA" and "TCIVB," respectively.
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Each of the Series A TCI Ventures Group Common Stock and the Series B TCI
Ventures Group Common Stock will be "margin securities" under the rules of the
Federal Reserve Board when issued, if, upon consummation of the Exchange Offers,
each series satisfies the requirements for inclusion on the National Market tier
of The Nasdaq Stock Market. The published criteria for inclusion thereon of the
Series A TCI Ventures Group Common Stock and the Series B TCI Ventures Group
Common Stock include, among other things, that there be, upon consummation of
the Exchange Offers, (i) at least 500,000 shares of each series of TCI Ventures
Group Common Stock publicly held, excluding for this purpose shares held
directly or indirectly by any officer or director of the Company and by any
person who is the beneficial owner of more than 10% of the total shares
outstanding, and (ii) at least 400 beneficial holders of each series of TCI
Ventures Group Common Stock. The Series A TCI Ventures Group Common Stock is
expected to satisfy such criteria if the Series A Exchange Offer is fully
subscribed and may satisfy such criteria at substantially lower levels of
participation depending on the resulting number of beneficial holders and the
resulting number of shares of Series A TCI Ventures Group Common Stock that will
be considered "publicly held" upon consummation of the Series A Exchange Offer.
The Series B TCI Ventures Group Common Stock is also expected to satisfy such
criteria if the Series B Exchange Offer is fully subscribed and at least 400
beneficial owners participate therein. Since there are substantially fewer
beneficial holders of Series B TCI Group Common Stock than Series A TCI Group
Common Stock, it is less clear whether the Series B TCI Ventures Group Common
Stock would satisfy such criteria and, accordingly, qualify as margin securities
at substantially lower levels of participation. Since the qualification of each
series of TCI Ventures Group Common Stock as margin securities is entirely
dependent upon the volitional participation of holders of TCI Group Common Stock
in the Exchange Offers, the Company can provide no assurance that either series
of TCI Ventures Group Common Stock will qualify as margin securities upon
consummation of the Exchange Offers. If the TCI Ventures Group Common Stock does
not so qualify, a stockholder tendering shares of TCI Group Common Stock held as
collateral in a brokerage margin account will not be permitted to use the shares
of TCI Ventures Group Common Stock issued to such stockholder as substitute
collateral and may be required to deposit additional collateral in such account.
On June 26, 1997, the Company filed a registration statement on Form 8-A
with the SEC to register the Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock under Section 12(g) of the Exchange Act.
Following the consummation of the Exchange Offers, the Company intends to
include in its annual reports on Form 10-K filed with the SEC and in its annual
reports to stockholders, supplementary audited combined financial statements for
the TCI Ventures Group. The Company also intends to include in its quarterly
reports for each of the first three quarters of each fiscal year filed with the
SEC, unaudited combined financial statements for the TCI Ventures Group. The
Company intends to furnish copies of its annual report to stockholders to the
holders of TCI Ventures Group Common Stock.
The percentage of TCI Ventures Group Common Stock that will be owned
following the Exchange Offers by a stockholder will depend on the level of
participation in the Exchange Offers by such stockholder relative to the level
of participation by all other TCI Group stockholders.
EXCHANGE AGENT AND INFORMATION AGENT
The Bank of New York has been appointed the Exchange Agent and Georgeson &
Company, Inc. has been appointed the Information Agent for the Exchange Offers.
Any questions or requests for assistance in connection with the Exchange Offers
or for additional copies of this Offering Circular or the Letters of Transmittal
should be directed to the Information Agent, in the manner and at the address
specified on the back cover page of this Offering Circular. Letters of
Transmittal and certificates for shares of TCI Group Common Stock to be
tendered, together with any other documents required by the Letter of
Transmittal, should be forwarded to the Exchange Agent in the manner and at the
address specified in the Letter of Transmittal. The Bank of New York is also the
stock transfer agent for the TCI Ventures Group Common Stock as it is for the
TCI Group Common Stock and Liberty Media Group Common Stock.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The Company has not retained any dealer manager or similar agent in
connection with the Exchange Offers and will not pay fees or commissions to any
broker, dealer, commercial bank, trust company or other person for soliciting
tenders of any shares of TCI Group Common Stock pursuant to the Exchange Offers.
No
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such broker, dealer, commercial bank or trust company has been authorized to act
as the Company's agent for purposes of the Exchange Offers. However, directors,
officers and employees of the Company (who will not be separately compensated
for such services) may solicit tenders by use of the mails, personally or by
telephone, facsimile or similar means of electronic transmission. Upon request,
the Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses incurred in forwarding
copies of this Offering Circular and related documents to the beneficial owners
of the TCI Group Common Stock and in handling or forwarding tenders of TCI Group
Common Stock by their customers. No person has been authorized to make any
recommendation to any securityholder as to whether to tender or refrain from
tendering TCI Group Common Stock pursuant to the Exchange Offers.
The Exchange Agent and the Information Agent will receive reasonable and
customary compensation for their services. The Company will also reimburse the
Exchange Agent and the Information Agent for out-of-pocket expenses, including
reasonable attorneys' fees, and has agreed to indemnify the Exchange Agent and
the Information Agent against certain liabilities in connection with the
Exchange Offers, including certain liabilities under the federal securities
laws.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion is a summary of the material federal
income tax consequences of the Exchange Offers and the material federal income
tax consequences to the holders of TCI Ventures Group Common Stock, but does not
purport to be a complete analysis of the relevant tax issues. The discussion is
based on 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 TCI Ventures 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 Exchange Offers or the TCI
Ventures Group Common Stock. However, the Company believes that, as a practical
matter, it is unlikely that such legislation or regulations would apply
retroactively to the Exchange Offers or the TCI Ventures Group Common Stock. The
discussion contained herein is based on the assumption that the Exchange Offers
will be consummated and the TCI Ventures Group Common Stock will have the
characteristics 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 TCI Ventures Group
Common Stock.
IT IS IMPORTANT TO NOTE THAT THE FOLLOWING DISCUSSION IS BASED UPON THE LAW
IN EFFECT AS OF THE DATE HEREOF.
TAX IMPLICATIONS TO STOCKHOLDERS
This discussion addresses only those stockholders who hold the Series A TCI
Group Common Stock or Series B TCI Group Common Stock and would hold TCI
Ventures Group Common Stock as a capital asset 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.
Exchange of TCI Group Common Stock for TCI Ventures Group Common Stock. The
Company believes that the TCI Ventures Group Common Stock would be stock of the
Company for federal income tax purposes, and therefore that the exchange of TCI
Group Common Stock for TCI Ventures Group Common Stock would be a tax-free
exchange. The tax basis in the TCI Ventures Group Common Stock received in such
exchange would equal the tax basis in the TCI Group Common Stock surrendered in
exchange therefor, and, although the question is not free from doubt, the
holding period of such TCI Ventures Group Common
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Stock would include the holding period of the TCI Group Common Stock surrendered
therefor, assuming that such TCI Group Common Stock was a capital asset in the
hands of the exchanging stockholder on the date of the exchange. If different
shares of TCI Group Common Stock have different holding periods, the Service
takes the position that the various holding periods must be allocated pro rata
among all the TCI Ventures Group Common Stock received.
Although the Company believes that the exchange of the TCI Group Common
Stock for TCI Ventures Group Common Stock would not result in the recognition of
any income, gain or loss by stockholders, there are no federal income tax
regulations, court decisions or published Service rulings bearing directly on
stock with characteristics of the TCI Ventures Group Common 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. Although the Service has since
withdrawn such stock from its list of matters under consideration, it has
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
TCI Ventures Group Common Stock represents property other than stock of the
Company.
If the TCI Ventures Group Common Stock were treated as property other than
stock of the Company, stockholders participating in the Exchange Offers would
recognize gain (or loss) in the amount by which the fair market value of the TCI
Ventures Group Common Stock received exceeds (or is less than) the adjusted
basis of the TCI Group Common Stock exchanged therefor. In addition, if the TCI
Ventures Group Common Stock were treated as property other than stock of the
Company, the Company could recognize gain on the exchange of the TCI Ventures
Group Common Stock for TCI Group Common Stock, in an amount equal to the
difference between the fair market value of the TCI Ventures Group Common Stock,
and the Company's tax basis in such property. However, as indicated above, the
Company believes that the TCI Ventures Group Common Stock would be treated as
stock of the Company.
Sale or Exchange of Common Stock. Upon the taxable sale or exchange of the
TCI Ventures Group Common Stock, a 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 therefor, or, if received in the Exchange Offers, be determined as
described under "--Exchange of TCI Group Common Stock for TCI Ventures Group
Common Stock" above.
Should the Company redeem the TCI Ventures Group Common Stock in the future
by distributing shares of one or more TCI Ventures Group Subsidiaries in
exchange therefor, it intends to do so in a manner so that such redemption will
be tax free under Section 355 of the Code. If such redemption does not qualify
under Section 355 of the Code, then the holders of the TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Subsidiaries' stock.
Capital gain could be taxed at a rate lower than ordinary income for
certain noncorporate taxpayers. Under the Taxpayer Relief Act of 1997 recently
signed by President Clinton, different tax rates may be applicable to such
taxpayers based upon the period that such TCI Ventures Group Common Stock was
held (for one year or less, for more than one year but not more than eighteen
months, for more than eighteen months, and for certain taxpayers in taxable
years beginning after December 31, 2000, for more than five years). 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. The TCI Ventures Group Common Stock should be treated as stock
of the Company for federal income tax purposes. If the TCI Ventures Group Common
Stock is so treated, a conversion of such stock into TCI Group Common Stock
pursuant to the Amended Charter should constitute a tax free exchange. However,
it is not clear that an exchange of shares of TCI Ventures Group Common Stock
for shares of TCI Group Common Stock, or shares of TCI Group Common Stock for
shares of TCI Ventures
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Group Common Stock, would constitute a tax free exchange under the Code if such
exchange occurred between shareholders (rather than between a shareholder and
the Company).
Dividends. Dividend payments received by a holder of TCI Ventures Group
Common Stock who is not a Nonresident Alien (as defined below) will be taxable
at ordinary income rates to the extent of the current and accumulated earnings
and profits of the Company, then as a return of basis of the TCI Ventures Group
Common Stock of the holder, then as capital gain. Corporate shareholders would
generally be eligible for a dividends received deduction with respect to the
distribution.
Nonresident Alien Holders. Dividend payments received by a holder of TCI
Ventures Group Common Stock who is a Nonresident Alien would be subject to
United States federal withholding tax unless a treaty exemption applies or the
Nonresident Alien otherwise establishes an exemption. 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. The TCI Ventures 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
TCI Ventures 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 TCI Ventures 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 (x) had furnished a correct
TIN and (y) had not 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 TCI
Ventures 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, the TCI Ventures 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 issuance of shares of TCI
Ventures Group Common Stock in exchange for shares of TCI Group Common Stock or
on subsequent sales of TCI Ventures Group Common Stock. If, however, the TCI
Ventures Group Common Stock were treated as property other than stock of the
Company, the Company could recognize gain on the sale of TCI Ventures Group
Common Stock in an amount equal to the difference between the proceeds received
therefrom and its tax basis in the hands of the Company. If the TCI Ventures
Group Common Stock is treated as stock of a subsidiary of the Company, and not
as stock of the Company, the TCI Ventures 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 TCI Ventures Group would be taxed to the Company.
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DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP
GENERAL
The TCI Ventures Group consists principally of the following assets and
their related liabilities: (i) TCI's 85% equity interest (representing a 92%
voting interest) in International, which is the Company's primary vehicle for
the conduct of its international cable, telephony and programming businesses
(other than those international programming businesses attributed to the Liberty
Media Group), (ii) TCI's principal interests in the Telephony Business,
consisting primarily of the Company's investment in a series of partnerships
formed to engage in the business of providing wireless communications services,
using the radio spectrum for PCS, to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.), the Company's investment in TCG, a competitive
local exchange carrier, and the Company's wholly owned subsidiary WTCI, which
provides long distance transport of video, voice and data traffic and other
telecommunications services to telecommunications carriers on a wholesale basis
using primarily a digital broadband microwave network located throughout a 12
state region, (iii) TCI's 40% equity interest (representing an 85% voting
interest) in UVSG, which provides satellite-delivered video, audio, data and
program promotion services to cable television systems, satellite dish owners,
radio stations and private network users, primarily throughout North America,
(iv) TCI's 39% equity interest (representing a 72% voting interest) in @Home, a
provider of high speed multimedia Internet services, and TCI's interest in other
Internet-related assets and (v) other assets, including NDTC, a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company which is a developer and distributor of
for-profit education, training and communication services and products, and TCI
SUMMITrak of Texas, Inc. and TCI SUMMITrak LLC, wholly owned subsidiaries of the
Company that provide an integrated network-based information management system
currently to certain of TCI's cable systems. (Percentage equity and voting
interests provided above and elsewhere under this caption "DESCRIPTION OF THE
BUSINESS OF THE TCI VENTURES GROUP" have been rounded to the nearest whole
number and calculated as of June 30, 1997, except for percentage interests in
entities that are not consolidated subsidiaries which have been calculated as of
March 31, 1997 and except that the percentage equity and voting interests in
@Home have been adjusted to reflect the closing of its initial public offering
on July 11, 1997.) The stocks of International, TCG, UVSG and @Home are traded
on the National Market tier of The Nasdaq Stock Market.
The TCI Ventures Group will also include such other assets and liabilities
of the TCI Group as the Board of Directors may in the future determine to
attribute to the TCI Ventures Group and such other businesses, assets and
liabilities as TCI or any of its subsidiaries may in the future acquire for the
TCI Ventures 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 TCI Ventures Group in the future would not include assets and
liabilities of the Company's domestic programming businesses and investments or
its domestic cable operations (including its businesses which utilize its cable
facilities to distribute domestic telephony and Internet services).
The Company has historically had a policy of continually evaluating its
various assets to determine ways in which to increase shareholder value, whether
by disposing of an asset to realize the appreciation in its value, by acquiring
additional assets in existing lines of business at attractive prices or in new
lines of business that have strategic potential or by partnering with others to
achieve economies of scale or pursue new opportunities. This policy applies
equally to the assets comprising the TCI Ventures Group, which include the
international expansion of TCI's traditional cable and programming businesses
and TCI's domestic investments in new telecommunications technologies. For
example, after the Board of Directors determined to create the TCI Ventures
Group, the Company sold its investments in Netscape and GCI in order to realize
the substantial appreciation in the values of such investments. (The proceeds of
such sales are attributed to the TCI Ventures Group.) As described above and
below, negotiations are ongoing and at various stages with respect to sales of
certain assets, exchanges of certain assets and the formation of joint ventures
to operate other assets. In addition, companies in which the TCI Ventures Group
holds a less than majority interest may engage in various transactions,
including mergers or acquisitions, that could affect the TCI Ventures Group's
interest in such company.
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The following table lists the entities the Company's interest in which has
been attributed to the TCI Ventures Group and sets forth, as of June 30, 1997
(except for unconsolidated entities which are as of March 31, 1997 and except
for @Home which has been adjusted to reflect its initial public offering), the
TCI Ventures Group's direct or indirect equity interest in such entities
(rounded to the nearest whole number) and the businesses currently conducted by
such entities. The table excludes certain direct and indirect wholly owned
subsidiaries of TCI, the sole assets of which consist of interests in the listed
entities. Such subsidiaries (such as TCI Telephony Holdings, Inc.) are also
attributed to the TCI Ventures Group. The Company's interests in certain other
of the listed entities are owned through subsidiaries that also own assets which
are not attributed to the TCI Ventures Group (such as the ownership by TCI
Internet of both @Home which is in the TCI Ventures Group, and subsidiaries that
are engaged in the business of distributing the @Home service to customers over
TCI's cable plant, which business is in the TCI Group). Such subsidiaries are
not attributed to the TCI Ventures Group. Certain of the listed entities operate
through subsidiaries and affiliates. In such cases, the listed entity's interest
in its subsidiaries and affiliates is also attributed to the TCI Ventures Group.
With respect to listed entities that are partnerships or the interest in which
is held through a partnership or similar structure, the Company's voting rights
and rights to participate in the earnings of affiliates may differ from the
equity interests indicated in the table below.
INTERNATIONAL CABLE, TELEPHONY AND PROGRAMMING
<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
Tele-Communications International,
Inc.(2)............................ 85% equity International cable, telephony and
92% voting programming interests and operations
</TABLE>
DOMESTIC TELEPHONY
<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
Sprint PCS Partnerships.............. 30% PCS under the "Sprint" brand name
PhillieCo, L.P....................... 35% PCS under the "Sprint" brand name
Teleport Communications Group,
Inc................................ 30% equity Competitive Local Exchange Carrier
37% voting
Kansas City Fiber
Network, L.P....................... 50% (3)(4) Competitive Access Provider serving the
Kansas City metropolitan area
NHT Partnership...................... 40% (4) Competitive Access Provider serving the
Buffalo metropolitan area
New Jersey Fiber Technologies,
L.P................................ 79% (4) Competitive Access Provider serving the
Morristown and New Brunswick, NJ
metropolitan area
Louisville Lightwave................. 43% (4)(5) Competitive Access Provider serving the
Louisville and Lexington, KY
metropolitan area
Western Tele-Communications, Inc..... 100% Provider of microwave and wireline
transport of telecommunications
services
</TABLE>
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DIVERSIFIED SATELLITE COMMUNICATIONS
<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
United Video Satellite Group, Inc.... 40% equity Satellite distribution of video, audio,
85% voting data and program promotion services
</TABLE>
INTERNET SERVICES
<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
At Home Corporation.................. 39% equity High-speed multimedia Internet services
72% voting
Sportsline USA, Inc.................. 7% Internet provider of branded
interactive sports information,
programming and merchandise
iVillage, Inc........................ 12% Developer of, and Internet and on-line
provider of, branded communities and
information services pertaining to
parenting, careers and personal health
Interzine Productions, Inc........... 15% Internet provider of interactive sports
communities and information services
KPCB Java Fund, L.P.................. 7% Investor in Java application
development
</TABLE>
OTHER ASSETS
<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
National Digital Television Center,
Inc................................ 100% Television production and provider of
digital compression and transmission
and authorization services to
programmers, cable systems and other
video distributors
ETC w/tci, Inc.(6)................... 80% Developer and distributor of for-profit
education, training and communication
services and products
CareerTrack, Inc.(7)................. 76% Provider of business and educational
seminars and related publications
National School Conference Institute,
Inc.(7)............................ 64% Provider of conference and
satellite-delivered staff development
programming for educators
Ingenius(TM)(7)(8)................... 40% Developer of educational software
products designed to facilitate
classroom learning
The Lightspan Partnership, Inc.(7)... 9% Developer of educational programming
Academic Systems Corporation(7)...... 8% Provider of higher education multimedia
instruction materials
</TABLE>
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<TABLE>
<CAPTION>
TCI VENTURES GROUP'S
COMPANY DIRECT OR INDIRECT INTEREST(1) BUSINESS
------- ------------------------------- --------
<S> <C> <C> <C>
SUMMITrak(9)......................... 100% Integrated information management
system
DigiVentures, LLC.................... 99% Leases digital set-top box equipment
Acclaim Entertainment, Inc........... 9% Publisher of entertainment software
Antec Corporation(10)................ 16% Manufacturer of products for hybrid
fiber/ coaxial broadband networks
Intessera, Inc....................... 100% Provider of database management
software
TCI TVGOS, Inc....................... 100% Holds an undivided interest in certain
intellectual property rights of TV
Guide on Screen, a joint venture which
has been dissolved
MCNS Holdings, L.P................... 25% Developer of multimedia communications
network and associated technologies.
Kitty Hawk Capital Limited
Partnership, II.................... 3% Venture capital fund
New Enterprise Associates IV, L.P.... 1% Venture capital fund
Venture First II, L.P................ 1% Venture capital fund
TVSM., Inc........................... 10% Publishing company of various cable
television programming guides
</TABLE>
- ---------------
(1) For indirect equity and voting interests, the percentage in the table is
calculated by multiplying TCI's percentage interest in the holding company
by the holding company's percentage interest in the listed company.
(2) For a description of the businesses in which International has interests,
see the chart under "International Cable, Telephony and
Programming -- International" below.
(3) The other 50% interest in Kansas City Fiber Network is owned by Kansas City
Cable Partners, a partnership that owns and operates cable systems in the
Kansas City area, in which the TCI Group holds a 50% interest.
(4) TCI is negotiating to sell its interests in these partnerships for cash.
There can be no assurance that any such sale will occur on terms
satisfactory to TCI, or at all; however, if a sale is consummated, the
proceeds will be attributed to the TCI Ventures Group.
(5) TCI's indirect interest in Louisville Lightwave will increase to 50% upon
the closing of its acquisition of the balance of the other partner's
interest in TCI-TKR of Kentucky, Inc., which owns, among other assets, the
interest in Louisville Lightwave.
(6) The Company is considering certain strategic alternatives with respect to
its investment in ETC, including, among other things, additional
investments from unrelated entities and a restructuring of the ownership of
ETC's assets that could result in a change in control. There can be no
assurance that any such transaction would occur on terms satisfactory to
the Company or at all. Any proceeds of any such transaction, in the form of
cash, capital stock or assets, would be attributed to the TCI Ventures
Group.
(7) Held through ETC.
(8) ETC had reached an agreement in principle to acquire the remaining 50% of
Ingenius(TM) which it did not already own, however the negotiations for a
definitive agreement for such transaction are currently in abeyance while
certain strategic alternatives with respect to the Company's interest in
ETC are being considered.
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(9) TCI is considering certain strategic alternatives with respect to SUMMITrak,
including a sale of the assets of SUMMITrak or the contribution of the stock
or assets of SUMMITrak to a joint venture with another investor. There can
be no assurance that any such transaction could be accomplished on terms
satisfactory to TCI or at all. The proceeds of any such sale or joint
venture interest, if applicable, will be attributed to the TCI Ventures
Group. Any such transaction may also include a simultaneous agreement with
the purchaser or joint venture to provide information system services to the
TCI Group's cable systems. If any such transaction included a service
agreement with the TCI Group, there can be no assurance that the terms of
such transaction would be as favorable to the TCI Ventures Group as the
terms it could have negotiated had such transaction not included such a
service agreement.
(10) This interest was previously represented by TCI's interest in TSX
Corporation which merged with Antec Corporation in February 1997.
The principal assets attributed to the TCI Ventures Group are described in
greater detail below.
INTERNATIONAL CABLE, TELEPHONY AND PROGRAMMING -- INTERNATIONAL
OVERVIEW
International, through its subsidiaries and affiliates, operates
multi-channel video and telecommunications distribution networks in, and
provides diversified programming services to, selected markets outside the
United States. International's activities are concentrated in Europe, Latin
America and The Caribbean, and Asia, Australia and New Zealand, with particular
focus at present on the United Kingdom, Argentina and Japan. International has
ownership interests in companies operating broadband networks that, at December
31, 1996, provided cable television service to an aggregate of approximately 2.9
million basic subscribers and, in the U.K., provided telephone service over
approximately 947,000 telephone lines (a customer may have multiple telephone
lines). As of December 31, 1996, International also had ownership interests in
or managed 39 cable and satellite programming services which were received by
subscribers in various countries outside the U.S.
All of TCI's interests in International have been attributed to the TCI
Ventures Group. As of June 30, 1997, TCI owned 86.25 million shares of TINTA
Series A Common Stock and all of the outstanding shares of TINTA Series B Common
Stock (collectively, the "TINTA Common Stock"). Such shares represented
approximately 85% of the outstanding shares of TINTA Common Stock and, due to
TCI's ownership of all of the TINTA Series B Common Stock (which has greater per
share voting rights), approximately 92% of the combined voting power of the
outstanding shares of TINTA Common Stock.
The following table sets forth as of March 31, 1997, the name of each of
the operating companies in which International has a direct or indirect equity
interest, the amount of such interest (based generally on the ownership interest
in capital stock and rounded to the nearest whole number) in each such operating
company, and the businesses currently conducted by such operating company. With
respect to Cablevision S.A. and TCI Cablevision of Puerto Rico, Inc.,
International's two consolidated subsidiaries, the information is as of June
30,1997. International's interests in the following operating companies are
often held through
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holding companies and its voting rights and rights to participate in the
earnings of affiliates may differ from the equity interests indicated in the
table below.
<TABLE>
<CAPTION>
INTERNATIONAL'S
DIRECT OR INDIRECT
COUNTRY OPERATING COMPANY INTEREST(1) BUSINESS
------- ----------------- ------------------ --------
<S> <C> <C> <C>
EUROPE
United Kingdom.................... Telewest Communications plc 27%(2) Cable/Telephony
Flextech p.l.c. 46%(3) Programming
DMX Inc.(4) 18% Music Programming
Israel............................ Tevel Israel International 23% Cable/Programming
Communications Ltd. ("Tevel")
Ireland........................... Princes Holdings Ltd. ("Princes") 25% Cable/MMDS
Malta............................. Melita Cable TV Ltd. ("Melita") 33% Cable
Poland............................ Aster City Cable Sp. Zo.o. 22%(5) Cable
Regionale Telewizja Kablowa 44% Cable
Autocom Sp. Zo.o.
Katowicka Telewizja Kablowa S.A. 34% Cable
Przedsiebiorstwo Rozwoju Handlui 44% Cable
TeleKomunikacji Sp. Zo.o.
Telefonia Polska Zachod Sp. Zo.o. 29% Telephony
France............................ MultiThematiques, S.A. 33% Programming
Videopole S.A. 7% Cable
LATIN AMERICA AND THE CARIBBEAN
Argentina......................... Cablevision S.A. 51%(6) Cable
Chile............................. Metropolis-Intercom S.A. 24% Cable
Dominican Republic................ TeleCable Nacional, CXA 49% Cable
Puerto Rico....................... TCI Cablevision of Puerto Rico, 100% Cable
Inc.
Various........................... The Sports Venture(7) 25% Programming
DTH Ventures(8) 10% DTH Satellite
ASIA, AUSTRALIA AND NEW ZEALAND
Japan............................. Jupiter Telecommunications, Co., 40% Cable
Ltd.
Jupiter Programming Co., Ltd 50% Programming
Singapore......................... Asia Business News (Singapore) 49%(9) Programming
Private
Australia......................... Australis Media Ltd. 1% MMDS/DTH
Satellite
The Premium Movie Partnership 17% Programming
New Zealand....................... Sky Network Television Limited 13%(10) UHF Subscription/
Programming
</TABLE>
- ---------------
(1) For indirect equity interests, the percentage in the table is calculated by
multiplying International's percentage interest in the holding company by
the holding company's percentage interest in the operating company.
(2) International's interest in Telewest is held through its 50% interest in TW
Holdings, L.L.C. ("TW Holdings") which has a majority interest in Telewest.
(3) In April 1997, Flextech and BBC Worldwide formed two separate joint
ventures (the "BBC Joint Ventures") and entered into certain related
transactions that resulted in, among other things, International having
ownership and voting interests in Flextech of 36% and 50%, respectively.
See "-- United Kingdom -- Cable and Satellite Programming Services."
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(4) On July 11, 1997, DMX Inc. merged with TCI Music, Inc. ("TCI Music"). As a
result of such merger, International currently owns 4% of TCI Music and
entities attributed to the TCI Group and the Liberty Media Group own 84%
and 2%, respectively, in TCI Music. TCI Music operates both in the U.S. and
the U.K.
(5) International's interest in Aster City Cable Sp. Zo.o. ("Aster City") is
held through its 44% interest in Bresnan International Partners (Poland),
L.P. ("BIP Poland"), which owns a 49% interest in Aster City. In May 1997,
BIP Poland executed agreements to acquire the remaining 51% interest in
Aster City not already owned by it. This transaction is expected to close
in the third quarter of 1997, although no assurance can be given that such
transaction will be consummated. International is currently in discussions
to swap its 44% interest in BIP Poland with the parent company of the other
partner in BIP Poland for certain cash and other assets, including such
entity's 20% interest in Bresnan International Partners (Chile), L.P.
(6) International has an option to purchase an additional 29-39% equity
interest in Cablevision S.A., exercisable at any time on or before October
30, 1997. However, as part of a reevaluation of its global strategy,
International has entered into a non-binding letter of intent to sell
one-half of its current 51% interest in Cablevision S.A. There can be no
assurance that any such transaction will be consummated. See "-- Latin
America and The Caribbean -- Argentina."
(7) Represents a joint venture, including a number of partnerships or other
entities under common ownership, formed by International, Liberty and News
Corporation Limited ("News Corp."), which venture currently operates sports
services in Latin America and Australia and intends to operate new sports
services throughout the world (excluding the U.S., Canada and certain other
geographic areas). See "-- Latin America and The Caribbean -- Strategic
Ventures."
(8) Represents various joint ventures for the development and operation of DTH
satellite service in Brazil, Mexico and various Central and South American
countries. See "-- Latin America and The Caribbean -- Strategic Ventures."
(9) International has exercised an option which entitles it to acquire an
additional interest in Asia Business News (Singapore) Private ("ABN") which
would increase its interest in ABN to 50%. International is also in
discussions, however, regarding a proposed sale of its interest in ABN to
the other major shareholder of ABN and a third party. See "-- Asia -- Other
Asian Programming."
(10) International's interest in Sky Network Television New Zealand Ltd. ("Sky
Network") is held through its 25.5% interest in HKP Partners of New Zealand
("HKP"). The partners of HKP, including International, are currently in
discussions with regard to a proposed sale of their interests in HKP to a
third party.
Merely for convenience, the following discussion in some instances contains
translations of the local functional currency of International's subsidiaries
and equity affiliates into U.S. currency at the applicable spot rate (as
published in The Wall Street Journal) in effect on March 31, 1997, unless
otherwise specified. No representation is made that any of such local functional
currencies have been, could have been or could be converted into U.S. dollars at
such rates. With respect to translations of sums which have already been paid,
such translations indicate the actual U.S. dollar amount paid. The applicable
rates at March 31, 1997 for the U.K. pound sterling ("L" or "pounds") and the
Japanese yen ("Y") were $1.6395 per L1.00 and Y123.75 per $1.00, respectively.
At July 31, 1997, such applicable rates were $1.6410 per L1.00 and Y118.65 per
$1.00, respectively.
UNITED KINGDOM
International's U.K. operating companies (i) own broadband fiber
optic/coaxial networks that provide combined cable television and cable
telephony services and (ii) own and manage cable and satellite programming
services.
Cable Television and Telephony. International owns, through a joint venture
with US WEST, Inc. ("US WEST"), an indirect 27% interest in Telewest, a leading
provider of cable television and cable telephony
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services in the United Kingdom. Telewest's ordinary shares trade on the London
Stock Exchange and are represented by American Depositary Receipts in the United
States, where they trade on the National Market tier of The Nasdaq Stock Market.
Telewest provides cable television services over a broadband (i.e., high
capacity) network and uses such network, together with twisted-pair copper wire
connections for final delivery to the customer premises, to provide telephony
services to its customers. The broadband network enables Telewest to deliver a
variety of both television and telephony services to its customers and will
enable Telewest to provide customers with a range of interactive and integrated
entertainment, telecommunications and information services as they become
available in the future. In 1996, Telewest began offering home access to the
Internet to a majority of its franchise areas.
Telewest provided, as of December 31, 1996, cable and telephony service to
26 owned and operated franchises (containing a total of approximately 3.9
million homes and .2 million businesses) and within such franchises provided
cable television service to 528,000 basic subscribers and telephony service to
641,000 residential and business customers at that date. (An additional
franchise covering 30,000 homes was awarded to Telewest on March 20, 1997.)
Telewest also had, as of December 31, 1996, minority interests in three U.K.
cable operators owning at that date a total of seven additional cable franchises
(the "Affiliated Franchises"), which included approximately 1.2 million homes
and approximately 84,000 businesses. Through the Affiliated Franchises, Telewest
served at December 31, 1996, on an equity basis, approximately 72,000 basic
cable subscribers and 68,000 residential and business telephony customers. "On
an equity basis" means the total number of subscribers or customers served
multiplied by Telewest's indirect percentage equity interest in the franchise.
Telewest believes that its franchises (including the Affiliated Franchises)
included more than 24% of the U.K. homes in areas covered by cable licenses at
December 31, 1996. According to Telewest, more than 49% of its customers
subscribe for both cable television and cable telephony services.
As of December 31, 1996, construction of broadband cable networks which
"passed" (i.e., could be connected to) approximately 65% of the homes in
Telewest's owned and operated franchises and 80% of the homes in the Affiliated
Franchises had been completed and approximately L1.6 billion had been invested
in the construction of the network of its owned and operated franchises and
approximately L665 million had been invested in the construction of the networks
of the Affiliated Franchises. Telewest expects that the remaining construction
of the networks in all of its franchises will be substantially completed by the
end of the year 2000. In addition to the construction of an HFC network in each
of its franchises, Telewest is developing a broadband inter-franchise network to
carry voice, data and video traffic between its franchises (including the
Affiliated Franchises), which is expected to reduce interfranchise connection
charges. The inter-franchise network is scheduled to be 75% complete by the end
of 1997, with full completion planned for the middle of 1998.
Telewest is required to have two principal licenses to operate its cable
television and telephony businesses: (i) a cable television license which
permits the holder to provide cable television service to a specific franchise
area, and (ii) a telecommunications license which allows the holder to construct
and operate the physical network necessary to provide cable television and
telephony services. The current regulatory policy of the U.K.'s Independent
Television Commission (the "ITC"), the agency which awards and enforces U.K.
cable television licenses, is to grant only one broadband cable license within a
franchise area. Accordingly, Telewest does not compete for subscribers with
other cable operators within its franchises. This exclusivity is not written
into the license itself and the ITC may change its policy at any time, although
it has indicated that it does not intend to do so for the foreseeable future.
Cable television licenses are subject to ownership and transfer restrictions. A
telecommunications license, which is awarded by the Department of Trade and
Industry and enforced by the Office of Telecommunications, gives the holder the
nonexclusive right to offer telephony services in its franchise areas, and
therefore cable operators are subject to competition with respect to telephony
in their franchise areas. Telecommunications licenses are subject to
restrictions on transfer and to build obligations that require the licensee to
construct its network according to a set timetable ("milestones"). Telewest
failed to meet certain of its 1996 build obligations, but has initiated
discussions with the agency which regulates milestone compliance regarding the
modification of Telewest's past and future milestone obligations. Telewest
believes that it will be able to obtain the necessary modifications to its
obligations, although there can be no assurance it will be successful in so
doing. Telewest's cable licenses have remaining
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terms of approximately 3 to 16 years and its telecommunications licenses have
remaining terms of approximately 11 to 20 years. Both the cable television
licenses and the telecommunications licenses require the payment of annual fees,
with the fees payable with respect to one form of license being based on a
percentage of "qualifying revenues" and with respect to the other licenses being
based upon the administrative costs of the relevant government agency.
A cable operator providing telephony service will need to interconnect its
system with that of a public telephone operator ("PTO") or other telephone
company for calls that do not originate and terminate on the cable operator's
network. PTOs are obliged under their licenses to enter into interconnection
agreements upon request with other PTOs, including cable operators. If the
parties are unable to agree upon the financial terms of the interconnection
agreement, the Director General of Telecommunications will make such
determination upon request of either party. In the case of interconnection with
British Telecommunications plc ("BT"), specific regulations and a standard form
of interconnection agreement apply. Operators who interconnect with BT are
required to pay an Access Deficit Contribution ("ADC") designed to compensate BT
for the losses which it incurs in providing local services throughout the U.K.
under certain price cap regulations. A cable operator that provides telephony
service may also be required to provide "equal access", a concept whereby local
telephone systems are required to offer customers access to each fixed link
trunk system, thereby enabling the customer to choose over which PTO's network
to route its calls. Cable television and cable telephony services are not
currently subject to specific government price control in the United Kingdom.
International's interest in Telewest is held through TW Holdings, a limited
liability company in which International and US WEST, through their respective
subsidiaries, each holds an indirect 50% interest. TW Holdings holds a majority
interest in Telewest. The operating agreement which governs the operations of TW
Holdings, as well as certain other agreements to which International and US WEST
are subject, contain restrictions regarding, among other things, the voting and
disposition of the Telewest shares and the acquisition by TCI, US WEST or their
respective controlled affiliates (including International) of cable television
or cable telephony systems in the U.K. other than through Telewest. See "RISK
FACTORS -- Considerations Relating to the TCI Ventures Group
Entities -- Restrictions on Competitive Activities". The Telewest charter
provides that so long as both International and US WEST each beneficially own at
least 25% of the outstanding Telewest ordinary shares, each will be entitled to
appoint two of the 12-member Telewest board of directors. International and US
WEST have agreed that on any matter requiring shareholder or board of directors
approval they will cause TW Holdings or their respective director designees
(subject to such directors' fiduciary duties), as applicable, to vote in such
manner as may be agreed by them or, in the absence of such agreement, in such
manner as would be most likely to continue the status quo. As a result of the
foregoing arrangements, International and US WEST will generally be able to
determine the outcome of any matter requiring approval of Telewest's
shareholders (other than matters which require approval by 75% of the
stockholders), including the election or removal of directors and the creation
and issuance of shares, and will have significant influence on decisions made by
Telewest's board of directors (including a veto right as to matters requiring
more than a 2/3 vote of the board). International and US WEST have agreed with
Telewest that, so long as they collectively beneficially own more than 50% or
individually own more than 30% of the outstanding Telewest ordinary shares, they
will use their respective best efforts to ensure that a majority of the
directors of Telewest are "independent" (within the meaning of the Listing Rules
of the London Stock Exchange) of International and US WEST. The Listing Rules of
the London Stock Exchange require that a majority of the directors of listed
companies be independent. International and US WEST have each also agreed to
subject transfers of their respective beneficial interests to a right of first
refusal by the other party; not to reduce their respective beneficial interests
in Telewest to 25% or less without the consent of the other party (except for
sales after November 1999 in the public market, subject to the right of first
refusal), and that in the event of a change of control of such party, the other
party will have the right to consent to such change or to require the initiation
of certain buy-sell procedures. International and US WEST have also agreed to
certain restrictions on their acquisition of additional equity interests in
Telewest other than pursuant to the exercise of preemptive rights or certain
options.
Telewest has been approached by NTL Inc., a cable operator that operates
primarily in the U.K., about a proposed combination of the two companies. There
can be no assurance that any agreement with respect to any transaction between
the companies will be reached.
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Cable and Satellite Programming Services. International and its
predecessors have been actively involved in the development of cable and
satellite programming in the U.K. since 1988, and International has created an
integrated programming enterprise through the operations of Flextech, a
36%-owned subsidiary at April 30, 1997 (such interest representing 50.0% of the
voting power of Flextech at that date). Flextech's ordinary shares trade on the
London Stock Exchange. Through its subsidiaries and affiliates, Flextech
creates, packages and markets entertainment and information programming for
distribution on cable television and DTH satellite systems throughout the U.K.
and, to a lesser extent, parts of continental Europe. Flextech also owns
interests in a terrestrial broadcast network and a production company. By
acquiring interests in and establishing alliances among providers of a variety
of entertainment programming, Flextech has been able to achieve significant
economies of scale and establish itself as a major low-cost provider of
television programming. At March 31, 1997, Flextech's ownership of programming
services included interests in the entities which operate the following
programming services (with its percentage interest set forth in parenthesis):
Bravo (100%); TCC (formerly The Children's Channel) (100%); Challenge TV (100%);
HSN Direct International(63%); Playboy TV (51%); Sell-A-Vision (50%); KinderNet
Channel (31%); UK Living (31%); European Business News (30%) and UK Gold (25%).
In April 1997, upon the consummation of certain transactions described below,
Flextech increased its interest in UK Living and UK Gold to 100% and 65%,
respectively. At March 31, 1997, Flextech had interests in 14 cable and
satellite channels of which 13 are distributed in the U.K. market.
In addition to managing its four wholly owned programming services,
Flextech provides management services to the BBC Joint Ventures and to Discovery
Channel Europe, Discovery Home & Leisure (formerly The Learning Channel), The
Parliamentary Channel, Playboy TV and Home Shopping Networks Direct (an indirect
49% interest in The Discovery Channel Europe and Discovery Home & Leisure is
attributed to the Liberty Media Group). Flextech receives for such services a
management fee and, in some cases, a percentage of the programming company's
gross revenue. Flextech received a total of L3.8 million in management fees in
1996 from its two management contracts with third parties unaffiliated with
Flextech -- Discovery Communications, Inc. and CPP1 Partnership (the entity
which owns Parliamentary Channel). The contract with Discovery Communications,
Inc. has a remaining term of 8 years and the contract with CPP1 Partnership must
be renewed annually.
In April 1997, Flextech (i) formed the BBC Joint Ventures with BBC
Worldwide and (ii) acquired all of the share capital in U.K. Living Limited
("UKLL") and U.K. Gold Television Limited ("UKGL") (the producers of UK Living
and UK Gold, respectively) not already owned by Flextech. One of the joint
ventures with BBC Worldwide (the "Principal Joint Venture") will operate and
launch a number of new subscription television channels for distribution in the
U.K. and Ireland. Flextech and BBC Worldwide each have a 50% interest in this
venture. The Principal Joint Venture has committed to the launch of at least
four new theme channels by September 30, 1998. The other joint venture (the
"Second Joint Venture") acquired 65% of the share capital of UKGL (following
Flextech's acquisition of all of the UKGL share capital), with put and call
arrangements over the remaining 35% of such share capital. The Second Joint
Venture will operate and develop UKGL, and both Flextech and BBC Worldwide have
a 50% interest in that venture. An affiliate of the British Broadcasting
Corporation ("BBC") will be responsible for the scheduling, programming and
presentation of the channels to be operated by the BBC Joint Ventures, while
Flextech will be responsible for providing distribution, airtime sales, off-air
marketing and management services to the two joint ventures. The BBC Joint
Ventures have entered into program license agreements with BBC pursuant to which
they are entitled to acquire licenses to broadcast programs originated by BBC
after their initial airing. The license agreements will have initial terms of 15
years, and will be extended automatically for an additional 15 years, unless
both Flextech and the BBC agree not to extend the term. A failure to extend
after the initial term will result in BBC Worldwide having the right to acquire
channel brands owned by the Principal Joint Venture for fair value.
Alternatively, Flextech may require that BBC Worldwide purchase its interest in
the Principal Joint Venture for fair value. The BBC Joint Ventures will not be
limited to BBC programming material.
Flextech has undertaken to finance the working capital requirements of the
Principal Joint Venture which financing comprises L22 million ($36 million) of
equity financing, a primary credit facility of up to L88 million ($144 million)
and, subject to certain restrictions, a standby credit facility of up to L30
million ($49 million). Flextech has also agreed to make available to the Second
Joint Venture, if required, funding of up to
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L10 million ($16 million). To support its funding obligations, Flextech has
obtained a revolving credit facility with current borrowing availability of up
to L85 million ($139 million), with a term of up to five years. International
has undertaken to fulfill Flextech's financial obligations to the Principal
Joint Venture in the event of Flextech's default. If International is required
to fulfill such financial obligations of Flextech, it will automatically acquire
Flextech's interest in the Principal Joint Venture for L1.00, subject to certain
"claw back" rights of Flextech. Subject to certain conditions and exceptions,
both International and TCI have agreed not to compete, and not to own more than
a 20% equity interest in any entity that competes, with the channels of the BBC
Joint Ventures.
Flextech acquired the share capital of UKGL and UKLL for shares of Flextech
stock. As a result of these issuances and the conversion of certain Flextech
convertible preference shares to ordinary shares upon consummation of the
formation of the BBC Joint Ventures, International's equity interest in Flextech
declined from approximately 46% to 36%. International's voting power would have
fallen below 50% as a result of these transactions; however, upon consummation
of the BBC Joint Ventures, International acquired a "special voting share" which
enabled International to maintain its voting power at 50%. The special voting
share, when combined with International's other share capital in Flextech, will
generally permit International to cast a number of votes equal to 50% of all
votes attributable to the outstanding share capital of Flextech at any meeting
of Flextech's stockholders. The special voting share, which does not participate
in dividends and has only a nominal liquidation preference, will terminate upon
the occurrence of the earliest of (i) April 14, 2000, (ii) any transfer of
Flextech shares by International outside a specified affiliated group or (iii)
International's interest in Flextech falling below 30%.
Flextech holds a 20% interest in Scottish Media Group plc ("SMG"), a
publicly traded company in the U.K. that is the terrestrial channel broadcast
licensee for Channel 3 in central Scotland. SMG's broadcast signal reaches
approximately 1.5 million U.K. homes. SMG's subsidiary, Scottish Television
Enterprises ("STE"), is a U.K. production company. In connection with the
acquisition of its interest in SMG, Flextech acquired the license rights to over
125 hours of drama and documentary features from SMG's program library. Flextech
also entered into a production output agreement with STE under which Flextech
has agreed to commission television programs from STE over a two year period,
subject to agreement on budgets and other items for each program. Flextech also
owns a 100% interest in Maidstone Studios, a production company which creates
and produces Challenge TV, among other programming, having acquired in April
1997 the 61% interest in Maidstone Studios not previously owned by it. Flextech
also has commitments to acquire distribution and exhibition rights for a variety
of programming under license agreements with Hallmark Entertainment, Inc.
("Hallmark Entertainment"), a subsidiary of Hallmark Cards Incorporated. The
rights are limited to the U.K. and certain other European markets and have a
term of ten years once the license period commences. Through March 31, 1997,
programming with an aggregate contractual value of L20 million ($33 million) had
been delivered to Flextech under the agreements with Hallmark Entertainment.
The ITC regulates programming in the U.K. through imposing obligations on
broadcast licensees with respect to the programming broadcast or otherwise
provided by them. Broadcast licensees are required to abide by certain codes and
directions issued by the ITC from time to time. These codes include the
Programme Code, the Code of Advertising Standards and Practice, Rules on
Advertising Breaks and the Code of Programme Sponsorship. The Broadcasting Act
of 1996 also restricts the extent to which certain sporting events of national
interest (designated by the Secretary of State for National Heritage as "listed
events") may be broadcast live on television on an exclusive basis within the
United Kingdom.
International currently has three appointees on Flextech's 13-member board
of directors. Flextech's Articles of Association provide that for so long as
International owns in excess of 50% of the voting power of Flextech or owns the
special voting share, (i) International will be entitled to appoint up to three
directors, and one of such directors must sit on each committee of the board and
(ii) International will have veto rights over the appointment of certain
officers of Flextech. If the voting power of International and its subsidiaries
in Flextech declines to between 25% and 50% of its outstanding share capital,
then International will be entitled to appoint up to two directors and if it
declines to between 5% and 25%, International will be entitled to appoint only
one director. The disposal by International of its interest in Flextech is
subject to certain tag-along rights of certain other Flextech shareholders and
in the event that either (i) Flextech shares cease to be traded on the London
Stock Exchange as a result of International's exercise of any rights as a
shareholder of
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Flextech or (ii) the aggregate amount of International and such other
shareholders' holdings in Flextech exceed 75% of Flextech's outstanding stock,
such shareholders can require International to purchase their interest in
Flextech at the higher of market value or the price paid to any third party by
International for Flextech shares in the preceding twelve months. The subsidiary
of International that holds the Flextech interest has agreed with Flextech that
so long as it owns at least 30% of Flextech's outstanding voting stock, Flextech
will have a right of first refusal with respect to all offers made to such
subsidiary relating to English language cable and satellite programming in the
United Kingdom and Europe.
CONTINENTAL EUROPE
Cable Television and Telephony. Through United International Investments
("UII"), a partnership between International and United and Phillips
Communications B.V. ("UPC"), International owns interests in Tevel, Princes and
Melita, operating companies that own cable systems in Israel, Ireland and Malta,
respectively. At March 31, 1997, International had a 50% interest in UII with
respect to UII's 47% ownership interest in Tevel, a 56% interest in UII with
respect to UII's 45% ownership interest in Princes and a 44% interest in UII
with respect to UII's 76% ownership interest in Melita. As of December 31, 1996,
these operating companies provided multi-channel service to a total of
approximately 405,000 basic subscribers in service areas consisting of
approximately 820,000 homes passed in the aggregate for the three countries.
Under the partnership agreement of UII, each of International and UPC has agreed
that, subject to certain exceptions, for so long as it remains a partner in the
partnership and for a period of three years thereafter, it will not participate
in any business that distributes television broadcast signals through cable or
other means, that provides certain programming services, or that otherwise
competes with an operating company of UII, in each case, in any country where an
operating company of UII does business without first offering the opportunity to
UII. International is also subject to certain transfer restrictions with respect
to its investment in UII.
International also has a 44% interest in BIP Poland which has either a
majority interest or is the controlling shareholder in four Polish cable
television operators serving an aggregate of approximately 283,000 basic
subscribers in Poland as of December 31, 1996, in service areas consisting of an
aggregate of 532,000 homes passed. BIP Poland also owns a 65% interest in
Telefonia Polska Zachod Sp. Zo.o. ("TPZS"), which has been granted two licenses
to provide commercial telephony services to two provinces in Poland with an
aggregate population of approximately 1,120,000. TPZS expects to begin providing
telephony services in such provinces in 1997. The BIP Poland partnership
agreement provides that most significant transactions require the approval of
each partner that has at least a 20% ownership interest. The term of the
partnership expires in 2020. International is currently in negotiations to swap
its 44% interest in BIP Poland with the parent company of the other partner in
BIP Poland for certain cash and other assets, including such entity's 20%
interest in Bresnan International Partners (Chile), L.P.
Programming. In late 1995, International and two of France's leading media
companies, Canal + S.A. ("Canal +") and Generale d'Images S.A. ("GDI"), formed
MultiThematiques, a Paris-based cable and satellite programming company. Each
company owns a one-third interest in MultiThematiques. MultiThematiques develops
thematic programming for distribution on cable television and DTH satellite
systems throughout continental Europe, and programming developed by
MultiThematiques may be used to support International's distribution interests
in other regions, particularly Japan and Latin America. As of March 31, 1997,
MultiThematiques offered six programming services which are distributed
throughout France (five channels) and Spain (one channel) by cable television
operators and DTH satellite providers and on June 21, 1997, MultiThematiques
launched four television channels in Germany. MultiThematiques has also secured
carriage on DTH satellite platforms in Italy and Scandinavia. In February 1997,
MultiThematiques announced that it had signed an agreement with International's
Japanese programming company, JPC, to create two thematic channels for cable and
satellite distribution in Japan. As of March 31, 1997, International had
contributed FF 328.1 million (approximately $64.6 million) to MultiThematiques
and agreed to contribute an additional FF 164.0 million (approximately $29.1
million) by no later than December 13, 1997. Canal+ and GDI contributed to
MultiThematiques their respective equity interests in an aggregate of five
programming services. Each of International, Canal+ and GDI have equal
representation on MultiThema-
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tiques' board of directors. International's interest in MultiThematiques is
subject to certain restrictions on dispositions. MultiThematiques represents
International's most significant effort to date to create programming designed
specifically for television audiences in continental Europe.
LATIN AMERICA AND THE CARIBBEAN
International currently operates in The Caribbean and Central and South
America (collectively referred to herein as Latin America) through its interests
in cable television and programming companies operating in Argentina, Chile,
Puerto Rico, Mexico, Brazil and the Dominican Republic, as described below.
Argentina. International's most significant operation in Latin America is
conducted through its 51% owned subsidiary, Cablevision S.A. (collectively with
certain affiliated companies, "Cablevision"), which it acquired in April 1995.
Cablevision is one of the three largest cable television operators in Argentina,
based on the number of basic subscribers it served at December 31, 1996, with
operations concentrated in the Federal District of Buenos Aires and the greater
Buenos Aires metropolitan area. As of December 31, 1996, Cablevision's
approximately 4,500 miles of cable plant passed approximately 1,534,000 homes
and provided cable television service to approximately 578,000 basic
subscribers.
International currently has the right to appoint a majority of
Cablevision's eight directors. All matters brought to the Cablevision board are
decided by the vote of a simple majority. International has an option to acquire
an additional 29-39% interest in Cablevision, exercisable at any time on or
before October 30, 1997. The purchase price contemplated by such option is
significant and International would need to arrange financing before this
transaction could be consummated. However, as part of a reevaluation of its
global strategy, International has been considering various ways to monetize a
portion of its investment in Cablevision. International has entered into a
non-binding letter of intent (the "Term Sheet") with CEI Citicorp Holdings SA
("CEI"), an Argentine media and telecommunications group that is 40% owned by
Citicorp's Citibank unit. The Term Sheet contemplates the sale by International
of one-half of its current 51% interest to CEI for cash. International would
continue to have the right to manage Cablevision (pursuant to a five year
management contract that would be entered into in connection with such sale),
and all material corporate transactions would require International's approval,
so long as International maintained its percentage interest in Cablevision at a
certain level yet to be agreed. In addition, International and its affiliates
would be assured carriage for any programming channels that they might create,
represent or otherwise distribute. CEI would also purchase the additional 39%
interest in Cablevision that International currently has the right to acquire,
thereby obtaining a substantial majority interest in Cablevision. There can be
no assurance that the transactions contemplated by the Term Sheet will be
consummated.
Cable television and broadcast companies in Argentina are required to
obtain a non-exclusive broadcast license from the Comite Federal de
Radiodifusion ("COMFER"). Since the Argentine government does not grant
exclusive broadcast licenses to cable operators, Cablevision competes, in
certain areas of Buenos Aires, with other cable operators. A license is granted
for a 15-year term and the licensee has the right to a 10-year extension at the
end of the initial term. Cablevision's broadcast licenses have remaining terms
of 11 to 22 years (inclusive of the 10-year extension period). Licenses may be
revoked for breach of regulations pertaining to broadcast licenses, or if such
revocation would be in the "public interest." There is no regulation of cable
subscription rates in Argentina. Although Argentine regulations do not currently
permit cable operators to offer voice telephony services, the exclusive licenses
granted to two Argentine public telephone companies to provide telephony service
in Argentina are scheduled to expire in 1997, but may be extended for an
additional three-year period if the licensees have met certain requirements. No
assurance can be given, however, that cable operators in Argentina will be
permitted to offer telephony services in 1997, in 2000 or at any other time in
the future. The two public telephone companies are not permitted to provide
cable television service on a commercial basis over their networks while their
licenses are exclusive. Delivery of telephony services by Cablevision would
require upgrading portions of its cable system. New construction by Cablevision,
however, is expected to consist of the installation of a fiber backbone and high
capacity coaxial cable which will permit the delivery of voice telephony
services in the future.
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The multi-channel television industry in Argentina is extremely
competitive. Cablevision decreased its rates in 1996 in response to increased
competition. If and when Cablevision provides telephony over its broadband
network, it will compete with the existing public telephone companies and
possibly other cable operators.
Chile. International owns an indirect 40% interest in Cordillera
Communicaciones, Limitada ("Cordillera"), through its 80% interest in Bresnan
International Partners (Chile), L.P. ("BIP-Chile") and BIP-Chile's 50% interest
in Cordillera. Cordillera was Chile's largest cable television company, based on
its number of basic subscribers, at the time International acquired its indirect
interest therein. On February 7, 1996, Cordillera and Compania de
Telecomunicaciones de Chile S.A. ("CTC") (a subsidiary of the Spanish telephone
company Telefonica de Espana S.A.) entered into agreements (the "Chile
Restructuring Agreements") that resulted in, among other things, the
contribution of substantially all of the cable distribution assets and the
associated cable subscribers within each party's cable systems (the "Contributed
Systems") to Metropolis-Intercom S.A. ("Metropolis-Intercom"), a recently formed
Chilean corporation. Cordillera owns 60% of the voting securities of
Metropolis-Intercom while CTC and two other corporations own, in the aggregate,
the remaining 40% of the voting securities of Metropolis-Intercom. Under the
Chile Restructuring Agreements, the cable distribution assets (excluding
headends) contributed by Cordillera were sold to CTC, and CTC entered into a
long-term lease agreement with Metropolis-Intercom (expiring in 2026, with an
option to renew) for use of CTC's cable plant. CTC services
Metropolis-Intercom's analog channels (or their equivalent) and provides
technical support to Metropolis-Intercom. International, BIP-Chile and
Cordillera have each agreed not to compete with Metropolis-Intercom and not to
pursue telephony opportunities in Chile; and CTC has agreed to refrain from
pursuing cable-related opportunities in Chile (other than through
Metropolis-Intercom). BIP-Chile and its partner in Cordillera each designate
one-half of the managers of Cordillera and all actions by such managers require
the consent of representatives of each partner. Certain transactions require the
approval of both partners. Six of the ten members of the board of directors of
Metropolis-Intercom are designated by Cordillera. All material matters require
the affirmative vote of the representatives of both CTC and Cordillera.
International is currently in negotiations to swap its 44% interest in BIP
Poland with the parent company of the other partner in BIP Poland for certain
cash and other assets, including such entity's 20% interest in BIP-Chile, which
would give International an indirect 50% interest in Cordillera. There can be no
assurance that this transaction will be consummated.
Metropolis-Intercom operates the Contributed Systems and is one of Chile's
largest cable operators based on its 217,000 basic subscribers at December 31,
1996, operating cable systems in six of the most densely populated cities within
Chile. At December 31, 1996, Metropolis-Intercom's network covered approximately
5,000 miles and passed an aggregate of approximately 900,000 homes. The present
cable plant is composed of fiber and coaxial cable.
Cable television companies in Chile are required to obtain a broadcast
license to provide cable service. Only non-exclusive franchises are granted in
Chile. Consequently, competition in the more populated regions of Chile is
intense. A portion of Metropolis-Intercom's customer base is passed by at least
one other cable operator, in addition to the local telephone company. Telephone
companies in Chile are permitted to offer cable television services over their
own networks or the networks of cable operators that they acquire.
The Caribbean. In Puerto Rico, as of June 30, 1997, a wholly owned
subsidiary of International owned 100% of and operated 41 cable franchises. As
of December 31, 1996, such franchises in Puerto Rico passed approximately
255,000 homes and served approximately 101,000 basic subscribers.
In the Dominican Republic, International owns a 49% interest in TeleCable
Nacional, CXA ("TeleCable Nacional"), that country's largest cable operator
based on the number of its subscribers at December 31, 1996. On that date,
TeleCable Nacional passed approximately 65,000 homes and served approximately
32,000 basic subscribers. TeleCable Nacional has received a license to provide
telephony services over its cable network in the Dominican Republic. The
delivery of such services would require certain upgrades to TeleCable Nacional's
cable network, and TeleCable Nacional has not yet determined whether it will
seek to offer such services. International has the right to appoint half of the
directors and officers of TeleCable
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Nacional. The affirmative vote of 75% of the members of the board of directors
is required to take any action requiring board approval.
Strategic Ventures. International, along with News Corp. and two of Latin
America's leading media companies, Globo Comunicacoes e Participacoes Ltda. and
Grupo Televisa, S.A., intend to form strategic partnerships for the development
and operation of a DTH satellite service for Brazil, Mexico, and various other
Latin American countries (collectively, the "DTH Ventures"). International
anticipates that it will own a 10% interest in the DTH Ventures. The DTH
Ventures launched (i) a Brazilian platform, NetSat, in October 1996 providing 40
digital satellite channels throughout Brazil and (ii) a Mexican platform,
Innova, in December 1996 providing 64 digital satellite channels throughout
Mexico. The final platform, Multi-Country, will be launched in 1997 and will
provide DTH satellite services to various other Latin American countries.
Through March 31, 1997, International had contributed $18.0 million to the DTH
Ventures. It is anticipated that International could be required to make cash
contributions totaling $45.8 million over the next three years in connection
with the DTH Ventures.
International, Liberty and News Corp. have formed a joint venture, which
includes a number of partnerships and other entities under common ownership (the
"Sports Venture"), to operate currently existing sports services in Latin
America and Australia and a variety of new sports services throughout the world,
excluding the United States, Canada and certain other defined geographic areas
(collectively, the "International Sports Territory"). News Corp. owns a 50%
interest in the Sports Venture with the remaining 50% owned by Liberty/TINTA
LLC, a limited liability company owned in equal parts by subsidiaries of
International and Liberty (the "LLC"). (As described in "MANAGEMENT AND
ALLOCATION POLICIES," an International Programming Opportunity in respect of
foreign sports programming may be pursued by TCI through either International or
the Liberty Media Group.) News Corp. is entitled to nominate the principal
officers of the Sports Venture, who are subject to approval by the LLC. All
matters not in the ordinary course of the business of the Sports Venture are to
be determined by the unanimous vote of the partners. Prior to November 1, 2000,
News Corp. and the LLC cannot transfer their interests in the Sports Venture
other than to certain of their respective affiliates. Thereafter, any transfer
to a non-affiliate is subject to a right of first refusal in favor of the
non-transferring partner. In addition, each of News Corp., Liberty and
International has agreed that the Sports Venture will be the exclusive vehicle
through which they will engage in international sports programming businesses in
the International Sports Territory, subject to certain exceptions. As of March
31, 1997, International had contributed to the LLC $56.3 million in cash and its
35% equity interest in Torneos y Competencias S.A. ("Torneos"), an Argentinean
sports programming production company, and Liberty had contributed to the LLC
its interests in Latin American and Australian sports programming services and
its rights under various television sports programming agreements. The LLC
contributed the non-cash assets contributed to it by International and Liberty
to the Sports Venture. News Corp. contributed various international sports
rights and certain trademark rights in exchange for its 50% interest in the
Sports Venture. As of March 31, 1997, International anticipates making
additional cash contributions totaling $29 million to the LLC to fund the
operations of the Sports Venture over the next three years.
In April 1996, International, Torneos and certain stockholders of Torneos
entered into an agreement whereby International agreed to make minimum periodic
payments from 1996 through 2004 aggregating $235.2 million to acquire certain
rights and considerations, including the exploitation rights to all sports
rights owned by Torneos with the exception of any rights which at that time had
been contractually committed to any third party. In particular, International
acquired worldwide distribution rights outside of Argentina for Clasico del
Domingo and worldwide distribution rights (excluding Buenos Aires) for Futbol de
Primera and Torneos de Verano (Summer Games). The rights and obligations under
this agreement were assumed by the Sports Venture.
ASIA
International's presence in Asia currently consists of its interests in
cable and programming companies in Japan and Singapore. International and its
predecessors have been exploring opportunities in Japan since 1992. Management
of International believes that the Japanese market offers opportunities to adapt
elements of the strategy, which has been implemented by International through
its subsidiaries and affiliates in the
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U.K., of building an integrated group of (i) broadband cable networks capable of
delivering both cable television services and cable telephony and (ii) thematic
cable and satellite channels, specifically targeted at the particular nation's
cable subscribers, supported by a multi-channel programming management company.
Cable and Telephony Distribution in Japan. At the beginning of 1995,
International and Sumitomo Corporation ("Sumitomo") formed Jupiter. At the time
of its formation, Jupiter was the first multiple cable system operator ("MSO")
in Japan. International owns 40% and Sumitomo owns the remaining 60% of Jupiter.
As of December 31, 1996, Jupiter had ownership interests in 20 companies that
own franchises clustered in three main areas: Tokyo, Osaka and Kyushu, and
Jupiter operated and managed 18 of the 20 companies. At December 31, 1996,
Jupiter's franchises covered approximately 3,103,000 franchise homes, its cable
plant passed approximately 1,309,000 homes, and it served approximately 134,000
basic cable subscribers.
Personnel seconded by International to Jupiter have been working with
Sumitomo's secondees and Jupiter's staff to: (i) train Jupiter's management team
in MSO management and operational practices, (ii) continue to develop a business
plan to, among other things, determine the likely costs and revenue associated
with the provision of cable telephony and determine targeted cable penetration
levels and (iii) continue to plan and implement a strategy to increase the
number of Jupiter's operating systems through acquisitions and the development
of new systems in areas for which franchises are granted to Jupiter.
As of March 31, 1997, International had contributed Y7.4 billion ($71.3
million) and Sumitomo had contributed Y11.1 billion ($106.9 million) to Jupiter.
In connection with the formation of Jupiter and Sumitomo's transfer of its cable
systems interests to Jupiter, International agreed to pay Sumitomo Y200 million
($1.6 million), which payment was made on March 31, 1997. As a result of a
number of developments that management of International believes are favorable
to Jupiter, International and Sumitomo are in the process of revising its
original business plan to increase the rate at which Jupiter would acquire
additional franchises and develop its network. In addition, Jupiter began
providing telephony services over its cable system on a commercial basis in its
Suginami franchise on July 1, 1997. Management of International estimates that
if Jupiter's business plan is accelerated in the manner currently under
discussion, Jupiter will require additional funding over the commitments of
International and Sumitomo provided for in Jupiter's original business plan,
which additional funding may be significant. No assurance can be given that
Jupiter's business plan will be revised as currently proposed, or at all.
The cable plant of each of Jupiter's cable systems, other than the Suginami
system, consists primarily of coaxial cable. The architecture of the Suginami
system, which includes a fiber optic backbone or "trunk," has been designed to
be state-of-the-art, with the specific goal of being telephone capable. To the
extent economically feasible, Jupiter intends to expand its cable networks, and
rebuild its existing cable systems, with the same network architecture as that
which currently exists in its Suginami system.
Sumitomo appoints a majority of the members of Jupiter's board of
directors; however, for so long as International owns directly or indirectly at
least 30% of Jupiter's shares, certain extraordinary actions require the consent
of International's director designees. Pursuant to a shareholders agreement,
subject to certain exceptions, neither Sumitomo nor International may transfer
its interest in Jupiter prior to March 31, 2000, at which time either party may
transfer shares to a publicly-quoted third party, subject to a right of first
offer to the other party. In addition, Sumitomo and International have agreed
not to invest in, or otherwise participate to the extent of 10% or more of the
equity of, any cable television or telephony business in Japan without first
offering such opportunity to Jupiter.
Programming in Japan. In February 1996, International and Sumitomo formed
JPC, Japan's first multichannel programming company. JPC is owned equally
(50/50) by International and Sumitomo. At March 31, 1997, each of International
and Sumitomo had made aggregate contributions to JPC of Y1.4 billion ($13.4
million). Additionally, International and Sumitomo contributed their respective
18% and 82% ownership interests in Cable Soft Network to JPC. International made
an equalizing payment of Y444 million ($4.0 million) in connection with such
contribution. As of December 31, 1996, JPC had ownership interests in and
management control of three other channels in addition to Cable Soft Network. In
addition to the above channels, JPC expects to launch at least four new channels
in 1997 (including two thematic channels being
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created with MultiThematiques) and on February 18, 1997, JPC announced its
acquisition of the distribution rights for all of Japan's premier soccer league
matches.
Government Regulation in Japan. Cable television franchise licenses are
granted by the Ministry of Post and Telecommunications (the "MPT"). The MPT
generally only grants one franchise license per franchise area; however, it has
the authority to issue multiple franchise licenses in a franchise area.
Franchise licenses are generally indefinite in duration, and no royalties are
payable to the Japanese government. Cable companies may apply to the MPT for a
"Type 1 Carrier" License, which permits carriage of telephony services on a
commercial basis over their cable networks.
The Japanese government does not generally regulate the amount of foreign
programming that may be shown on Japanese television. Foreign ownership of
broadcast and DBS program services is restricted, while ownership of
cable-exclusive program services is not.
Japan currently allows foreign ownership of up to a maximum 33-1/3% of a
Japanese company that provides direct cable television or telephony services.
(International can own a 40% interest in Jupiter due to the presence of minority
third party investors in many of Jupiter's cable systems.) In 1996, the Japanese
government announced its intention of more fully deregulating foreign ownership
restrictions over time.
Other Asian Programming. International has a 49% interest in ABN, a joint
venture of which Dow Jones Broadcasting (Asia), Inc. ("Dow Jones") is the other
major shareholder (49%). The first dedicated financial business news channel to
launch in Asia, ABN is targeted at affluent business people across the Asian
region, many of whom use English as a common language in business. ABN, whose
presenters are all from the Asian region, broadcasts primarily in English but
also features a daily half-hour of original Mandarin-language programming. As of
December 31, 1996, ABN's programming was available to approximately 53 million
homes across Southeast Asia, China and parts of India. International and Dow
Jones have exercised an option to purchase an equal part of the remaining
interest from the ABN minority shareholders which would give each of
International and Dow Jones a 50% interest in ABN. This transaction is expected
to close in 1997, but the parties are currently in negotiations over the
purchase price for the remaining interest and thus there is no assurance that
such acquisition will be consummated. International is also in discussions
regarding a proposed sale of its interest in ABN to Dow Jones and a third party.
There can be no assurance that such sale will be consummated.
As part of the formation of the Sports Venture, the LLC is entitled to
receive from News Corp. 7.5% of the outstanding stock of STAR Television
Limited, which operates a satellite-delivered television platform in Asia. Upon
delivery of such stock, News Corp. is entitled to receive from the LLC up to
$20.0 million and rights under various Asian sports programming agreements.
AUSTRALIA AND NEW ZEALAND
International owns a 17% interest in Premium Movie Partnership ("PMP"), a
partnership with Australis Movies Pty Limited and four movie studios formed to
provide two movie channels, Showtime and Encore, for the Australian market.
Although these services carry the same name as the services in the U.S., their
programming is unique. Each of the partners in PMP holds an approximate 17%
interest in the partnership and each has mandatory capital commitments to PMP of
approximately $3.3 million. As of March 31, 1997, International had funded
approximately $2.1 million of its capital commitment. The Company has also
provided financial guarantees in the amount of $55 million at March 31, 1997 to
the movie studios for the payment by PMP of studio license fees. PMP's movie
channels were launched on March 3, 1995 and served approximately 365,000
subscribers as of March 31, 1997. No partner may transfer an interest in PMP
prior to July 1, 2000, other than to an affiliate of such partner, without the
unanimous consent of the partners committee which exercises general management
control of PMP.
In New Zealand, International indirectly owns a 13% interest in Sky
Network, which owns an encrypted UHF pay television service that, as of December
31, 1996, offered five programming services to approximately 260,000 subscribers
in New Zealand. International's indirect interest in Sky Network is held through
its 25.5% interest in HKP Partners of New Zealand, a New Zealand general
partnership among International,
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Ameritech International, Inc., Time Warner Entertainment Company, L.P., and Bell
Atlantic International, Inc. HKP has a management committee in which decisions
are made by the affirmative vote of representatives of partners that
collectively own greater than 74% of HKP except that certain extraordinary
actions require unanimous consent. International's interest in HKP is subject to
certain transfer restrictions and restrictions on its ability to make
investments in other pay television or broadcasting services in New Zealand. The
partners of HKP, including International, are currently in discussions with
regard to a proposed sale of their interests in HKP to a third party. There can
be no assurance that such sale will be consummated.
COMPETITION
Cable and other Multi-Channel Television. The various cable operators in
which International has interests directly compete for customers and advertisers
in local markets with other providers of entertainment, news and information.
Their competitors include broadcast television and radio, newspapers, magazines
and other printed material, motion picture theaters, video cassette rental
stores and other sources of entertainment and information. Such cable operators
also compete with companies who use alternative methods of distributing the same
or similar video programming offered by cable television systems such as
terrestrial (over the air) broadcast stations, MMDS, DTH satellite services,
SMATV and in some instances, digital terrestrial services and certain narrowband
providers. The most significant competition for cable operators, including
Telewest, in the U.K. multi-channel television market currently comes from
providers of DTH satellite television services and, in particular, BSkyB. DTH
satellite services are widely available in the U.K. and are increasing in
popularity there. In those countries where, by regulation or policy, cable
operators do not have an exclusive franchise, International's cable operators
compete with other cable operators, and if permitted by regulation or policy,
with telephone companies providing video services in their franchises. The
extent of competition with the services provided by International's cable
subsidiaries or affiliates in any particular market depends, among other
factors, on price (including up-front and service costs), the amount and quality
of the programming offered, customer satisfaction and quality of the system
network. The full extent to which other media or home delivery services will
compete with cable television systems may not be known for some time and there
can be no assurance that existing, proposed or as yet undeveloped technologies
will not become dominant in the future. International also competes with similar
operators of broadband distribution networks for franchises, the acquisition of
existing cable operators and financing.
Cable television has a limited operating history in many regions of the
world outside the United States. Although International operates cable systems
in markets where it believes there is consumer demand for multi-channel
television services, International is unable to predict with certainty how
consumer demand for the services provided by its cable television subsidiaries
and affiliates will develop over time. International's prospects depend in large
part on the development of consumer preference for cable television over other
in-home entertainment alternatives in the markets where International competes.
Certain of International's cable systems, particularly in the United Kingdom,
have experienced significant churn in their franchise areas. There can be no
assurance that churn rates will decrease over time, or that International's
cable systems will not experience higher churn rates in the future. Higher
levels of churn could have a material adverse effect on International.
Cable Telephony. The Company believes that it is preferable for
International's cable subsidiaries and affiliates to offer a wide range of cable
services, including telephony services where permitted under the applicable
statutory and regulatory framework and where business conditions permit.
Currently the U. K. and Japan are the only countries in which International is
providing both television and telephony services to subscribers through the
broadband distribution networks of its cable subsidiaries and affiliates. In the
U.K., such services are being provided through Telewest. In Japan, Jupiter
commenced offering telephony services commercially in July 1997 in its Suginami
franchise. Although no assurances can be given, International anticipates that
legal restrictions on the provision of telephony services by its cable
subsidiaries and affiliates in certain other countries will be relaxed or
eliminated over the next few years. In markets in which International is allowed
to offer cable telephony services, the primary competitor is the national public
telephone company. International believes that the established PTOs generally
benefit from their long-standing relationships with customers, substantial
technical and financial resources and established ubiquitous networks. The
success of
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the telephony operations of a cable operator is dependent upon its ability to
convince longtime customers of the national public telephone providers to switch
to its telephony network. Telewest and Jupiter are both relatively new entrants
to the telephony business, and have sought to compete with the more well
established telephone operators by pricing cable telephony call charges below
those of the established telephone operators. In both the U.K. and Japan, the
ability of the established PTOs to respond to such price competition has been
restricted by their license obligation not to show undue preference to or unduly
discriminate against different classes of customers and to offer uniform rates
nationally. There can be no assurance that either Telewest or Jupiter will be
able to continue to price their telephony services below those charged by the
national public telephone providers, or that future price reductions will not
adversely impact the profitability of such companies' telephony operations.
The ability to provide viable cable telephony services is also dependent on
the ability of International's cable subsidiaries and affiliates to interconnect
with the local telephony network of the public telephone company in order to
complete calls that originate from a customer on the cable network of such
subsidiary or affiliate but terminate off its network, or that originate from a
caller off its cable network and terminate on its network. Regulations in the
U.K. provide a unique means by which disputes over pricing and other terms of
interconnection can be determined by a government representative. In Japan,
under interim rules the national public telephone provider currently is required
to enter into interconnection agreements. There can be no assurance that similar
rights will be afforded to cable operators in other countries that eventually
permit the delivery of cable telephony services. The inability to obtain
interconnection at reasonable rates could prevent International's subsidiaries
or affiliates from offering telephony services at competitive rates. No
assurance can be given that International's experience with offering telephony
services in the United Kingdom can or will be replicated in Japan or in any of
the other countries in which International's subsidiaries and affiliates
eventually provide telephony services.
Programming. The business of distributing programming for cable television
is highly competitive. International's Programming Companies directly compete
with other programming services for distribution on a limited number of cable
television channels and, when distribution is obtained, the programming offered
by the Programming Companies competes, in varying degrees, for viewers and
advertisers with other cable programming services and off-air broadcast
television programming services, as well as with other entertainment media
described above under " -- Competition -- Cable and other Multi-Channel
Television." The Company believes that important competitive factors include the
prices charged for programming, the quantity, quality and variety of the
programming offered and effectiveness of marketing efforts. With the advent of
new compression technologies, which are intended to increase channel capacity,
competition for channel capacity may substantially decrease, although additional
competitors may have the opportunity to enter the marketplace. No predictions
can be made with respect to the viability of these technologies or the extent to
which they will ultimately impact the availability of new channels. In addition
to competition for cable distributors, viewers and advertisers, the Programming
Companies also compete, to varying degrees, for product with other programming
companies that distribute similar types of programs, many of which have greater
financial resources than International and its Programming Companies.
ADDITIONAL INFORMATION
Each of International and Telewest is subject to the information
requirements of the Exchange Act, and, in accordance therewith, files reports
and other information with the SEC (under SEC file numbers 0-26264 and 0-26840,
respectively), all of which are available from the SEC in the manner described
above under "AVAILABLE INFORMATION." The TINTA Series A Common Stock is traded
in the National Market tier of The Nasdaq Stock Market under the symbol "TINTA".
Information contained herein regarding Telewest is based upon, and is qualified
in its entirety by reference to, information contained in such filings and other
publicly available information. Although believed by TCI to be reliable, there
can be no assurance as to the accuracy of such information.
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DOMESTIC TELEPHONY
OVERVIEW
The TCI Ventures Group's telephony assets consist primarily of (a) TCI's
investments, held through TCI Telephony, in the PCS Ventures, a series of
partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband PCS, to
residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.), and in Teleport,
which is a CLEC and (b) WTCI, a wholly owned subsidiary of the Company that
provides long distance transport of video, voice and data traffic and other
telecommunications services on a wholesale basis in a 12 state region. The PCS
Ventures include the Sprint PCS Partnerships and PhillieCo. The Sprint PCS
Partners are subsidiaries of the Sprint PCS Parents. The partners of PhillieCo
are subsidiaries of Sprint, Cox and the Company. Through TCI Telephony, the
Company has a 30% interest as a partner in each of the Sprint PCS Partnerships
and a 35% interest as a partner in PhillieCo. As of March 31, 1997, the Company,
through TCI Telephony, had a 30% equity interest (representing a 37% voting
interest) in the outstanding common stock of TCG.
In addition, the TCI Ventures Group has been attributed a 50% partnership
interest in Kansas City Fiber Network and a 40% partnership interest in NHT
Partnership, each owned through TCI Telephony, and an approximate 79% interest
in New Jersey Fiber Technologies, L.P., and a 43% interest in Louisville
Lightwave, each owned through members of the TCI Group. The foregoing companies
are CAPs serving the metropolitan areas of Kansas City, Buffalo, Morristown and
New Brunswick, New Jersey, and Louisville and Lexington, Kentucky, respectively.
The other 50% interest in Kansas City Fiber Network is owned by Kansas City
Cable Partners, a partnership that owns and operates cable systems in the Kansas
City area, in which the TCI Group holds a 50% interest. TCI's indirect interest
in Louisville Lightwave will increase to 50% upon the closing of its acquisition
of the balance of the other partner's interest in TCI-TKR of Kentucky, Inc.,
which owns, among other assets, the interest in Louisville Lightwave. TCI is
negotiating to sell its interests in all of these CAP partnerships for cash.
There can be no assurance that any such sale will occur on terms satisfactory to
TCI, or at all; however, if a sale is consummated, the proceeds will be
attributed to the TCI Ventures Group. The Company's ownership of shares of the
common stock of General Communication, Inc., a diversified telecommunications
provider with a leading position in facilities based long-distance service in
the state of Alaska using fiber optic, digital microwave, PCS and satellite
transmission, had also been attributed to the TCI Ventures Group. The Company
sold its entire interest in GCI on August 1, 1997 for aggregate proceeds of
approximately $4 million, all of which are attributed to the TCI Ventures Group.
SPRINT PCS
General. Sprint PCS has announced its intention to become a leading
provider of wireless communications products and services in the United States.
Sprint PCS believes that it is the largest broadband wireless PCS company in the
United States in terms of total license coverage of "Pops," with licenses
(including those owned by licensees that have affiliated or intend to affiliate
with Sprint PCS, including PhillieCo) to provide service in 33 MTAs (including
eight of the nation's ten largest MTAs) covering over 190 million Pops at
December 31, 1996. The term "Pops" refers to the population of a geographic area
covered by a license or group of licenses and, as used in this Offering
Circular, is based on the Donnelley Marketing Service estimate of the December
31, 1995 population of a geographic area.
Broadband PCS systems differ from traditional analog cellular telephone
service principally in that PCS systems operate at a higher frequency band
(1850-1900 MHz radio spectrum), have more spectrum allotted and have different
license areas. Sprint PCS was the successful bidder for 29 PCS licenses in the A
Block and B Block PCS auction conducted by the FCC which concluded in March
1995. Additionally, on February 6, 1997, Cox contributed to Sprint PCS a PCS
license for the Omaha MTA that Cox separately purchased in the same PCS auction.
Sprint PCS's 30 wholly owned markets include, among others, the New York City,
San Francisco, Detroit, Dallas/Fort Worth and Boston/Providence MTAs, and cover
152 million Pops. 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 the Sprint PCS Partners
have an interest. Each
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affiliated PCS service provider will be included in Sprint PCS's national
network and will use the Sprint brand name pursuant to affiliation agreements.
Any reference herein to an "affiliation" with, or "affiliate" of, Sprint PCS
does not necessarily imply that Sprint PCS exercises or has the power to
exercise control over the management and policies of such entity.
The table below presents the owned and affiliated Pops of Sprint PCS as of
March 31, 1997:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT NET POPS
1995 OWNERSHIP ATTRIBUTED TO
POPULATION INTEREST TCI
IN ATTRIBUTED VENTURES
# OF MTA(S) TO TCI VENTURES GROUP(2)
OWNED/AFFILIATED (1) MTAS (MILLIONS) GROUP (MILLIONS)
-------------------- ---- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Owned by Sprint PCS................................ 30 152 30% 45.6
Affiliated:
APC (Baltimore/
Washington)(3)................................ 1 8.3 15% 1.2
Cox PCS (Los Angeles/San Diego)(4)............... 1 21.5 15% 3.2
PhillieCo (Philadelphia)(5)...................... 1 9.1 35% 3.2
-- ----- ----
Total......................................... 33 190.9 53.2
== ===== ====
</TABLE>
- ---------------
(1) Does not give effect to the purchase of any 10 MHz BTA PCS licenses by an
affiliate of Sprint in the D and E Block auctions which were granted to such
affiliate in April 1997. Sprint PCS has not yet entered into an affiliation
agreement with such affiliate, and no assurance can be given that such an
agreement will be entered into.
(2) Represents aggregate Pops covered by the PCS licenses held by the applicable
PCS licensee multiplied by the direct or indirect percentage equity interest
in such licensee attributed to the TCI Ventures Group. Such number is not
necessarily indicative of the number of Pops that are or will be served by
the applicable licensee's PCS network in such license area or the actual or
expected number of customers using such PCS network. In addition, the number
of Pops attributed to the TCI Ventures Group is not intended to imply that
TCI has any actual ownership interest in or right to acquire such an
interest in, or other rights with respect to, such Pops or the applicable
PCS license(s), including upon liquidation or dissolution of the applicable
PCS licensee.
(3) Sprint PCS owns a 49% limited partnership interest in APC, which indirectly
owns a PCS license for and operates a broadband PCS system in the
Baltimore/Washington D.C. MTA and has entered into an affiliation agreement
with Sprint PCS.
(4) Sprint PCS owns a 49% limited partnership interest in Cox PCS which was
formed to hold a PCS license for and operates a broadband PCS system in the
Los Angeles/San Diego MTA and has entered into an affiliation agreement with
Sprint PCS.
(5) Owned by subsidiaries of Sprint, TCI and Cox. Sprint PCS expects to sign a
services and affiliation agreement with PhillieCo.
Pursuant to an agreement among the Sprint PCS Partners, SprintCom, Inc., an
affiliate of Sprint, participated in the D and E Block PCS auctions conducted by
the FCC for additional 10 MHz Basic Trading Area ("BTA") PCS licenses, which
auctions concluded in January 1997. On April 28, 1997, the FCC granted
SprintCom, Inc. D and E block licenses for 139 BTAs covering an aggregate of
approximately 70 million additional Pops, none of which BTAs are within any of
the MTAs represented by the PCS licenses held by Sprint PCS, Cox PCS, APC or
PhillieCo. In accordance with such agreement and the Sprint PCS Partnership
Agreement, Sprint is required to offer to enter into an affiliation agreement
with Sprint PCS with respect to such BTA licenses pursuant to which Sprint's PCS
systems in such areas would be included in Sprint PCS's national PCS network. If
such an affiliation agreement were entered into, Sprint PCS, together with
SprintCom, Inc. and the other PCS licensees that have affiliated (or, in the
case of PhillieCo, are expected to affiliate) with Sprint PCS, would have
licenses to provide service to nearly 260 million Pops in all 50 states,
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Puerto Rico and the U.S. Virgin Islands. No assurance can be given, however,
that Sprint and Sprint PCS will be able to reach a mutually acceptable agreement
as to the terms of any such affiliation agreement. Sprint PCS has been engaged
in the build-out of the network infrastructure for SprintCom, Inc. in certain
BTA markets pursuant to interim authorizations of the Sprint PCS Partnership
Board and is compensated on a direct and allocated cost basis. TCI is also
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 TCI will acquire
such interest or that such partnership will enter into an affiliation agreement
with Sprint PCS.
APC launched its PCS service in November 1995 in the Baltimore/Washington
MTA and was the nation's first commercially operational PCS system. Cox PCS
initiated the commercial launch of its PCS service in San Diego in December 1996
and in Orange County in May 1997. PhillieCo launched PCS service in
Philadelphia, PA in April 1997. Sprint PCS commenced initial commercial PCS
operations late in the fourth quarter of 1996. As of July 15, 1997, Sprint PCS
had launched service in over 50 cities in the U.S., including Dallas/Fort Worth,
Austin and San Antonio, TX; Oklahoma City and Tulsa, OK; New Orleans, LA;
Toledo, OH; Little Rock, AR; Fresno and Sacramento, CA; Milwaukee, WI; Portland,
OR; New York City, Albany, Rochester, Buffalo and Syracuse, NY; Pittsburgh, PA;
Spokane, WA; Salt Lake City, UT; Des Moines, IA; Wichita, KS; Louisville, KY;
Denver and Boulder, CO; Lincoln and Omaha, NE; Nashville, TN; Indianapolis, IN;
Phoenix and Tucson, AZ; Birmingham, AL; Minneapolis, MN; Miami, FL; and Kansas
City and St. Louis, MO. Additional markets, including San Francisco, Boston, and
Seattle, will be launched on a market-by-market basis during the remainder of
1997 and thereafter. Upon completion of the first phase of its PCS launch, which
management of Sprint PCS expects to be completed by the end of 1997, Sprint PCS
service will be available in 65 cities in the U.S., including 35 of the top 50
U.S. markets. Thereafter, Sprint PCS will evaluate further coverage expansion on
a market-by-market basis, taking into account, among other things, population
and traffic density, FCC coverage requirements and the ability to cluster groups
of markets. The timing of launch in individual markets will be determined by
various factors, principally zoning and relocation of incumbent microwave
facilities operating at the same frequency as Sprint PCS, equipment delivery
schedules, completion of network testing and optimization and local market and
competitive considerations. Zoning restrictions have resulted in delays in the
launch of Sprint PCS's service in several of its markets. Sprint PCS is in the
development stage and has minimal revenue from operations.
Sprint PCS will require significant funds for development, construction,
testing and deployment of its PCS network. To date, total financing commitments
made to Sprint PCS are approximately $10 billion. The Sprint PCS Partners have
agreed to contribute up to an aggregate of $4.2 billion of equity to Sprint PCS
from inception through fiscal 1999 (of which approximately $3.0 billion had been
contributed as of March 31, 1997) if and to the extent required by the annual
budgets of Sprint PCS for fiscal years in such period approved by the Sprint PCS
Partners or requested during such period by the affirmative vote of general
partners with percentage interests in Sprint PCS of 75% or more in the
aggregate. The Company currently expects that the remaining approximately $1.2
billion of equity contributions by the Sprint PCS Partners will be made by the
end of the first quarter of 1998 (although there can be no assurance that any
additional capital will be contributed by the Sprint PCS Partners). As of June
30, 1997, TCI Telephony had contributed a total of approximately $954.5 million
to Sprint PCS. Sprint PCS's subsidiary, Sprint Spectrum, has obtained
approximately $3.1 billion in secured vendor financing in the aggregate from
certain equipment vendors, 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 the Sprint Spectrum Notes with a principal amount at
maturity of $750 million. As described under "RISK FACTORS -- Considerations
Relating to the TCI Ventures Group Entities -- Significant Capital
Requirements", the Sprint PCS Parents provided certain financial guarantees to
the secured creditors in such debt financings, of which TCI Telephony's
remaining contingent liability at March 31, 1997 was approximately $150 million.
Assuming all of the foregoing debt and equity financing amounts are made
available to Sprint PCS, Sprint PCS currently believes that such amounts would
be sufficient to meet its currently anticipated capital requirements (other than
obligations in respect of Sprint PCS's interest in APC and Cox PCS) through
mid-1998 (based on Sprint PCS's current plans for its network buildout in its
current license areas).
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Sprint PCS is implementing what it believes to be a state-of-the-art PCS
network using a frequency management technology or "protocol" called CDMA (or
Code Division Multiple Access). The FCC has not mandated a universal digital
protocol for PCS systems. Currently, various vendors have proposed three
principal competing, incompatible protocols for use in PCS systems: CDMA, GSM
and TDMA (IS-136). The GSM protocol is an updated up-banded version of the
TDMA-based protocol now in use in Europe. APC's PCS system uses the GSM
protocol. TDMA (IS-136) is an up-banded version of the TDMA-based digital
cellular protocol now used by cellular operators in the U.S. TDMA (IS-136) is
being deployed by AT&T Wireless Services, Inc., a competitor of Sprint PCS, in
its PCS systems. CDMA is a first-generation technology that is just beginning to
be commercially deployed in the United States. Sprint PCS selected the CDMA
technology rather than the other technologies because it believes it will have
increased subscriber capacity, higher quality of transmission and lower
infrastructure and ongoing support costs. Sprint PCS believes that CDMA provides
the following benefits: performance, cost effectiveness, functionality, security
and capacity. Sprint PCS believes that the CDMA protocol will be the most widely
adopted PCS protocol in the United States. While several major PCS providers
have publicly announced that they intend to deploy CDMA-based PCS systems, there
can be no assurance that such providers will do so. As of June 30, 1997, PrimeCo
and GTE Wireless Inc. were the only PCS providers other than Sprint PCS that had
commercially deployed a 1900 MHz CDMA system in the United States.
The trademarks Sprint(R) and Sprint PCS(R) are licensed to Sprint PCS on a
royalty-free basis pursuant to a trademark license agreement between Sprint
Communications Company, L.P. ("Sprint Communications") and Sprint Spectrum.
Sprint Communications may terminate such agreement (i) upon the dissolution and
winding up of Sprint PCS, (ii) upon the bankruptcy of Sprint PCS, (iii) upon the
failure of Sprint PCS to perform in accordance with the material terms of the
agreement or for breach of its representations and warranties or (iv) if Sprint
PCS challenges Sprint Communications' rights to the Sprint trademark and the
associated logo. Sprint PCS may terminate the agreement (i) if Sprint
Communications abandons or fails to support its trademark and associated logo,
(ii) upon the bankruptcy of Sprint Communications, (iii) if Sprint
Communications takes action that conflicts with Sprint PCS's rights to use the
trademark and associated logo or (iv) if Sprint Communications breaches its
covenant to license the trademark and associated logo to additional licensees in
accordance with the terms of the agreement. Subject to certain conditions, each
of Sprint PCS and Sprint Communications may terminate the agreement if a
controlled affiliate of Sprint ceases to own any equity interest in Sprint PCS.
Within 30 days of termination, or in certain circumstances on a specified
termination date, Sprint PCS's rights to use the trademark and associated logo
will cease.
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. Sprint PCS has stated its expectation that competition in the
wireless telecommunications industry will be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services. The Company 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. Sprint PCS will also face competition from
other current or developing technologies, such as paging, ESMR and satellite
networks. ESMR operators have begun to design and deploy digital mobile networks
that increase the channel capacity of ESMR systems to a level that may be
competitive with that of cellular systems. 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.
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
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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., PrimeCo and Western Wireless Corporation. Sprint PCS also expects that
existing analog wireless service providers in the PCS markets, all of which have
been operational for a number of years and many of which 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 Communications,
Inc., 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.
Because Sprint PCS's network operates at a different frequency and uses a
different technology than cellular systems, Sprint PCS's network will not
directly connect with existing cellular networks. In order for Sprint PCS's
subscribers to use their handsets in areas outside Sprint PCS's network, another
CDMA-based PCS provider must operate in such area or the subscriber must have a
dual-mode, dual-band handset which would allow access to analog cellular or
other digital cellular or PCS systems and, in either case, as with other
wireless carriers, Sprint PCS or its subscribers, on an individual basis, must
have arrangements with such other cellular or PCS providers permitting Sprint
PCS's subscribers to access their respective services. Although Sprint PCS
expects to enter into affiliation agreements with SprintCom, Inc. and PhillieCo
which would give Sprint PCS nationwide coverage, Sprint PCS currently does not
have a license or any affiliation agreement enabling it to provide coverage for
27% of the Pops in the United States, including those in several major cities
and surrounding regions. Further, dual-mode, dual-band handsets are not
currently available. Sprint PCS currently expects dual-mode, dual-band
telephones to be commercially available in September 1997 (although sufficient
quantities may not be commercially available until the fourth quarter of 1997).
There can be no assurance that such dual-mode, dual-band handsets will be
available. This lack of interoperability may impede Sprint PCS's ability to
attract current cellular subscribers or potential new wireless communications
subscribers that desire the ability to access different service providers in the
same market. Initially, the cost to Sprint PCS of PCS handsets may not be
competitive with the cost to analog operators of analog cellular handsets. While
Sprint PCS believes that its PCS handsets will be competitively priced as
compared to digital cellular handsets of comparable size, weight and features,
cellular operators may subsidize the sale of digital handset units at prices
below those with which Sprint PCS can compete through Sprint PCS's handset
subsidies. Although Sprint PCS has entered into a few roaming agreements, there
also can be no assurance that, should Sprint PCS determine that it desires
roaming agreements with other providers, such agreements can be obtained on
terms acceptable to Sprint PCS.
Management. Pursuant to the Sprint PCS Partnership Agreement, the general
partners of Sprint PCS conduct the business and affairs of Sprint PCS through
their representatives (the "Representatives") on the Sprint PCS Partnership
Board. The Sprint PCS 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 Comcast, Cox and TCI Telephony. The
Representative(s) designated by each Sprint PCS Partner have an aggregate voting
power equal to the percentage interest in Sprint PCS (as to each Sprint PCS
Partner, its "Percentage Interest") of the Sprint PCS Partner appointing him or
them. As of March 31, 1997, the aggregate voting power of the Representative(s)
of each of Sprint, TCI Telephony, Cox and Comcast was 40%, 30%, 15% and 15%,
respectively.
The Sprint PCS Partners have from time to time discussed possible
restructurings of their investments in and the governance of Sprint PCS, and TCI
has advised its partners of its interest in monetizing a portion of
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its investment. Any direct sale of all or a part of TCI's partnership interest
would require the consent of the Sprint PCS Partners, however, and no offer has
been received and no negotiations are ongoing.
Except for certain actions requiring a unanimous vote of the Sprint PCS
Partnership Board or of all general partners, substantially all actions required
or permitted to be taken by the Sprint PCS Partnership Board must be approved by
the affirmative vote of Representatives having voting power of 75% or more of
the Percentage Interests of the Sprint PCS Partners whose Representatives are
entitled to vote on such action (other than those required to abstain pursuant
to the terms of the Sprint PCS Partnership Agreement). As a result, subject to
certain exceptions and based on TCI Telephony's 30% voting Percentage Interest
at this time, no action may be taken by the Sprint PCS Partnership Board without
the consent of TCI Telephony's Representative (other than any action with
respect to which such Representative is required to abstain).
Liquidating Events. Sprint PCS will be dissolved upon the earliest to occur
of (i) the sale of all or substantially all of the property of Sprint PCS, (ii)
a unanimous vote of the Sprint PCS Partnership Board to dissolve, wind up, and
liquidate Sprint PCS in accordance with the terms of the Sprint PCS Partnership
Agreement, (iii) the failure of the general partners to resolve a Deadlock Event
and (iv) the withdrawal of a general partner, the assignment by a general
partner of its entire interest or any other event that causes a general partner
to cease to be a general partner under Delaware limited partnership law;
provided, that upon the occurrence of the events set forth in clause (iv) above,
Sprint PCS will not be dissolved or required to be wound up if (x) at the time
of such event there is at least one remaining general partner, or (y) if there
is not at least one remaining general partner, within 90 days after such event
all remaining Sprint PCS Partners agree in writing to continue the business of
Sprint PCS and to the appointment, effective as of the date of such event, of
one or more additional general partners.
Upon the occurrence of the events described in clauses (ii), (iii) and (iv)
above, and subject to the satisfaction of certain conditions, the Sprint PCS
Partnership Agreement provides for buy/sell arrangements pursuant to which a
multiple round auction will be conducted whereby the general partner or group of
general partners that submits the highest bid (on a per 1% Percentage Interest
basis) will purchase for cash all of the partnership interests of the other
Sprint PCS Partners. In the event such procedures fail to cause the sale of such
partnership interests in accordance with the buy/sell provisions (including in
the event that no general partner or group of general partners submits a bid
equal to or greater than the aggregate adjusted net equity of the other Sprint
PCS Partners' partnership interests (on a per 1% Percentage Interest basis)),
the Sprint PCS Partnership Board shall be responsible for overseeing the
dissolution and winding up of Sprint PCS, shall cause Sprint PCS's property to
be liquidated and shall apply and distribute the proceeds therefrom in
accordance with the terms of the Sprint PCS Partnership Agreement.
Restrictions on Transfer of Interests. The Sprint PCS Partnership Agreement
generally restricts any transfer or other disposition of an interest in Sprint
PCS, whether directly or indirectly (including in a transaction as a result of
which a Sprint PCS Partner ceases to be a subsidiary of its Sprint PCS Parent),
except as otherwise permitted by the Sprint PCS Partnership Agreement. Subject
to certain restrictions, a Sprint PCS Partner may at any time transfer all or a
portion of its interest (i) to any controlled affiliate of such Sprint PCS
Partner, (ii) in connection with a Permitted Transaction involving such Sprint
PCS Partner, (iii) to the administrator or trustee of such Sprint PCS Partner to
whom such interest is transferred in an involuntary bankruptcy, (iv) pursuant to
and in compliance with certain provisions of the Sprint PCS Partnership
Agreement, including right of first refusal provisions, right of first offer and
registration rights provisions, certain buy-sell arrangements, and "tag-along"
rights in certain circumstances and (v) with the prior written consent of the
other Sprint PCS Partners.
"Permitted Transaction" with respect to a Sprint PCS Partner means a
transaction or series of related transactions in which (i) such Sprint PCS
Partner ceases to be a subsidiary of its Sprint PCS Parent or such Sprint PCS
Partner transfers its partnership interest to a person that is not a controlled
affiliate of such Sprint PCS Partner and (ii) the new corporate parent of such
Sprint PCS Partner or the corporate parent of the transferee of such Sprint PCS
Partner's partnership interest after giving effect to such transaction, or the
last transaction in a series of related transactions, owns, directly and
indirectly through its controlled affiliates, all or a Substantial Portion of
the cable television system assets (in the case of Cox, Comcast or TCI) or long
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distance telecommunications business assets (in the case of Sprint) owned by the
Sprint PCS Parent of such Sprint PCS Partner, directly and indirectly through
its controlled affiliates, immediately prior to the commencement of such
transaction or series of transactions. A "Substantial Portion" means (x) in the
case of Cox, Comcast or TCI, cable television systems serving 75% or more of the
aggregate number of basic subscribers served by cable television systems in the
United States of America (including its territories and possessions other than
Puerto Rico) owned by such Sprint PCS Parent, directly and indirectly through
its controlled affiliates, and (y) in the case of Sprint, long distance
telecommunications business assets serving 75% or more of the aggregate number
of customers served by the long distance telecommunications business in the U.S.
(including its territories and possessions other than Puerto Rico) owned by
Sprint, directly and indirectly through its controlled affiliates.
After March 1, 2000, a Sprint PCS Partner may transfer all or any portion
of its partnership interest to a person that is not a controlled affiliate of
such Sprint PCS Partner (a "Purchaser"), provided that such Sprint PCS Partner
first offers to sell such partnership interest or portion thereof to the other
Sprint PCS Partners. If such Purchaser, together with its controlled affiliates,
after any such transfer (including an indirect transfer resulting in a Sprint
PCS Partner becoming a controlled affiliate of such Purchaser) would own more
than 55% of the Percentage Interests, then the transfer will not be permitted
unless such Purchaser offers to purchase the entire interest of any other Sprint
PCS Partner wishing to sell its interest at a price equal (on a per 1%
Percentage Interest basis) to the price paid by such Purchaser to such Sprint
PCS Partner in such transfer (or the adjusted net equity of such other Sprint
PCS Partner(s) in the case of an indirect transfer).
Competitive Activities. Subject to certain exceptions, the Sprint PCS
Partnership Agreement restricts any Sprint PCS 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 using or permitting its name to be
used in connection with, any business or enterprise that engages in any Wireless
Business or in the bidding for or acquisition of any Wireless Business license
or that provides, offers, promotes or brands wireless communications services
that use radio spectrum for cellular, PCS, paging or other voice or data
wireless services. A "Wireless Business" includes, subject to certain
exceptions, all wireless communications services conducted in the U.S. that use
radio spectrum for cellular, PCS, ESMR, paging, mobile telecommunications and
any other voice or data wireless services, whether fixed or mobile. In addition,
pursuant to an agreement with Sprint, the ability of TCI and its controlled
affiliates (including the TCI Ventures Group) to offer or promote, act as a
sales agent for, or package certain of its cable television services with,
certain local or long distance telephony services offered under the brand of
certain ILECs and IXCs (such as AT&T Corporation and MCI Communications
Corporation) other than Sprint is restricted. Such agreement also limits the
ability of TCI and its controlled affiliates to make its cable plant available
to such ILECs and IXCs for the provision of local telephony services on an
exclusive basis without making such facilities similarly available to Sprint on
comparable terms. Such agreement has a five-year term that commenced January 31,
1996; however, under certain circumstances such agreement may terminate on
January 31, 1999.
Additional Information. Sprint Spectrum, a subsidiary of Sprint PCS through
which Sprint PCS conducts substantially all of its operations other than the
ownership of its 49% partnership interest in APC and its 49% partnership
interest in Cox PCS, filed with the SEC a registration statement pursuant to
which it completed an underwritten public offering of the Sprint Spectrum Notes
in August 1996 (the "Sprint Spectrum Registration Statement"). Since such
offering Sprint Spectrum has been subject to the information requirements of
Section 15(d) of the Exchange Act, pursuant to which it files reports and other
information with the SEC (under SEC file number 333-06609-01). The Sprint
Spectrum Registration Statement and such reports are available from the SEC in
the manner described above under "AVAILABLE INFORMATION." Information contained
herein regarding Sprint PCS is based upon, and is qualified in its entirety by
reference to, information contained in such filings and other publicly available
information. Although believed by the Company to be reliable, there can be no
assurance as to the accuracy of such information.
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TELEPORT AND OTHER WIRELINE INVESTMENTS
General. Teleport, the largest CLEC (or competitive local exchange carrier)
in the United States as measured by route miles, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. Teleport
competes with ILECs as "The Other Local Phone Company"(R) (a registered service
mark of Teleport) 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, hospitals and educational institutions,
governmental agencies, long distance carriers and resellers, Internet service
providers, disaster recovery service providers and wireless communications
companies. While Teleport's carrier business has continued to grow, in 1996 all
other customers (including resellers) accounted for approximately 62% of
Teleport's pro forma revenue (after giving effect to the TCG Reorganization as
if it had occurred at the beginning of 1996).
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. As of March 31, 1997, Teleport operated
high-capacity state-of-the-art digital networks in 53 metropolitan markets,
including 18 of the 20 largest metropolitan areas. Such markets include
metropolitan New York City/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, Omaha, Providence, Cleveland, Portland
(Oregon), Salt Lake City, Philadelphia and Wilmington (Delaware). As of such
date, Teleport was also developing networks in Atlanta, Birmingham, Charlotte,
Chattanooga, Cincinnati, Columbus (Ohio), Knoxville, Minneapolis/St. Paul,
Nashville, Orlando, Sacramento and Tampa. As of June 30, 1997, Teleport's
networks spanned approximately 7,870 route miles, contained over 398,700 fiber
miles and served approximately 10,949 buildings.
In addition, in February 1996 Teleport acquired a minority interest in
BizTel Communications, Inc. ("BizTel"), which, as of March 31, 1997, held FCC
licenses to provide telecommunications services utilizing 38 GHz digital
milliwave transmission in 160 geographic areas in the United States with a
population of approximately 184 million people, including more than 90 of the
100 largest metropolitan areas and all of the markets where TCG currently
operates. As of March 31, 1997, BizTel also had applications for 44 additional
licenses pending FCC approval in geographic areas which have a population of an
additional 31 million people. The 38 GHz milliwave facilities can be used by TCG
to economically connect customers to its networks, to provide network
redundancy, diverse routing or quick temporary installations and to provide
stand-alone facilities where Teleport does not have networks. On July 28, 1997,
TCG exercised an option to acquire the remaining 50.1% equity interest in BizTel
which it did not already own in exchange for approximately 1.7 million shares of
Class A Common Stock of Teleport ("Teleport Class A Stock"). The completion of
such transaction is subject to regulatory approvals, including approval of the
FCC.
In February 1997, TCG acquired CERFnet Services Inc. ("CERFnet"), a leading
regional provider of Internet-related services to businesses (including dial-up
and dedicated Internet access, Web hosting and co-location services, and
Internet training), in exchange for approximately 2.1 million shares of Teleport
Class A Stock. CERFnet operates an advanced nationwide backbone network,
maintains state-of-the-art Internet server facilities, has established and
maintains direct peering relationships with other Internet service providers,
and as of March 31, 1997 served over 6,000 customers located primarily in
California and Arizona. TCG has indicated that it expects to upgrade CERFnet's
backbone, to accelerate the expansion of CERFnet's services on a nationwide
basis and to achieve marketing synergies by packaging CERFnet's Internet
services with TCG's complementary telecommunications services.
In April 1997, TCG entered into a master communications services agreement
with @Home to provide targeted colocation facilities and local telephone
circuits for infrastructure and subscriber connectivity at promotional and
standard pricing over a five-year term. The agreement provides @Home with the
option to co-locate certain of its equipment in TCG premises in which event
@Home will incur certain obligations to use TCG's services. The Internet
services being or to be offered by @Home may compete with those being or to be
offered by TCG through CERFnet.
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 TCG
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Reorganization, Teleport's revenue grew from approximately $184.9 million for
1995 to approximately $283.4 million for 1996, substantially all of which were
derived from the provision of local telecommunications services.
TCG estimates that total revenue from the local telecommunications market
in the United States was approximately $100 billion in 1996, based on published
FCC data for 1995. In the past, competitive access providers, including
Teleport, were limited to serving only the dedicated services portion of this
market, which TCG estimates (based on such FCC data) was approximately $5.5
billion in 1996, whereas TCG estimates (on such basis) that the local switched
services portion of this market for business customers was approximately $60
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.
Teleport has stated its belief that, with the passage of the 1996 Act, 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.
Teleport provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, Internet services, dedicated services, high-speed
switched data services, disaster avoidance services and video channel
transmission services. Switched voice services offered by Teleport primarily use
high-capacity digital switches to route voice transmissions anywhere on the
public switched telephone network. Teleport's Internet services are primarily
provided through CERFnet described above. 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 believes that it uses the latest technologies and network
architectures to develop a highly reliable infrastructure for delivering
high-speed, quality digital transmission 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 routing customer traffic simultaneously in both directions around
the ring thereby eliminating loss of service in the event of damage to the fiber
optic network. 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 (primarily provided by BizTel) and other technologies. TCG also
installs diverse building entry points where a customer's network 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.
Teleport has substantial business relationships with a few large customers,
including the major long distance carriers. During 1996, TCG's top 10 customers
accounted for approximately 52% of TCG's total revenue on a pro forma basis
after giving effect to the TCG Reorganization. Sprint accounted for more than
10% of such revenue; no customer accounted for 15% or more of such revenue. A
significant reduction in the level of services TCG performs for any of these
customers could have a material adverse effect on Teleport's results of
operations or financial condition. Most of Teleport's customer arrangements are
subject to termination on short notice and do not provide TCG with guarantees
that service quantities will be maintained at current levels, and there can be
no assurance that such arrangements will be continued at the same service
quantity levels. TCG believes that certain of the major long distance carriers
are pursuing alternatives to their current practices with regard to obtaining
local telecommunications services, including construction of their own
facilities and/or acquisitions of CLECs. This type of activity could accelerate
as a result of the 1996 Act, which limits the authority of states to impose
legal restrictions that have the effect of prohibiting a company, including an
IXC, from providing any telecommunications service.
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As of March 31, 1997, TCI Telephony owned 48,779,388 shares of Teleport
Class B Stock, each of which is 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 Teleport Class A Stock. TCI Telephony also owns
an additional 1,011,528 shares of Teleport Class A Stock. At March 31, 1997,
such shares of Teleport Class B Stock and Teleport Class A Stock in the
aggregate represented approximately 30% of the outstanding common stock of
Teleport and approximately 37% of the aggregate voting power of such securities.
In addition, as of March 31, 1997, subsidiaries of Cox, Comcast and Media One
owned shares of Teleport Class B Stock and Teleport Class A Stock representing
approximately 24%, 17% and 8%, respectively, of the outstanding common stock of
Teleport (representing approximately 30%, 20% and 11%, respectively, of the
aggregate voting power of such securities). Because certain provisions in the
Sprint PCS Partnership Agreement restrict TCI and its controlled affiliates from
engaging in any Wireless Business, TCI may determine not to acquire additional
interests in Teleport that would result in Teleport becoming a controlled
affiliate of TCI to avoid a potential breach of such agreement if Teleport
determines to engage in a Wireless Business. However, subject to certain
exceptions, Teleport currently may not engage in the business of providing
certain wireless communications services without the affirmative vote of holders
of a majority of the Teleport Class B Stock until the earlier of June 2001 and
the date on which the Teleport Class B Stock ceases to represent at least 50% of
the voting power of the outstanding common stock of Teleport.
TCG has benefited substantially from its relationships with the Teleport
Cable Stockholders, which are among the largest cable television companies in
the United States. Through such relationships, Teleport has been able to utilize
rights-of-way, obtain fiber optic facilities and share the cost of building new
fiber optic networks, thereby allowing Teleport to achieve significant economies
of scale and scope through capital efficiencies in extending its networks in a
rapid, efficient and cost-effective manner. Teleport has the indefeasible right
to use certain fiber optic and cable transmission facilities of the Company for
compensation based on the cost of construction of such facilities. In general,
such arrangements were entered into with Teleport by the Company and other MSOs
that are stockholders of Teleport prior to Teleport's initial public offering in
June 1996.
TCG has had preliminary discussions with a number of other companies
regarding a variety of possible transactions, including mergers, joint ventures,
acquisitions, sales and other investment transactions of various structures. To
the Company's knowledge, TCG has not reached any agreement, in principle or
otherwise, with respect to any material transaction, and no assurance can be
given as to whether any such transaction may be consummated. TCG expects to
consider and explore potential transactions of various types with other
companies and to pursue any attractive opportunity.
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 Corporation,
Bell Atlantic Corporation, BellSouth Corp., NYNEX Corporation, SBC
Communications Inc., US WEST and GTE Corporation. Teleport believes that ILECs
generally benefit from their long-standing relationships with customers,
substantial technical and financial resources, established ubiquitous networks
and federal and state regulations that are likely to provide them with increased
pricing flexibility as competition increases. In most of the metropolitan areas
in which Teleport currently operates, at least one, and sometimes several, other
CLECs also offer substantially similar services at substantially similar prices
to those of Teleport. In addition to CLECs and ILECs (including ILECs entering
new geographic markets), 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. The current trend of actual and proposed business
combinations, strategic investments and alliances in the telecommunications and
related industries, which include mergers between ILECs, between IXCs and
international carriers and between IXCs and CLECs, may create significant new
competitors or strengthen existing competitors to Teleport.
Teleport has stated that it believes that the 1996 Act will provide
increased business opportunities and potentially better margins by opening local
markets to competition and requiring ILECs to provide improved direct
interconnection between the facilities of CLECs and the public-switched
telephone network at lower cost. However, under the 1996 Act, the FCC and some
state regulatory authorities may provide ILECs with
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increased flexibility to reprice their services as competition develops and as
ILECs allow competitors to interconnect to their networks. In addition, some new
entrants in the local market may price certain services to particular customers
or for particular routes below the prices charged by Teleport for services to
those customers or for those routes, just as Teleport may itself underprice
those new entrants. If the ILECs and other competitors lower their rates and can
sustain significantly lower prices over time, this may adversely affect revenue
and operating results of TCG. If regulatory decisions permit the ILECs to charge
CLECs substantial fees for interconnection to the ILECs' networks or afford
ILECs other regulatory relief, such decisions could also have a material adverse
effect on Teleport. However, Teleport has stated that it believes that the
following factors may offset the negative effects of the 1996 Act: (i) the
increased revenue available as a result of being able to address a significantly
larger portion of the local telecommunications market; (ii) mutual reciprocal
compensation with the ILEC that results in TCG terminating its local exchange
traffic on the ILEC's network at little or no net cost to TCG; (iii) obtaining
access to off-network customers through more reasonably priced expanded
interconnection with ILEC networks; and (iv) a shift by IXCs to purchase access
services from CLECs instead of ILECs. There can be no assurance, however, that
these anticipated results will offset completely the effects of increased
competition as a result of the 1996 Act.
Management. The Teleport Cable Stockholders and Teleport are parties to a
stockholders agreement ("Teleport Stockholders Agreement") which provides for,
among other things, the corporate governance of Teleport, certain registration
rights and certain transfer restrictions, rights of first refusal and rights of
first offer relating to sales and conversions of shares of Teleport Class B
Stock. Under the Teleport Stockholders Agreement, (i) ten of the thirteen
members of the Teleport 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. As a result of its
merger with US WEST, Media One currently does not have the right to designate
any of such directors under the terms of the Teleport Stockholders Agreement. At
March 31, 1997, TCI Telephony, Cox, Comcast and Media One owned 38%, 31%, 20%
and 11%, respectively, of the outstanding Teleport Class B Stock. As a result,
TCI is currently entitled to designate four directors for election to the board
of directors of Teleport. In addition, the Teleport 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 Teleport 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 Teleport Stockholders Agreement have certain
rights of first offer and rights of first refusal thereunder with respect to
proposed sales of the Teleport Class B Stock.
Each holder of Teleport Class B Stock has the right to sell all or a part
of its Teleport Class B Stock upon receiving a bona fide offer from an
unaffiliated third party, subject to giving notice to the other holders of
Teleport Class B Stock who have designated at least one director, which notice
shall contain an offer to sell such stock to such other holders of Teleport
Class B Stock on the terms and conditions set forth in the offer from the third
party. Subject to certain limitations, the non-selling holders of Teleport Class
B Stock have the right to purchase pro rata all, but not less than all, of the
Teleport Class B Stock offered. If the non-selling holders of Teleport Class B
Stock do not purchase all of the Teleport Class B Stock offered, the offering
holders of Teleport Class B Stock may sell the Teleport Class B Stock to the
third party on the terms contained in the offer made to the other holders of
Teleport Class B Stock. However, unless the amount of Teleport Class B Stock
being transferred is sufficient to entitle the transferee to designate a nominee
for director under the Teleport Stockholders Agreement (i.e., the total
percentage of Teleport Class B Stock that would be held by the transferee and
certain of its affiliates is at least 9%) and the transferee agrees to become a
party to the Teleport Stockholders Agreement, any Teleport Class B Stock
included in the stock being sold must be converted to Teleport Class A Stock
prior to such transfer.
If any party desires to convert Teleport Class B Stock to Teleport Class A
Stock, it must first offer that stock to the other holders of Teleport Class B
Stock who have designated at least one director. If such other holders do not
elect to buy such stock, then such stock can be converted to Teleport Class A
Stock and sold by the selling stockholder free of restrictions under the
Teleport Stockholders Agreement. In accordance with the
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Teleport Stockholders Agreement, on August 4, 1997, the Company received a
notice from the subsidiary of Media One that is a Teleport Cable Stockholder of
its intention to convert 1,500,000 shares of Teleport Class B Stock into
Teleport Class A Stock. Pursuant to the Teleport Stockholders Agreement, it has
offered to sell all or a portion of such shares prior to their conversion to the
other Teleport Cable Stockholders at a price per share equal to the market price
as of the date of such notice, which was $37.2749 per share. The Company has not
yet determined whether or not it will accept such offer.
The Teleport Stockholders Agreement will terminate when the aggregate
voting power of the Teleport Class B Stock represents less than 30% of the
aggregate voting power of all outstanding common stock of Teleport.
Additional Information. 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 SEC (under SEC file number
0-20913), all of which are available from the SEC in the manner described above
under "AVAILABLE INFORMATION." In addition, the Teleport Class A Stock is quoted
on the National Market tier of The Nasdaq Stock Market under the symbol "TCGI."
Information contained herein regarding Teleport is based upon, and is qualified
in its entirety by reference to, information contained in such filings and other
publicly available information. Although believed by the Company to be reliable,
there can be no assurance as to the accuracy of such information.
Other Investments. In addition to its interest in Teleport, the TCI
Ventures Group's wireline telephony investments also include a 50% partnership
interest in Kansas City Fiber Network, a 40% partnership interest in NHT
Partnership, an approximately 79% interest in New Jersey Fiber Technologies,
L.P., and a 43% interest in Louisville Lightwave, which are CAPs serving the
metropolitan areas of Kansas City, Buffalo, Morristown and New Brunswick, New
Jersey, and Louisville and Lexington, Kentucky, respectively. The other 50%
interest in Kansas City Fiber Network is owned by Kansas City Cable Partners, a
partnership that owns and operates cable systems in the Kansas City area, in
which the TCI Group holds a 50% interest. TCI's indirect interest in Louisville
Lightwave will increase to 50% upon the closing of its acquisition of the
balance of the other partner's interest in TCI-TKR of Kentucky, Inc., which
owns, among other assets, the interest in Louisville Lightwave. TCI is
negotiating to sell its interests in all of these CAP partnerships for cash.
There can be no assurance that any such sale will occur on terms satisfactory to
TCI, or at all; however, if a sale is consummated, the proceeds will be
attributed to the TCI Ventures Group.
WTCI
General. WTCI is a regional carrier of long distance telephony services,
providing primarily high-speed point-to-point private line, frame relay
communications services on a wholesale basis capable of offering audio, video
and data transmission to customers in a 12 state area in the northwestern region
of the United States. WTCI has the capability to expand its service to include
two additional states with minimal capital expenditures should its customer base
dictate the need. WTCI's customers are principally long distance carriers and
other telecommunications companies for whom WTCI primarily supplies digital
point-to-point private line, frame relay and data transport services. WTCI's
customers also include over 56 cable companies (including TCI) for whom WTCI
provides primarily video analog transmission services. WTCI had aggregate
revenue of approximately $32 million in 1996. Of this amount, approximately 85%
came from WTCI's voice and data carrier customers; video transmission customers
accounted for approximately 8% of such revenue. The remaining revenue
principally came from video conferencing, data, and Internet services.
WTCI uses a diversified high-speed telecommunications network
infrastructure, consisting primarily of its 16,000 route mile owned and operated
digital microwave network, together with fiber transmission capacity leased by
WTCI from other carriers. WTCI's network enables WTCI to provide its customers
with a wide array of telecommunications services, including carrier services,
enhanced switched services, data services, video channel transmission services
(including video conferencing) and Internet services.
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Carrier Services. WTCI provides broadband radio frequency channels for the
use of its customers, primarily for transmission of long distance telephone
service ("Carrier Services"). WTCI's Carrier Services provide the majority of
its revenue.
WTCI has master service contracts with approximately 80 customers to
provide Carrier Services. These agreements provide for transmission services,
including varying levels of digital service, pursuant to individual service
orders. The initial terms of service orders generally range from 1 to 3 years.
After an initial term, service orders generally continue on a month to month
basis and may be canceled by the customer upon 30 days prior written notice. As
a general rule, the master service contracts expire when the last service order
in effect thereunder has terminated. WTCI's six largest customers' master
service contracts all contain many service orders (in some cases, in excess of
100 service orders) with remaining terms varying from 1 month to approximately
15 months.
In particular, WTCI's largest carrier customer has the right to terminate
its contract for use of the entire capacity of a core backbone of WTCI's network
between the Seattle and Denver areas in October 1997, subject to certain
conditions. Although this area has been overbuilt with fiber, management of WTCI
does not believe such termination would have a material adverse effect on WTCI
because it believes that it is likely that it would be able to re-lease all of
such capacity based on current demand in the area for Carrier Services.
WTCI's customers historically have been primarily IXCs, as well as ILECs
and other telecommunications companies. For the year ended December 31, 1996,
WTCI's six largest customers were all Carrier Services customers, accounting in
the aggregate for approximately 70% of consolidated gross revenue. A significant
reduction in the level of services WTCI provides for any of these customers
could have a material adverse effect on WTCI's results of operations or
financial condition, unless WTCI located replacement customers willing to lease
the vacated channels on similar terms.
Video Services. WTCI's services to cable television system operators
consist of transmitting broadcast television signals to the cable operator
headends for further distribution to their subscribers ("Video Services"). At
December 31, 1996, WTCI provided Video Services to 56 cable television systems
which, based on information available to WTCI from standard industry sources,
had approximately 432,252 subscribers. Forty-seven of these systems, having
approximately 285,203 subscribers, are owned or operated by TCI and its
affiliates. Video Services rendered to TCI and its affiliates accounted for
approximately 5% of WTCI's revenue in 1996. Video Services rendered to cable
television systems have declined as system operators have increasingly relied on
satellite systems, rather than terrestrial microwave systems, for the delivery
of broadcast signals from independent network television stations. This trend is
expected to continue.
The vast majority of WTCI's Video Services, including the services provided
to the TCI Group, are rendered in accordance with tariffs filed with the FCC.
Under WTCI's tariffs, Video Services generally are provided for initial terms of
five years, and thereafter may be terminated by the customer upon 90 days
notice. Approximately 10% of WTCI's Video Services contracts can currently be
terminated on 90 days notice.
Other Services. WTCI's wholly owned subsidiary, Western
Tele-Communications/Retail Sales Group, is a start-up business, developing and
offering "one-stop shopping", state-of-the-art broadband telecommunications
services, including switched services, to retail customers in the previously
underserved, more remote, second and third tier communities in its service
region. Its suite of services includes video conferencing, server-based
information depositories, data networking, and on-line broadband facilities and
services for internal communications requirements as well as long distance
traffic to its customers, including state governments and educational
institutions.
Competition. WTCI faces growing competition from long distance carriers
using fiber optic cable. Historically, the area served by WTCI was remote and
sparsely populated and consequently fiber optic cables have only recently been
laid in the region. However, during the last few years, the network has been
largely overbuilt with fiber by MCI Communications Corporation. A second
overbuild by various IXCs is currently underway. According to current plans,
such second overbuild of the network will likely be completed by the end of the
second quarter of 1998. Such fiber optic networks are expected to compete
directly with WTCI's network for many of the same customers along a significant
portion of the same routes. The recurring
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operating costs associated with maintaining WTCI's microwave network facilities
are greater than those associated with a fiber optic network. In response to the
competitive pressures from long distance carriers using fiber optic networks to
transmit their customers' services, WTCI has begun developing (i) more cost
effective methods of conducting its business, (ii) new uses for its microwave
facilities and (iii) lines of business outside of its traditional base long
distance operations such as those described above under "-- Other Services."
Additionally, WTCI's microwave facilities can be redeployed into even more
remote, sparsely populated communities, either ahead or in lieu of the expanding
fiber networks. However, there can be no assurance that these efforts will be
successful or that the increased competition from other long distance carriers
overbuilding the region with fiber will not have a material adverse effect on
the business, financial condition, results of operations and prospects of WTCI.
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. Pursuant to the Communications Act,
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) establish access and universal funding provisions, (vi) impose
fines and forfeitures for violations of any of the FCC's rules and (vii)
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. The D, E, and F Block
auctions concluded on January 14, 1997. Sprint PCS did not participate in the C
Block or F Block auctions, as these licenses were available only to small
businesses and other designated entities.
On April 25, 1997, the FCC completed the auction of licenses in the 2 GHz
band for a new wireless communication service ("WCS"). While WCS licensees will
determine for themselves which services they will offer, the FCC has stated that
it believes that wide area, full mobility systems and services of the sort
provided by cellular and PCS licensees likely will be infeasible for the
foreseeable future, due to technological limitations adopted by the FCC to
protect other FCC licensees from harmful interference.
The FCC currently has two ongoing rulemaking proceedings addressing issues
relating to the allocation and use of spectrum in the 38 GHz band which is
utilized by BizTel, in which Teleport holds an interest. The first involves the
establishment of licensing and technical rules for spectrum in the 37.0 - 40.0
GHz band allocated to fixed, terrestrial wireless services. While the rules to
be adopted in this proceeding primarily address the assignment and use of
currently unassigned frequencies, certain proposals advanced by the FCC and
commenting parties could affect the operations of existing 38 GHz licensees,
including BizTel. The second proceeding involves the allocation of spectrum
between terrestrial wireless and satellite services. In its Notice of Proposed
Rulemaking, the FCC has proposed deletion of satellite allocations in the 38 GHz
band. However, the FCC's proposal has been contested by several parties, some of
whom seek to eliminate the terrestrial wireless allocation in the 39.5 - 40.0
GHz band. Action taken by the FCC in this proceeding could have an impact on the
availability of spectrum for use by BizTel, which could affect its provision of
facilities and services to TCG and other customers.
The Communications Act restricts foreign investment in and ownership of
certain FCC radio licensees, including PCS licensees. Non-United States citizens
or their representatives, foreign governments or their
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representatives, or corporations organized under the laws of a foreign country
may not own more than 20% of a common carrier PCS licensee directly or more than
25% of the parent of a common carrier PCS licensee. If it would serve the public
interest, the FCC has the authority to permit the parent of a licensee to exceed
the 25% limit. However, the FCC lacks the authority to permit a licensee itself
to exceed the 20% limit on direct foreign ownership. If an entity fails to
comply with the foreign ownership requirements, the FCC may order the entity to
divest alien ownership to bring the entity into compliance with the
Communications Act. Other potential sanctions include fines, a denial of
renewal, or revocation of the license. Pursuant to a multi-lateral agreement
negotiated under the auspices of the World Trade Organization ("WTO"), the
United States government has agreed that it will allow up to 100% indirect
foreign ownership of common carrier radio licenses. The WTO agreement takes
effect on January 1, 1998. In making determinations as to whether to permit
additional indirect foreign ownership of PCS and other CMRS licensees in excess
of the 25% statutory benchmark, the FCC currently undertakes as part of its
public interest determination an evaluation of the extent to which the home
countries of the foreign investors extend reciprocal treatment, i.e.,
"equivalent competitive opportunities" ("ECO"), to U.S. entities. In a recent
Notice of Proposed Rulemaking, the FCC has proposed to discontinue application
of the ECO requirement in determining whether to allow additional foreign
investment by common carrier licensees or applicants with foreign investment
from WTO member countries. On March 13, 1997, the Sprint PCS Partners filed a
petition with the FCC seeking clarification regarding the application of the
foreign ownership restrictions to Sprint PCS and PhillieCo.
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's buildout requirements. Pursuant to the FCC's buildout
requirements, all 30 MHz broadband PCS licensees must construct facilities that
offer coverage to one-third of the population of their service area(s) within
five years of their initial license grant(s) and to two-thirds of the population
within 10 years. Holders of 10 MHz PCS licenses in the D, E, and F Blocks must
provide coverage to one-quarter of the population in their licensed area (or
make a showing of "substantial service" in their licensed area) within five
years of their initial license grant. Licensees that fail to meet the buildout
requirements may be subject to license forfeiture. Rule violations could result
in license revocations, forfeitures or fines.
PCS systems must comply with FCC regulations, including, among others,
regulations with respect to PCS license renewal, relocation of incumbent
microwave facilities operating at the same frequency as such PCS system, and
interconnection with local exchange carriers' networks. Under the 1996 Act, both
the FCC and state Public Utility Commissions ("PUCs") regulate the terms of
interconnection between broadband PCS networks and the networks of local
exchange carriers. PCS systems also must comply with certain FCC and FAA
regulations regarding the siting, lighting and construction of transmitter
towers and antennas. In addition, certain FCC environmental regulations may
cause PCS networks to become subject to regulation under the National
Environmental Policy Act.
In May 1997, the FCC released an order establishing a significantly
expanded federal telecommunications subsidy regime. For example, the FCC
established new subsidies for services provided to qualifying schools and
libraries with an annual cap of $2.25 billion and for services provided to rural
health care providers with an annual cap of $400 million. Pursuant to the 1996
Act and the FCC's implementing regulations, all telecommunications carriers that
provide interstate telecommunications services, including PCS, as well as
certain other entities, are required to make an "equitable and
non-discriminatory contribution" to the support of federal universal service
programs. Contributions will be calculated on the basis of each carrier's
interstate and, for certain programs, intrastate end-user telecommunications
revenue. In addition, any telecommunications carrier, including a cellular or
PCS provider, that meets the criteria for eligibility established in the 1996
Act, is eligible to receive universal service support. Several parties have
appealed the FCC's May 1997 order. These appeals have been consolidated and
transferred to the United States Court of Appeals for the Fifth Circuit where
they are currently pending. In addition, on July 3, 1997, several ILECs filed a
petition for stay of the order with the FCC. That petition is also pending. The
1996 Act also requires all telecommunications carriers, including PCS licensees,
to ensure that their services are accessible to and useable by persons with
disabilities, if readily achievable. These regulations are also applicable to
Teleport and TCI's other wireline telephony activities.
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The FCC has adopted rules prohibiting broadband PCS licensees and other
CMRS providers from unreasonably restricting or disallowing resale of their
services or unreasonably discriminating against resellers, and currently is
considering whether wireless providers should be required to offer unbundled
communications capacity to resellers who intend to operate their own switching
facilities. The FCC's resale requirements currently are scheduled to expire five
years after the last group of initial licenses for broadband PCS has been
awarded. The FCC also requires broadband PCS and other CMRS providers to provide
"manual" roaming service that allows customers of one wireless provider to
obtain service while roaming in another wireless provider's service area, and is
considering whether broadband PCS and other CMRS providers should be required to
offer "automatic" roaming agreements on a non-discriminatory basis that would
allow customers to roam by simply turning on their handsets in a host market.
Other FCC rules require all broadband PCS and other CMRS providers to implement
enhanced emergency 911 capabilities on a phased basis over a five-year period
beginning October 1996 and to implement certain number portability requirements
by June 30, 1999.
On May 22, 1997, the PCIA filed a petition requesting that the FCC exercise
authority granted under the 1996 Act and forbear from imposing
non-discrimination requirements, mandatory resale obligations, and certain other
regulatory requirements on broadband PCS licensees. PCIA's petition is currently
awaiting action by the FCC.
In addition, the CALEA requires all telecommunications carriers, including
wireless carriers, as of October 1998, to ensure that their equipment is capable
of permitting the government, pursuant to a court order or other lawful
authorization, to intercept any wire and electronic communications carried by
the carrier to or from its subscribers and to access certain call-identifying
information that is reasonably available to the carriers. These regulations are
also applicable to Teleport and TCI's other wireline telephony activities.
Media reports have suggested that certain RF emissions from wireless
telephones or facilities might be linked to certain forms of cancer or other
health problems. Concerns over the potential health effects of RF emissions may
have the effect of discouraging the use of wireless telephones and other
wireless communications services, including PCS. In August 1996, the FCC adopted
revised guidelines and methods for evaluating the environmental effects of RF
transmitters, including cellular and PCS antennas and telephones, based on
recommendations by several federal agencies, including the Environmental
Protection Agency and the Food and Drug Administration. The new rules generally
are more stringent than the requirements in effect prior to the FCC's action for
cellular operations (previously exempt from some environmental evaluation
obligations now applicable) and for PCS (the requirements for which previously
in effect permitted fractionally higher levels of exposure). The owners of
facilities and manufacturers of telephones are responsible for compliance with
the regulatory requirements. In response to requests by the PCIA and other
affected industry groups, the FCC in December 1996 issued an order extending the
transition period for applicants and station licensees to conform with the FCC's
new requirements. For most radio services, including CMRS, the old requirements
will apply to station applications filed prior to September 1, 1997; the new
guidelines and methods will apply to applications filed thereafter. The new
guidelines and requirements for evaluation of hand-held devices are already in
effect. The FCC has issued a draft revision of its OET Bulletin No. 65
describing in greater detail the procedures to be used in determining compliance
with the new requirements. The FCC is currently considering petitions for
reconsideration seeking further clarification of the compliance obligations of
wireless carriers, and requesting that the deadline for compliance with the new
guidelines be extended until one year after the final version of the FCC's
revised OET Bulletin No. 65 is released.
Certain interest groups have requested that the FCC investigate claims that
wireless communications technology poses health concerns and causes interference
with hearing aids and other medical devices. One group studying the matter,
which group was founded with funds from the wireless industry, has released
results from the first phase of its study (which focused on worst case
(operation at full-power) interaction) that indicate that the three wireless
technologies tested, including CDMA, caused interference in some instances, but
not all, with hearing aids. Phase II of this research study is expected to be
completed by January 1998. In addition, the PCIA has been undertaking an
industrywide study to gather information on possible PCS interference with
medical devices for all PCS protocols, and results from researchers working
under the guidance of the Wireless Technology Research LLC indicate that
wireless telephones cause
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interference to some users of cardiac pacemakers and that the risk of clinically
significant interference is greater for pacemaker-dependent patients who use
digital (as opposed to analog) telephones. There can be no assurance that the
findings of any of the foregoing studies will not lead to additional
governmental regulations that will have an adverse effect on Sprint PCS.
PCS licensees may use common carrier point-to-point microwave and
traditional landline facilities to connect cell sites and to link them to their
respective main switching offices. The FCC separately licenses these microwave
facilities, as well as the microwave transmission facilities of WTCI, and
regulates the technical parameters and service requirements of these facilities.
In providing interstate transmission services to its non-carrier customers, WTCI
also is subject to the streamlined tariffing and other requirements applicable
to "nondominant carriers" under the current federal regulatory regime, as
described below. See " -- Government Regulation -- Regulation of Wireline
Telephony Activities." WTCI's provision of intrastate transmission services may
also be subject to regulatory requirements at the state level, similar to those
described in the discussion of " -- Government Regulation -- Regulation of
Wireline Telephony Activities" below. In addition, WTCI's placement of
facilities is subject to applicable state and local laws and regulations.
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 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. 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.
The FCC currently is considering a number of requests for federal preemption of
various state and local requirements which allegedly constitute unlawful
barriers to entry, discrimination, or other violations of the Communications
Act.
Under the 1996 Act, states and localities cannot regulate the placement of
certain types of wireless facilities, including facilities used to provide PCS,
cellular, and common carrier wireless exchange access services, so as to
prohibit the provision of such services or to discriminate among providers of
such services. In addition, so long as such 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. Since the enactment of the 1996 Act, Sprint
PCS has been involved in a number of legal proceedings concerning tower sites,
including various disputes concerning the imposition of moratoria on the
processing or approval of permits for wireless telecommunications towers or
denial of applications for permits. There can be no assurance that such
litigation will not, in the aggregate, have a material adverse effect on Sprint
PCS and the TCI Ventures Group's interest therein. The FCC is currently
considering a Petition for Declaratory Ruling filed by the Cellular
Telecommunications Industry Association seeking federal preemption of moratoria
regulation imposed by state and local governments with regard to the siting of
telecommunications facilities.
Regulation of Wireline Telephony Activities. The wireline telephony
activities of Teleport and the CAPs in which TCI has an interest 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. However,
because these developments require numerous implementation actions by the 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
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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 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. On April 18, 1997, the FCC released an order which provides that ILEC
long distance affiliates will be regulated as nondominant carriers in the
provision of interstate, domestic, long distance services. The FCC's order does
not alter the FCC's classification of ILECs as dominant carriers in the
provision of interstate access services. Pursuant to a June 1997 FCC order,
nondominant carriers, such as TCG, are permitted, but not required to file
tariffs for interstate access services with the FCC. The rules applicable to
such tariffs are generally less restrictive than those imposed on ILECs which
offer similar services. Tariffs filed with the FCC must contain the rates, terms
and conditions under which service is generally available from Teleport. An
October 1996 FCC ruling required federal tariffs for domestic interstate,
interexchange services to be canceled by September 22, 1997. The FCC's order has
been temporarily stayed pending judicial review and a number of parties have
filed petitions with the FCC seeking reconsideration of the FCC's decision. As a
result, the tariff obligation remains applicable to any TCG interstate long
distance services. TCG must offer its interstate services on a nondiscriminatory
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.
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange carriers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act requires CLECs and ILECs to first attempt to
resolve interconnection issues through negotiation for at least 135 days. During
these negotiations, the parties may submit disputes to state regulators for
mediation and, after the negotiation period has expired, the parties may submit
outstanding disputes to state regulators for arbitration.
Under the 1996 Act, all local exchange carriers (including TCG), must
interconnect with other carriers, make their services available for resale by
other carriers, provide non-discriminatory access to rights of way, offer
reciprocal compensation for termination of traffic, and provide dialing parity
and telephone number portability. ILECs have certain additional duties,
including the duty to (i) interconnect at any technically feasible point and
provide service equal in quality to that provided to their customers or the ILEC
itself, (ii) provide unbundled access to network elements at any technically
feasible point, and (iii) offer retail services at wholesale prices for the use
of competitors. The 1996 Act includes various provisions addressing the pricing
of certain of these services.
On August 8, 1996, the FCC released several orders (collectively the
"Interconnection Orders") establishing new policies and rules implementing the
local interconnection and access provisions of the 1996 Act. However, on July
18, 1997, the U.S. Court of Appeals for the Eighth Circuit overturned a number
of the rules adopted by the FCC, including the pricing rules and "pick and
choose" rule established in one of the FCC's orders, which would have allowed
CLECs to receive the benefit of the most favorable provisions contained in an
ILEC's agreements with other carriers. While certain FCC rules applicable to
CMRS remain unaffected by the Court of Appeals' decision, the court's order
substantially limits the FCC's role in implementing and enforcing the
interconnection and access provisions of the 1996 Act with respect to wireline
carriers such as TCG. As a result of the Court of Appeals' ruling, a number of
significant issues affecting the terms and conditions under which TCG and other
CLECs obtain interconnection and access to ILEC facilities and services will be
resolved on a state-by-state basis by state public utility commissions, whose
decisions may then be subject to review by federal and/or state courts. The
adoption of unfavorable and/or inconsistent rulings by state commissions and
reviewing courts could have a significant adverse impact on TCG's business and
the value of the TCI Ventures Group's investment therein.
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The FCC's Interconnection Orders represent the first part of a trilogy of
actions that the FCC contends will promote competition in the local
telecommunications market. The second part involves reform of the system for
funding and providing universal service support, as described above in
" -- Government Regulation -- Regulation of PCS and other Wireless Activities."
The third part of the FCC's trilogy of actions involves the reform of the FCC's
rules for establishing interstate interexchange access charges. In December
1996, the FCC made several changes to the interstate access charge system,
removed certain restrictions on ILECs' ability to lower access prices, and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. In May 1997, the FCC issued an
order adopting additional changes to its existing rules that are designed to
move ILEC interstate access charges, over time, to more economically efficient
levels and rate structures. The FCC has stated that it will rely on marketplace
forces in the first instance to drive ILEC interstate access prices to
competitive levels, and will in a subsequent order provide detailed rules for
implementing the FCC's market-based approach, which will give ILECs
progressively greater flexibility in setting rates as competition develops. The
FCC also plans to establish a "backstop" mechanism for mandating lower prices in
instances where a market-based approach proves to be inadequate. Several parties
have appealed the FCC's May 1997 order. Those appeals have been consolidated and
transferred to the United States Court of Appeals for the Eighth Circuit, where
they are currently pending. In a separate order, the FCC has adopted changes to
its price cap rules that are expected to result in significant reductions in
ILEC access charge levels. Several parties have appealed the FCC's price cap
order. Those appeals have been consolidated and transferred to the United States
Court of Appeals for the Tenth Circuit, where they are currently pending.
Under the 1996 Act, ILECs have a statutory duty to negotiate
interconnection and access arrangements with CLECs in good faith. The RBOCs (or
Regional Bell Operating Companies), in particular, must satisfy certain
"checklist" requirements, designed to facilitate the development of
facilities-based competition for business and residential users, in order to
enter the interLATA long distance markets (as described below) within their
regions. TCG has been able to reach negotiated agreements with certain of the
ILECs, and has had to resort to state mediation and arbitration in order to
obtain interconnection agreements with other ILECs. During the pendency of the
negotiation and contract approval process, TCG is able to operate under either
interim interconnection agreements or interim state regulatory policies and
rules.
The 1996 Act establishes procedures under which an RBOC can provide
interLATA services within its telephone service area under certain
circumstances, with the FCC's approval. "InterLATA services" are
telecommunications which originate in one and terminate in another local access
and transport area. Under the 1996 Act, the FCC is required to approve or deny
the requested authorization within 90 days following its receipt of such an
application. Authorization to provide in-region interLATA services will enable
the RBOCs to provide customers with a full range of local and long distance
telecommunications services and information services. The provision of interLATA
services by RBOCs may reduce the market share of the major long distance
carriers, which are among TCG's largest customers, but TCG believes it will also
encourage IXCs to use TCG's and other CLECs' services instead of RBOC services
wherever possible. On April 11, 1997, SBC Communications Inc. filed an
application requesting authority to provide in-region, interLATA service in the
State of Oklahoma. On May 21, 1997, Ameritech Michigan ("Ameritech") filed an
application to provide in-region interLATA service in the State of Michigan.
Ameritech's application is currently pending before the FCC. On June 26, 1997,
the FCC released an order rejecting SBC's application. On July 3, 1997, SBC
filed an appeal of the FCC's order with the United States Court of Appeals for
the District of Columbia. That appeal is currently pending. In addition, on July
2, 1997, SBC filed a lawsuit in the United States District Court for the
Northern District of Texas, challenging the restrictions imposed on the RBOCs
under the 1996 Act, including the interLATA restriction, on constitutional
grounds. SBC's suit is currently pending before the District Court.
The 1996 Act contains other provisions that potentially could affect TCG's
business, which may be subject to FCC rulemaking and judicial interpretation,
including a provision that limits the ability of a cable television operator and
its affiliates to acquire more than a 10% financial interest or any management
interest in a local exchange carrier which provides local exchange service in
such cable operator's franchise area. While this provision does not affect
acquisitions made prior to enactment of the 1996 Act, any construction or
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application of this provision by the FCC or the courts which limits TCI's or
TCG's ability to acquire interests in existing CLECs could have an adverse
impact on TCG and the TCI Ventures Group's activities in this area. The 1996 Act
also requires all telecommunications carriers, including CLECs and CAPs, to
ensure that their services are accessible to and useable by persons with
disabilities, if readily achievable.
In addition, Teleport's and TCI's other wireline activities will be subject
to certain requirements of CALEA described above under " -- Government
Regulation -- Regulation of PCS and other Wireless Activities."
Most state PUCs 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 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 PUCs also are actively involved in the mediation and
arbitration of disputes between ILECs and TCG and other CLECs concerning local
interconnection and access arrangements, and will play an expanded role in this
area, as a result of the Court of Appeals' recent decision overturning many of
the rules adopted by the FCC in its Interconnection Orders.
TCG may be required to obtain from municipal authorities street opening 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. In certain of the metropolitan areas where TCG provides network
services, TCG pays license or franchise fees based on a percent of gross
revenue. There can be no assurance that municipalities that do not currently
impose fees will not seek to impose fees in the future, nor is there any
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. Under the 1996 Act, such fees must be "fair and
reasonable," applied on a "competitively neutral and non-discriminatory basis,"
and be "publicly disclosed" by the relevant governmental entity. There can be no
assurance, however, that municipalities that currently favor the ILECs will
conform their practices in a timely manner or without legal challenges by TCG,
or another CAP or CLEC. If any of TCG's existing franchise or license agreements
for a particular metropolitan area were terminated prior to its expiration date
and TCG was forced to remove its fiber optic cables from the streets or abandon
its network in place, even with compensation, such termination could have a
material adverse effect on TCG's operations in that metropolitan area and on the
TCI Ventures Group's investment in TCG.
DIVERSIFIED SATELLITE COMMUNICATIONS
UNITED VIDEO SATELLITE GROUP, INC.
General. UVSG provides satellite-delivered video, audio, data and program
promotion services to cable television systems, DTH satellite dish users, radio
stations and private network users primarily throughout North America and
software development and systems integration services to commercial entities,
the federal government and defense related agencies in locations throughout the
United States.
UVSG operates the following related satellite transmission businesses: (i)
Prevue Networks, Inc. ("Prevue Networks"), a wholly owned subsidiary that
develops and distributes on-screen television program promotion and guide
services, including Prevue Channel, the leading electronic programming guide in
the North American market, (ii) Superstar Satellite Entertainment ("Superstar"),
a division that markets and distributes programming to C-band DTH satellite dish
owners in North America; (iii) UVTV ("UVTV"), a division that distributes three
superstations, including WGN, primarily to cable operators and (iv) SpaceCom
Systems, Inc. ("SpaceCom"), a wholly owned subsidiary that provides audio and
data satellite transmission services to the paging industry and others. UVSG
also has a 70% interest in SSDS, which provides
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information technology consulting and software development services to large
organizations with complex computer needs.
In January 1996, UVSG became a consolidated subsidiary of the Company
through the merger of a subsidiary of the Company into UVSG. As of June 30,
1997, the Company owned approximately 40% of the shares of outstanding common
stock of UVSG, representing approximately 85% of the voting power of UVSG. Five
of UVSG's ten directors are also employees, officers and/or directors of the
Company or its affiliates.
UVSG's Satellite Transmission Infrastructure. UVSG owns and operates the
Chicago International Teleport (the "CIT"), an uplink transmitter facility near
Chicago with seven transmit/receive antennas by which most of its services are
transmitted to satellites. The CIT also has 26 receive-only antennas. UVSG
believes the CIT is one of the largest such facilities in the United States.
UVSG also operates an uplink in Tulsa, Oklahoma for its Prevue Channel which
allows real-time promotional inserts into the video portion of its service. In
addition, UVSG leases uplink station facilities in other cities as needed. The
State of Illinois has asserted that certain uplinking services performed by the
CIT are subject to the state's Telecommunications Excise Tax Act and that UVSG
should have collected $1.5 million in excise taxes from its customers on behalf
of the state from past services performed during the period August 1985 through
June 1994. UVSG is disputing the assertion and continues not to collect such
taxes.
UVSG leases a total of ten transponders on several different satellites
owned and operated by various satellite companies. Lease payments for a single
transponder range from $33,000 to $200,000 per month, depending upon the
location of the satellite, the satellite's footprint, the date of the lease and
the power of the satellite. Certain of the transponder leases are for fixed
terms while others have terms through the operational life of the applicable
satellite. The transponder leases are expected to expire between 2000 and 2005.
UVSG has contracted for backup transponder space for two of its primary
transponders, should they fail. These primary transponders are also
contractually protected from preemption. The remainder of UVSG's transponder
space is subject to preemption, although no preemption has occurred to date.
UVSG believes there is a reasonably sufficient quantity of appropriate
transponder space available to satisfy its needs for the foreseeable future.
Program Promotion and Guide Services. UVSG has developed and markets
satellite-delivered on-screen program promotion and guide services to cable
television systems and other multi-channel video programming distributors such
as DBS and telephone companies ("Programming Distributors"). Such services
include the Prevue Channel, offered through Prevue Networks, and Sneak Prevue,
offered through Sneak Prevue LLC, a joint venture owned 72% by Prevue Networks.
These services provide continuously updated on-screen video and text information
customized for each Programming Distributor, to promote the Programming
Distributor's programs and provide program schedule information to its
subscribers. The Prevue Channel is a comprehensive information source for all of
a system's channel offerings, while Sneak Prevue exclusively promotes a system's
pay-per-view offerings. As of December 31, 1996, the Prevue Channel was carried
by approximately 2,000 systems with subscribers totaling approximately 44.4
million in the United States, and Sneak Prevue was carried by over 900 systems
with subscribers totaling approximately 34.4 million subscribers in the United
States.
Prevue Networks has been expanding sales of the Prevue Channel and Sneak
Prevue services in the international marketplace. As of December 31, 1996,
Prevue Networks operated in 22 countries spanning three continents. At such
time, Prevue services reached over 350 systems and approximately 1.7 million
subscribers in Canada and, through its Prevue Channel product branded Prevue
Latino, 75 systems and approximately 1.2 million subscribers in Mexico and
Central and South America. As of December 31, 1996, Prevue Networks reached over
48 million homes with satellite-delivered services globally.
UVSG generates both license fees and advertising revenue from the Prevue
Channel, while Sneak Prevue and other products currently generate only license
fees. During 1996, approximately 48% of Prevue Networks' $49.4 million in
revenue was attributable to the Prevue Channel and Sneak Prevue fees paid by
U.S. systems, and approximately 46% came from advertising sales in the United
States.
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The Company believes that, as a result of the maturing U.S. cable
television industry's slowing subscriber growth and increasing competition from
DBS, there is a strong demand by cable operators for services such as the Prevue
Channel and Sneak Prevue to promote subscriber purchases of higher-margin
program packages and pay-per-view services. In addition, the Company believes
that as cable television channel capacity increases and the number of channels
offered by other Programming Distributors increases, the demand for program
promotion and guide services will also increase.
Through Prevue Networks, UVSG also develops and markets interactive program
guide services and software applications for use by cable television system
operators and other Programming Distributors that enable customers to review
program schedules and retrieve selected programing information on demand. These
services provide continuously updated, on-screen text and graphic information,
customized to deliver system-specific schedule and program promotion information
to subscribers. Prevue Networks' ongoing interactive operations, excluding the
cost of patent litigation described below, consists primarily of software
development to achieve compatibility with new advanced analog and digital
set-top converter platforms. Prevue Networks generated no significant
interactive revenue in 1996 ($218,000) and incurred operating expenses
(excluding depreciation and amortization) of $5.7 million ($1.3 million of which
is attributable to the StarSight patent litigation).
The Company believes that, if and when third-party manufacturers complete
the design and begin the manufacture of a significant number of set-top
converter boxes capable of delivering interactive programming services, the
demand for interactive program guide services has the potential to increase
significantly. However, at this time, the development and deployment by third
parties of the hardware which will be required to operate Prevue Networks'
interactive technology cannot be predicted. In addition, the response of
Programming Distributors and their subscribers to Prevue Networks' interactive
technology, and the likelihood of competitors succeeding with the same general
concept, but differing technology, is difficult to predict at this time.
Furthermore, UVSG's competitors or other parties may have developed or obtained,
or may develop or obtain in the future, intellectual property rights, including
patents, that UVSG may need to implement its interactive technology. The impacts
of the existence of these intellectual property rights and the ability of and
cost to UVSG to gain access to or acquire these intellectual property rights may
be significant, but cannot be ascertained at this time. UVSG is currently
engaged in litigation with StarSight with respect to certain patents held by
StarSight relating to certain functions performed by interactive program guide
services. If this litigation is resolved in StarSight's favor, it could have a
material adverse effect on the business prospects of UVSG's interactive
operations.
Prevue Networks' Prevue Channel and Sneak Prevue services compete with
other programmers for limited cable television system channel slots. Prevue
Networks believes that its Prevue services currently are the leading
satellite-delivered cable television promotion and program guide products in the
North American market. Prevue Networks continues to face competition from
Programming Distributors that have and are operating single-system program
guides or pay-per-view promotional channels similar to the Prevue services. To
some extent, Prevue Networks also indirectly competes with printed program
guides. Prevue Networks' interactive products, along with new interactive
program guides being developed by UVSG's competitors, may create competition for
Prevue Networks. Although the Company believes that UVSG is currently the market
leader in providing interactive program guide, sports and weather information,
it anticipates that the market for such interactive services will be
characterized by intense competition in the next few years.
Home Satellite Dish Services. UVSG's Superstar division markets and
distributes programming to the C-band DTH satellite dish subscriber market
through SNG, a joint venture formed effective April 1, 1996 to combine the
retail C-band DTH satellite businesses of UVSG's Superstar division and
Liberty's subsidiary Netlink USA ("Netlink"). Each of Netlink and Superstar own
50% of SNG. Liberty, whose assets are not part of the TCI Ventures Group, is a
wholly owned subsidiary of the Company.
As of December 31, 1996, approximately 1.0 million C-band DTH satellite
dish owners, or 42% of the estimated authorized C-band home satellite dish
subscriber market of 2.3 million subscribers at that date, subscribed to
programming directly through SNG. The Company believes that SNG is the largest
marketer of satellite entertainment programming in the C-band DTH satellite dish
industry in terms of number of
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subscribers. It currently markets several different packages featuring more than
100 channels of programming as well as pay-per-view movies and events to the
C-band DTH satellite dish market.
Through its business services division, Superstar provides software and
subscriber management system services, functions as a service agent in the DBS
market and markets ESPN to commercial establishments, such as bars and
restaurants. The current contract governing commissions earned as a service
agent in the DBS market expired on June 30, 1997; however, commissions on
subscribers serviced pursuant to such agreement prior to its termination will
continue to be earned through the year 2000.
Superstar also markets UVTV's satellite-transmitted WGN, WPIX and KTLA
superstations to other packagers and marketers of programs to the home satellite
dish industry through its wholesale division. As of December 31, 1996,
approximately 1.8 million C-band home satellite dish households subscribed to
one or more of UVTV's three superstations through home satellite dish packages
offered by SNG and other home satellite dish packaging and marketing companies.
Liberty, through Netlink, also conducts wholesale operations in the C-band DTH
satellite industry and thus competes with Superstar's wholesale operations.
Effective January 1, 1997, UVSG began reporting the operating results of
Superstar's wholesale division with those of UVTV, as they are in the same line
of business.
Superstar's revenue in 1996 was $189.2 million and its operating income was
$26.8 million (in each case, after excluding Liberty's 50% interest in SNG).
SNG competes with several other large C-band DTH satellite dish program
packagers, some of which are affiliated with well-known, large programmers and
cable television system operators. Because a significant portion of SNG's sales
is generated through home satellite dish dealers, SNG also competes for dealer
relationships on the basis of commission rates and quality of service offered to
the dealer and its customers. In addition, the C-band DTH satellite dish market
faces competition from cable television as well as technologies such as DBS
services, which were launched in 1994. With the continued expansion of cable
systems and the emergence of DBS systems, the C-band DTH industry is no longer
growing. UVSG has reported that during the twelve month period ended March 31,
1997, the industry decreased by 136,000 subscribers or 6%. DBS uses Ku-band
frequencies that can be received by significantly smaller and less expensive
receive terminals than those home satellite dishes that receive C-band
frequencies. Because of the smaller dish size, DBS is more widely accepted than
C-band DTH satellite dish systems, particularly in urban markets. In addition,
the FCC recently preempted most zoning and other restrictions by state and local
governments, as well as by certain private associations, regarding the placement
of DBS video reception equipment. This preemption does not extend, however, to
the larger C-band dishes. The Company believes that the entry of DBS will serve
to decrease the size of the C-band market in the short-term and long-term. The
Company also believes that for the near future more programming will be
available for the C-band DTH satellite dish market than the DBS market because
the majority of programming for cable television systems is transmitted on C-
band frequencies. Given the initial investment costs and life of a C-band DTH
satellite dish system, the Company believes that a significant portion of
current C-band DTH satellite dish owners will continue to use home satellite
dish services rather than invest in a DBS system.
Satellite Distribution of Video Entertainment Services. UVTV markets and
distributes to Programming Distributors video and audio services such as
superstations WGN (Chicago), WPIX (New York) and KTLA (Los Angeles), three of
the five independent satellite-delivered television superstations in the United
States. As of December 31, 1996, television channels transmitted by UVTV served
an aggregate of approximately 42 million subscribers, approximately 94% of which
were attributable to WGN, the country's second largest superstation in terms of
the number of subscribers. UVTV's revenue for 1996 was $26 million. Domestically
the number of WGN subscribers decreased by 3.5 million or 9% from March 1996 to
March 1997, primarily due to the impact from TCI's discontinuing WGN in certain
of its wholly owned systems, partially offset by new system launches and
existing system subscriber growth aggregating approximately 1.1 million
subscribers. The country's largest superstation in terms of the number of
subscribers is WTBS (Atlanta), which is distributed by a subsidiary of Liberty.
UVTV faces competition from over 100 cable network suppliers, including
other superstations, for limited channel capacity on cable television systems.
Cable television systems must make copyright payments to the
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Copyright Office when they receive and distribute satellite-transmitted
television broadcasts, such as WGN and other superstations, which is a separate,
less controllable cost than the bundled fee incurred and paid directly to the
copyright holder when distributing a cable television network. These and other
factors can influence a cable television system's decision as to whether to
select UVTV's superstations for distribution. Since no exclusive rights are
granted for the transmission of superstations, UVTV also faces potential direct
competition from other operators who may decide to transmit stations currently
being marketed by UVTV. Because a significant number of UVTV's customers have
entered into service agreements generally with a three-year initial term, UVTV
believes its customers would not be able to change immediately to another
company transmitting those superstations. In addition, while the 1992 Cable Act
generally requires all Programming Distributors to obtain the prior consent of
broadcast stations, including superstations, before retransmitting their
signals, this requirement does not apply to those superstation signals that were
on a satellite prior to May 1, 1991. All of UVTV's superstations were being
retransmitted prior to that time, and thus UVTV is exempt from retransmission
consent requirements. UVTV believes that these provisions of the 1992 Cable Act
may create a barrier to the emergence of new superstations because it may be
difficult to obtain retransmission consent from the stations at an economically
feasible price.
Satellite Transmission Services for Private Networks. SpaceCom provides
point-to-multipoint audio and data satellite transmission services for various
customers throughout North America, primarily to paging network operators, radio
programmers and financial information providers. SpaceCom leases two C-band and
two Ku-band satellite transponders, subdivides the capacity of these
transponders into a number of smaller channel units and resells these units
using its value-added transmission methods and proprietary technology.
As of December 31, 1996, SpaceCom's two C-band transponders were occupied
to approximately 70% of capacity; one of its Ku-band transponders was filled to
approximately 68% of capacity, and the other, which uses a newer, superior (in
terms of reliability, flexibility and security) proprietary transmission
technology (the "FM Cubed" technology), was operating at approximately 100% of
capacity. SpaceCom believes these transponders will satisfy its capacity
requirements through 1997 and is focusing on selling and implementing a new
proprietary technology which has the same characteristics as the FM Cubed
technology, but at half its price with higher priced receivers.
SpaceCom generated $15.6 million in revenue in 1996. Approximately 52% of
SpaceCom's 1996 revenue was attributable to paging customers; SpaceCom serves 8
of the 10 largest paging companies in the United States.
SpaceCom competes with a number of other companies in the one-way
point-to-multipoint satellite distribution business. Many of these competitors
have duplicated and use SpaceCom's original proprietary technology. SpaceCom's
newer FM Cubed technology is difficult and expensive to reverse engineer. In
addition, SpaceCom has two patents covering certain aspects of its FM Cubed
technology, although there can be no assurances that these patents will afford
SpaceCom significant protection against competitors with similar products or
technology. SpaceCom also competes with two-way satellite communication network
service providers as well as telephone companies, although it believes its
point-to-multipoint technology is less expensive for customers with a large
number of sites that do not require two-way communication capabilities.
SpaceCom's customers typically sign contracts for initial terms of five years or
greater, often through the end of the life of the satellite. Historically,
SpaceCom has retained the majority of its significant customers at the time a
contract is renewed, however some customers have transitioned to competing
services.
Software Development and Systems Integration Services. UVSG owns a 70%
interest in SSDS, which provides information technology consulting, integration
and software development services to organizations that are using or migrating
to distributed, open computing environments. Open systems computing environments
are created from various components, which may include networks of personal
computers, file servers, information storage and retrieval devices,
communications and video equipment and the software necessary to perform desired
functions and to link the various components of the systems. SSDS provides
technology consulting and software development to its customers to design,
integrate and manage open systems components within an enterprise-wide
environment.
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SSDS currently markets its services to three primary market segments: (a)
commercial, (b) public sector (consisting of federal, state and local government
agencies, other than defense-related agencies), and (c) defense-related
agencies. During the year ended December 31, 1996, the commercial, public sector
and defense market segments represented 37%, 19% and 44%, respectively, of
SSDS's total revenues. SSDS's revenue for 1996 was $36.2 million.
Generally, SSDS's larger contracts in the public sector and defense
segments of its business range in duration from one to seven years, subject to,
in certain cases, the right of the other party not to renew the contract,
exercisable annually. Its contracts in the commercial segment of its business
are generally of shorter duration (one day to one year).
The information technology and systems integration field is highly
fragmented and competitive and is comprised of a substantial number of
participants, many of which are much larger than SSDS. In addition, the
competitive market includes many large consulting and computer equipment
companies that offer professional services. For its higher-end services, such as
business process analysis or strategic system architecture, SSDS competes
primarily on its technical capabilities and timeliness. For its other services,
such as complex system design, implementation, integration and migration, SSDS
competes primarily on superior experience and quality.
Agreements with TCI. The TCI Group has agreements with UVSG for the
carriage of UVSG's Prevue Networks and superstation programming on certain of
the cable systems attributed to the TCI Group and for UVSG's subscriber
management services, and UVSG purchases programming from companies attributed to
the Liberty Media Group. Many of these contracts were entered into prior to the
Company's acquisition of an equity interest in UVSG.
Regulation. The satellite transmission, cable and telecommunications
industries are subject to federal regulation, including FCC licensing and tariff
requirements. The cable and telecommunications industries are also subject to
extensive regulation by local and/or state authorities. While most cable and
telecommunications industry regulations do not apply directly to UVSG, they
affect Programming Distributors, the primary customers for UVSG's products and
services. In the past, uncertainty about proposed or even rumored regulations
has occasionally caused UVSG's Programming Distributor customers to postpone
purchasing decisions and actions.
Under the "cable compulsory license" provisions of the Copyright Act,
Programming Distributors are required to pay copyright fees that arise from
their reception and retransmission of satellite-transmitted television
broadcasts such as WGN and other superstations. These compulsory copyright fees
(which are paid to the Copyright Office and then distributed by the Copyright
Royalty Tribunal to copyright owners) are in lieu of separately negotiated
copyright payments between the programmers and the Programming Distributors.
These provisions also grant an exemption which allows UVTV and other "passive
carriers" to transmit and market its superstations without agreements with, or
copyright payments to, the broadcast station transmitted.
The Copyright Act and U.S. Copyright Office regulations generally impose a
significantly higher copyright fee on cable television systems in certain
markets for carrying more than two distant independent television stations. This
copyright fee structure limits the extent to which cable television systems are
able to carry superstations. A reduction in the number of competitive
superstations within the industry could increase distribution for UVTV's
superstations, as a replacement product, without increasing a cable operator's
overall copyright payments.
SHVA provides for a "home satellite dish compulsory copyright license" for
the retransmission of network and superstation signals and programming directly
to subscribers with a home satellite dish. Under the terms of the SHVA,
satellite carriers, such as Superstar, are responsible for paying compulsory
copyright fees to the Copyright Office for the sale of superstation signals.
Currently, a proceeding regarding a potential change in the compulsory copyright
fees under SHVA is pending before the Copyright Arbitration Royalty Panel, with
a decision expected sometime this Fall. Any change in such rates could be
applied retroactively as
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of July 1, 1997. The Satellite Home Viewer Act of 1994 extended the home
satellite dish compulsory license through the end of 1999.
Legislation has been introduced from time to time to repeal the cable
compulsory license provision, although no such legislation has been passed by
Congress. At Congress' request, the Copyright Office conducted a review of
compulsory licensing for both the cable and satellite industries and issued its
report and legislative proposals to Congress on August 1, 1997. Among other
things, the Copyright Office's report urges Congress to: (1) eliminate the
current December 31, 1999 sunset for the satellite compulsory license and
refrain from imposing any further sunset; (2) maintain the satellite and cable
compulsory licenses as separate licenses, but eliminate, wherever possible, any
differences between the two licenses; and (3) extend the satellite compulsory
license to the retransmission by satellite carriers, such as SNG, of local
broadcast signals in their local area. The report also suggests changes to the
cable and satellite copyright rate structures which, if enacted, could result in
increased copyright payments by cable systems and satellite carriers. Finally,
the report suggests that Congress further study whether the passive carrier
exemption should continue to apply to satellite carriers, such as UVTV, in cases
where the carrier is retransmitting a signal on which national advertising has
been substituted by the broadcaster for the local advertising on the
over-the-air signal. Enactment of reform legislation which eliminates or limits
the scope of the current exemption could hinder or prevent UVTV from marketing
superstation services such as WGN.
The 1992 Cable Act, which established substantial rate regulation for
certain services and equipment provided by most cable television systems in the
United States, may impair UVSG's ability to offer competitive rates and volume
discounts on certain of its products and services and may affect the rates
charged by Superstar to home satellite dish programming packagers and other
Programming Distributors. For example, the FCC's "program access" rules prohibit
certain satellite programmers which are "affiliated" (under the FCC's
affiliation rules) with certain types of Programming Distributors (such as cable
operators) from, among other things: (1) discriminating in prices, terms, or
conditions between various Programming Distributors; and (2) entering into
agreements with certain Programming Distributors which provide for exclusivity,
except in limited circumstances. To the extent UVSG's programming is deemed to
be affiliated with Programming Distributors covered by these rules, such
programming is also subject to these pricing and marketing limitations.
Currently pending and upcoming FCC proceedings under the 1992 Cable Act
could further restrict channel capacity on DBS and cable systems. Currently
pending before the FCC is a rulemaking to implement provisions of the 1992 Cable
Act that require DBS providers to devote 4-7% of their channel capacity to
informational and educational programming. In addition, the FCC has indicated
that it plans to initiate a proceeding to determine whether cable operators are
required to carry any or all of the digital signals delivered by local
broadcasters using the additional 6 MHz of spectrum recently awarded to
broadcasters by the FCC. To the extent the FCC's decisions in either or both of
these proceedings reduce the number of available channels for which cable or DBS
operators can select programming, the ability of UVSG programming to gain or
maintain carriage on such systems could be affected.
The 1996 Act requires the closed captioning of all video programming other
than programming which has received an exemption from the FCC. A proceeding is
currently underway at the FCC to establish closed captioning rules and to
determine which classes of program services will receive exemptions. Prevue
Networks requested such an exemption for the Prevue Channel and Sneak Prevue,
based on the primarily textual and promotional nature of the programming. If the
FCC denies Prevue Networks' exemption request, implementation of closed
captioning could add significant annual costs to Prevue Networks' business. The
FCC is expected to issue its closed captioning rules in August 1997.
The 1996 Act will also affect UVSG indirectly by creating more competition
and less regulation within the video services marketplace. For example, the 1996
Act authorized local exchange carriers to own and program video distribution
systems in their telephone service areas. At the same time, the 1996 Act
provides cable operators with greater pricing flexibility, deregulates cable
rates more quickly than under prior law, and adds a mechanism for aggregating
the costs for customer equipment in order to facilitate deployment of digital
technology. These legislative developments, in turn, could increase the number
of homes capable of receiving video services which would result in an increase
in the potential market for UVSG services.
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Additional Information. UVSG 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 SEC (under SEC file number
0-22662), all of which are available from the SEC in the manner described above
under "AVAILABLE INFORMATION." In addition, the UVSG Class A Common Stock is
quoted on the National Market tier of The Nasdaq Stock Market under the symbol
"UVSGA."
INTERNET SERVICES
@HOME
General. @Home, which provides Internet services over the cable television
infrastructure to consumers and businesses, was founded by the Company and KPCB,
a venture capital firm, in March 1995. In August 1996, Comcast and Cox became
investors in @Home, and in April 1997, Rogers and Shaw became investors in
@Home. On July 11, 1997, @Home consummated an initial public offering of @Home's
Series A Common Stock. After giving effect to the @Home IPO, the Company's
equity interest and voting power in @Home was approximately 39% and 72%,
respectively. @Home's stock is traded on the National Market tier of The Nasdaq
Stock Market under the symbol "ATHM."
@Home began commercial operation of the @Home service in September 1996 and
currently offers two Internet services, @Home for residential consumers and
@Work for businesses. @Home's primary offering, the @Home service, allows
residential subscribers to connect their personal computers via cable modem to a
new high-speed network developed and managed by @Home. This service enables
subscribers to receive the "@Home Experience," which includes Internet service
over HFC cable at peak data transmission speeds 300 times faster than typical
dial-up connections, "always on" availability and rich multimedia programming
through an intuitive graphical user interface. The technology foundation of the
@Home Experience is the @Network, a "parallel Internet" that optimizes traffic
routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing @Home's ability to address performance
bottlenecks before they affect the user experience. The content foundation of
the @Home Experience is provided by @Home's @Media group, which aggregates
content, sells advertising to businesses and will provide premium services to
@Home subscribers. For businesses, @Home's @Work services provides a platform
for Internet, intranet and extranet connectivity solutions and networked
business applications over both cable infrastructure and leased digital
telecommunications lines. By combining the @Network's distributed architecture
with cable, telephone and technology relationships, the @Work services provide a
compelling platform for nationwide delivery of network-based business
applications.
@Home was founded on the premise that the cable infrastructure could enable
the fastest, most cost-effective delivery mechanism for residential Internet
services and that the creation of a "parallel Internet" would enable @Home to
avoid the fundamental architectural drawback of the Internet, which would limit
the actual speed of these services. As a result, @Home assembled a team of
industry experts to develop an advanced network architecture and the custom
hardware and software products that would address these limitations. As of June
30, 1997, @Home had expended more than $77.5 million on capital expenditures and
operating costs and expenses (including deferred compensation) to design and
build the @Network and the corporate infrastructure necessary to support the
rollout of the @Home and @Work services. As of June 30, 1997, @Home had
developed a nationwide backbone, designed and implemented a Network Operations
Center with end-to-end management capabilities, deployed regional data centers
in 14 geographic areas, implemented an integrated customer management system
including billing and support, implemented a customized browser and aggregated
the initial multimedia content required to deliver the @Home service to
subscribers.
The @Network is a scalable, distributed, intelligent network architecture
that combines a private high-speed nationwide backbone with distributed caching.
Caching moves frequently accessed information close to the user to avoid
multiple transmissions of the same data over the backbone. The @Network is an
end-to-end network solution, enabling @Home to manage the network 24 hours a day
from a central Network Operations Center and enhancing its ability to address
performance bottlenecks before they affect the user experience. All elements of
the @Network are readily scalable, enabling it to provide sustainable high
performance as usage increases.
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@Home Service. The @Home service is a comprehensive Internet solution that
leverages the two-way HFC cable television infrastructure and @Home's
technological and programming capabilities to provide the "@Home Experience,"
which @Home believes is the most compelling consumer Internet experience
currently available. By connecting via a cable modem to the @Network through the
local cable infrastructure, @Home subscribers' personal computers can achieve a
peak data transmission speed over two-way HFC cable of 10 Mbps (10,000 Kbps),
over 300 times faster than the peak data transmission speed of a 28.8 Kpbs
modem. This high bandwidth is critical for enabling sophisticated multimedia
applications, advertising, online commerce and online interactive games. In
addition, the two-way cable infrastructure is "always on," providing
instantaneous access to the Internet and eliminating the need for a tedious
dial-up procedure using the telephone network.
@Home's programming services, provided by the @Media group, enhance the
@Home Experience by aggregating high-quality and compelling multimedia content
available on the Internet and delivering this content through an intuitive
graphical user interface. The cornerstone of this programming is the @Home
Guide, the user's guide to the high-quality multimedia content on the Web. The
@Home Guide is organized around a series of "channels," which are defined by
both topical subjects (such as news, technology, sports or popular culture) and
audiences (such as children, game players or shoppers). With the @Home Guide,
@Home generates and directs regular audience traffic to @Media and content
providers' offerings. @Home believes the @Home Guide broadens the appeal of
online services beyond technology enthusiasts to the mass market by simplifying
navigation, increasing the subscriber's knowledge of Internet resources,
presenting compelling high-bandwidth content with animated graphics,
near-CD-quality audio and video clips, and stimulating persistent usage by
promoting current events and interesting new services.
@Home has entered into distribution arrangements for the @Home service with
seven leading cable companies in North America: TCI, Comcast, Cox, Rogers, Shaw,
Marcus Cable Operating Company, L.P. and IP IV. The @Home Cable Partners operate
cable systems which pass approximately 44 million homes in North America. @Home
believes that approximately two million of these homes are currently passed by
upgraded two-way HFC cable. Subject to certain exceptions, TCI, Comcast and Cox
(the "@Home Principal Cable Stockholders") have granted @Home the exclusive
right to be the provider of high-speed residential consumer Internet services
over their cable systems for an agreed period. (The TCI entity which will be the
distributor of the @Home services will continue to be a member of the TCI Group,
and the assets and business of such entity will not be included in the TCI
Ventures Group). In March 1997, @Home entered into exclusive arrangements for
the distribution of its @Home service under the name "Wave@Home" in Canada
through Rogers and Shaw, two of the leading cable system operators in Canada.
Through Rogers and Shaw, which have the right to redistribute the Wave@Home
service to other cable system operators in Canada, @Home expects to expand the
distribution of its service to Canada.
Transmission of the @Home service over cable is dependent on the
availability of high speed two-way HFC cable infrastructure. The @Home Cable
Partners have announced plans to complete the upgrade to two-way HFC of a
majority of the homes passed in their cable systems within five years. However,
cable system operators have limited experience with these upgrades, and the
investments in cable plant necessary to upgrade the cable infrastructure to
two-way HFC cable have placed a significant strain on the financial, managerial,
operating and other resources of the @Home Cable Partners and other cable system
operators, most of which are already highly leveraged. Thus, these upgrades have
been, and @Home expects they will continue to be, subject to change, delay or
cancellation. Although @Home's commercial success depends on the successful and
timely completion of these infrastructure upgrades, the @Home Cable Partners are
under no obligation to @Home to upgrade systems or to roll out, market or
promote @Home's services. In addition, none of the @Home Cable Partners has
agreed to any specific schedule for rolling out two-way HFC cable infrastructure
improvements, and the @Home Cable Partners are not contractually required to
achieve any specific rollout schedule. Although there are no contractual
obligations relating to the upgrade of their cable systems, TCI, Comcast and Cox
have agreed, subject to certain exceptions, that @Home will be their exclusive
provider of high-speed residential consumer Internet access services during the
period ending June 4, 2002.
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Specifically, each @Home Principal Cable Stockholder on behalf of itself
and its controlled affiliates has agreed not to conduct, participate in or have
a material beneficial ownership interest in any business within the United
States (a "Restricted Business") that involves (a) the provision of a
residential Internet service over the cable television plant of the @Home
Principal Cable Stockholder at data transmission speeds greater than 128 Kbps
and whose primary purpose is the provision to consumers of entertainment,
information content, transactional services or electronic mail, chat and news
groups (a "Consumer Purpose"), (b) the connection by the @Home Principal Cable
Stockholder of its cable television plant directly or indirectly to any Internet
backbone for a Consumer Purpose at data transmission speeds greater than 128
Kbps or (c) the provision of an Internet backbone service. These exclusivity
provisions do not apply to the creation or aggregation of content or, among
other things, the following services: (i) the provision of telephony services,
(ii) the provision of services that are primarily work-related (such as the
@Work services), (iii) the provision of Internet services that do not use the
cable television infrastructures of the @Home Principal Cable Stockholders, (iv)
the provision of any local Internet service that does not require use of an
Internet backbone outside a single metropolitan area, (v) the provision of
services that are utilized primarily to connect students to schools, colleges or
universities, (vi) the provision of Internet telephony, Internet video telephony
or Internet video conferencing, (vii) the provision of certain limited Internet
services for display on a television, (viii) the provision of certain Internet
services that are primarily downstream services where the user cannot send
upstream commands in "real-time," (ix) the provision of streaming video
transmissions that include video segments longer than ten minutes in duration or
(x) limited testing, trials and similar activities of less than six months.
These exclusivity provisions bind TCI and its controlled affiliates, which will
include the TCI Group entity which will be the distributor of the @Home service.
The exclusivity provisions described above may be terminated under the
following circumstances: (i) any local cable operator affiliated with the @Home
Cable Partners (an "Affiliated LCO") may terminate its exclusivity obligations
if @Home fails to roll out the @Home service in such operator's territory by
mutually agreed dates in a schedule set forth in a local cable operator
agreement; (ii) the @Home Principal Cable Stockholders may terminate all
exclusivity obligations upon a change in law that materially impairs certain of
the @Home Principal Cable Stockholders' rights under their distribution
agreement with @Home; (iii) Comcast or Cox may terminate all @Home Principal
Cable Stockholders' exclusivity obligations if there is a change of control of
TCI at any time or if certain subscriber penetration levels for the @Home
services are not achieved by TCI and its affiliates on June 4, 1999 or any
anniversary thereof; and (iv) Comcast may terminate its exclusivity obligations
at its election after June 4, 1999 if it permits a portion of its equity in
@Home to be repurchased by @Home at Comcast's original cost. Comcast has
informed @Home that Comcast has entered into an agreement with Microsoft
Corporation ("Microsoft") pursuant to which Microsoft can require Comcast to
terminate its exclusivity obligations after June 4, 1999. Although Microsoft has
stated in the agreement that it has no present intention to do so, there can be
no assurance that Microsoft will not be more likely than Comcast to terminate
Comcast's exclusivity obligations.
Until such time as the applicable @Home Principal Cable Stockholder ceases
to be obligated under the exclusivity provisions set forth above or, if the
exclusivity provisions are terminated by reason of TCI's failure to meet
specified subscriber penetration requirements, until June 4, 2002, @Home has
agreed not to (except through such @Home Principal Cable Stockholder) offer or
provide Internet services at data transmission speeds greater than 128 Kbps to
residences in the geographic area served by the cable systems of such @Home
Principal Cable Stockholder that remains in compliance with the exclusivity
provisions, subject to certain conditions.
As of June 30, 1997, @Home had launched the @Home service through TCI,
Comcast, Cox and IP IV in portions of 13 cities and communities (of which 11
have revenue-paying subscribers) in the United States and had approximately
7,000 subscribers, and @Home was in the process of converting to its @Home
service approximately 5,000 subscribers currently receiving the Wave interactive
service provided by Rogers and Shaw in Canada. Subscribers of @Home subscribe to
its services through the local cable operator, and thus the local cable operator
(and not @Home) will substantially control the customer relationship with the
subscriber. The local cable operator generally has discretion regarding the
pricing of the @Home service to subscribers in its territory (except for certain
premium services for which @Home contracts directly with the
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subscriber). The @Home service is currently offered to consumers in the United
States for flat monthly fees generally ranging from $35 to $55, including a
cable modem provided by the Affiliated LCO. Installation of the @Home service is
provided by the Affiliated LCO at a price generally ranging from $75 to $175.
Under the current arrangement with the United States @Home Cable Partners, @Home
receives 35% of monthly fees and fees for premium services, and the Affiliated
LCO retains the entire installation payment. In Canada, @Home will receive a
smaller percentage of the monthly subscription fees billed by Rogers, Shaw and
their sub-distributors because Rogers and Shaw will bear the costs of providing
additional customer support, data transport, marketing and programming for the
Canadian market which are not borne by the Affiliated LCOs in the United States.
Each @Home Principal Cable Stockholder and its controlled affiliates are
entitled to "most favored nation" terms and conditions of carriage with respect
to the distribution of @Home's services.
To expand distribution, @Home is aggressively seeking to form strategic
relationships with additional United States and international cable companies.
In order to shorten time to market for cable operators, @Home provides a turnkey
solution, which includes not only a technology platform, but also a national
brand, marketing, customer service and billing. In addition, to access
residences that are not upgraded to two-way HFC cable, @Home is also exploring
alternative delivery mechanisms such as the use of one-way HFC cable with
telephone return and the use of high-speed telecommunications services for
multiple dwelling units.
@Work Services. @Work services provide a platform for corporate Internet,
intranet and extranet connectivity solutions and have the ability to provide a
series of networked business applications over both HFC cable and leased digital
telecommunications lines that leverage the @Network. In order to accelerate
deployment of @Work services into metropolitan areas, @Home has established a
strategic relationship with Teleport to provide targeted co-location facilities
and local telephone circuits for infrastructure and subscriber connectivity. By
combining the @Network's distributed architecture with cable, telephone and
technology relationships, the @Work services provide a compelling platform for
nationwide delivery of network-based business applications. @Home has developed
this platform at a low incremental cost by leveraging its existing @Network
investment.
@Home offers @Work Internet service and plans to offer @Work Remote
services. The @Work Internet service delivers dedicated, high-speed, end-to-end
managed Internet connectivity to commercial enterprises over both local
telephone circuits and HFC cable. As of June 30, 1997, the @Work Internet
service was available in five major metropolitan markets: Chicago, Hartford, San
Diego, the San Francisco Bay Area and Seattle. At such date, @Home was receiving
revenue from 27 @Work Internet customers and had agreements with more than 160
additional business customers to begin to install the service. @Home's @Work
Remote service offers secure, high-speed telecommuting solutions via HFC cable
and virtual private networks among remote users, branch offices and a corporate
local area network. The @Work Remote service includes the network equipment and
software needed to connect the corporate local area network securely to the
@Network via high-bandwidth local telephone circuits. @Home is currently
negotiating arrangements with the @Home Cable Partners to offer the @Work Remote
service over the cable infrastructure for telecommuters.
@Media Services and Technologies. In addition to aggregating content and
providing the @Home Guide, the @Media group sells advertising and, in
partnership with content providers, packages advertising-supported transaction
and premium services that it will offer to @Home subscribers. Advertisers and
content providers can utilize @Media technologies that enable them to exploit
the high-bandwidth, multimedia capabilities of the @Network. The @Media division
sells advertising through the "B*box," a broadband audio/video advertising space
located in the @Home Guide. With the B*box, advertisers are not constrained by
the Web banner paradigm and can broaden their creative presentation using video
clips, near-CD-quality audio and animation. @Home has a broad range of
revenue-generating advertisers, including General Motors, Toyota and Unilever.
Advertisers have reported response rates (click-throughs) substantially greater
than they currently experience with traditional Web banner advertisements. @Home
believes that advertisers' ability to present more compelling messages to online
users will lead to advertising rates greater than those charged for banner
advertising on the Web. @Home retains 100% of all U.S. national advertising
revenue delivered on the @Home service through the U.S. @Home Cable Partners,
but Affiliated LCOs of the U.S. @Home Cable
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Partners retain 100% of revenue generated from local service offerings that
relate to programming within the designated local areas of the home page for the
@Home service, such as revenue from advertising.
@Home believes that growth in its subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing efforts,
@Home has developed a variety of compelling programming services delivered
through the @Home Guide in order to drive incremental subscriber penetration. In
addition to receiving advertising fees, the @Media programming services provide
a variety of revenue sources. Examples of @Media programming services include
real-time news and entertainment services, enhanced search and directory
services, online services, near CD quality digital audio services, the ability
to purchase and download software titles at speeds substantially faster and with
greater reliability than a typical dial-up modem, the ability to download and
play popular Internet games against other online players, and interactive
shopping.
The @Media group offers a series of technologies to assist advertisers and
content providers in delivering multimedia advertising and premium services,
including technologies which enable @Home's content partners to: (i) place
copies of their content and applications locally on the @Network; (ii) connect
directly to @Home's high-speed network without traversing the congested
Internet; and (iii) deliver advertising, content and services such as
continually updated news and sports information, from one source to many
subscribers simultaneously.
Competition. The markets for consumer and business Internet services and
online content are extremely competitive, and the Company expects that
competition will intensify in the future. @Home's most direct competitors in
these markets are ISPs, national long distance carriers and local exchange
carriers, wireless service providers, OSPs and Internet content aggregators.
Many of these competitors are offering (or may soon offer) technologies that
will attempt to compete with some or all of @Home's high-speed data service
offerings. Such technologies include ISDN and xDSL. @Home also competes with
other cable-based data services that are seeking to contract with cable system
operators to bring their services into geographic areas that are not covered by
an exclusive relationship with @Home. The bases of competition in these markets
include transmission speed, reliability of service, ease of access,
price/performance, ease-of-use, content quality, quality of presentation,
timeliness of content, customer support, brand recognition, operating experience
and revenue sharing. The Company believes that @Home compares favorably with its
competitors with respect to each of these factors, except brand recognition,
which it is starting to build. Many of @Home's competitors and potential
competitors have substantially greater resources than @Home, and there can be no
assurance that @Home will be able to compete effectively in its target markets.
ISPs, such as Netcom On-Line Communications, Services, Inc. and PSInet
Inc., provide basic Internet access to residential consumers and businesses,
generally using existing telephone network infrastructures. This method is
widely available and inexpensive, but performance is limited. Barriers to entry
are low, resulting in a highly competitive and fragmented market.
Long distance IXCs, such as AT&T Corp. ("AT&T"), MCI Communications
Corporation, and Sprint, have deployed large-scale Internet access networks and
sell connectivity to business and residential customers. The RBOCs and other
local exchange carriers have also entered this field. Many of such carriers are
offering diversified packages of telecommunications services, including Internet
access service, to residential customers and could bundle such services
together, which could place @Home at a competitive disadvantage.
Wireless service providers, including AT&T and Hughes Network Systems, are
developing wireless Internet connectivity, such as MMDS, local multipoint
distribution service ("LMDS") and DBS.
OSPs include companies such as America Online, Inc. ("America Online"),
CompuServe Corporation ("CompuServe"), and Microsoft's Microsoft Network ("MSN")
that provide, over the Internet and on proprietary online services, content and
applications ranging from news and sports to consumer video conferencing. These
services are designed for broad consumer access over telecommunications-based
transmission media, which enables the provision of data services to the large
group of consumers who have personal computers with modems. In addition, they
provide basic Internet connectivity, ease-of-use and consistency of environment.
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Internet content aggregators seek to provide a "one-stop" shop for Internet
and online users. Leading companies in this area include America Online,
CompuServe, Excite, Inc., Microsoft and Yahoo! Inc. In this market, competition
occurs in acquiring both content providers and subscribers. The principal bases
of competition in attracting content providers include quality of demographics,
audience size, cost-effectiveness of the medium and ability to create
differentiated experiences using aggregator tools. The principal bases of
competition in attracting subscribers include richness and variety of content
and ease of access to the desired content. The proprietary online services such
as America Online, CompuServe and MSN have the advantage of a large customer
base, industry experience, many content partnerships and substantial resources.
@Home's competitors in the cable-based services market are those cable
companies that have developed their own cable-based services and market those
services to unaffiliated cable system operators that are planning to deploy data
services. Several cable system operators, including Time Warner Inc. ("Time
Warner") and the Media One subsidiary of US WEST, have deployed high-speed
Internet access services over their existing local HFC cable networks.
Specifically, Time Warner, the second largest cable company in the United
States, has established its own cable-based high-speed data service with
proprietary content, called Road Runner. Time Warner plans to market the Road
Runner service through Time Warner's own cable systems as well as to other cable
system operators nationwide. Media One has developed another service called
Highway One, which offers high-speed Internet services to its existing
customers. Others that have publicly announced limited-area trials for their own
cable-based Internet services include Adelphia Communications Corporation,
BellSouth Corporation and Jones Intercable, Inc. Some of these companies, such
as Time Warner, have their own substantial libraries of multimedia content, and
the other competitors could establish strategic relationships with content
providers, which could provide them with a significant competitive advantage.
Many of @Home's competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than @Home.
Such competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing Internet services or online content than @Home. There can be no
assurance that @Home will be able to compete successfully against current or
future competitors or that competitive pressures faced by @Home will not
materially adversely affect @Home's business, operating results or financial
condition. Further, as a strategic response to changes in the competitive
environment, @Home may make certain pricing, service or marketing decisions or
enter into acquisitions or new ventures that could have a material adverse
effect on @Home's business, operating results or financial condition.
Government Regulation. Although @Home's services are not directly subject
to current regulations of the FCC or any other federal or state communications
regulatory agency, changes in the regulatory environment relating to the
Internet connectivity market, including regulatory changes that, directly or
indirectly, affect telecommunications costs, limit usage of subscriber-related
information or increase the likelihood or scope of competition from the RBOCs or
other telecommunications companies, could affect the prices at which @Home may
sell its services. For example, the FCC has adopted rules requiring discounts on
Internet connectivity rates for qualifying schools and libraries, although @Home
may be eligible for reimbursements from the FCC in the amount of such discounts.
In addition, regulation of cable television rates may affect the speed at which
cable operators who have agreed or will agree in the future to provide the @Home
service will be able to upgrade their cable systems as necessary to carry
@Home's services. Similarly, enactment of proposed privacy legislation currently
pending in Congress, which would restrict the use of subscriber information by
interactive computer services for marketing and other purposes, could adversely
affect the marketing of @Home's services as well as its revenues from
advertising. The @Home Cable Partners have advised @Home that the local cable
operators typically have elected to classify the provision of all or some of the
@Home services as "additional cable services" under their respective local
franchise agreements, and to pay franchise fees in accordance therewith. Local
franchise authorities may attempt to subject cable systems to higher or other
franchise fees or taxes or otherwise seek to require cable operators to obtain
additional franchises, in connection with their distribution of the @Home
service. There are thousands
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of franchise authorities, and thus it will be difficult or impossible for @Home
or such cable operators to operate under a unified set of franchise
requirements. It is possible that governmental authorities may attempt to impose
some type of additional regulation of cable systems carrying the @Home services.
In the event that the FCC or another governmental agency were to classify @Home
or such cable operators as "common carriers" of Internet services, or cable
operators were to seek such classification as a means of protecting themselves
against liabilities, @Home's rights as the exclusive Internet service provider
over the systems of TCI, Cox and Comcast could be lost. In addition, if @Home,
the @Home Cable Partners or such cable operators were classified as common
carriers, they could be subject to government-regulated tariff schedules for the
amounts they could charge for their services and would likely be required to pay
higher rates to ILECs for carrying @Home traffic. Alternatively, such local
cable operators or federal or state regulators could attempt to treat the
provision of @Home's services as "information services" under federal law. While
the FCC does not, at present, regulate the provision of information services,
such services could, in the future, be the subject of federal regulation, state
regulation and/or special fees or taxes. Given the close relationship of the
information services classification to the "enhanced services" classification
established years ago in the common carrier context, a classification of @Home
as an information service may also increase the risk that common carrier
regulation would be imposed on cable operators distributing the @Home service.
Such regulation could affect the willingness of such local cable operators to
offer @Home's services. To the extent @Home increases the number of foreign
jurisdictions in which it offers its services, @Home will be subject to
additional governmental regulation.
Management. The Company currently owns approximately 39% of the equity in
@Home. This interest includes ownership of all of the outstanding shares of
@Home's Series B Common Stock, which carries ten votes per share, and
approximately 36% of the outstanding shares of @Home's Series A Common Stock,
giving the Company approximately 72% of the voting power in @Home. Pursuant to
@Home's certificate of incorporation and based on current stock ownership, TCI,
as the holder of all of the @Home Series B Common Stock, has the right to elect
five of the 11 members of @Home's board of directors (the "Series B Directors");
KPCB, as the owner of all of @Home's Series K Common Stock, has the right to
elect one member, and the holders of Series A Common Stock (of which TCI,
together with either Cox or Comcast, holds a majority) have the right to elect
two directors (the "Series A Directors") who are not officers or employees of
@Home and are not affiliates or associates of TCI, Comcast or Cox. The remaining
three directors (the "At-Large Directors") are elected by the holders of all
series of @Home's common stock, voting together as a single class (of which
TCI's shares represent a majority of the voting power). Although the foregoing
would indicate that TCI acting alone has the power to elect eight of the 11
members of @Home's board, pursuant to a stockholders agreement (the "@Home
Stockholders Agreement") among TCI, Comcast, Cox, KPCB and @Home, TCI has ceded
a portion of that authority by agreeing, subject to certain conditions, to vote
for one designee of Comcast and one designee of Cox as two of its five Series B
Directors. In addition, TCI, Cox, Comcast and KPCB (the "@Home Principal
Stockholders") have agreed to vote their shares for the election of the chief
executive officer of @Home and one joint designee of Rogers and Shaw as two of
the three At-Large Directors.
The @Home certificate of incorporation also provides, however, that so long
as TCI continues to own a specified number of shares of Series B Common Stock
and securities representing a majority of the voting power of @Home, there will
be a committee of the @Home board, comprised of those Series B Directors who are
officers, directors or employees of TCI or a subsidiary of TCI, which will have
the sole power exercisable at any time to increase the size of the @Home board
to up to 17 directors and to fill any vacancy created by such increase. In
addition, subject to certain conditions, all actions of the @Home board must be
approved by a majority of the Series B Directors, in addition to a majority of
the members of the board present at a meeting at which a quorum is present (or
by unanimous written consent). TCI's power to control all @Home board decisions
were it to exercise its power to increase the size of the board and fill the
resulting vacancies is subject however to certain supermajority and unanimous
vote requirements and limitations with respect to the approval of related party
transactions.
In addition, subject to certain exceptions, the @Home Stockholders
Agreement restricts transfers of @Home securities by @Home Principal
Stockholders until the earlier to occur of (i) the fifth anniversary of
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the termination of any @Home Principal Cable Stockholder's exclusive
distribution arrangements with @Home and (ii) the sixth anniversary of the @Home
IPO (July 11, 2003). Following the first anniversary of @Home's IPO (July 11,
1998), each @Home Principal Stockholder will be permitted to sell its @Home
securities in the public market, subject to a right of first offer of the other
@Home Principal Stockholders. The restrictions on transfer do not apply to the
sale of a controlling interest in @Home, but such sale is subject to certain
tag-along rights of certain other stockholders of @Home. The @Home Stockholders'
Agreement also provides that, if the number of homes passed by an @Home
Principal Cable Stockholder's cable systems that are subject to the exclusive
distribution obligations to @Home falls below a specified level, then such @Home
Principal Cable Stockholder must offer to sell a proportionate amount of its
@Home securities to the other @Home Principal Stockholders. See "RISK FACTORS
- -- Considerations Relating to the TCI Ventures Group Entities -- Potential
Conflicts with Owners." Each @Home Principal Stockholder also has preemptive
rights to purchase its pro rata portion of any new equity securities offered by
@Home, subject to certain conditions and exceptions, including exceptions for
securities issued pursuant to a public offering.
OTHER INVESTMENTS
In addition to its interests in @Home, the TCI Ventures Group's
Internet-related assets also include: TCI's 7% interest in Sportsline USA, Inc.,
an Internet provider of branded interactive sports information, programming and
merchandise; a 12% interest in iVillage, Inc., a developer, and Internet and
on-line provider, of branded communities and information services pertaining to
parenting, careers and personal health; a 15% interest in Interzine Productions,
Inc., a provider of interactive sports programming and information services on
the Internet; and a 7% interest in KPCB Java Fund, L.P., a company which invests
in companies that develop Java applications for the Internet and intranets. The
Company's ownership of shares of the common stock of Netscape, a developer of
Internet and intranet software, had also been attributed to the TCI Ventures
Group. The Company sold its entire interest in Netscape in July 1997 for
aggregate proceeds of approximately $16 million, all of which is attributed to
the TCI Ventures Group.
OTHER ASSETS
OVERVIEW
In addition to the ventures and businesses mentioned above, the TCI
Ventures Group contains other assets of TCI, including (i) NDTC, a wholly owned
subsidiary of TCI, which provides digital compression and authorization services
to programming suppliers and to video distribution outlets, (ii) an 80% interest
in ETC, a developer and distributor of a wide range of for-profit education,
training and communication services and products, and (iii) SUMMITrak, a wholly
owned subsidiary of the Company which provides an integrated network-based
information management system.
NATIONAL DIGITAL TELEVISION CENTER, INC.
General. NDTC, a wholly owned subsidiary of the Company, provides a wide
range of analog and digital television services, including the digital
compression of television and multimedia programming, satellite uplinking,
transponder management, primary origination, production, and post-production
services, and the encryption and authorization of transmitted signals, primarily
to television programming suppliers and satellite distributors ("NDTC Video
Services"). Using a combination of these capabilities, NDTC also supplies a
package of television programming signal transport and addressable set-top
authorization services directly to cable systems (which services are known as
its "Headend in the Sky" or "HITS" services). NDTC's primary facilities are
located in Littleton, Colorado where it has two facilities, including uplink
transmitters, studios and other property and equipment sufficient to provide the
full range of its services. NDTC also has specialized facilities in New York
and, more recently, Hong Kong, which are primarily used for post-production and
origination services and also have uplinking capabilities, and in Hollywood,
which is primarily used for production and post-production services.
NDTC's customers include television programmers, cable operators, and
satellite distributors, such as PrimeStar Partners L.P., Encore Media
Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
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Communications, Inc. The Liberty Media Group has interests in each of Encore
Media Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
Communications, Inc. NDTC derives a substantial portion of its revenue from
companies that are affiliated with TCI. For the year ended December 31, 1996,
revenue from services provided to TCI (including its consolidated subsidiaries,
but not other affiliates) was $25 million, or 34% of NDTC's total revenue for
1996. NDTC has been, and intends to continue, seeking to expand its customer
base to increase the number of unaffiliated customers over time.
NDTC, working with a variety of new technologies, has implemented
statistical multiplexing of digitally compressed video signals. This technology
significantly increases the number of digital program signals that can be
transmitted simultaneously over a single satellite transponder or 6MHz cable
channel, thus effectively increasing the digital compression ratio. NDTC
believes that one effect of a successful implementation of such technologies may
be to increase and expand NDTC's customer base as the cable industry and other
television service providers (such as owners of SMATV and MMDS systems) seek to
increase the channel capacity of their transmission systems. Additional
technological innovations in the area of statistical multiplexing hold promise
for even higher compression ratios, while maintaining the quality of high
definition pictures; however, there can be no assurance that such additional
technology innovations will be successfully implemented.
NDTC has obtained both long-term and short-term leases for 34 transponders
that are located on various satellites owned and operated primarily by four
satellite companies. Certain of the transponder leases are for fixed terms while
others have terms through the operational life of the respective satellites;
however, all of such transponder leases are expected to expire between 1998 and
2006. In general, the transponder leases are either fully protected or contain
certain preemption rights if a transponder is deemed a failure, as defined in
the contracts. The Company believes there currently is reasonably sufficient
transponder space available to satisfy NDTC's needs for the foreseeable future,
even in the event that a transponder preemption occurs, which the Company
believes is unlikely.
NDTC Video Services. NDTC markets and provides NDTC Video Services
primarily to programming suppliers, which include several in which the Company
holds interests as well as third party content providers. Such services usually
consist of the digital compression and encryption of programming signals,
satellite uplinking, transponder management, and primary origination,
production, and post-production. Customers may contract for one or more NDTC
Video Services or for the full range of services offered. The NDTC Video
Services currently provided to affiliated companies are governed by agreements
which have been negotiated on a basis which is intended to approximate an
arm's-length negotiation and the material terms of which are substantially the
same as those governing relationships with third parties, except as appropriate
to take into account volume differences. Generally, NDTC Video Services
contracts have a term of six years and are terminable by the customer upon
payment of significant early termination fees. The majority of the NDTC Video
Services contracts have remaining terms of at least four years.
HITS Services. NDTC's HITS services consist of the transmission of
compressed and encrypted digital programming signals to addressable set-top
boxes and the authorization of such boxes. HITS provides cable operators and
other television service providers with securely encrypted signals and the
ability to control viewer access all the way to the subscriber set-top box from
a single national location, thereby reducing the need for costly local staffing
and headend equipment. HITS enables cable system operators to provide their
subscribers with new digital tiers composed of new cable television networks,
movie multiplexes and pay-per-view services, while maintaining the same analog
service they currently provide.
During the fourth quarter of 1996, NDTC began offering HITS commercially.
TCIC, which is included in the TCI Group, is presently utilizing HITS in a few
of TCIC's major markets, and TCIC intends to expand its use of HITS to a
substantial number of additional markets by the end of 1997. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC. These negotiations are being carried out on an arm's-length basis (or, in
the case of affiliated customers, on a basis which is intended to approximate an
arm's-length negotiation), and it is expected that the material terms made
available to the TCI Group will be substantially the same as those provided to
unaffiliated third parties, but will include pricing on a most favored nations
basis due to the importance to NDTC of the TCI Group's large customer base.
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Competition. NDTC Video Services, specifically the transmission, production
and post-production services, are highly competitive. There are a number of
well-established competitors located on both the east and west coasts to both
NDTC's uplinking and satellite transmission services and its production and
post-production services, many of which competitors have been in existence
significantly longer than NDTC and may have an established customer base. NDTC's
HITS authorization and transport services compete with locally operated
authorization controllers, purchased from the same vendor that supplies set-top
terminals to cable operators, and with programmers who provide their own digital
signal transport. There can be no assurance that the HITS service will achieve
significant market penetration beyond the TCI affiliated companies.
Regulatory Environment. While the NDTC Video Services and other services
offered by NDTC are not directly regulated, the NDTC uplink facilities are
operated pursuant to FCC licenses and subject to applicable FCC rules, including
but not limited to the FCC's environmental rules, which establish limits on
human exposure to RF radiation emanating from FCC-licensed facilities. See "RISK
FACTORS-- Considerations Relating to the TCI Ventures Group
Entities -- Environmental Risks." Failure to comply with applicable FCC rules
could result in fines, denial of renewal, or revocation of the relevant
license(s).
ETC W/TCI, INC.
The TCI Ventures Group includes the Company's 80% equity interest in ETC
w/tci, Inc., which is a developer and distributor of a wide range of for-profit
education, training and communication services and products for customers at
school, at work and at home. The TCI Ventures Group also includes (i) the
Company's interest in ETC's Series A Cumulative Redeemable Preferred Stock which
currently has a liquidation value of approximately $36 million and (ii) certain
debt obligations of ETC to TCI in an aggregate amount of approximately $91
million at June 30, 1997. Formed in February 1996 to consolidate the investments
and initiatives the Company has made in the education industry over the past 15
years, ETC manages these investments and initiatives, creates synergies among
them, and develops complementary new businesses which can be distributed across
the Company's existing and developing distribution infrastructure. The Company
is considering certain strategic alternatives with respect to its investment in
ETC, including, among other things, additional investments from unrelated
entities and a restructuring of the ownership of ETC's assets that could result
in a change in control. There can be no assurance that any such transaction
would occur on terms satisfactory to the Company or at all. Any proceeds of any
such transaction, in the form of cash, capital stock or assets, would be
attributed to the TCI Ventures Group.
ETC's current investments include: (i) a 95% interest in CareerTrack, Inc.
("CareerTrack"), a training company which is a leader in the development,
marketing and production of business and educational seminars and related
publications targeting mid-level corporate managers; (ii) an 80% interest in
National School Conference Institute, Inc., a training company which is a
leading provider of public seminars and satellite-delivered staff development
programming for educators; (iii) a 50% interest in Ingenius, a general
partnership which develops and distributes interactive multimedia current events
programming using satellite, cable television and Internet distribution
channels; (iv) an approximately 11% interest in The Lightspan Partnership, Inc.,
a venture capital-financed, start-up company which develops and markets
innovative, curriculum-based, interactive reading, language arts and mathematics
programming for K-6 schools; and (v) an approximately 10% interest in Academic
Systems Corporation, a venture capital-financed, start-up company which provides
multimedia instructional materials for higher education. ETC had reached an
agreement in principle to acquire the remaining 50% of Ingenius which it did not
already own; however, the negotiations for a definitive agreement for such
transaction are currently in abeyance while certain strategic alternatives with
respect to the Company's interest in ETC are being considered.
ETC's other major current initiatives include: (i) customized technology
solutions for school customers whereby ETC performs a feasibility study to
assess the needs of such customers and then recommends and implements customized
technology solutions for such customers, which may include wide and local area
networks, hardware, software, programming, Internet connectivity, professional
development, and support and maintenance; and (ii) single and multi-day courses
in educational technology taught at one of ETC's two Educational Technology
Centers located in Denver, Colorado and Washington, D.C.
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ETC works closely with the National Education Association, the American
Federation of Teachers, the American Association of School Administrators, the
National School Boards Association and the National Association of Secondary
School Principals in developing and distributing ETC's educational technology
services and products.
ETC's business is divided into two separate divisions, Training and
Education. The Training Division concentrates primarily on the commercial
training market, including vocational and technical training, as well as
continuing adult education. Currently, ETC is structuring the Training Division
around CareerTrack, through which it markets various commercial training
services and products. The Education Division concentrates primarily on the K-12
education market, including both public and private schools, but also plans to
address pre-kindergarten, post-secondary and home-school markets. The services
and products delivered by the Education Division consist of customized
technology solutions, staff development, professional development, software and
programming. In addition, ETC has recently undertaken additional activities to
(i) expand its products and services to focus on the rapidly growing small
business market, a sector which management believes has been underserved by
traditional training companies from an on-going training and education
perspective and (ii) facilitate the delivery of the services and products of ETC
to international customers.
SUMMITRAK
SUMMITrak is wholly owned by TCI and is a development stage business which
is in the process of developing and testing its client server based customer
management and marketing information systems. Such systems are currently
designed to support delivery of cable television and Internet access products
and can be expanded to support telephony products as a future development. The
customer management system includes modules which support customer care,
billing, inventory control, dispatch and workforce management, marketing and
set-top box or converter activation. The marketing information system includes
database and reporting software which supports market analysis as well as
enables generation of lists which are cross-referenced to various factors and
allow marketing campaigns to be tailored to customers' profiles.
SUMMITrak is currently beta testing its customer management system in a
small number of TCI's local cable systems. At present SUMMITrak has no agreement
with the TCI Group. If SUMMITrak is used by the TCI Group on a commercial basis,
it is intended that the TCI Group will purchase such services at market rates
negotiated on a basis that is intended to approximate an arm's-length
negotiation. Upon completion of development and testing, SUMMITrak could also be
made available commercially to non-affiliated customers on an outsourced or
service bureau basis.
TCI is considering certain strategic alternatives with respect to
SUMMITrak, including a sale of the assets of SUMMITrak or the contribution of
the stock or assets of SUMMITrak to a joint venture with another investor. There
can be no assurance that any such transaction could be accomplished on terms
satisfactory to TCI or at all. The proceeds of any such sale or joint venture
interest, if applicable, will be attributed to the TCI Ventures Group. Any such
transaction may also include a simultaneous agreement with the purchaser or
joint venture to provide information system services to the TCI Group's cable
systems. If any such transaction included a service agreement with the TCI
Group, there can be no assurance that the terms of such transaction would be as
favorable to the TCI Ventures Group as the terms it could have negotiated had
such transaction not included such a service agreement.
DIGIVENTURES, LLC
DigiVentures, LLC ("DigiVentures") is a joint venture formed in December
1996 by the Company and Babcock & Brown Financial Corporation, which venture was
established for the purpose of leasing digital set-top boxes from third parties
to sublease such equipment to TCIC. TCIC may further sublease such equipment to
other parties. Currently, DigiVentures leases certain equipment to TCIC which
DigiVentures purchased from General Instruments Corporation of Delaware and
other vendors. In the future, DigiVentures intends to lease equipment from third
parties and then sublease such equipment to TCIC. The lease rates that have been
established and that the parties currently intend to use for future leases
between TCIC and DigiVentures are commensurate with market rates given TCIC's
size and creditworthiness, and as such, approximate the rates
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that would be charged by unaffiliated third parties. The Company's 99% interest
in DigiVentures has been attributed to the TCI Ventures Group. Babcock & Brown
Financial Corporation holds a 1% interest in the venture. DigiVentures is not
the TCI Group's exclusive provider or lessor of set-top boxes; the TCI Group may
from time to time acquire or lease set-top boxes from other companies.
OTHER INVESTMENTS
The TCI Ventures Group also contains interests in the following additional
technology-related assets: a 9% interest in Acclaim Entertainment, Inc.
("Acclaim"), a leading publisher of interactive entertainment software; a 16%
interest in Antec Corporation ("Antec"), a communications company specializing
in the design, manufacture and distribution of products for HFC broadband
networks; a 25% interest in MCNS Holdings, L.P., a joint venture established for
the purpose of developing and implementing technologies for upgrades and
expansions to the telecommunications systems of its partners; a 100% interest in
TCI TVGOS, Inc., which holds an undivided interest with one other company to the
intellectual property rights previously owned by TV Guide on Screen, a joint
venture formed to develop programming guides, which has been dissolved; and
Intessera, a wholly owned subsidiary of TCI that develops database management
software and offers back office support to its customers. Each of Acclaim and
Antec are traded on the National Market tier of The Nasdaq Stock Market under
the symbols "AKLM" and "ANTC," respectively.
MANAGEMENT AND ALLOCATION POLICIES
Following the Exchange Offers, the Company will prepare and include in its
filings with the SEC under the Exchange Act consolidated financial statements of
the Company and combined financial statements of the TCI Ventures Group (for so
long as the TCI Ventures Group Common Stock is outstanding), the TCI Group (for
so long as either the TCI Ventures Group Common Stock or the Liberty Media Group
Common Stock is outstanding) and the Liberty Media Group (for so long as the
Liberty Media Group Common Stock is outstanding). The combined financial
statements of each Group, taken together and after giving effect to inter-Group
eliminations, will effectively comprise the 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 attributed thereto. 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 will continue to be subject
to risks associated with an investment in the Company and all of its businesses,
assets and liabilities. See "RISK FACTORS -- Considerations Relating to the TCI
Ventures Group Common Stock -- Stockholders of One Company; Financial Effects on
One Business Could Affect Other Businesses."
Following the Exchange Offers, cash management, taxes and allocation of
principal corporate activities among the Groups will be based upon methods that
management of the Company believes to be reasonable and will be reflected in the
respective Group financial information as follows:
(i) All debt incurred or preferred stock issued by the Company and its
subsidiaries will (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. As described above, the obligations of the TCI Ventures Group with
respect to indebtedness under the Revolving Credit Facility and the TCI
Ventures Group Preferred Interest will be reflected in the combined
financial statements of the TCI Ventures Group.
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(ii) All financial impacts of issuances of shares of TCI Ventures
Group Common Stock the proceeds of which are attributed to the TCI Ventures
Group will be to such extent reflected in the combined financial statements
of the TCI Ventures Group, and all financial impacts of issuances of shares
of TCI Ventures Group Common Stock the proceeds of which are attributed to
the TCI Group in respect of a reduction in any Inter-Group Interest of the
TCI Group in the TCI Ventures Group will be to such extent reflected in the
combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on TCI Ventures Group Common Stock will be
attributed entirely to the TCI Ventures Group, except that dividends or
other distributions on the TCI Ventures Group Common Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in
the TCI Group being credited, and the TCI Ventures Group being charged (in
addition to the charge for the dividend or other distribution paid on the
outstanding shares of TCI Ventures Group Common Stock), with an amount
equal to the product of (x) the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of TCI
Ventures Group Common Stock and (y) a fraction the numerator of which is
the TCI Ventures Group Inter-Group Interest Fraction and the denominator of
which is the TCI Ventures Group Outstanding Interest Fraction. Financial
impacts of repurchases of TCI Ventures Group Common Stock the consideration
for which is charged to the TCI Ventures Group will be to such extent
reflected in the combined financial statements of the TCI Ventures Group,
and financial impacts of repurchases of TCI Ventures 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 the creation of an, or an increase in any then existing,
Inter-Group Interest of the TCI Group in the TCI Ventures 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 TCI Ventures Group or the Liberty
Media Group, reflected as the creation of an, or an increase in any then
existing, Inter-Group Interest of the TCI Group in such Group or, in the
case of a transfer from either the TCI Ventures Group or the Liberty Media
Group to the TCI Group, reflected as a reduction in any Inter-Group
Interest of the TCI Group 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 TCI Ventures Group will require additional
advances from the TCI Group for some period of time. To satisfy this need,
the Company has agreed to provide the Revolving Credit Facility to the TCI
Ventures Group for a five-year period commencing on the closing of the
Exchange Offers. Such facility will permit aggregate borrowings at any one
time outstanding of up to $500 million (subject to reduction as provided
below), which borrowings will bear interest at a rate per annum equal to
The Bank of New York's prime rate (as in effect from time to time) plus 1%
per annum, payable quarterly. A commitment fee equal to 3/8% per annum of
the average unborrowed availability under the Revolving Credit Facility
will be payable by the TCI Ventures Group to the TCI Group on a quarterly
basis. The maximum amount of borrowings permitted under the Revolving
Credit Facility will be reduced on a dollar-for-dollar basis by up to $300
million if and to the extent that the aggregate amount of any additional
capital that TCI Telephony is required to contribute to the Sprint PCS
Partnerships subsequent to the closing of the Exchange Offers is less than
$300 million.
(iv) Except as described above with respect to the Revolving Credit
Facility, loans from one Group to another Group will 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.
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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 TCI Ventures Group that the Board of Directors has determined
to reflect as creating or increasing the TCI Group's Inter-Group Interest
in the TCI Ventures Group, the Number of Shares Issuable with Respect to
the TCI Ventures 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 TCI Ventures Group
Common Stock as of the date of such transfer, and the TCI Ventures Group
Inter-Group Interest Fraction would be increased and the TCI Ventures Group
Outstanding Interest Fraction would be decreased accordingly. In the event
of a transfer of funds or other assets from the TCI Ventures 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 TCI Ventures Group,
the Number of Shares Issuable with Respect to the TCI Ventures 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 TCI Ventures Group Common Stock as of the date
of such transfer and the TCI Ventures Group Inter-Group Interest Fraction
would be decreased and the TCI Ventures Group Outstanding Interest Fraction
would be increased accordingly. For illustrations of the effects of the
issuance of shares of TCI Ventures Group Common Stock, see Annex
C -- Illustration of Certain Terms.
(vi) The combined balance sheets of a Group will reflect its net loans
to or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups will 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 will reflect
changes in the amounts of loans or borrowings deemed outstanding. In the
historical financial information included in this Offering Circular, net
borrowings of the TCI Ventures Group have been included as a component of
the TCI Ventures Group's combined equity. Such net borrowings incurred
prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity.
Amounts borrowed by the TCI Ventures Group from another Group on and
subsequent to the consummation of the Exchange Offers (including pursuant
to the Revolving Credit Facility), will be reflected on the TCI Ventures
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) will be charged to
both the TCI Ventures Group and the Liberty Media Group at rates set at the
beginning of each year based on projected utilization for that year. The
balance of such costs will be reflected in the combined financial
statements of the TCI Group. The utilization-based charges will be set at
levels that management believes to be reasonable and that approximate the
costs that the TCI Ventures Group and the Liberty Media Group would incur
for comparable services on a stand-alone basis. Assuming shares of TCI
Ventures Group Common Stock had first been issued on January 1, 1996, the
Company estimates that such costs of the TCI Ventures Group would have
aggregated approximately $7,918,000 for the year ended December 31, 1996.
Certain other corporate general and administrative costs related
specifically to management of a Group will be allocated entirely to such
Group. The scope of the services charged to the TCI Ventures Group and
Liberty Media 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 attributed to such
Group.
(viii) Certain of the companies with domestic operations that are
attributed to the TCI Ventures Group provide services to companies
attributed to one or more of the other Groups, and certain of the companies
attributed to the other Groups provide services and the use of facilities
to companies attributed to the TCI Ventures Group, all as more fully
described in "DESCRIPTION OF THE BUSINESS OF THE TCI VENTURES GROUP."
Generally, services and rights to use facilities provided pursuant to
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contractual arrangements to which a member of the TCI Ventures Group that
is not a wholly owned subsidiary of the Company is a party will continue to
be provided in accordance with the terms of such arrangements following the
consummation of the Exchange Offers. For example, Teleport has the
indefeasible right to use certain fiber optic and cable transmission
facilities of the Company for compensation based on the cost of
construction of such facilities. In general, such arrangements were entered
into with Teleport by the Company and other MSOs that are stockholders of
Teleport several years ago when Teleport was a privately owned company.
Similarly, @Home has entered into arrangements for the distribution of its
@Home service with its stockholders that are MSOs. The TCI Group has
agreements with UVSG for, among other things, the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems
attributed to the TCI Group, and UVSG purchases programming from companies
attributed to the Liberty Media Group. Many of these contracts were entered
into prior to the Company's acquisition of an equity interest in UVSG.
Because of the presence in each of TCG, @Home and UVSG of other
stockholders not affiliated with the Company and the independent management
teams at each of these companies, the Company anticipates that future
contractual arrangements between these companies and entities attributed to
the other Groups will be negotiated on an arm's-length basis. DigiVentures,
a lease finance company owned by the Company and Babcock & Brown, leases
digital set-top boxes to TCIC (which is attributed to the TCI Group) at
rates commensurate with market rates given TCIC's size and
creditworthiness.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each
of which is a wholly owned subsidiary of the Company, provide or may
provide services to the other Groups. WTCI provides video transport
services to the TCI Group (in addition to services provided to third
parties) based on published tariffed rates. NDTC provides digital
television services, including digital compression of programming,
satellite uplinking, and transponder management, primarily to programming
suppliers, many of which are affiliated with the Liberty Media Group, and
satellite distributors. Such services provided to affiliated companies are
governed by agreements which have been negotiated on a basis which was
intended to approximate an arm's-length negotiation and the material terms
of which are substantially the same as those governing relationships with
third parties, except as appropriate to take into account volume
differences. NDTC has also recently begun offering on a commercial basis
its newly developed service of authorization of addressable set-top boxes
and transmission of compressed and encrypted digital programming signals
directly to cable operators, and is currently negotiating a long term
contract with the TCI Group for such services. Such negotiations are being
carried out on a basis which is intended to approximate an arm's-length
negotiation and it is expected that the material terms made available to
the TCI Group will be substantially the same as those provided to
unaffiliated third parties, but will include pricing on a most favored
nations basis due to the importance to NDTC of the TCI Group's large
customer base. SUMMITrak has been funded by the TCI Group during its
development and test phases, which are substantially complete. Currently,
the TCI Group is only utilizing SUMMITrak's services on a test basis and
has no agreement with SUMMITrak for commercial deployment. If SUMMITrak's
services are used by the TCI Group on a commercial basis, such use will be
at commercial rates and on terms negotiated on a basis that is intended to
approximate an arm's-length negotiation.
(ix) A tax sharing agreement (the "Old Tax Sharing Agreement") among
entities attributed to the TCI Ventures Group, Liberty Media Group, the TCI
Group and certain subsidiaries of TCI was implemented effective July 1,
1995 for all periods after such effective date and prior to October 1,
1997. The Old Tax Sharing Agreement formalizes certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. Under the Old Tax Sharing Agreement, tax
liabilities and benefits of the entities attributed to the TCI Ventures
Group, Liberty Media Group, and TCI Group are charged or credited to
intercompany accounts between TCI and each of its first tier subsidiaries.
The Old Tax Sharing Agreement encompasses U.S. federal, state, local and
foreign tax consequences and relies upon the Code, and any applicable
state, local and foreign tax law and related regulations. In connection
with the formation of the TCI Ventures Group, the net amount of the balance
of each intercompany account under the Old Tax
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Sharing Agreement that is attributable to entities included in the TCI
Ventures Group for the period beginning July 1, 1995 and ending prior to
the consummation of the Exchange Offers will be reflected as a component of
the TCI Ventures Group's combined equity. The intercompany account existing
between TCI and International for the period beginning July 1, 1995 and
ending prior to the consummation of the Exchange Offers will be required to
be settled by the TCI Ventures Group and International when International
ceases to be a member of the TCI consolidated group for federal income tax
purposes. Tax liabilities and benefits, as determined under the Old Tax
Sharing Agreement, that are generated by the entities comprising the TCI
Ventures Group for the period beginning on the consummation of the Exchange
Offers and ending prior to October 1, 1997 will be credited or debited to
an intercompany account between TCI and the TCI Ventures Group as described
below. For the period beginning on the consummation of the Exchange Offers
and ending prior to October 1, 1997, the TCI Ventures Group will be
responsible to TCI for its share of consolidated income tax liabilities
(computed as if the Company was not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement. TCI will be
responsible to the TCI Ventures Group to the extent that the TCI Ventures
Group's income tax attributes generated during the period beginning on the
consummation of the Exchange Offers and ending prior to October 1, 1997 are
utilized by TCI to reduce its consolidated income tax liabilities (computed
as if the Company was not liable for the alternative minimum tax).
Accordingly, all tax attributes generated by the TCI Ventures Group's
operations for the period beginning on the consummation of the Exchange
Offers and ending prior to October 1, 1997 (including, but not limited to,
net operating losses, tax credits, deferred intercompany gains, and the tax
basis of assets) will be inventoried and tracked for the entities
comprising the TCI Ventures Group. All intercompany accounts existing under
the Old Tax Sharing Agreement with respect to entities attributed to the
TCI Group, entities attributed to the Liberty Media Group and, for the
period beginning on the consummation of the Exchange Offers, entities
attributed to the TCI Ventures Group, will be required to be settled only
upon the date that an entity ceases to be a member of the TCI consolidated
group for federal income tax purposes. Under the Old Tax Sharing Agreement,
TCI retains the burden of any alternative minimum tax and has the right to
receive the tax benefits from any alternative minimum tax credit
attributable to any tax period beginning on or after July 1, 1995 and
ending on or before October 1, 1997.
For periods from and after October 1, 1997, federal income taxes will
be computed pursuant to a new tax sharing agreement (the "New Tax Sharing
Agreement") based upon the type of tax paid by the Company (on a regular
tax or alternative minimum tax basis) on a separate basis for each Group
(applying provisions of the Code, and related regulations as if such Group
filed a separate consolidated return for federal income tax purposes, with
certain adjustments, but was subject to the same type of tax as the
Company). Based upon these separate calculations, an allocation of tax
liabilities and benefits will be made such that each Group will be required
to make cash payments to the Company based on its allocable share of the
Company's consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable). The Company may be required
at the times and under the circumstances described below to make cash
payments to each Group for tax benefits (on a regular tax or alternative
minimum tax basis, as applicable) attributable to such Group and actually
used by the Company in reducing its consolidated federal income tax
liability. Tax attributes, including but not limited to net operating
losses, foreign tax credits, investment tax credits, alternative minimum
tax net operating losses, deferred intercompany gains, and tax basis in
assets would be inventoried and tracked for ultimate credit to or charge
against each Group. Similarly, in each taxable period that the Company pays
alternative minimum tax, the federal income tax liabilities and federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group (at the difference between the amount such Group would have
paid or received under the New Tax Sharing Agreement if the Company had
paid regular tax during such taxable period and the amount such Group paid
or received under the New Tax Sharing Agreement on an alternative minimum
tax basis for such taxable period) in years that the Company utilizes the
alternative minimum tax credit associated with such taxable period. Even
though the tax benefits of a Group are utilized by the Company in reducing
its consolidated federal income tax liability, such Group may not receive
current cash payments for such benefit (or the difference between such
Group's benefits
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computed under the New Tax Sharing Agreement on a regular tax basis and on
an alternative minimum tax basis) if the Group against the income of which
the tax benefits are applied had other separate taxable losses (not
currently utilized by the Company) which would offset income attributable
to such Group. The Group generating the utilized tax benefits would receive
a cash payment only if, and when, the unutilized taxable losses of the
other Group are actually utilized. If the unutilized taxable losses expire
without ever being utilized, the Group generating the utilized tax benefits
will never receive payment for such benefits. In addition, if the
unutilized taxable losses are connected with a Group or part of a Group
which ceases to be part of the TCI consolidated group for federal income
tax purposes, there can be no assurance that the transferee will agree to
pay for the eventual use of the unutilized taxable losses. In addition,
pursuant to the New 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 among 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.
As detailed elsewhere, unutilized taxable losses of the TCI Ventures
Group may be used to offset the obligation of the TCI Ventures Group to pay
dividends on the TCI Ventures Group Preferred Interest. Any such taxable
losses which are so used will be considered taxable losses of the TCI Group
for all calculations under the New Tax Sharing Agreement relating to
federal income taxes. Such taxable losses will continue to be treated as
taxable losses of the TCI Ventures Group for all calculations relating to
state and local income taxes. In addition, any amount owed by the TCI Group
with respect to utilized taxable losses of the TCI Ventures Group may be
canceled as an offset to the obligation of the TCI Ventures Group to pay
dividends on the TCI Ventures Group Preferred Interest.
(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.
The Company has advised International that the Company intends (a) to make
available to International any opportunity to acquire, develop, own and/or
manage cable and/or telephony operations outside the United States that is
presented to the Company or any of its controlled affiliates and (b) except
as provided below, to make available to International any opportunity to
acquire, develop, manage and/or operate programming services outside of the
United States (an "International Programming Opportunity") that is
presented to the Company or any of its controlled affiliates, including
those affiliates that are a part of the Liberty Media Group. The foregoing
does not apply to (1) international programming services owned or managed,
directly or indirectly (in whole or in part), by the Company or any of its
controlled affiliates other than International as of July 12, 1995 (the
date of the prospectus for International's initial public offering), (2)
International Programming Opportunities under development by the Company or
any of its controlled affiliates other than International that were the
subject of a signed letter of intent or other agreement in principle as of
July 12, 1995, (3) an International Programming Opportunity in respect of
foreign sports programming, which may be pursued either through
International or the Liberty Media Group, (4) an International Programming
Opportunity presented to a public company that is a controlled affiliate of
either the Company or any of the Company's controlled affiliates (other
than International), (5) an International Programming Opportunity presented
to, or cable television or cable telephony services provided by, any
company or other entity in which the Company or any of its controlled
affiliates has an interest but which is not itself a controlled affiliate
of either the Company or any of the Company's controlled affiliates and (6)
the distribution outside the United States of a programming service
initially distributed within the United States and owned and/or managed by
the Company or any of its controlled affiliates (other than International).
If International determines not to pursue an International Programming
Opportunity, subsidiaries or controlled affiliates of the Company other
than International may pursue such International Programming Opportunity or
International and another subsidiary of the Company (or any of its other
controlled affiliates) may pursue such opportunity jointly. To the extent
that the Company or any of its controlled affiliates (other than
International) owns rights to worldwide or regional sporting
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events, the Company or such affiliates may also utilize those rights
worldwide, including to provide "backdrop" services. Neither the Company
nor any of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent the
Company or such controlled affiliate is legally (for example, by a
fiduciary duty owed to others) or contractually prohibited from doing so.
The foregoing arrangement concerning International Programming
Opportunities will, in any event, be terminable at such time as the Company
ceases to beneficially own at least a majority in voting power of the
outstanding shares of common stock of International. See "DESCRIPTION OF
THE BUSINESS OF THE TCI VENTURES GROUP".
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 "RISK
FACTORS -- Considerations Relating to the TCI Ventures Group Common
Stock -- Fiduciary Duties of the Board of Directors Are to All Stockholders
Regardless of Class or Series."
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DESCRIPTION OF CAPITAL STOCK
The following description of certain terms of the TCI Ventures Group Common
Stock, the TCI Group Common Stock and 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 Amended Charter
(including the applicable Certificate of Designation with respect to each
outstanding series of Series Preferred Stock). See "AVAILABLE INFORMATION." As
with the rest of this Offering Circular (except as otherwise indicated), the
following description of the capital stock of the Company assumes that the
stockholders of the Company approve the Charter Amendments at the Annual Meeting
and, assuming such approval at the Annual Meeting, the Charter Amendments have
been filed with the Secretary of State of Delaware and become effective.
GENERAL
The Amended Charter provides that the Company is authorized to issue
3,602,375,096 shares of capital stock, including (i) 3,550,000,000 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,
75,000,000 shares are designated Series B Liberty Media Group Common Stock,
750,000,000 shares are designated Series A TCI Ventures Group Common Stock and
75,000,000 shares are designated Series B TCI Ventures 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 6% Cumulative
Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share (the
"Class B Preferred Stock") and 50,000,000 shares are designated as Series
Preferred Stock, par value $.01 per share (the "Series Preferred Stock"),
issuable in series. Of the Series Preferred Stock, 80,000 shares are designated
as Convertible Preferred Stock, Series C (the "Series C Preferred Stock"),
1,000,000 shares are designated as Convertible Preferred Stock, Series D (the
"Series D Preferred 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
Redeemable Convertible TCI Group Preferred Stock, Series G (the "Series G
Preferred Stock"), and 7,259,380 shares are designated as Redeemable Convertible
Liberty Media Group Preferred Stock, Series H (the "Series H Preferred Stock").
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 June 30, 1997, 628,870,996 shares of Series A TCI Group Common Stock
(net of shares held by subsidiaries of TCI), 54,221,314 shares of Series B TCI
Group Common Stock (net of treasury stock), 228,239,906 shares of Series A
Liberty Media Group Common Stock (net of treasury stock) and 21,175,465 shares
of Series B Liberty Media Group Common Stock had been issued and were
outstanding and 116,853,196 shares of Series A TCI Group Common Stock were held
by subsidiaries of the Company. As of that date, 125,616,994 shares of Series A
TCI Group Common Stock and 29,915,040 shares of Series A Liberty Media Group
Common Stock were reserved for issuance upon conversion, exchange or exercise of
outstanding convertible or exchangeable securities (other than the Series B TCI
Group Common Stock and the Series B Liberty Media Group Common Stock, and other
than Series F Preferred Stock held by subsidiaries of the Company) and options.
In addition, the Company 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, in either case for issuance upon conversion, at the option of the
holder, of the Series B TCI Group Common Stock and the Series B Liberty Media
Group Common Stock, respectively. Additionally, subsidiaries of the Company own
shares of Series F Preferred Stock, which are convertible into an aggregate of
416,528,172 shares of Series A TCI Group Common Stock in the aggregate.
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COMMON STOCK
CERTAIN DEFINITIONS
As used in this Offering Circular, the following terms have the meanings
specified below:
"Adjusted TCI Ventures Group Outstanding Interest Fraction" means a
fraction the numerator of which is the number of outstanding shares of TCI
Ventures 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 TCI Ventures Group Inter-Group Interest and (c) the number of shares of TCI
Ventures Group Common Stock issuable upon conversion, exercise or exchange of
Pre-Exchange Offer Securities.
"Appraisal Date," with respect to any determination of the TCI Ventures
Group Private Market Value or the Liberty Media 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" means (i) the shares of Series A Liberty
Media Group Common Stock that the Company had, prior to the record date for the
Liberty Media Group Distribution on August 10, 1995, 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
Liberty Media Group 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
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
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 Liberty Media Group Distribution. The shares of
Series A Liberty Media Group Common Stock issuable upon conversion of the Series
H Preferred Stock constitute Committed Acquisition Shares.
"Convertible Securities" means any securities of the Company (other than
any series of Common Stock) or any Subsidiary thereof 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.
"Disposition" means 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 TCI
Ventures Group Private Market Value or the Liberty Media Group Private Market
Value, an investment banking firm of recognized national standing selected by
the Company to make such determination.
"Higher Appraised Amount" means, with respect to any determination of the
TCI Ventures Group Private Market Value or the Liberty Media 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.
"Initial Ventures Options" means those certain options to purchase shares
of Series A TCI Ventures Group Common Stock that are issued effective upon the
consummation of the Exchange Offers, in connection with the adjustment of the
Adjustable Options. For purposes of this definition, the term "Adjustable
Options"
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means those options to purchase shares of Series A TCI Group Common Stock that
are outstanding immediately prior to the consummation of the Exchange Offers
under any Existing Stock Plan (as defined below), which options the Board of
Directors and, if applicable, the committee of the Board of Directors charged
with the administration of such Existing Stock Plan, determined to adjust for
the effects of the Exchange Offers by the issuance, in substitution for and in
cancellation of each such Adjustable Option effective upon the consummation of
the Exchange Offers, of an Initial Ventures Option to purchase a number of
shares of Series A TCI Ventures Group Common Stock initially equal to 30%
(rounded up to the next whole number) of the number of shares of Series A TCI
Group Common Stock that would have been issuable upon exercise of such
Adjustable Option immediately prior to the consummation of the Exchange Offers,
and an option to purchase a number of shares of Series A TCI Group Common Stock
equal to 70% (rounded down to the next whole number) of the number of shares of
Series A TCI Group Common Stock that would have been issuable upon exercise of
such Adjustable Option immediately prior to the consummation of the Exchange
Offers, together with such other securities as were then issuable upon exercise
of such Adjustable Option (and, in each case, having such other terms consistent
with the terms of the Adjustable Option for which they are exchanged as the
Board of Directors or the committee, as applicable, determines.) The term
"Existing Stock Plans" means each of the following: the Tele-Communications,
Inc. 1994 Stock Incentive Plan, the Tele-Communications, Inc. 1995 Employee
Stock Incentive Plan and the Tele-Communications, Inc. 1996 Incentive Plan.
"Inter-Group Interest" of the TCI Group in the TCI Ventures Group or the
Liberty Media Group means any common stockholders' equity value of the Company
attributable to the TCI Ventures Group or the Liberty Media Group, as the case
may be, that is not represented by outstanding shares of TCI Ventures Group
Common Stock or Liberty Media Group Common Stock, as the case may be. The TCI
Group's Inter-Group Interest in the TCI Ventures Group is represented by the
Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest and 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.
"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 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
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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.
"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 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
Company in respect of such Disposition or in respect of any resulting dividend
or redemption pursuant to clause (i) or (ii), respectively, of the second
paragraph under "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of Liberty Media Group Common Stock" (or which would have been
payable but for the utilization of tax benefits attributable to the TCI Group or
the TCI Ventures 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 Company'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 the penultimate paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock."
"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
Liberty Media Group Common Stock outstanding on such date
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and the denominator of which is the sum of (a) such aggregate number of shares
of 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.
"Lower Appraised Amount," with respect to any determination of the TCI
Ventures Group Private Market Value or the Liberty Media Group Private Market
Value, shall mean 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
Company 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.
"Market Value" of any class or series of capital stock of the Company 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 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 of TCI
Ventures Group Common Stock at the Option of TCI," "-- Conversion of Liberty
Media Group Common Stock at the Option of TCI," "-- Mandatory Dividend,
Redemption or Conversion of TCI Ventures Group Common Stock," and "-- Mandatory
Dividend, Redemption or Conversion of Liberty Media Group Common Stock" and as
described under "-- Liquidation Rights," (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.
"Mutually Appraised Amount," with respect to any determination of the TCI
Ventures Group Private Market Value or the Liberty Media Group Private Market
Value, shall mean 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 TCI Ventures Group Private Market Value or the Liberty
Media 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" 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 Liberty Media Group Distribution
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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 Series A 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 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
Company 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 (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.
"Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest" shall initially be 204,927,700 and, immediately following
the consummation of the Exchange Offers and the attribution of the TCI Ventures
Group Preferred Interest to the TCI Group, shall be zero and thereafter shall
from time to time, as applicable, 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 TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock and dividends or distributions of shares of Series A TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock to
holders of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock and other reclassifications of the Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock,
(ii) decreased (but not to less than zero) by (i) the aggregate number
of shares of Series A TCI Ventures Group Common Stock or Series B TCI
Ventures Group Common Stock issued or sold by the Company after the
consummation of the Exchange Offers the proceeds of which are attributed to
the TCI Group, (ii) the aggregate number of shares of Series A TCI Ventures
Group Common Stock or
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Series B TCI Ventures Group Common Stock issued or delivered upon
conversion, exercise or exchange of Convertible Securities (other than
Pre-Exchange Offer Securities), the proceeds of which are attributed to the
TCI Group, (iii) the aggregate number of shares of Series A TCI Ventures
Group Common Stock or Series B TCI Ventures 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, (iv) the
aggregate number of shares of Series A TCI Ventures Group Common Stock or
Series B TCI Ventures Group Common Stock issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities (other than
Pre-Exchange Offer Securities) issued or delivered by the Company after the
consummation of the Exchange Offers 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 TCI Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group that are
transferred from the TCI Ventures Group to the TCI Group in consideration
of a reduction in the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest, divided by the Market Value of one
share of Series A TCI Ventures Group Common Stock as of the date of such
transfer, and
(iii) increased by (a) the aggregate number of any shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures 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 TCI
Ventures Group in consideration of an increase in the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest,
divided by the Market Value of one share of Series A TCI Ventures Group
Common Stock as of the date of such contribution and (c) the aggregate
number of shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures 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."
Whenever a change in the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest occurs, the Company shall 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 Liberty Media Group 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).
"Pre-Exchange Offer Securities" means the TCI-UA Notes and the Initial
Ventures Options.
"Qualifying Subsidiary" shall mean a Subsidiary of the Company in which (x)
the Company's ownership and voting interest is sufficient to satisfy the
requirements of the Service for a distribution of the Company's interest in such
Subsidiary to the holders of Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock to be tax free to such holders or (y) the
Company owns, directly or indirectly, all of the issued and outstanding capital
stock. [Note: The Board has requested approval by the Company's stockholders at
the Annual Meeting of an additional amendment to the Company Charter to provide
a definition of Qualifying Subsidiary that would be applicable to the Liberty
Media Group.]
"Related Business Transaction" shall mean any Disposition of all or
substantially all of the properties and assets of the TCI Ventures Group or the
Liberty Media Group, as the case may be, 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 TCI Ventures Group or the Liberty Media Group, as the case may
be, any entity which succeeds (by merger, formation of a joint venture
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enterprise or otherwise) to such assets and properties of the TCI Ventures Group
or the Liberty Media 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 TCI Ventures Group or the Liberty Media 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 TCI
Ventures Group Private Market Value or the Liberty Media 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 TCI Ventures
Group Private Market Value or the Liberty Media 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" means as of any date of determination thereof:
(i) the interest of TCI 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 or the TCI Ventures 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 a proportionate interest
in the businesses, assets and liabilities of the TCI Ventures Group equal
to the TCI Ventures 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) from and after any dividend or other distribution with respect to
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures 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 TCI Ventures
Group Inter-Group Interest," or in other securities of the Company
attributed to the TCI Ventures 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 TCI Ventures 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
TCI Ventures Group Common Stock multiplied by a fraction the numerator of
which is equal to the TCI Ventures 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 TCI Ventures
Group Outstanding Interest Fraction in effect immediately prior to the
record date for such dividend or other distribution;
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(v) any assets or properties transferred from the Liberty Media Group
or the TCI Ventures Group to the TCI Group; and
(vi) the TCI Ventures Group Preferred Interest;
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 TCI Ventures
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 TCI
Ventures 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 TCI Ventures Group Common Stock payable in other securities
of the Company attributed to the TCI Ventures 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 TCI Ventures 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 the TCI Ventures Group, as
applicable.
"TCI-UA Notes" shall mean those certain convertible notes due December 12,
2021 issued by TCI UA, Inc., a Subsidiary of the Corporation, which notes were,
prior to the consummation of the Exchange Offers, exchangeable for shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common Stock.
"TCI Ventures Group" shall mean, as of any date that any shares of Series A
TCI Ventures Group Common Stock or Series B TCI Ventures Group Common Stock have
been issued and continue to be outstanding:
(i) the interest of the Company or of any of its subsidiaries in any
of the following persons or any of their respective 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:
TCI Ventures Group, LLC, Tele-Communications International, Inc., TCI
Telephony Holdings, Inc., New Jersey Fiber Technologies, L.P., Louisville
Lightwave, Western TeleCommunications, Inc., TCI GCI, Inc., TCI UVSG, Inc.,
Acclaim Entertainment, Inc., TCI TSX, Inc., Intessera, Inc., TCI-TVGOS,
Inc., TCI MCNS Holdings, Inc., TCI ETC Holdings, Inc., TCI Internet
Holdings, Inc., TCI Online Sports Holdings, Inc., TCI Online Village
Holdings, Inc., TCI INZ Sports Holdings, Inc., TCI Netscape Holdings, Inc.,
TCI Java, Inc., National Digital Television Center, Inc., TCI SUMMITrak of
Texas, Inc., TCI SUMMITrak, LLC., DigiVentures, LLC, Kitty Hawk
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Capital Limited Partners, II, New Enterprise Associates, IV, Limited
Partnership, Venture First II, L.P., TVSM, Inc.,
(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 (a) of this sentence, whether or not such assets or
liabilities are assets and liabilities of any of the Persons named in
clause (a) or any of their respective subsidiaries (or any successor as
described in clause (a) of this sentence),
(iii) the proceeds of exercise of the Initial Ventures Options and the
expense of exercise of any related stock appreciation rights,
(iv) all assets and properties contributed or otherwise transferred to
the TCI Ventures Group from the TCI Group, and
(v) 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 TCI Ventures 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 TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock, with respect
to which adjustment shall be made as provided in clause (i) of the definition of
"Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest," or in other securities of the Company attributed to the TCI Ventures
Group for which provision shall be made as set forth in the penultimate sentence
of this definition), the TCI Ventures 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 TCI Ventures Group Common Stock
multiplied by a fraction the numerator of which is equal to the TCI Ventures
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 TCI Ventures 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 TCI Ventures
Group to the TCI Group, the TCI Ventures Group shall 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 TCI Ventures Group Common Stock
payable in securities of the Company attributed to the TCI Ventures Group other
than TCI Ventures 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 (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 TCI Ventures Group
Common Stock, the TCI Ventures 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 TCI
Ventures 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 TCI Ventures Group.
"TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Inter-Group Interest as of such date and (b)
the aggregate number of shares of TCI Ventures Group Common Stock outstanding as
of such date.
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"TCI Ventures Group Net Proceeds" shall mean, as of any date, with respect
to any Disposition of any of the properties and assets of the TCI Ventures
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
Company in respect of such Disposition or in respect of any resulting dividend
or redemption pursuant to clause (i) or (ii), respectively, of the second
paragraph under "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of TCI Ventures Group Common Stock" (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 TCI Ventures 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 Company's
obligations with respect to Pre-Exchange Offer Securities which are included in
the determination of the Adjusted TCI Ventures Group Outstanding Interest
Fraction) in respect of Preferred Stock attributed to the TCI Ventures Group and
in respect of the TCI Ventures Group Preferred Interest. For purposes of this
definition, any properties and assets of the TCI Ventures 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 the third paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock."
"TCI Ventures Group Outstanding Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the aggregate number of shares of TCI
Ventures Group Common Stock outstanding on such date and the denominator of
which is the sum of (a) such aggregate number of shares of TCI Ventures Group
Common Stock outstanding on such date and (b) the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest as of such date.
"TCI Ventures Group Preferred Interest" means the preferred equity interest
in the TCI Ventures Group that will be attributed to the TCI Group following the
consummation of the Exchange Offers if the number of shares of Series A TCI
Group Common Stock validly tendered pursuant to the Exchange Offers and not
withdrawn is less than the Series A Maximum (the amount of such shortfall being
the "Series A Number"), or if the number of shares of Series B TCI Group Common
Stock validly tendered pursuant to the Exchange Offers and not withdrawn is less
than the Series B Maximum (the amount of such shortfall being the "Series B
Number"). The stated liquidation value of the TCI Ventures Group Preferred
Interest, if any, shall equal the product of (x) the sum of the Series A Number
and the Series B Number, multiplied by (y) the Market Value of the Series A TCI
Group Common Stock on the last Trading Day preceding the consummation of the
Exchange Offers. The TCI Group will be entitled to receive cumulative dividends
on the TCI Ventures Group Preferred Interest, which shall accrue at the rate of
5% per annum of the Liquidation Preference thereof, from the date the Exchange
Offers are consummated to and including the date that the TCI Ventures Group
makes the Liquidation Preference available to the TCI Group. Accrued dividends
on the TCI Ventures Group Preferred Interest shall accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers. On and after such fifth anniversary, accrued
dividends shall be payable annually on each anniversary of the closing of the
Exchange Offers and will accumulate and compound to the extent not paid on any
such anniversary. When dividends become payable currently they could be paid (i)
through the transfer of cash or other assets from the TCI Ventures Group to the
TCI Group, (ii) through the reduction of amounts owed by the TCI Group to the
TCI Ventures Group, (iii) through the deemed transfer of taxable losses of the
TCI Ventures Group to the TCI Group pursuant to the New Tax Sharing Agreement
(in an amount equal to the highest corporate tax rate in effect at the time of
the dividend multiplied by the amount of taxable losses deemed transferred), but
only if such taxable losses have not been utilized in any calculation under the
New Tax Sharing Agreement or (iv) through the cancellation of amounts owed by
the TCI Group under the New Tax Sharing Agreement with respect to
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utilized tax benefits of the TCI Ventures Group. See "MANAGEMENT AND ALLOCATION
POLICIES." The Liquidation Preference of the TCI Ventures Group Preferred
Interest as of any relevant date shall be an amount equal to the sum of (a) the
stated liquidation value of the TCI Ventures Group Preferred Interest plus (b)
an amount equal to all dividends accrued thereon as of any annual dividend
payment date that have not been paid on such date (which dividends shall remain
a part of the Liquidation Preference until such accrued dividends and all
dividends accrued thereon have been paid in full), plus (c) for purposes of
determining the amounts payable with respect to the TCI Ventures Group Preferred
Interest upon redemption thereof or the liquidation, dissolution and winding up
of the TCI Ventures Group, an amount equal to all unpaid dividends accrued on
the sum of the amounts specified in clauses (a) and (b) during the period from
the immediately preceding dividend payment date to such date. The TCI Ventures
Group Preferred Interest shall be redeemed in full on the fifteenth (15th)
anniversary of the consummation of the Exchange Offers, and may be redeemed, in
whole or in part, at the discretion of the Board of Directors at any time prior
thereto, for a redemption price, payable in cash, equal to the Liquidation
Preference thereof as of the redemption date.
"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."
VOTING RIGHTS
Holders of Series A TCI Group Common Stock, Series A TCI Ventures Group
Common Stock and Series A Liberty Media Group Common Stock, in each case, are
entitled to one vote for each share of such stock held, and holders of Series B
TCI Group Common Stock, Series B TCI Ventures Group Common Stock and Series B
Liberty Media Group Common Stock, in each case, 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 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 TCI Ventures Group Common Stock, 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 with respect to all matters to
be voted on by stockholders of the Company.
None of the holders of Series A TCI Group Common Stock, Series B TCI Group
Common Stock, Series A TCI Ventures Group Common Stock, Series B TCI Ventures
Group Common Stock, 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 of
such corporation 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. 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 TCI Ventures Group Common Stock
and the Series B TCI Ventures Group Common Stock are each a separate series of a
single class of stock, each series will 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
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Common Stock and the TCI Ventures 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
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, (ii) on the TCI Ventures Group Common Stock
out of the lesser of (x) the TCI Ventures Group Available Dividend Amount and
(y) funds of the Company legally available therefor under the DGCL, and (iii) 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 TCI Group,
the TCI Ventures Group or the Liberty Media Group. Consequently, the amount of
legally available funds will be reduced by the amount of any net losses of the
TCI Group, the TCI Ventures Group or the Liberty Media Group and any dividends
or distributions on, or repurchases of, the TCI Group Common Stock, the TCI
Ventures Group Common Stock or the Liberty Media 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 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. The "Corporation 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, including
income and expenses of TCI 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 "TCI Ventures Group Available Dividend Amount," as of any date, means
the product of the TCI Ventures Group Outstanding Interest Fraction and either
(i) the excess of (a) an amount equal to the total assets of the TCI Ventures
Group less the total liabilities (not including preferred stock) of the TCI
Ventures 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 Ventures Group Common Stock, each class or series of Preferred Stock
attributed to the TCI Ventures Group and the TCI Ventures Group Preferred
Interest or (ii) in case there is no such excess, an amount equal to the
Corporation Earnings (Loss) Attributable to the TCI Ventures Group (if positive)
for the fiscal year in which such date occurs and/or the preceding fiscal year.
The "Corporation Earnings (Loss) Attributable to the TCI Ventures Group," for
any period, means the net earnings or loss of the TCI Ventures Group for such
period determined on a basis consistent with the determination of the net
earnings or loss of the TCI Ventures Group for such period as presented in the
combined financial statements of the TCI Ventures Group, including income and
expenses of the Company attributed to the operations of the TCI Ventures Group
on a substantially consistent basis, including, without limitation, corporate
administrative costs, net interest and income taxes. The TCI Ventures Group
Available
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Dividend Amount is intended to be similar to the amount that would be legally
available for the payment of dividends on the TCI Ventures Group Common Stock
under the DGCL if the TCI Ventures Group were a separate Delaware corporation.
There can be no assurance that there will be a TCI Ventures 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 the Corporation 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 "Corporation 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, 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," "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of Liberty Media Group Common Stock," and "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures 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; any dividends paid on the Series A TCI Ventures Group Common
Stock or the Series B TCI Ventures 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.
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, the TCI Ventures Group Common Stock
or the Liberty Media Group Common Stock in equal or unequal amounts,
notwithstanding the relationship among the TCI Group Available Dividend Amount,
the TCI Ventures 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, the TCI Ventures Group
Common Stock or the Liberty Media Group Common Stock or any other factor. See
"DIVIDEND POLICY."
At the time of any dividend or other distribution on the outstanding shares
of TCI Ventures Group Common Stock (including any dividend of TCI Ventures Group
Net Proceeds from the Disposition of all or substantially all of the properties
and assets of the TCI Ventures Group as described under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock"), the TCI Group will (if at such time there is an Inter-Group
Interest in the TCI Ventures Group) be credited, and the TCI Ventures Group will
be charged (in addition to the charge for the dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures 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 TCI Ventures Group Common Stock times (ii) a fraction the numerator of
which is the TCI Ventures Group Inter-Group Interest Fraction and the
denominator of which is the TCI Ventures Group Outstanding Interest Fraction.
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At the time of any dividend or other distribution on the outstanding shares
of Liberty Media Group Common Stock (including any dividend of Liberty Media
Group 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.
See Annex C -- Illustration of Certain Terms for illustrations of the
calculation of the TCI Ventures Group Inter-Group Interest Fraction and the
effects of dividends on shares of TCI Ventures Group Common Stock.
SHARE DISTRIBUTIONS
Distributions on TCI Group Common Stock. If at any time after the initial
issuance of shares of TCI Ventures Group Common Stock, a distribution paid in
TCI Group Common Stock, TCI Ventures Group Common Stock, Liberty Media Group
Common Stock, or any other securities of the Company or any other person (a
"share distribution"), is 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 TCI
Ventures Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures 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 Ventures Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of
Series B TCI Ventures 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 Ventures Group Common Stock
(or Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A TCI Ventures Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Ventures Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B TCI
Ventures Group Common Stock) to holders of Series B TCI Group Common Stock;
provided that the sum of (A) the aggregate number of shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock to
be so distributed (or the number of such shares 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 TCI Ventures Group
Common Stock and Series B TCI Ventures 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 (other
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than Pre-Exchange Offer Securities) is less than or equal to the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest;
(iii) 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;
(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, TCI Ventures 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, TCI Ventures 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 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 TCI Ventures Group Common Stock. If at any time a share
distribution is to be made with respect to the TCI Ventures 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 TCI Ventures
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, on an equal per share basis; or
consisting of shares of Series B TCI Ventures Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B TCI Ventures Group Common Stock) to holders of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock, on an equal per share basis; or consisting of shares of Series A TCI
Ventures Group Common Stock (or Convertible
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Securities convertible into or exercisable or exchangeable for shares of
Series A TCI Ventures Group Common Stock) to holders of Series A TCI
Ventures Group Common Stock and, on an equal per share basis, shares of
Series B TCI Ventures Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B TCI
Ventures Group Common Stock) to holders of Series B TCI Ventures 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
identical securities, on an equal per share basis, to holders of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock or on the basis of a distribution of one class or series of
securities to holders of Series A TCI Ventures Group Common Stock and
another class or series of securities to holders of Series B TCI Ventures
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 Ventures 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 Ventures Group Common
Stock and the Series B TCI Ventures 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
Ventures Group Common Stock and the Series B TCI Ventures Group Common
Stock, and provided in each case that such distribution is otherwise made
on an equal per share basis.
Because under the Amended Charter the TCI Ventures Group is not permitted
to have an Inter-Group Interest in either the TCI Group or the Liberty Media
Group, no distributions on the TCI Ventures Group Common Stock of shares of TCI
Group Common Stock (or related Convertible Securities) or Liberty Media Group
Common Stock (or related Convertible Securities) are permitted.
The Company will not reclassify, subdivide or combine the Series A TCI
Ventures Group Common Stock without reclassifying, subdividing or combining the
Series B TCI Ventures Group Common Stock, on an equal per share basis, and the
Company will not reclassify, subdivide or combine the Series B TCI Ventures
Group Common Stock without reclassifying, subdividing or combining the Series A
TCI Ventures 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
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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 TCI Ventures Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of TCI Group Common Stock or
TCI Ventures 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.
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 TCI Ventures Group
Common Stock is convertible, at the option of the holder thereof, into one share
of Series A TCI Ventures 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; shares of Series A TCI Ventures Group Common Stock are not
convertible into shares of Series B TCI Ventures 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 of TCI Ventures Group Common Stock 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 TCI Ventures 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 TCI Ventures Group Optional Conversion Ratio,
and (ii) all of the outstanding shares of Series B TCI Ventures 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 TCI
Ventures Group Optional Conversion Ratio. As more fully described below, the TCI
Ventures Group Optional Conversion Ratio is the ratio of the private market
value of a share of TCI Ventures Group Common Stock determined by appraisal to
the public trading price of a share of TCI Group Common Stock.
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Under the Amended Charter, the "TCI Ventures Group Optional Conversion
Ratio" means the quotient (calculated to the nearest five decimal places)
obtained by dividing (x) the TCI Ventures 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 TCI Ventures Group Common Stock Per Share Value will equal the
quotient obtained by dividing the TCI Ventures Group Private Market Value by the
Adjusted Outstanding Shares of TCI Ventures Group Common Stock, which will be
determined in the manner provided below.
The "TCI Ventures Group Private Market Value" means an amount equal to the
private market value of the TCI Ventures Group as of the Appraisal Date. In the
event that the Company determines to establish the TCI Ventures Group Private
Market Value, the Company shall designate the First Appraiser and a committee of
the Board of Directors all of whose members are independent directors as
determined under the Nasdaq National Market rules (the "Independent Committee")
shall designate the Second Appraiser. 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 TCI Ventures 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 Appraised Amount is not more than 120% of the Lower
Appraised Amount, the TCI Ventures 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 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 the Mutually
Appraised Amount, and the TCI Ventures 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 TCI Ventures 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 TCI Ventures 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 TCI Ventures Group, as if the TCI Ventures 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 TCI
Ventures Group other than that which would have existed if the TCI Ventures
Group were a publicly traded non-controlled entity.
Following the determination of the TCI Ventures Group Private Market Value,
the investment banking firms whose final views of the private market value of
the TCI Ventures Group were used in the calculation of the TCI Ventures Group
Private Market Value will determine the Adjusted Outstanding Shares of TCI
Ventures Group Common Stock together with any further appropriate adjustments to
the TCI Ventures Group Private Market Value resulting from such determination.
The "Adjusted Outstanding Shares of TCI Ventures 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 TCI Ventures Group Common Stock
outstanding, the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest, the number of shares of TCI Ventures Group Common
Stock issuable upon the conversion, exercise or
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exchange of all Pre-Exchange Offer Securities, and the number of shares of TCI
Ventures Group Common Stock issuable upon the conversion, exercise or exchange
of those Convertible Securities (other than Pre-Exchange Offer 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 "TCI
Ventures Group Common Stock Per Share Value" means the quotient obtained by
dividing the TCI Ventures Group Private Market Value by the Adjusted Outstanding
Shares of TCI Ventures Group Common Stock, provided that if such investment
banking firms do not agree on the determinations provided for in this paragraph,
the TCI Ventures 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 TCI Ventures Group
Common Stock into Series A TCI Group Common Stock and shares of Series B TCI
Ventures Group Common Stock into Series B TCI Group Common Stock at the TCI
Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock from
retaining their interest in a security reflecting separately the business of the
TCI Ventures Group. In addition, the adjustments in respect of Pre-Exchange
Offer Securities would dilute the interests of holders of TCI Ventures Group
Common Stock upon any conversion of shares of TCI Ventures Group Common Stock
into TCI Group Common Stock at the TCI Ventures Group Optional Conversion Ratio.
See "RISK FACTORS -- Considerations Relating to the TCI Ventures Group Common
Stock -- Potential Dilution from Issuances of TCI Ventures Group Common Stock
upon Conversion, Exercise or Exchange of Certain Outstanding Securities."
See Annex C -- Illustration of Certain Terms for an illustration of the
conversion of TCI Ventures Group Common Stock into TCI Group Common Stock at the
TCI Ventures Group Optional Conversion Ratio.
Conversion of Liberty Media Group Common Stock 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. As more fully described below,
the TCI Ventures Group Optional Conversion Ratio is the ratio of the private
market value of a share of TCI Ventures Group Common Stock determined by
appraisal to the public trading price of a share of TCI Group Common Stock.
Under the Amended Charter, 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 Appraisal Date. In the
event that the Company shall determines to establish the Liberty Media Group
Private Market Value, the Company 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 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 Appraised
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Amount is not more than 120% of 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 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 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 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
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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 TCI Ventures 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 TCI Ventures Group to any one or more persons,
entities or groups, the Company is required, on or prior to the 85th Trading Day
following the consummation of such Disposition, to take one of the actions
listed in the following paragraph. This requirement does not apply to a
Disposition (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) by dividend, other distribution or redemption in accordance
with any provision described under "-- Conversion and Redemption -- Redemption
of TCI Ventures Group Common Stock in Exchange for Stock of Subsidiary"
"-- Dividends," "-- Share Distributions," 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. For these purposes, "substantially all of the properties and assets
of the TCI Ventures 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 TCI Ventures Group as of
such date.
The action the Company is required to take is 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 TCI Ventures Group Common Stock equally on a
share for share basis (subject to the provisions described in the second
sentence of the third paragraph under this caption "-- Mandatory Dividends,
Redemption or Conversion of TCI Ventures Group Common Stock,") in an
aggregate amount equal to the product of the TCI Ventures Group Outstanding
Interest Fraction as of the record date for determining the holders
entitled to receive such dividend and the TCI Ventures Group Net Proceeds
of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the TCI Ventures 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 TCI Ventures Group, redeem all
outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures 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 TCI Ventures Group
Outstanding Interest Fraction as of the date of such redemption and the
TCI Ventures Group Net Proceeds of such Disposition, such aggregate
amount to be allocated (subject to the provisions described in the
second sentence of the following paragraph) to shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and each share of Series B
TCI Ventures Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the TCI Ventures Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the TCI Ventures Group Outstanding
Interest Fraction as of the date shares are selected for redemption and
the TCI Ventures Group Net Proceeds of such Disposition to the
redemption of outstanding shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock, such aggregate
amount to be allocated (subject to the provisions described in the
second sentence of the following paragraph) to shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
in the ratio of the number of shares of each such series outstanding,
with the number of shares of each such series to be redeemed to equal
the lesser of (x) the whole number
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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 TCI Ventures 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 TCI Ventures Group Common Stock and
each share of Series B TCI Ventures Group Common Stock is the same); or
(iii) convert (A) each outstanding share of Series A TCI Ventures
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 TCI Ventures 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 TCI Ventures 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.
The Company may elect to pay the dividend or redemption price referred to
in clause (i) or (ii) of the second paragraph under this caption "-- Mandatory
Dividend, Redemption or Conversion of TCI Ventures 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 TCI Ventures Group
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 TCI Ventures Group Common Stock and another
class or series of securities to holders of Series B TCI Ventures 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 TCI Ventures 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 Ventures Group Common Stock and the Series B TCI Ventures 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 TCI Ventures
Group Common Stock and the Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock. The Related Business Transaction exception to the foregoing requirements
would enable the Company to enter into transactions in which the properties or
assets of the TCI Ventures 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 TCI Ventures Group while
maintaining the capital structure and delineation of business groups of the TCI
Ventures Group.
The effect of using the Adjusted TCI Ventures Group Outstanding Interest
Fraction, instead of the TCI Ventures Group Outstanding Interest Fraction, in
the determination of amounts to be paid in redemption of shares of TCI Ventures
Group Common Stock following a Disposition of all of the properties and assets
of the TCI Ventures Group is to allocate to the TCI Group a portion of the TCI
Ventures Group Net Proceeds of the Disposition, in addition to the amount so
allocated in respect of any Inter-Group Interest, sufficient to provide for the
delivery of the portion of the consideration deliverable by the Company upon any
post-Disposition conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group Common Stock
that would have been issuable upon such conversion, exercise or exchange if it
had occurred prior to such Disposition. To the extent such Pre-Exchange Offer
Securities are
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included in the determination of the Adjusted TCI Ventures Group Outstanding
Interest Fraction, the Company's obligations in respect of such securities would
not be a reduction in the calculation of the TCI Ventures Group Net Proceeds.
See "RISK FACTORS -- Considerations Relating to the TCI Ventures Group Common
Stock -- Potential Dilution from Issuances of TCI Ventures Group Common Stock
upon Conversion, Exercise or Exchange of Certain Outstanding Securities." In the
event any redemption of the TCI Ventures Group Common Stock or conversion of the
TCI Ventures Group Common Stock into TCI Group Common Stock is made in
circumstances in which securities or property are allocated to the TCI Group in
respect of Pre-Exchange Offer Securities or other Convertible Securities
entitled to receive such securities or property upon conversion, exercise or
exchange (such securities or other property, the "Reserved Property"), the TCI
Group will segregate and hold such property separate (in the case of any
Reserved Property other than TCI Group Common Stock), or duly reserve shares of
TCI Group Common Stock issuable upon such conversion, exercise or exchange, for
the benefit of the holders of Pre-Exchange Offer Securities or other Convertible
Securities. In the event the holders of any such Pre-Exchange Offer Securities
or other Convertible Securities do not convert, exercise or exchange such
securities prior to the expiration of any conversion, exercise or exchange right
or the retirement of such security, then the Reserved Property shall revert to
the TCI Group and the former holders of TCI Ventures Group Common Stock shall
have no interest in such Reserved Property.
At the time of any dividend made as a result of a Disposition referred to
above, the TCI Group will be credited, and the TCI Ventures Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of TCI Ventures 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 TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction.
The option to convert the TCI Ventures 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 TCI
Ventures Group were disposed of by the Company in one transaction, the Company
would not be required to pay a dividend on, redeem or convert the outstanding
shares of TCI Ventures Group Common Stock, even if an additional transaction
were consummated at a later time in which additional properties and assets of
the TCI Ventures 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 TCI Ventures
Group at the time of the first transaction, 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 TCI Ventures Group at such time. If less than
substantially all of the properties and assets of the TCI Ventures Group were
disposed of by the Company, the holders of the TCI Ventures 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 TCI Ventures Group
Common Stock in an amount related to the proceeds of such Disposition.
See Annex C -- Illustration of Certain Terms for an illustration of the
dividend on or redemption or conversion of TCI Ventures Group Common Stock
following the Disposition of all or substantially all of the properties and
assets of the TCI Ventures Group.
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, the Company is required, on or prior to the 85th Trading Day
following the consummation of such
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Disposition, to take one of the actions listed in the following paragraph. This
requirement does not apply to a Disposition (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) by dividend, other
distribution or redemption in accordance with any provision described under
"-- Conversion and Redemption -- Redemption of Liberty Media Group Common Stock
in Exchange for Stock of Subsidiary," "-- Dividends," "-- Share Distributions,"
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. 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 action the Company is required to take is 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 under this caption "-- 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 Liberty Media Group Net
Proceeds;
(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
Liberty Media Group Net Proceeds, such aggregate amount to be allocated
(subject to the provisions described in the last sentence of the
penultimate paragraph under this caption) 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 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 under this caption) 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
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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.
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 second paragraph under this caption "-- 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 Liberty
Media Group 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 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 of TCI Ventures Group Common Stock in Exchange for Stock of
Subsidiary. At any time at which all of the assets and liabilities attributed to
the TCI Ventures Group have become and continue to be held directly or
indirectly by any one or more corporations that are Qualifying Subsidiaries (the
"TCI Ventures Group Subsidiaries"), the Board of Directors may, subject to the
availability of assets of the
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Company legally available therefor, redeem on a pro rata basis, all of the
outstanding shares of TCI Ventures Group Common Stock in exchange for an
aggregate number of outstanding, fully paid and nonassessable shares of common
stock of each TCI Ventures Group Subsidiary equal to the product of the Adjusted
TCI Ventures Group Outstanding Interest Fraction and the number of outstanding
shares of common stock of such TCI Ventures Group Subsidiary that are owned by
the Company. The effect of using the Adjusted TCI Ventures Group Outstanding
Interest Fraction, instead of the TCI Ventures Group Outstanding Interest
Fraction, in the determination of shares of the TCI Ventures Group Subsidiaries
deliverable in such a redemption is to allocate to the TCI Group a portion of
the shares of the TCI Ventures Group Subsidiaries, in addition to the number of
such shares so allocated in respect of any Inter-Group Interest, sufficient to
provide for the delivery of the consideration deliverable by the Company upon
any post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that become so payable in substitution for shares of TCI Ventures
Group Common Stock that would have been issuable upon such conversion, exercise
or exchange if it had occurred prior to such redemption. See "RISK
FACTORS--Considerations Relating to the TCI Ventures Group Common
Stock--Potential Dilution from Issuances of TCI Ventures Group Common Stock upon
Conversion, Exercise or Exchange of Certain Outstanding Securities."
In effecting such a redemption, the Board of Directors may determine either
to (i) redeem shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock in exchange for shares of separate classes or
series of common stock of each TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock, with holders of shares of Series B TCI Ventures
Group Common Stock receiving the class or series having the higher relative
voting rights, or (ii) redeem shares of Series A TCI Ventures Group Common Stock
and Series B TCI Ventures Group Common Stock in exchange for shares of a single
class of common stock of each TCI Ventures Group Subsidiary without distinction
between the shares distributed to the holders of the two series of TCI Ventures
Group Common Stock.
See Annex C -- Illustration of Certain Terms for an illustration of the
redemption of TCI Ventures Group Common Stock in exchange for common stock of
the TCI Ventures Group Subsidiaries.
Redemption of Liberty Media Group Common Stock 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 outstanding shares of common stock of such Liberty
Media Group Subsidiary. The Board of Directors has proposed an additional
amendment to the Company Charter for stockholder approval at the Annual Meeting
which would provide a definition of Qualifying Subsidiary applicable to the
Liberty Media Group and define Liberty Media Group Subsidiaries as Qualifying
Subsidiaries that hold directly or indirectly all of the assets and liabilities
attributed to the Liberty Media Group.
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
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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 the Pre-Exchange Offer Securities provide specifically to the contrary, after
any conversion date or redemption date on which all outstanding shares of TCI
Ventures Group Common Stock were converted or redeemed, any share of TCI
Ventures Group Common Stock that is issued on conversion, exercise or exchange
of any Pre-Exchange Offer 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 TCI Ventures 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
securities or other property that a holder of such Pre-Exchange Offer Securities
would have been entitled to receive as a result of such conversion and
redemption had such Pre-Exchange Offer Securities been converted, exercised or
exchanged immediately prior to such action. Unless the provisions of any class
or series of Convertible Securities (other than Pre-Exchange Offer Securities)
which are convertible into or exercisable or exchangeable for shares of TCI
Ventures Group Common Stock provide specifically to the contrary, after any
conversion date or redemption date on which all outstanding shares of TCI
Ventures Group Common Stock were converted or redeemed, any share of TCI
Ventures 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 TCI Ventures 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.
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 as a result of such conversion and redemption had such
securities been converted, exercised or exchanged immediately prior to such
action. With respect to any Convertible Securities that are convertible into or
exercisable or exchangeable for shares of Liberty Media Group Common Stock and
which are created, established or otherwise first authorized for issuance
subsequent to the record date for the Liberty Media Group 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.
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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
TCI Ventures Group Common Stock," the Company will announce publicly by press
release (i) the TCI Ventures Group Net Proceeds of such Disposition, (ii) the
number of outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, (iii) the number of shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures 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 are Pre-Exchange Offer
Securities), (iv) the TCI Ventures Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice and (v) the Adjusted TCI Ventures
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 second paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend described in clause (i) of the
second paragraph under "-- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of TCI Ventures 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
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock, 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 TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock, (iv) the TCI Ventures
Group Net Proceeds of such Disposition, (v) the TCI Ventures Group Outstanding
Interest Fraction as of a recent date preceding the date of such notice, and
(vi) the number of outstanding shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock and the number of shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof.
If the Company determines to undertake a redemption of shares of TCI
Ventures Group Common Stock following a Disposition of all (not merely
substantially all) of the properties and assets of the TCI Ventures Group as
described in clause (ii)(A) of the second paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock a notice setting forth (i) a statement that all shares of TCI
Ventures 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 TCI Ventures Group Common Stock outstanding on the
redemption date, (iv) the TCI Ventures Group Net Proceeds of such Disposition,
(v) the Adjusted TCI Ventures 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 TCI Ventures 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, and (vii) the number of outstanding shares
of Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock and the number of shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures 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 are Pre-Exchange Offer Securities). Such notice will
be sent not less than 35 Trading Days nor more than 45 Trading Days prior to the
redemption date.
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If the Company determines to undertake a redemption of shares of TCI
Ventures Group Common Stock following a Disposition of substantially all (but
not all) of the properties and assets of the TCI Ventures Group as described in
clause (ii)(B) of the second paragraph under the caption "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures 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 TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock 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
TCI Ventures 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 TCI Ventures Group Common Stock
selected for redemption, (iv) the TCI Ventures Group Net Proceeds of such
Disposition, (v) the TCI Ventures Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (vi) the number of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock and the number of shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures 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) a
statement that the Company will not be required to register a transfer of any
shares of TCI Ventures 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 TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock to be redeemed, a notice setting forth
(i) the number of shares of Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock held by such holder to be redeemed, (ii) a
statement that such shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures 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 TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock to be redeemed will be redeemed by the
Company pro rata among the holders of TCI Ventures 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 of the TCI Ventures Group Common Stock at the Option of
the Company" or "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of TCI Ventures Group Common Stock," the Company will cause to be
given to each holder of outstanding shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock a notice setting forth (i) a
statement that all outstanding shares of TCI Ventures 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 TCI Ventures 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 of TCI Ventures Group Common Stock
at the Option of the Company"), (iii) the per share number (or fraction) 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 TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock, including
details as to the calculation thereof, (iv) the place or places where
certificates for shares of TCI Ventures Group Common
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Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement), are to be surrendered, and (v) the number of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock, and the number of shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof. Such
notice will be sent not less than 35 Trading Days nor more than 45 Trading Days
prior to the conversion date.
If the Company determines to redeem shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock as described above
under "-- Conversion and Redemption -- Redemption of TCI Ventures Group Common
Stock in Exchange for Stock of Subsidiary," the Company will promptly cause to
be given to each holder of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock a notice setting forth (i) a statement that all
outstanding shares of TCI Ventures Group Common Stock will be redeemed in
exchange for shares of common stock of the TCI Ventures Group Subsidiaries, (ii)
the redemption date, (iii) the Adjusted TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Subsidiaries, and (v) the number of
outstanding shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock and the number of shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures 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 are Pre-Exchange Offer
Securities). Such notice will be sent by not less than 35 Trading Days nor more
than 45 Trading Days prior to the redemption date.
In each case in which a notice is required to be given to holders of
outstanding shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock in accordance with the preceding five paragraphs
(other than a notice to holders of shares selected for redemption), notice shall
also be given, within the required time period, to each holder of Convertible
Securities that are 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), which notice shall
include, in addition to all of the information set forth in the corresponding
notice to holders of TCI Ventures Group Common Stock, a statement to the effect
that the holders of such Convertible Securities will be entitled to receive the
dividend, participate in the redemption of shares following a Disposition or in
the selection of shares for redemption, participate in the conversion of shares
or participate in the redemption of shares in exchange for stock of the TCI
Ventures Group Subsidiaries only if such holder appropriately converts,
exercises or exchanges such Convertible Securities on or prior to the record
date for the dividend, redemption date, date fixed for selection of shares to be
redeemed or conversion date, as applicable, set forth in such notice. In the
case of a redemption or conversion of shares of TCI Ventures Group Common Stock,
the notice to holders of Convertible Securities shall also state 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 the redemption date or conversion date, as applicable.
All notices required to be given in accordance with the preceding
paragraphs will be sent to a holder by first class mail, postage prepaid, at the
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 TCI Ventures
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 TCI Ventures 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 TCI
Ventures Group Common Stock upon any conversion, redemption, dividend or other
distribution described above. In connection with the determination of the number
of shares
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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 TCI Ventures
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 TCI Ventures 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 TCI Ventures Group Common Stock; provided, however,
that if the conversion date or the redemption date with respect to the TCI
Ventures 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 TCI Ventures 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 TCI Ventures 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 TCI Ventures 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 TCI
Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock not redeemed. The
Company will not be required to register a transfer of (i) any shares of TCI
Ventures Group Common Stock for a period of 15 Trading Days next preceding any
selection of shares of TCI Ventures Group Common Stock to be redeemed or (ii)
any shares of TCI Ventures Group Common Stock selected or called for redemption.
Shares selected for redemption may not thereafter be converted pursuant to the
provisions described under the caption "--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 TCI Ventures Group Common Stock that were
converted or redeemed will cease except for the right, upon surrender of the
certificates representing shares of TCI Ventures 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 TCI Ventures
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. No holder of a
certificate that, immediately prior to the applicable conversion date or
redemption date for the TCI Ventures Group Common Stock, represented shares of
TCI Ventures 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 TCI Ventures 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
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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 TCI Ventures Group
Common Stock, the Company will, however, be entitled to treat the certificates
for shares of TCI Ventures 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 TCI
Ventures 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 TCI Ventures 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 TCI Ventures 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.
Provisions substantially the same as those described under this caption
"--General Conversion and Redemption Provisions," apply in the event of a
Disposition of all or substantially all of the properties and assets of the
Liberty Media Group and a determination of the Company to pay a dividend on or
undertake a partial or complete redemption of the Liberty Media Group Common
Stock following such Disposition, in the event of any conversion of the Liberty
Media Group Common Stock as described under "-- Conversion and
Redemption -- Conversion of Liberty Media Group Common Stock at the Option of
the Company" or "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of Liberty Media Group Common Stock," and in the event of a
redemption of the Liberty Media Group Common Stock in exchange for stock of one
or more subsidiaries as described under "-- Conversion and
Redemption -- Redemption of Liberty Media Group Common Stock in Exchange for
Stock of Subsidiary."
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 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 TCI Ventures 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 TCI Ventures Group Common Stock and the Series B
TCI Ventures 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 TCI Ventures Group
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Common Stock and the Series B TCI Ventures 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.
No holder of TCI Ventures Group Common Stock or Liberty Media Group Common
Stock will have any special right to receive specific assets of the TCI Ventures
Group or the Liberty Media Group, as the case may be, in the case of any
dissolution, liquidation or winding up of the Company.
DETERMINATIONS BY THE BOARD OF DIRECTORS
The Amended Charter provides that any determinations made by the Board of
Directors under any provision described under "DESCRIPTION OF CAPITAL 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 "RISK FACTORS -- Considerations Relating to the
TCI Ventures Group Common Stock -- Fiduciary Duties of the Board of Directors
are to all Stockholders Regardless of Class of 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
Holders of the TCI Group Common Stock, Liberty Media Group Common Stock and
the TCI Ventures 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 June 30, 1997, 1,620,026 shares of Class B Preferred Stock, 70,575
shares of Series C Preferred Stock, 995,324 shares of Series D Preferred Stock,
278,307 shares of Series F Preferred Stock, 6,693,077 shares of Series G
Preferred Stock and 6,693,177 shares of Series H Preferred Stock were
outstanding. All of the outstanding shares of Series F Preferred Stock are held
by subsidiaries of the Company. The liquidation preference as of such date of
the Class B Preferred Stock was $100 per share, of the Series C Preferred Stock
was $2,375 per share, of the Series D Preferred Stock was $300 per share, of the
Series F Preferred Stock was $.01 per share, of the Series G Preferred Stock was
$21.60 per share, and of the Series H Preferred Stock was $5.40 per share. After
receipt of their liquidation preference, holders of Series F Preferred Stock are
entitled to receive from the assets of the Company available for distribution to
common stockholders an amount equal to the amount per share to be distributed to
holders of Series A TCI Group Common Stock in such liquidation, multiplied by
the number of shares of Series A TCI Group Common Stock into which their shares
of Series F Preferred Stock are then convertible. As of July 25, 1997, (i) each
share of Series C Preferred Stock is convertible at the option of the holder
into 116.24 shares of Series A TCI Group Common Stock and 25 shares of Series A
Liberty Media Group Common Stock, (and, upon conversion of shares of Series C
Preferred Stock, each holder of Series C Preferred Stock is entitled to receive
one additional share of Series A Liberty Media Group Common Stock for every two
such shares received upon conversion); (ii) 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, two and one-half shares of Series A Liberty Media Group
Common Stock (and, upon conversion of shares of the Series D Preferred Stock,
each holder of Series D Preferred Stock is entitled to receive one additional
share of Series A Liberty Media Group Common Stock for every two such shares
received upon conversion), and one share of TCI Satellite Entertainment, Inc.
Series A Common Stock; (iii) each share of Series F Preferred Stock is
convertible into 1,496.65 shares of Series A TCI Group Common Stock; (iv) each
share of Series G Preferred Stock is convertible at the option of the holder
into 1.190 shares of Series A TCI Group Common Stock; and (v) each share of
Series H Preferred Stock is convertible at the option of the holder into .2625
shares of Series A Liberty Media Group Common Stock (and, upon conversion of
shares of Series H Preferred Stock, each holder of Series H Preferred Stock is
entitled to receive one additional share of Series A Liberty Media Group Common
Stock for every two such shares received upon conversion), in each case subject
to antidilution adjustments. The Series C Preferred
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Stock, the Series G Preferred Stock and the Series H Preferred Stock are
required to be redeemed by the Company out of legally available funds on August
8, 2001, February 1, 2016 and February 1, 2016, respectively. The Series D
Preferred Stock is redeemable at the option of the holder at any time after the
tenth anniversary of its issuance.
The Class B Preferred Stock, the Series F Preferred Stock, the Series G
Preferred Stock and the Series H Preferred Stock are each entitled to vote, on
the basis of one vote per share, together with the Common Stock and any class or
series of Preferred Stock of the Company entitled to vote thereon, in the
general election of directors of the Company. The holders of shares of Series C
Preferred Stock are entitled to vote such shares on an as converted basis on all
matters submitted to a vote of holders of Common Stock and any other class of
capital stock of the Company entitled to vote generally on the election of
directors. The consent of the holders of 66 2/3% of the aggregate liquidation
value of the Series D Preferred Stock is required in order for the Company to
create any series of Preferred Stock that is senior to the Series D Preferred
Stock. Except as described above and as otherwise required by the DGCL or the
Amended Charter, the currently outstanding Preferred Stock of the Company has no
voting rights. The terms of the various classes and series of the Company's
Preferred Stock include provisions that restrict the redemption or repurchase of
and the payment of dividends or the making of distributions on the Common Stock
if any dividends are in arrears on the Preferred Stock or if the Company has
failed to redeem any shares of Preferred Stock that it was required to redeem.
The foregoing description of certain terms of the outstanding classes and
series of Preferred Stock does not purport to be complete and is qualified in
its entirety by reference to the Amended Charter (including the Certificate of
Designation with respect to each outstanding series of Preferred Stock).
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Amended 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, the Company Charter and
the Company's Bylaws with respect to the foregoing are outlined below.
DGCL Section 203, in general, prohibits a "business combination" between a
corporation and an "interested stockholder" within three years of the time such
stockholder became an "interested stockholder," unless (i) prior to such time
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) at
or subsequent to such time, 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 or entity that
individually or with or through such person or entity's affiliates or
associates, among other things, beneficially owns such stock, or has the right
to acquire such stock (whether such right is exercisable
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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 The Nasdaq Stock
Market or held of record by more than 2,000 stockholders.
The Amended 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."
The Amended Charter also contains certain provisions which could make a
change in control of the Company more difficult. For example, the Amended
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 defined in the Amended Charter as the TCI Group
Common Stock, the Liberty Media Group Common Stock, the TCI Ventures 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, which currently would include the Series C Preferred Stock. The
Amended 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 the annual meeting of stockholders at
which such class of directors' term expires. The exact number of directors,
currently ten, is fixed by the Board of Directors. The holders of Voting
Securities and of Class B 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 Amended Charter authorizes the issuance of 50,000,000 shares of Series
Preferred Stock, of which 33,901,240 remain available for issuance as of June
30, 1997. Under the Amended 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, 825,000,000 shares of
Liberty Media Group Common Stock and 825,000,000 shares of TCI Ventures Group
Common Stock are currently authorized by the Amended Charter. As of June 30,
1997, 1,069,508,630 shares of TCI Group Common Stock and 575,022,629 shares of
Liberty Media Group Common Stock remained available for issuance (without taking
into consideration shares reserved for issuance upon conversion, exchange or
exercise of outstanding convertible or exchangeable securities and options). No
shares of TCI Ventures Group Common Stock have been issued. The issue and sale
of shares of TCI Group Common Stock, Liberty Media Group Common Stock, TCI
Ventures 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 Amended 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 Amended Charter or the addition or insertion of other provisions therein.
194
<PAGE> 203
The Amended 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 SEC 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 action to remove directors is 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 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, in addition to the Voting
Securities).
The Company believes that the issuance of TCI Ventures Group Common Stock
should not make a change in control of the Company more difficult. Nevertheless,
the existence of the TCI Ventures Group Common Stock could 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 TCI Ventures
Group Common Stock.
NO INITIAL INTER-GROUP INTEREST IN THE TCI VENTURES GROUP
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent all of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares are issued in the Exchange
Offers, the TCI Group will not have any Inter-Group Interest in the TCI Ventures
Group. If fewer than all of the shares offered are issued, the remaining
InterGroup Interest would be extinguished in consideration of the attribution to
the TCI Group of the TCI Ventures Group Preferred Interest.
An Inter-Group Interest in the TCI Ventures Group would be created only if
a subsequent transfer of cash or other property from the TCI Group to the TCI
Ventures Group is specifically designated by the Board of Directors as being
made to create an Inter-Group Interest in the TCI Ventures 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 TCI Ventures Group Common
Stock are retired or otherwise cease to be outstanding following their purchase
with funds attributed to the TCI Group. Pursuant to the Amended Charter, the TCI
Ventures Group is not permitted to create an interest in either the TCI Group or
the Liberty Media Group corresponding to the Inter-Group Interest, and the
Liberty Media Group is not permitted to create an interest in the TCI Ventures
Group or the TCI Group corresponding to the Inter-Group Interest.
195
<PAGE> 204
The amount of any Inter-Group Interest of the TCI Group in the TCI Ventures
Group would be expressed in terms of the "Number of Shares Issuable with Respect
to the TCI Ventures Group Inter-Group Interest", which is intended to provide a
measure of the Inter-Group Interest in the TCI Ventures Group on a basis
comparable to an investment in shares of TCI Ventures Group Common Stock and
which represents the number of shares of TCI Ventures Group Common Stock that
could be issued or sold by the Company for the account of the TCI Group in
respect of any Inter-Group Interest in the TCI Ventures Group. The authorized
shares of TCI Ventures Group Common Stock in excess of the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest, if any,
and the outstanding shares of TCI Ventures Group Common Stock (the "Available
Shares") will be available for issuance as additional equity for the TCI
Ventures Group. The "TCI Ventures Group Outstanding Interest Fraction" means the
percentage interest in the common stockholders' equity value of the Company
attributable to the TCI Ventures Group that is represented at any time by the
outstanding shares of TCI Ventures Group Common Stock, and the "TCI Ventures
Group Inter-Group Interest Fraction" means, any remaining percentage interest in
the common stockholders' equity value of the Company attributable to the TCI
Ventures Group that is attributed to the TCI Group and is represented by the
Inter-Group Interest in the TCI Ventures Group. The sum of the TCI Ventures
Group Outstanding Interest Fraction and the TCI Ventures Group Inter-Group
Interest Fraction would always equal 100%. The "Adjusted TCI Ventures Group
Outstanding Interest Fraction" is a measure of the percentage interest in the
TCI Ventures Group represented by outstanding shares of TCI Ventures Group
Common Stock that is similar to the TCI Ventures Group Outstanding Interest
Fraction but takes into account the dilutive effect of the Pre-Exchange Offer
Securities. The Adjusted TCI Ventures Group Outstanding Interest Fraction is
used instead of the TCI Ventures Group Outstanding Interest Fraction in certain
provisions described under "DESCRIPTION OF CAPITAL STOCK -- Common
Stock -- Conversion and Redemption." The full definitions of "Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest," "TCI
Ventures Group Outstanding Interest Fraction," "TCI Ventures Group Inter-Group
Interest Fraction" and "Adjusted TCI Ventures Group Outstanding Interest
Fraction" are set forth in "DESCRIPTION OF CAPITAL STOCK."
Any Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be represented by outstanding shares of TCI
Ventures Group Common Stock and, therefore, would not be entitled to any voting
rights. In addition, outstanding shares of TCI Ventures 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 TCI
Ventures Group, and the outcome of any vote of the TCI Ventures Group Common
Stock would be determined by the holders of the outstanding shares of TCI
Ventures Group Common Stock (excluding any shares held by such majority owned
subsidiaries of the Company).
For financial reporting purposes, shares of TCI Ventures 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 TCI Ventures Group Inter-Group
Interest, if any, and reported as the TCI Group's investment in the TCI Ventures
Group. Any differences between such reported investment and any then existing
Inter-Group Interest in the TCI Ventures Group would be reconcilable by adding
to any then existing Inter-Group Interest in the TCI Ventures Group the number
of outstanding shares of TCI Ventures 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 TCI Ventures Group
Inter-Group Interest.
The Company may from time to time, by action of the Board (i) offer shares
of TCI Ventures Group Common Stock for cash in one or more public offerings,
(ii) issue shares of TCI Ventures Group Common Stock as consideration for
acquisitions or investments, (iii) issue shares of TCI Ventures Group Common
Stock to employees of the Company pursuant to employee benefit plans or
otherwise as compensation, or
196
<PAGE> 205
(iv) issue shares of TCI Ventures 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. Shares may be issued from the Available
Shares at any time at prices that could dilute the value of the outstanding
shares of TCI Ventures Group Common Stock.
If there is an Inter-Group Interest in the TCI Ventures Group in the
future, whenever shares of TCI Ventures Group Common Stock are subsequently
issued or sold by the Company, the Company will identify (i) the number of
shares of TCI Ventures Group Common Stock issued 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 TCI Ventures 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 TCI
Ventures 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 TCI Ventures Group. 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 "RISK
FACTORS -- Considerations Relating to the TCI Ventures Group Common
Stock -- Fiduciary Duties of the Board of Directors are to All Stockholders
Regardless of Class or Series." In the discretion of the Board of Directors,
shares of TCI Ventures Group Common Stock issued in respect of the TCI Group's
Inter-Group Interest in the TCI Ventures Group may be issued in the form of
shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
Group Common Stock (subject to there being a sufficient number of authorized and
unissued shares of the applicable series of TCI Ventures Group Common Stock).
If there is an Inter-Group Interest in the TCI Ventures Group, whenever
additional shares of TCI Ventures Group Common Stock are issued or sold by the
Company for the account of the TCI Group in respect of a reduction in its
InterGroup Interest in the TCI Ventures Group, the Number of Shares Issuable
with Respect to the TCI Ventures Group InterGroup Interest would decrease on a
share-for-share basis and the TCI Ventures Group Inter-Group Interest Fraction
would decrease and the TCI Ventures Group Outstanding Interest Fraction would
increase accordingly. If the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest is reduced to zero as a result of any
combination of one or more of such issuances or sales, shares of TCI Ventures
Group Common Stock could no longer be issued or sold by the Company for the
account of the TCI Group unless a further Inter-Group Interest in the TCI
Ventures Group is subsequently created. If the net proceeds of any issuance or
sale by the Company of TCI Ventures Group Common Stock are allocated to the TCI
Ventures Group, the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest would not be reduced, but the TCI Ventures Group
Inter-Group Interest Fraction would decrease and the TCI Ventures Group
Outstanding Interest Fraction would increase accordingly.
If there is an Inter-Group Interest in the TCI Ventures Group and the Board
of Directors determines to issue or deliver shares of TCI Ventures 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 TCI Ventures Group, and as a result, the Number of
Shares Issuable with Respect to the TCI Ventures 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 TCI Ventures Group
Inter-Group Interest Fraction and increase in the TCI Ventures Group Outstanding
Interest Fraction.
If shares of TCI Ventures 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 TCI Ventures Group
Inter-Group Interest would increase on a share-for-share basis and the TCI
Ventures Group Inter-Group Interest Fraction would increase and the TCI Ventures
Group Outstanding Interest Fraction would decrease accordingly. If the purchase
of shares of TCI Ventures Group Common
197
<PAGE> 206
Stock was made with funds attributed to the TCI Ventures Group, the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest
would not be increased, but the TCI Ventures Group Inter-Group Interest Fraction
would increase and the TCI Ventures Group Outstanding Interest Fraction would
decrease accordingly. The Board of Directors would, in its sole discretion,
determine whether purchases of TCI Ventures Group Common Stock should be made
with consideration attributed to the TCI Group or the TCI Ventures 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 have the Company contribute cash or other property of the TCI Group
as additional equity to the TCI Ventures Group, which would increase the Number
of Shares Issuable with Respect to the TCI Ventures 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 TCI Ventures Group Common Stock as of the date of such
contribution. In such event, the TCI Ventures Group Inter-Group Interest
Fraction will increase and the TCI Ventures 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 TCI
Ventures Group from the TCI Ventures Group to the TCI Group in respect of a
reduction in any then existing Inter-Group Interest in the TCI Ventures Group,
in which case the Number of Shares Issuable with Respect to the TCI Ventures
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 by the Market Value of one share of Series A TCI
Ventures Group Common Stock as of the date of such contribution. In such event,
the TCI Ventures Group Inter-Group Interest Fraction would decrease and the TCI
Ventures 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 TCI Ventures Group Common Stock (other than
in shares of TCI Ventures Group Common Stock, which will result in an adjustment
to the Number of Shares Issuable with Respect to the TCI Ventures Group Inter-
Group Interest as described below), the TCI Group will be credited, and the TCI
Ventures Group will be charged (in addition to the charge for such dividend or
other distribution paid upon outstanding shares of TCI Ventures Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or other distribution paid or distributed in respect of outstanding
shares of TCI Ventures Group Common Stock (including any dividend of TCI
Ventures Group Net Proceeds from the Disposition of all or substantially all of
the assets and properties of the TCI Ventures Group), and (ii) a fraction the
numerator of which is the TCI Ventures Group Inter-Group Interest Fraction and
the denominator of which is the TCI Ventures Group Outstanding Interest
Fraction.
The Number of Shares Issuable with Respect to the TCI Ventures 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 TCI Ventures Group Common Stock, (ii)
dividends or distributions payable in shares of TCI Ventures Group Common Stock
to holders of TCI Ventures Group Common Stock and (iii) reclassifications of TCI
Ventures Group Common Stock and (b) be decreased by the number of shares of TCI
Ventures Group Common Stock (i) issued upon conversion or exercise of
Convertible Securities that are not attributed to the TCI Ventures Group or (ii)
issued by the Company as a dividend or distribution or by reclassification or
exchange to holders of TCI Group Common Stock.
See Annex C -- Illustration of Certain Terms for illustrations of the
calculation of the Inter-Group Interest in the TCI Ventures Group and the
effects thereon of dividends on, and the sale or purchase of, shares
198
<PAGE> 207
of TCI Ventures Group Common Stock and contributions of cash or other property
of the TCI Group to the TCI Ventures Group.
DIVIDEND POLICY
The Company has never paid cash 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 the TCI Ventures 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 TCI Ventures Group Common Stock would be paid on such
basis as the Board of Directors determines, subject to the provisions described
under "DESCRIPTION OF CAPITAL STOCK -- 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 "FINANCIAL
INFORMATION" for the Consolidated Financial Information of the Company and the
Combined Financial Information of the TCI Ventures Group.
199
<PAGE> 208
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Condensed Pro Forma Combined Financial Statements:
Tele-Communications, Inc.................................. F-2
"TCI Ventures Group"...................................... F-9
"TCI Group"............................................... F-15
Tele-Communications, Inc. and Subsidiaries:
Management's Discussion and Analysis of Financial
Condition Results of Operations, Three months ended
March 31, 1997 and 1996................................ F-22
Consolidated Balance Sheets, March 31, 1997 and December
31, 1996 (unaudited)................................... F-27
Consolidated Statements of Operations, Three month period
ended March 31, 1997 and 1996 (unaudited).............. F-28
Consolidated Statement of Stockholders' Equity, Three
months ended March 31, 1996 (unaudited)................ F-29
Consolidated Statements of Cash Flows, Three months ended
March 31, 1997 and 1996 (unaudited).................... F-30
Notes to Consolidated Financial Statements, March 31, 1997
(unaudited)............................................ F-31
</TABLE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1996, 1995 and 1994....................... F-41
Independent Auditors' Report.............................. F-54
Consolidated Balance Sheets, December 31, 1996 and 1995... F-55
Consolidated Statements of Operations, Years ended
December 31, 1996, 1995 and 1994....................... F-56
Consolidated Statements of Stockholders' Equity, Years
ended
December 31, 1996, 1995, 1994.......................... F-57
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994....................... F-60
Notes to Consolidated Financial Statements, December 31,
1996, 1995 and 1994.................................... F-61
"TCI Ventures Group":
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Three months ended
March 31, 1997 and 1996................................ F-95
Combined Balance Sheets, March 31, 1997 and December 31,
1996 (unaudited)....................................... F-114
Combined Statements of Operations, Three month period
ended March 31, 1997 and 1996 (unaudited).............. F-115
Statement of Combined Equity, Three months ended March 31,
1997 (unaudited)....................................... F-116
Combined Statements of Cash Flows, Three months ended
March 31, 1997 and 1996 (unaudited).................... F-117
Notes to Combined Financial Statements, March 31, 1997
(unaudited)............................................ F-118
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1996, 1995 and 1994....................... F-136
Independent Auditors' Report.............................. F-159
Combined Balance Sheets, December 31, 1996 and 1995....... F-160
Combined Statements of Operations, Years ended December
31, 1996, 1995 and 1994................................ F-161
Statements of Combined Equity, Years ended December 31,
1996, 1995, 1994....................................... F-162
Combined Statements of Cash Flows, Years ended December
31, 1996, 1995 and 1994................................ F-163
Notes to Combined Financial Statements, December 31, 1996,
1995 and 1994.......................................... F-164
F-1
<PAGE> 209
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of
Tele-Communications, Inc. ("TCI" or the "Company"), dated as of March 31, 1997,
assumes that the Exchange Offers (see note 1) had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI for the three months ended March 31, 1997 assumes that the
Exchange Offers had occurred as of January 1, 1997.
The following unaudited condensed pro forma combined statement of
operations of TCI for the year ended December 31, 1996 assumes that the Exchange
Offers, the distribution (the "Distribution") by TCI to the holders of shares of
TCI Group common stock of all the issued and outstanding common stock of TCI
Satellite Entertainment, Inc. ("Satellite") (see note 2) and the acquisition of
all the common stock of a subsidiary of Viacom, Inc. ("VII Cable") (the "VII
Cable Acquisition") (see note 3) had occurred as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers, the
Distribution and the VII Cable Acquisition had occurred as of January 1, 1996.
These condensed pro forma combined financial statements of TCI should be read in
conjunction with the historical financial statements and the related notes
thereto of TCI.
F-2
<PAGE> 210
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------
TCI EXCHANGE TCI
HISTORICAL OFFERS(1) PRO FORMA
---------- --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
ASSETS
Cash, receivables and other current assets.................. $ 1,191 -- 1,191
Investment in affiliates and Turner Broadcasting System,
Inc., and related receivables............................. 4,935 -- 4,935
Property and equipment, net of accumulated depreciation..... 7,688 -- 7,688
Franchise costs, intangibles and other assets, net of
amortization.............................................. 16,862 -- 16,862
------- ---- ------
$30,676 -- 30,676
======= ==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals....................................... $ 1,502 -- 1,502
Debt........................................................ 15,049 -- 15,049
Deferred income taxes....................................... 5,946 -- 5,946
Other liabilities........................................... 251 -- 251
------- ---- ------
Total liabilities................................. 22,748 -- 22,748
------- ---- ------
Minority interests.......................................... 1,349 -- 1,349
Redeemable preferred stock.................................. 655 -- 655
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debt securities
of TCIC................................................... 1,502 -- 1,502
Stockholders' equity:
Preferred stock........................................... -- -- --
TCI Group Series A common stock........................... 715 (189) 526
TCI Group Series B common stock........................... 85 (16) 69
Liberty Media Group Series A common stock................. 229 -- 229
Liberty Media Group Series B common stock................. 21 -- 21
TCI Ventures Group Series A common stock.................. -- 189 189
TCI Ventures Group Series B common stock.................. -- 16 16
Additional paid-in capital................................ 3,904 -- 3,904
Cumulative foreign currency translation adjustment........ 5 -- 5
Unrealized holding gains for available-for-sale
securities............................................. 11 -- 11
Accumulated deficit....................................... (234) -- (234)
TCI stock held by subsidiaries............................ (314) -- (314)
------- ---- ------
4,422 -- 4,422
------- ---- ------
$30,676 -- 30,676
======= ==== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-3
<PAGE> 211
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------
TCI EXCHANGE TCI
HISTORICAL OFFERS(1) PRO FORMA
---------- --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Revenue..................................................... $ 1,827 -- 1,827
Operating, cost of sales, selling, general and
administrative expenses and compensation relating to stock
appreciation rights....................................... (1,104) -- (1,104)
Depreciation and amortization............................... (374) -- (374)
------- --- ------
Operating income.......................................... 349 -- 349
Interest expense............................................ (289) -- (289)
Interest and dividend income................................ 21 -- 21
Share of losses of affiliates, net.......................... (156) -- (156)
Other income (expense), net................................. (21) -- (21)
------- --- ------
Earnings (loss) before income taxes....................... (96) -- (96)
Income tax benefit (expense)................................ 38 -- 38
------- --- ------
Net earnings (loss)....................................... (58) -- (58)
Dividend requirement on redeemable preferred stocks......... (10) -- (10)
------- --- ------
Net earnings (loss) attributable to common stockholders... $ (68) -- (68)
======= === ======
Primary earnings (loss) attributable to common stockholders
per common and common equivalent share:
TCI Group Series A and Series B common stock........... $ (.12) (.01)(8)
======= ======
Liberty Media Group Series A and Series B common
stock................................................ $ .06 .06
======= ======
TCI Ventures Group Series A and Series B common
stock................................................ $ -- (.38)(10)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-4
<PAGE> 212
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------
TCI EXCHANGE SATELLITE VII CABLE PRO FORMA TCI
HISTORICAL OFFERS(1) DISTRIBUTION(2) HISTORICAL(3) ADJUSTMENTS(3) PRO FORMA
---------- --------- --------------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $ 8,022 -- (377) 280 -- 7,925
Operating, cost of sales,
selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring charges... (5,774) -- 373 (176) -- (5,577)
Depreciation and
amortization................ (1,616) -- 166 (52) (14)(4) (1,516)
------- ----- ---- ---- --- ------
Operating income (loss)..... 632 -- 162 52 (14) 832
Interest expense.............. (1,096) -- -- (31) (44)(5) (1,171)
Interest and dividend
income...................... 64 -- -- 2 -- 66
Share of earnings (losses) of
affiliates, net............. (473) -- -- -- -- (473)
Gains......................... 1,605 -- -- -- -- 1,605
Other income (expense), net... (192) -- -- 1 (18)(6) (209)
------- ----- ---- ---- --- ------
Earnings (loss) before
income taxes............. 540 -- 162 24 (76) 650
Income tax benefit
(expense)................... (262) -- (53) (13) 11(7) (317)
------- ----- ---- ---- --- ------
Net earnings (loss)......... 278 -- 109 11 (65) 333
Dividend requirement on
redeemable preferred
stocks...................... (35) -- -- -- -- (35)
------- ----- ---- ---- --- ------
Net earnings (loss)
attributable to common
stockholders............. $ 243 -- 109 11 (65) 298
======= ===== ==== ==== === ======
Primary earnings (loss)
attributable to common
stockholders per common and
common equivalent share:
TCI Group Series A and
Series B common
stock.................. $ (1.22) (1.09)(9)
======= ======
Liberty Media Group
Series A and Series B
common stock........... $ 3.97 3.97
======= ======
TCI Ventures Group Series
A and Series B common
stock.................. $ -- (1.26)(11)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-5
<PAGE> 213
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of TCI authorized, subject to
shareholder approval (the "TCI Ventures Group Stock Proposal"), the issuance of
two new series of stock ("TCI Ventures Group Common Stock") which are intended
to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such series outstanding as of June 30, 1997, excluding shares held by
majority owned subsidiaries of the Company)
F-6
<PAGE> 214
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
in the ratio of one share of the applicable series of TCI Ventures Group Common
Stock in exchange for each share of the corresponding series of TCI Group common
stock properly tendered. The Exchange Offers will be subject, among other
conditions, to the approval by stockholders of the TCI Ventures Group Stock
Proposal. If such approval is obtained and other conditions are satisfied, the
Company would consummate the Exchange Offers on or about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) On December 4, 1996, TCI completed the Distribution by TCI to the
holders of shares of the TCI Group common stock of all of the issued and
outstanding common stock of Satellite. At the time of the Distribution,
Satellite was a Delaware corporation and a direct wholly-owned subsidiary of
TCI. The Distribution was effected as a tax-free dividend to, and did not
involve the payment of any consideration by, the holders of TCI Group common
stock. Prior to the Distribution, TCI caused to be transferred to Satellite, or
one or more of Satellite's subsidiaries, certain assets and businesses (and the
related liabilities) of the TCI Group constituting all of TCI's interests in the
business of distributing multichannel programming services in the United States
direct to the home via medium power or high power broadcast satellite, including
the rental and sale of customer premises equipment relating thereto.
(3) On July 31, 1996, pursuant to certain agreements entered into among TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, TCI, Viacom International
Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of VII
Cable which, at the time of such acquisition, owned Viacom's cable systems and
related assets.
The transaction was structured as a tax-free reorganization in which VII
Cable initially 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"). VII Cable 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 VII Cable. Following these transfers, VII Cable 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 VII Cable 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 VII Cable ("VII Cable Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from VII Cable shares of VII Cable Class B Common Stock (the "Share
Issuance") in exchange for $350 million (which was used to reduce VII Cable's
obligations under the Loan Facility). At the time of the Share Issuance, the VII
Cable
F-7
<PAGE> 215
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 VII Cable with a stated value of
$100 per share.
The cost to acquire VII Cable was approximately $2.326 billion, consisting
of the Loan Proceeds and the $626 million aggregate par value of the VII Cable
Exchangeable Preferred Stock. The accompanying unaudited pro forma condensed
combined statements of operations do not reflect potential cost savings
attributable to (i) economics of scale which may be realized in connection with
purchases of programming and equipment or (ii) consolidation of certain
operating and administrative functions including the elimination of duplicative
facilities and personnel.
(4) Represents depreciation and amortization of VII Cable's allocated
excess purchase price based upon a weighted average life of 12.5 years for
property and equipment and a 40 year life for franchise costs.
(5) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable operations)
incurred by the Company on the borrowings of the Loan Proceeds. Solely for the
purposes of this presentation, the Company has assumed an interest rate of 7.50%
for the year ended December 31, 1996, based upon historical interest rates
adjusted for anticipated terms of the Loan Facility.
(6) Reflects a 5.0% cumulative annual dividend on the $626 million of VII
Cable Exchangeable Preferred Stock included in minority share of losses of
consolidated subsidiaries.
(7) Reflects the estimated income tax effect of the VII Cable pro forma
adjustments. The effective income tax rate on a pro forma basis is adversely
affected by the amortization of excess acquisition costs, which are assumed not
to be deductible for tax purposes.
(8) Reflects loss per common share based upon 473.1 million weighted
average shares of TCI Group at March 31, 1997. Such amount represents the
weighted average shares disclosed in TCI's historical financial statements net
of 204.9 million shares assumed exchanged in the Exchange Offers.
(9) Reflects loss per common share based upon 459.9 million weighted
average shares of TCI Group for the entire period ended December 31, 1996,
respectively. Such amounts represent TCI Group weighted average shares, as
disclosed in its historical financial statements net of 204.9 million shares
assumed exchanged in the Exchange Offers.
(10) Reflects loss per common share for the three months ended March 31,
1997 based upon 204.9 million weighted average shares of TCI Ventures Group
assumed issued in exchange for TCI Group stock in the Exchange Offers.
(11) Reflects loss per common share for the year ended December 31, 1996
based upon 204.9 million weighted average shares of TCI Ventures Group assumed
issued in exchange for TCI Group stock in the Exchange Offers.
F-8
<PAGE> 216
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited pro forma combined balance sheet of TCI Ventures
Group, dated as of March 31, 1996, assumes that the Exchange Offers (see note 1)
had occurred as of such date.
The following unaudited pro forma combined statements of operations of TCI
Ventures Group for the three months ended March 31, 1997 and the year ended
December 31, 1996 assumes that the Exchange Offers had occurred as of January 1,
1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers had
occurred as of January 1, 1996. These pro forma combined financial statements of
TCI Ventures Group should be read in conjunction with the historical financial
statements and the related notes thereto of TCI Ventures Group.
F-9
<PAGE> 217
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
ASSETS
Cash, receivables and other current assets............. $ 171,264 -- 171,264
Investment in affiliates and related receivables....... 1,821,126 -- 1,821,126
Property and equipment, net of accumulated
depreciation......................................... 745,393 -- 745,393
Franchise costs, intangibles and other assets, net of
amortization......................................... 1,125,779 -- 1,125,779
---------- -------- ------------
$3,863,562 -- 3,863,562
========== ======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals.................................. $ 307,459 -- 307,459
Capital lease obligations.............................. 193,832 -- 193,832
Debt................................................... 512,757 -- 512,757
Deferred income taxes.................................. 189,107 -- 189,107
Other liabilities...................................... 8,263 -- 8,263
---------- -------- ------------
Total liabilities............................ 1,211,418 -- 1,211,418
---------- -------- ------------
Minority interests..................................... 218,147 -- 218,147
Combined equity:
Combined equity...................................... 2,556,643 -- 2,556,643
Cumulative foreign currency translation adjustment... 4,817 -- 4,817
Unrealized holding gains for available-for-sale
securities........................................ 7,028 -- 7,028
Due from TCI......................................... (134,491) -- (134,491)
---------- -------- ------------
2,433,997 -- 2,433,997
---------- -------- ------------
$3,863,562 -- 3,863,562
========== ======== ============
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-10
<PAGE> 218
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue................................................. $247,020 -- 247,020
Operating, selling, general and administrative expenses
and compensation relating to stock appreciation
rights................................................ (205,991) -- (205,991)
Depreciation and amortization........................... (41,144) -- (41,144)
-------- ------- --------
Operating loss........................................ (115) -- (115)
Interest expense........................................ (14,196) -- (14,196)
Share of losses of affiliates, net...................... (142,120) -- (142,120)
Other income (expense), net............................. 34,809 -- 34,809
-------- ------- --------
Loss before income taxes.............................. (121,622) -- (121,622)
Income tax benefit...................................... 44,370 -- 44,370
-------- ------- --------
Net loss.............................................. $(77,252) -- (77,252)
======== ======= ========
Net loss attributable to common stockholders.......... $ -- (77,252) (77,252)
======== ======= ========
Loss attributable to common stockholders per common
share................................................. $ -- (.38)(2)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-11
<PAGE> 219
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNT IN THOUSANDS
<S> <C> <C> <C>
Revenue................................................ $ 925,676 -- 925,676
Operating, selling, general and administrative
expenses, compensation relating to stock appreciation
rights and restructuring charge...................... (826,944) -- (826,944)
Depreciation and amortization.......................... (149,289) -- (149,289)
--------- -------- --------
Operating income..................................... (50,557) -- (50,557)
Interest expense....................................... (51,128) -- (51,128)
Share of losses of affiliates, net..................... (368,338) -- (368,338)
Gains.................................................. 32,941 -- 32,941
Other income (expense), net............................ 68,315 -- 68,315
--------- -------- --------
Loss before income taxes............................. (368,767) -- (368,767)
Income tax benefit..................................... 110,345 -- 110,345
--------- -------- --------
Net loss............................................. $(258,422) -- (258,422)
========= ======== ========
Net loss attributable to common stockholders......... $ -- (258,422) (258,422)
========= ======== ========
Loss attributable to common stockholders per common
share................................................ $ -- (1.26)(3)
========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-12
<PAGE> 220
"TCI VENTURES GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of Tele-Communications, Inc.
("TCI" or the "Company") authorized, subject to shareholder approval (the "TCI
Ventures Group Stock Proposal"), the issuance of two new series of stock ("TCI
Ventures Group Common Stock") which are intended to reflect the separate
performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such
F-13
<PAGE> 221
"TCI VENTURES GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group common stock properly tendered. The Exchange
Offers will be subject, among other conditions, to the approval by stockholders
of the TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) Reflects loss per common share for the three months ended March 31,
1997 based upon 204.9 million weighted average shares of TCI Ventures Group
assumed issued in exchange for TCI Group Stock in the Exchange Offers.
(3) Reflects loss per common share for the year ended December 31, 1996
based upon 204.9 million weighted average shares of TCI Ventures Group assumed
issued in exchange for TCI Group Stock in the Exchange Offers.
F-14
<PAGE> 222
"TCI GROUP"
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of TCI
Group, dated as of March 31, 1997, assumes that the Exchange Offers (see note 1)
had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the three months ended March 31, 1997 assumes that
the Exchange Offers had occurred as of January 1, 1997.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the year ended December 31, 1996 assumes that the
Exchange Offers, the distribution (the "Distribution") by TCI to the holders of
shares of TCI Group common stock of all the issued and outstanding common stock
of TCI Satellite Entertainment, Inc. ("Satellite") (see note 2) and the
acquisition of all the common stock of a subsidiary of Viacom, Inc. ("VII
Cable") (the "VII Cable Acquisition") (see note 3) had occurred as of January 1,
1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers, the
Distribution and the VII Cable Acquisition had occurred as of January 1, 1996.
These condensed pro forma combined financial statements of TCI Group should be
read in conjunction with the historical financial statements and the related
notes thereto of TCI Group.
F-15
<PAGE> 223
"TCI GROUP"
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------
TCI GROUP TCI VENTURES EXCHANGE TCI GROUP
HISTORICAL GROUP OFFERS(1) PRO FORMA
---------- ------------ --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
ASSETS
Cash, receivables and other current assets.... $ 733 (171) -- 562
Investment in affiliates and related
receivables................................. 2,333 (1,821) -- 512
Property and equipment, net of accumulated
depreciation................................ 7,678 (745) -- 6,933
Franchise costs, intangibles and other assets,
net of amortization......................... 16,791 (1,127) -- 15,664
------- ------ ------ ------
$27,535 (3,864) -- 23,671
======= ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals......................... $ 1,439 (443) -- 996
Debt.......................................... 15,049 (571) -- 14,478
Deferred income taxes......................... 5,367 (189) -- 5,178
Other liabilities............................. 229 (8) -- 221
------- ------ ------ ------
Total liabilities................... 22,084 (1,211) -- 20,873
------- ------ ------ ------
Minority interests............................ 1,298 (218) -- 1,080
Redeemable preferred stock.................... 655 -- -- 655
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely subordinated debt securities
of TCIC..................................... 1,502 -- -- 1,502
Combined equity:
Combined equity (deficit)................... 2,039 -- (2,557) (518)
Cumulative foreign currency translation
adjustment............................... 5 (5) -- --
Unrealized holding gains for
available-for-sale securities............ 11 (7) -- 4
Due from Liberty Media Group................ (59) -- -- (59)
Due to TCI Ventures Group................... -- 134 -- 134
Interest in TCI Ventures Group.............. -- (2,557) 2,557 --
------- ------ ------ ------
1,996 (2,435) -- (439)
------- ------ ------ ------
$27,535 (3,864) -- 23,671
======= ====== ====== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-16
<PAGE> 224
"TCI GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------
TCI GROUP TCI VENTURES TCI GROUP
HISTORICAL GROUP EXCHANGE OFFERS(1) PRO FORMA
---------- ------------ ------------------ ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
Revenue................................ $ 1,791 (247) -- 1,544
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights.................. (1,088) 206 -- (882)
Depreciation and amortization.......... (373) 41 -- (332)
------- ----- -- -----
Operating income..................... 330 -- -- 330
Interest expense....................... (289) 14 -- (275)
Share of losses of affiliates, net..... (159) 142 -- (17)
Other income (expense), net............ (6) (35) -- (41)
------- ----- -- -----
Earnings (loss) before income
taxes............................. (124) 121 -- (3)
Income tax benefit (expense)........... 50 (44) -- 6
------- ----- -- -----
Earnings (loss) before loss of TCI
Ventures Group.................... (74) 77 -- 3
Loss of TCI Ventures Group............. -- (77) 77 --
------- ----- -- -----
Net earning (loss)........... (74) -- 77 3
Dividend requirement on preferred
stocks............................... (10) -- -- (10)
------- ----- -- -----
Net earnings (loss)
attributable to common
stockholders............... $ (84) -- 77 (7)
======= ===== == =====
Loss attributable to common
stockholders per common share........ $ (.12) (.01)(8)
======= =====
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-17
<PAGE> 225
"TCI GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
TCI TCI
TCI GROUP VENTURES EXCHANGE SATELLITE VII CABLE PRO FORMA GROUP
HISTORICAL GROUP OFFERS(1) DISTRIBUTION(2) HISTORICAL(3) ADJUSTMENTS(3) PRO FORMA
---------- -------- --------- --------------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 6,790 (926) -- (377) 280 -- 5,767
Operating, selling, general and
administrative expenses and
compensation relating to
stock appreciation rights.... (4,689) 827 -- 373 (176) -- (3,665)
Depreciation and
amortization................. (1,555) 149 -- 166 (52) (14)(4) (1,306)
------- ---- --- ---- ---- --- ------
Operating income............. 546 50 -- 162 52 (14) 796
Interest expense............... (1,080) 51 -- -- (31) (44)(5) (1,104)
Share of losses of affiliates,
net.......................... (469) 368 -- -- -- -- (101)
Gains.......................... 68 (33) -- -- -- -- 35
Other income (expense), net.... (149) (68) -- -- 3 (18)(6) (232)
------- ---- --- ---- ---- --- ------
Earnings (loss) before income
taxes...................... (1,084) 368 -- 162 24 (76) (606)
Income tax benefit (expense)... 306 (110) -- (53) (13) 11(7) 141
------- ---- --- ---- ---- --- ------
Earnings (loss) before losses
of TCI Ventures Group...... (778) 258 -- 109 11 (65) (465)
Loss of TCI Ventures Group..... -- (258) 258 -- -- -- --
------- ---- --- ---- ---- --- ------
Net earnings (loss).... (778) -- 258 109 11 (65) (465)
Dividend requirement on
redeemable preferred
stocks....................... (35) -- -- -- -- -- (35)
------- ---- --- ---- ---- --- ------
Net earnings (loss)
attributable to
common
stockholders......... $ (813) -- 258 109 11 (65) (500)
======= ==== === ==== ==== === ======
Loss attributable to common
stockholders per common
share........................ $ (1.22) (1.09)(9)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-18
<PAGE> 226
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of Tele-Communications, Inc.
("TCI" or the "Company") authorized, subject to shareholder approval (the "TCI
Ventures Group Stock Proposal"), the issuance of two new series of stock ("TCI
Ventures Group Common Stock") which are intended to reflect the separate
performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997 the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such
F-19
<PAGE> 227
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group common stock properly tendered. The Exchange
Offers will be subject, among other conditions, to the approval by stockholders
of the TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) On December 4, 1996, TCI completed the Distribution by TCI to the
holders of shares of the TCI Group common stock of all of the issued and
outstanding common stock of Satellite. At the time of the Distribution,
Satellite was a Delaware corporation and a direct wholly-owned subsidiary of
TCI. The Distribution was effected as a tax-free dividend to, and did not
involve the payment of any consideration by, the holders of TCI Group common
stock. Prior to the Distribution, TCI caused to be transferred to Satellite, or
one or more of Satellite's subsidiaries, certain assets and businesses (and the
related liabilities) of the TCI Group constituting all of TCI's interests in the
business of distributing multichannel programming services in the United States
direct to the home via medium power or high power broadcast satellite, including
the rental and sale of customer premises equipment relating thereto.
(3) On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International Inc. and Viacom, TCIC acquired all of the common
stock of VII Cable which, at the time of such acquisition, owned Viacom's cable
systems and related assets.
The transaction was structured as a tax-free reorganization in which VII
Cable initially transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to New Viacom Sub. VII Cable also
transferred to New Viacom Sub the Loan Proceeds of the Loan Facility arranged by
TCIC, TCI and VII Cable. Following these transfers, VII Cable 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 VII Cable 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 of VII Cable Class A
Stock. Immediately following the completion of the Exchange Offer, TCIC acquired
from VII Cable shares of VII Cable Class B Common Stock in exchange for $350
million (which was used to reduce VII Cable's obligations under the Loan
Facility). At the time of the Share Issuance, the VII Cable Class A Stock
received by Viacom stockholders pursuant to the Exchange Offer automatically
converted into the Exchangeable Preferred Stock of VII Cable with a stated value
of $100 per share. The terms of the Exchangeable Preferred Stock, including its
dividend, redemption and exchange features, were
F-20
<PAGE> 228
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
designed to cause the Exchangeable Preferred Stock, in the opinion of two
investment banks, to initially trade at the Stated Value.
The cost to acquire VII Cable was approximately $2.326 billion, consisting
of the Loan Proceeds and the $626 million aggregate par value of the VII Cable
Exchangeable Preferred Stock. The accompanying unaudited pro forma condensed
combined statements of operations do not reflect potential cost savings
attributable to (i) economics of scale which may be realized in connection with
purchases of programming and equipment or (ii) consolidation of certain
operating and administrative functions including the elimination of duplicative
facilities and personnel.
(4) Represents depreciation and amortization of VII Cable's allocated
excess purchase price based upon a weighted average life of 12.5 years for
property and equipment and a 40 year life for franchise costs.
(5) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable operations)
incurred by TCI Group on the borrowings of the Loan Proceeds. Solely for the
purposes of this presentation, TCI Group has assumed an interest rate of 7.50%
for the year ended December 31, 1996, based upon historical interest rates
adjusted for anticipated terms of the Loan Facility.
(6) Reflects a 5.0% cumulative annual dividend on the $626 million of VII
Cable Exchangeable Preferred Stock included in minority share of losses of
consolidated subsidiaries.
(7) Reflects the estimated income tax effect of the pro forma adjustments.
The effective income tax rate on a pro forma basis is adversely affected by the
amortization of excess acquisition costs, which are assumed not to be deductible
for tax purposes.
(8) Reflects loss per common share based upon 473.1 million weighted
average shares. Such amount represents TCI Group's weighted average shares, as
disclosed in its March 31, 1997 historical financial statements net of 204.9
million shares assumed exchanged in the Exchange Offers.
(9) Reflects loss per common share based upon 459.9 million weighted
average shares for the entire period ended December 31, 1996. Such amount
represents TCI Group's weighted average shares as disclosed in its December 31,
1996 historical financial statements net of 204.9 million shares assumed
exchanged in the Exchange Offers.
F-21
<PAGE> 229
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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 herein for the year ended December 31, 1996. The
following discussion focuses on material changes in the trends, risks and
uncertainties affecting the Company's results of operations and financial
condition. Reference should also be made to the Company's consolidated financial
statements included herein.
(1) MATERIAL CHANGES IN FINANCIAL CONDITION:
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming ("TINTA");
and Technology/Venture Capital. Within the Domestic Cable and Communications
line of business, the Company operates three strategic business units: Cable,
Telephony and Internet. The Company's organizational structure 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 none
of TINTA, the Technology/Venture Capital unit, the Telephony unit or the
Internet 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.
During March 1997, the Company, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial paper
and repay certain other indebtedness.
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of Series A TCI Group common
stock ("TCI Group Stock"), assumed $584 million of TKR Cable's debt and paid
cash of $88 million and shares of Time Warner, Inc. ("Time Warner") common stock
valued at $41 million upon consummation of such acquisition.
On July 31, 1996, TCI Communications, Inc. ("TCIC") consummated the
acquisition (the "Viacom Acquisition") of all of the common stock of a
subsidiary ("Cable Sub") of Viacom, Inc. ("Viacom") 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 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. For additional
discussion of the Viacom Acquisition, see note 6 to the accompanying
consolidated financial statements.
At March 31, 1997, subsidiaries of the Company had approximately $2.0
billion of availability in unused 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 7 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, compensation relating to
stock appreciation rights and adjustments to compensation relating to stock
F-22
<PAGE> 230
appreciation rights) ($738 million and $533 million for the three months ended
March 31, 1997 and 1996, respectively) to interest expense ($289 million and
$261 million for the three months ended March 31, 1997 and 1996, respectively),
is determined by reference to the consolidated statements of operations. The
Company's interest coverage ratio was 255% and 204% for the three months ended
March 31, 1997 and 1996, respectively. Management of the Company believes that
the foregoing interest coverage ratio is adequate in light of the relative
predictability of its cable television operations and interest expense, almost
half of which results from fixed rate indebtedness. However, the Company's
current intent is to reduce its outstanding indebtedness such that its interest
coverage ratio could be increased. There is no assurance that the Company will
be able to achieve such objective. 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 ($239 million and $317 million for the three
months ended March 31, 1997 and 1996, 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. Historically, amounts
expended by the Company for its investing activities have exceeded 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.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions, investments and capital
expenditures have exceeded net cash provided by operating activities. The
Company has reevaluated its capital expenditure strategy and currently
anticipates that it will expend significantly less for property and equipment in
1997 than it did in 1996. In this regard, the amount of capital expended by the
Company for property and equipment was $90 million during the three months ended
March 31, 1997, as compared to $423 million during the corresponding period in
1996. The Company currently estimates that it will spend approximately $750
million for capital expenditures during 1997. To the extent that net cash
provided by operating activities exceeds net cash used in investing activities
in 1997, the Company currently anticipates that such excess cash will initially
be used to reduce outstanding debt.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at March 31, 1997, these agreements
require minimum payments aggregating approximately $651 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. 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 March 31, 1997, such
commitments aggregated $215 million.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $252
million at March 31, 1997. 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.
F-23
<PAGE> 231
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.
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 (i)
pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.1% to
9.3% and receives variable interest rates on notional amounts of $410 million at
March 31, 1997 and (ii) pays variable interest rates (the "Variable Rate
Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on
notional amounts of $2,250 million at March 31, 1997. During the three months
ended March 31, 1997 and 1996, the Company's net receipts pursuant to the Fixed
Rate Agreements were $3 million and $5 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $1 million and $8
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.
On March 12, 1997, the TCI stockholders authorized the TCI Board of
Directors to issue two new series of the Company's common stock, par value $1.00
per share, (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 and Tele-Communications, Inc. Series B Telephony
Group common stock (collectively, the "Telephony Group Stock"). The Telephony
Group Stock, if issued, would be intended to reflect the separate performance of
Telephony Group, which initially consists of the Company's investments in
certain entities engaged in the domestic wireline and wireless telephony
businesses. A total of 750 million shares of Series A Telephony Group Stock and
75 million shares of Series B Telephony Group Stock were authorized. As of March
31, 1997, no shares of Telephony Group Stock have been issued.
TCI is considering the creation of a new series of its common stock which
would be intended to reflect the performance of substantially all of TCI Group's
international and non-cable assets. To do this, TCI is contemplating amending
the recently approved Telephony Group Stock to expand that group to track such
assets, including TCI's investments in At Home Corporation, TINTA, United Video
Satellite Group, Inc. and others. The tracking stock may be issued through an
exchange offer whereby the Company's stockholders will have the opportunity to
exchange their TCI Group Stock for tracking stock of the new group.
On April 21, 1997, TCI announced that it had entered into an agreement to
merge Kearns-Tribune Corporation into a wholly-owned TCI subsidiary. The merger
is valued at approximately $627 million. Pursuant to the merger agreement, TCI
would exchange shares of Series A TCI Group Stock for shares of Kearns-Tribune
Corporation which holds 17.9 million shares of TCI Group Stock and 6.7 million
shares of Liberty Group Stock. Liberty Media Group intends to purchase from TCI
Group the 6.7 million shares that would be acquired in such transaction at
market valuations to be determined at the time of the merger closing.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS:
Communications and Programming Services Revenue
The operation of the Company's cable television systems is regulated at the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 and the Telecommunications Act of 1996 (collectively,
the "Cable Acts") established rules under which the Company's basic and tier
service rates and its equipment and installation charges (the "Regulated
Services") are regulated if a complaint is filed or if the appropriate franchise
authority is certified. At March 31, 1997, approximately 79% of the Company's
basic customers were served by cable television systems that were subject to
such rate regulation.
During the three months ended March 31, 1997, 65% of the Company's revenue
from Communications and Programming Services was derived from Regulated
Services. As noted above, any increases in rates charged for Regulated Services
are regulated by the Cable Acts. Moreover, competitive factors may limit the
Company's ability to increase its service rates.
F-24
<PAGE> 232
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with those of the
Company.
Revenue from communications and programming services increased 14% for the
three months ended March 31, 1997, as compared to the corresponding period of
1996. Exclusive of the effects of acquisitions, revenue from the Company's
domestic cable customers accounted for 5% of such increase as a result of an 11%
increase in the Company's average basic rate, a 1% increase in the Company's
average premium rate and a 3% decrease in the number of average premium
subscribers. The number of average basic customers increased less than 1% from
1996 to 1997. The Company's revenue from domestic cable operations aggregated
$1,556 million and $1,333 million for the three months ended March 31, 1997 and
1996, respectively. In addition, the Company's revenue from communications and
programming services increased 15% due to acquisitions and decreased 5% due to
the deconsolidation of the Company's sports programming businesses (see
discussion below) and decreased 5% due to the Satellite Spin-off. Increases in
the Company's domestic programming revenue (from Encore Media Corporation and
QE+), international cable revenue and other revenue accounted for the remaining
4% increase.
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 Liberty/Fox U.S. Sports LLC
("Fox Sports") 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 Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed Liberty Media Group and TINTA formed a venture ("Fox
Sports International") to operate previously existing sports services in Latin
America and Australia and a variety of new sports services in selected areas
throughout the world. Liberty/TINTA and News Corp. each own 50% of Fox Sports
International. News Corp. contributed various international sports rights and
certain trademark rights. Liberty/TINTA contributed its interests in certain
international sports programming services, various international sports and
satellite transponder rights and cash.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Net Sales From Electronic Retailing Services
As a result of the merger of Home Shopping Network, Inc. ("HSN") with a
subsidiary of Silver King Communications, Inc. in December 1996, HSN is no
longer a consolidated subsidiary of the Company. Accordingly, the Company no
longer reports revenue or cost of sales related to electronic retailing
services. See note 4 to the accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses increased 5% for the three months ended March 31, 1997,
as compared to the corresponding period of 1996. Exclusive of the effects of
acquisitions, net of dispositions, such expenses increased 8%. Programming
expenses accounted for the majority of such increase. The Company cannot
determine whether and to what extent increases in the cost of programming will
affect its future operating costs.
F-25
<PAGE> 233
Selling general and administrative expenses decreased 22% for the three
months ended March 31, 1997, as compared to the corresponding period of 1996.
Exclusive of the effects of acquisitions, net of dispositions, such expenses
decreased 3%. Such decrease is due primarily to a reduction in salaries and
related payroll expenses due to work force reductions in the fourth quarter of
1996, as well as reduced marketing and general overhead expenses.
The decrease in the Company's depreciation expense in 1997 is the result of
the net effect of a decrease due to the Satellite Spin-off partially offset by
increases due to acquisitions and capital expenditures. The increase in
amortization expense in 1997 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.
Other Income and Expenses
At March 31, 1997, the Company had an effective ownership interest of
approximately 27% in Telewest Communications plc, 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 March 31, 1997 of $427 million and comprised $42 million and
$31 million of the Company's share of its affiliates' losses during the three
months ended March 31, 1997 and 1996, respectively. 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 $373
million at March 31, 1997 and accounted for $22 million and $18 million of the
Company's share of its affiliates' losses for the three months ended March 31,
1997 and 1996, respectively. Additionally, included in share of losses of
affiliates for the three months ended March 31, 1997 and 1996 is $64 million and
$53 million, respectively, attributable to Sprint Spectrum Holding Company,
L.P., MinorCo, L.P. and PhillieCo, L.P. Such 1996 amount includes $34 million
associated with prior periods.
Minority interests in earnings of consolidated subsidiaries aggregated $38
million for the three months ended March 31, 1997, as compared to minority
interests in losses of consolidated subsidiaries for the corresponding period in
1996. Such change is due primarily to the accrual of dividends on the Trust
Preferred Securities in 1997. See note 8 to the accompanying consolidated
financial statements.
Net Loss
The Company's net loss (before preferred stock dividend requirements) of
$58 million for the three months ended March 31, 1997 represents an improvement
of $63 million, as compared to the Company's net loss (before preferred stock
dividend requirements) of $121 million for the three months ended March 31,
1996. Such change is primarily the net result of an increase in operating income
partially offset by increases in share of losses of affiliates, dividends on the
Trust Preferred Securities reflected as minority interests in earnings of
consolidated subsidiaries and interest expense.
F-26
<PAGE> 234
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 505 394
Trade and other receivables, net............................ 455 448
Prepaid expenses............................................ 84 81
Prepaid program rights...................................... 58 49
Committed film inventory.................................... 89 136
Investments in affiliates, accounted for under the equity
method, and related receivables (note 4).................. 2,898 3,012
Investment in Time Warner, Inc. ("Time Warner") (note 5).... 2,037 2,027
Property and equipment, at cost:
Land...................................................... 76 77
Distribution systems...................................... 10,373 10,078
Support equipment and buildings........................... 1,514 1,541
------- ------
11,963 11,696
Less accumulated depreciation............................. 4,275 4,168
------- ------
7,688 7,528
------- ------
Franchise costs............................................. 18,416 17,875
Less accumulated amortization............................. 2,505 2,439
------- ------
15,911 15,436
------- ------
Other assets, net of amortization........................... 951 1,133
------- ------
$30,676 30,244
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 137 216
Accrued interest............................................ 168 274
Accrued programming expense................................. 372 347
Other accrued expenses...................................... 825 812
Debt (note 7)............................................... 15,049 14,926
Deferred income taxes....................................... 5,946 6,012
Other liabilities........................................... 251 253
------- ------
Total liabilities................................... 22,748 22,840
------- ------
Minority interests in equity of consolidated subsidiaries... 1,349 1,493
Redeemable preferred stocks................................. 655 658
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Preferred
Securities") holding solely subordinated debt securities
of TCI Communications, Inc. ("TCIC") (note 8)............. 1,502 1,000
Stockholders' equity (note 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
715,058,159 shares in 1997 and 696,325,478 shares in
1996.................................................... 715 696
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value. Authorized 150,000,000 shares; issued
84,647,065 shares in 1997 and 1996...................... 85 85
Tele-Communications, Inc. Series A Liberty Media Group
common stock, $1 par value. Authorized 750,000,000
shares; issued 228,749,797 shares in 1997 and
227,844,437 shares in 1996.............................. 229 228
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value. Authorized 75,000,000
shares; issued 21,187,969 shares in 1997 and 21,189,369
shares in 1996.......................................... 21 21
Tele-Communications, Inc. Series A Telephony Group Stock,
$1 par value. Authorized 750,000,000 shares, no shares
outstanding............................................. -- --
Tele-Communications, Inc. Series B Telephony Group Stock,
$1 par value. Authorized 75,000,000 shares, no shares
outstanding............................................. -- --
Additional paid-in capital................................ 3,904 3,672
Cumulative foreign currency translation adjustment, net of
taxes................................................... 5 26
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 11 15
Accumulated deficit....................................... (234) (176)
------- ------
4,736 4,567
Series A TCI Group common stock, at cost, held by
subsidiaries (116,853,196 shares in 1997 and 1996)...... (314) (314)
------- ------
Total stockholders' equity.......................... 4,422 4,253
------- ------
Commitments and contingencies (note 10)..................... $30,676 30,244
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 235
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS
<S> <C> <C>
Revenue:
Communications and programming services................... $1,827 1,605
Net sales from electronic retailing services (note 4)..... -- 256
------ -----
1,827 1,861
------ -----
Operating costs and expenses:
Operating................................................. 696 662
Cost of sales from electronic retailing services (note
4)..................................................... -- 165
Selling, general and administrative....................... 393 501
Compensation (adjustment to compensation) relating to
stock appreciation rights.............................. 15 (9)
Depreciation.............................................. 241 252
Amortization.............................................. 133 118
------ -----
1,478 1,689
------ -----
Operating income....................................... 349 172
Other income (expense):
Interest expense.......................................... (289) (261)
Interest and dividend income.............................. 21 10
Share of losses of affiliates, net (note 4)............... (156) (115)
Minority interests in losses (earnings) of consolidated
subsidiaries, net...................................... (38) 2
Gain on disposition of assets............................. 19 10
Other, net................................................ (2) 6
------ -----
(445) (348)
------ -----
Loss before income taxes............................... (96) (176)
Income tax benefit.......................................... 38 55
------ -----
Net loss............................................... (58) (121)
Dividend requirements on preferred stocks................... (10) (9)
------ -----
Net loss attributable to common stockholders........... $ (68) (130)
====== =====
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock.............. $ (84) (145)
Liberty Media Group Series A and Series B common stock.... 16 15
------ -----
$ (68) (130)
====== =====
Net earnings (loss) attributable to common stockholders per
common share (note 2):
TCI Group Series A and Series B common stock.............. $ (.12) (.22)
Liberty Media Group Series A and Series B common stock.... $ .06 .06
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 236
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------
CLASS B TCI GROUP LIBERTY MEDIA GROUP TELEPHONY GROUP ADDITIONAL
PREFERRED ------------------- -------------------- ------------------- PAID-IN
STOCK SERIES A SERIES B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- -------- -------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997..................... $ -- 696 85 228 21 -- -- 3,672
Net loss................. -- -- -- -- -- -- -- --
Issuance of common stock
for acquisition........ -- 16 -- -- -- -- -- 242
Issuance of common stock
upon conversion of
notes.................. -- 3 -- 1 -- -- -- --
Issuance of common stock
to Tele-Communications,
Inc. Employee Stock
Purchase Plan.......... -- -- -- -- -- -- -- 8
Accreted dividends on all
classes of preferred
stock.................. -- -- -- -- -- -- -- (10)
Accreted dividends on all
classes of preferred
stock not subject to
mandatory redemption
requirements........... -- -- -- -- -- -- -- 2
Payment of preferred
stock dividends........ -- -- -- -- -- -- -- (10)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- --
Change in unrealized
holding gains for
available-for-sale
securities............. -- -- -- -- -- -- -- --
------ --- -- --- -- --- -- ------
Balance at March 31,
1997..................... $ -- 715 85 229 21 -- -- 3,904
====== === == === == === == ======
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING
FOREIGN GAINS FOR
CURRENCY AVAILABLE- COMMON
TRANSLATION FOR-SALE STOCK TOTAL
ADJUSTMENT, SECURITIES, ACCUMULATED HELD BY STOCKHOLDERS'
NET OF TAXES NET OF TAXES DEFICIT SUBSIDIARIES EQUITY
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997..................... 26 15 (176) (314) 4,253
Net loss................. -- -- (58) -- (58)
Issuance of common stock
for acquisition........ -- -- -- -- 258
Issuance of common stock
upon conversion of
notes.................. -- -- -- -- 4
Issuance of common stock
to Tele-Communications,
Inc. Employee Stock
Purchase Plan.......... -- -- -- -- 8
Accreted dividends on all
classes of preferred
stock.................. -- -- -- -- (10)
Accreted dividends on all
classes of preferred
stock not subject to
mandatory redemption
requirements........... -- -- -- -- 2
Payment of preferred
stock dividends........ -- -- -- -- (10)
Foreign currency
translation
adjustment............. (21) -- -- -- (21)
Change in unrealized
holding gains for
available-for-sale
securities............. -- (4) -- -- (4)
--- -- ----- ----- ------
Balance at March 31,
1997..................... 5 11 (234) (314) 4,422
=== == ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE> 237
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
------- --------
AMOUNTS IN MILLIONS
(SEE NOTE 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (58) (121)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 374 370
Compensation (adjustment to compensation) relating to
appreciation rights................................... 15 (9)
Payments of stock appreciation rights.................. (1) (3)
Share of losses of affiliates.......................... 156 115
Minority interests in earnings (losses)................ 38 (2)
Gain on disposition of assets.......................... (19) (10)
Deferred income tax benefit............................ (66) (57)
Payments of restructuring charges...................... (16) --
Other noncash charges (credits)........................ 3 (1)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................ (16) 25
Change in inventories................................ -- 9
Change in prepaids................................... (32) (10)
Change in accrued interest........................... (112) (54)
Change in other accruals and payables................ (27) 65
----- ------
Net cash provided by operating activities......... 239 317
----- ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (156) (3)
Capital expended for property and equipment............... (90) (423)
Additional investments in and loans to affiliates and
others................................................. (35) (88)
Repayments of loans to affiliates......................... 120 6
Proceeds from disposition of assets....................... 140 41
Cash received in exchanges................................ 22 50
Other investing activities................................ (104) (59)
----- ------
Net cash used in investing activities............. (103) (476)
----- ------
Cash flows from financing activities:
Borrowings of debt........................................ 363 1,588
Repayments of debt........................................ (820) (1,954)
Proceeds from issuance of common stock.................... 4 --
Proceeds from issuance of Trust Preferred Securities...... 490 486
Proceeds from issuance of subsidiary preferred stock...... -- 223
Payment for repurchase of subsidiary common stock......... (7) --
Payment of preferred stock dividends...................... (21) (21)
Payment of dividends on subsidiary preferred stock and
Trust Preferred Securities............................. (34) --
----- ------
Net cash provided (used) by financing
activities....................................... (25) 322
----- ------
Net increase in cash and cash equivalents......... 111 163
Cash and cash equivalents at beginning of
period........................................... 394 118
----- ------
Cash and cash equivalents at end of period........ $ 505 281
===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 238
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, 1996.
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.
Effective January 13, 1997, the Company issued a stock dividend to holders
of Tele-Communications, Inc. Series A and Series B Liberty Media Group common
Stock ("Liberty Group Stock") consisting of one share of Series A Liberty Group
Stock for every two shares of Series A Liberty Group Stock owned and one share
of Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock
Dividend has been treated as a stock split, and accordingly, all share and per
share amounts have been retroactively restated to reflect the Liberty Group
Stock Dividend.
Certain amounts have been reclassified for comparability with the 1997
presentation.
(2) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"). Statement No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with potentially dilutive securities, such as
convertible debt, options and warrants, diluted EPS. Statement No. 128 is
effective for annual and interim periods ending after December 31, 1997. The
Company does not expect that Statement No. 128 will have a material impact on
the Company's earnings (loss) per share as described below.
TCI Group Series A and Series B Common Stock
The loss attributable to Tele-Communications, Inc. Series A and Series B
TCI Group common stock ("TCI Group Stock") stockholders per common share for the
three months ended March 31, 1997 and 1996 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 (678.0 million and 659.3 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 Group Stock stockholders per common share
for the three months ended March 31, 1997 and 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 (249.7
million and
F-31
<PAGE> 239
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
247.2 million, respectively). Common stock equivalents were not included in the
computation because their inclusion would be anti-dilutive to TCI.
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $401 million and $315 million for the three
months ended March 31, 1997 and 1996, respectively. Cash paid for income taxes
during these periods was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired............................. $1,065 1,130
Liabilities assumed, net of current assets................ (616) (374)
Deferred tax liability recorded in acquisitions........... (34) (240)
Minority interests in equity of acquired entities......... (1) (52)
Common stock and preferred stock issued in acquisitions... (258) (461)
------ -----
Cash paid for acquisitions............................. $ 156 3
====== =====
Cash received in exchanges:
Aggregate cost basis of assets acquired................... $ (294) (193)
Historical cost of assets exchanged....................... 305 222
Gain recorded on exchange of assets....................... 11 21
------ -----
Cash received in exchanges............................. $ 22 50
====== =====
Effect of foreign currency translation adjustment on book
value of foreign equity investments....................... $ 21 7
====== =====
Change in unrealized gains, net of deferred income taxes, on
available-for-sale securities............................. $ 4 24
====== =====
Accrued preferred stock dividends........................... $ 8 7
====== =====
</TABLE>
(4) INVESTMENTS IN AFFILIATES
The Company has various investments accounted for under the equity method.
The following table includes the Company's carrying value and percentage
ownership of the more significant investments at March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PERCENTAGE CARRYING
OWNERSHIP VALUE
---------- --------
AMOUNTS IN MILLIONS
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P................................... 30%-35.3% $728
Teleport Communications Group, Inc..................... 31.1% 263
Home Shopping Network, Inc. ("HSN").................... 19.9% 144
BDTV INC. and BDTV II, INC............................. 99% 200
Telewest Communications plc ("Telewest")............... 27% 427
Various foreign equity investments (other than
Telewest)............................................ various 373
Discovery Communications, Inc.......................... 49% 118
QVC, Inc............................................... 43% 110
</TABLE>
F-32
<PAGE> 240
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 1,751 1,308
Operating expenses........................................ (1,642) (1,151)
Depreciation and amortization............................. (282) (149)
------- ------
Operating income (loss)................................ (173) 8
Interest expense.......................................... (171) (108)
Other, net................................................ (152) (31)
------- ------
Net loss.......................................... $ (496) (131)
======= ======
</TABLE>
The Company is a partner 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 residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum Holding Company, L.P.
("Sprint Spectrum") and MinorCo, L.P. (collectively, the "Sprint PCS
Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The
Company has a 30% partnership interest in each of the Sprint PCS Partnerships
and a 35.3% interest as a partner in PhillieCo. During the three months ended
March 31, 1997 and 1996, the Sprint PCS Partnerships contributed $64 million and
$53 million, respectively, to the Company's share of affiliate losses. Such 1996
amount includes $34 million related to prior periods.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents). The Sprint PCS Partnerships' licenses, which cover 29
markets, were acquired in an auction conducted by the Federal Communications
Commission ("FCC") that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which
owns a PCS license for and operates a PCS system in the Baltimore/Washington,
D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS
license for the Los Angeles/San Diego MTA and currently operates a PCS system in
San Diego, California. The Sprint PCS Partnerships may invest in other entities
that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA,
which was acquired at a license cost of $85 million. During December 1996, the
Sprint PCS Partnerships initiated the commercial launch of PCS service in seven
markets.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion). The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. The Company
expects that the remaining approximately $1.2 billion of such amount (of which
the Company's share is approximately $0.4 billion) will be contributed by the
end of the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed). The Company expects that the Sprint PCS
Partnerships will require additional equity thereafter.
F-33
<PAGE> 241
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, 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 the aforementioned $4.2 billion amount.
Pursuant to an agreement among Liberty Media Corporation ("Liberty"), a
subsidiary of TCI, Barry Diller and certain of their respective affiliates
entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"),
Liberty contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
"Option") to purchase 2 million shares of Class B common stock of Silver King
Communications, Inc. ("Silver King") (which shares represented voting control of
Silver King at such time) and $3,500,000 in cash, representing the exercise
price of the Option. BDTV-I is a corporation formed by Liberty and Mr. Diller
pursuant to the BDTV Agreement, in which Liberty owns over 99% of the equity and
none of the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the Option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty in Silver
King not exceed 21.37% without the prior approval of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger"). In order to effect the HSN
Merger in compliance with the FCC Order, Liberty agreed to defer receiving
certain shares of Silver King that would otherwise have become issuable to it in
the HSN Merger until such time as it was permitted to own such shares. As a
result, the HSN Merger was structured so that Liberty received (i) 7,809,111
shares of Class B common stock of Silver King, all of which shares Liberty
contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the
"Contingent Right") to be issued up to an additional 2,591,752 shares of Class B
common stock of Silver King from time to time upon the occurrence of certain
events which would allow Liberty to own additional shares in compliance with the
FCC Order (including events resulting in the dilution of Liberty's percentage
equity interest), and (iii) 739,141 shares of Class B common stock and
17,566,702 shares of common stock of HSN (representing approximately 19.9% of
the equity of HSN). BDTV-II is a corporation formed by Liberty and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty and Mr. Diller are substantially the same as their
respective equity ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty and
therefore, the financial results of HSN are no longer consolidated with the
financial results of Liberty. Although Liberty no longer possesses voting
control over HSN, it continues to have an indirect equity interest in HSN
through its ownership of the equity securities of BDTV-I and BDTV-II as well as
a direct interest in HSN which would be exchangeable into shares of Silver King.
Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method.
Telewest is a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). Telewest
contributed $42 million and $31 million of the Company's share of its
affiliates' losses during the three months ended March 31, 1997 and 1996,
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 accounted for $22 million
and $18 million of the Company's share of its affiliates' losses in 1997 and
1996, respectively.
F-34
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(5) INVESTMENT IN TIME WARNER
Through October 9, 1996, TCI owned shares of Turner Broadcasting System,
Inc. ("TBS") common stock and shares of TBS preferred stock that were
convertible into TBS common stock. The Company's total holdings represented an
approximate 7.5% voting interest for those matters which preferred and common
voted as a single class. On October 10, 1996, 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 held,
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.
Time Warner, TBS, TCI and Liberty entered into an Agreement Containing
Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996,
as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC
Consent Decree, among other things, Liberty agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger for shares
of a separate series of Time Warner common stock with limited voting rights (the
"TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one
one-hundredth ( 1/100th) of a vote for each share with respect to the election
of directors. Holders of the TW Exchange Stock will not have any other voting
rights, except as required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such holders.
Subject to the federal communications laws, each share of the TW Exchange Stock
will be convertible at any time at the option of the holder on a one-for-one
basis for a share of Time Warner common stock. Holders of TW Exchange Stock are
entitled to receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets remaining
for common stockholders upon dissolution, liquidation or winding up of Time
Warner.
In connection with the TBS/Time Warner Merger, the Company received
approximately 50.6 million shares of the TW Exchange Stock in exchange for its
TBS holdings. At March 31, 1997, the Company's investment in Time Warner,
carried at cost, had an aggregate fair value of approximately $2.2 billion based
upon the market value of the marketable common stock into which it is
convertible.
Subject to a number of conditions, including receipt of a ruling from the
Internal Revenue Service ("IRS") that such dividend would be tax free to the
Liberty Group Stock stockholders, TCI agreed in an Agreement Containing Consent
Order (the "FTC Consent Decree") with the FTC that it would distribute in the
form of a stock dividend (the "Spin-Off") to the Liberty Group Stock
stockholders the stock of a new company ("Spinco") which would own, directly or
indirectly, the TW Exchange Stock and the business of Southern Satellite
Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty which
distributes the TBS SuperStation ("WTBS") signal in the United States and
Canada. The IRS has declined to provide the requested ruling and, accordingly,
TCI has canceled plans for the Spin-Off. Pursuant to the FTC Consent Decree, the
level of TCI's ownership in Time Warner is restricted to the lower of 9.2% of
the fully diluted number of shares of Time Warner's common stock and 12.4% of
the aggregate number of outstanding shares of Time Warner's common stock.
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. The agreement provides for the
Contract Option to be granted no later than the fifth business day following the
earlier of May 31, 1997, the receipt of a favorable IRS ruling and the
determination that the IRS ruling will not be
F-35
<PAGE> 243
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obtained, subject to extension for a 30-day period, if the IRS ruling were not
obtained, during which period the parties would seek to negotiate an alternative
structure for the transaction. On the date of grant of the Contract Option, the
agreement provides for Time Warner to issue to Southern, in consideration for
the Contract Option and certain noncompetition covenants, an aggregate of 5.0
million shares of TW Exchange Stock and $66,666,700, payable at Time Warner's
option in cash or TW Exchange Stock. If Time Warner were to exercise the
Contract Option and enter into the Distribution Contract, Time Warner would be
obligated to make quarterly payments to Southern in an amount which, when added
to Southern's net cash flow, would aggregate approximately $213.3 million on a
present value basis discounted to the effective date of the Distribution
Contract. In light of the cancellation of the Spin-Off, Liberty is seeking to
renegotiate the Contract Option to provide instead for an option for Time Warner
to acquire Southern's business.
(6) ACQUISITIONS
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of TCI Group Stock, assumed $584
million of TKR Cable's debt and paid cash of $88 million and shares of Time
Warner common stock valued at $41 million upon consummation of such acquisition.
On July 31, 1996, pursuant to certain agreements entered into among TCIC, a
subsidiary of TCI; 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. 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 of Cable Sub with a stated value of $100 per share.
F-36
<PAGE> 244
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN MILLIONS
<S> <C> <C>
Notes payable............................................... $ 9,254 9,308
Bank credit facilities...................................... 5,219 4,813
Commercial paper............................................ 404 638
Convertible notes(a)........................................ 41 43
Other debt.................................................. 131 124
------- ------
$15,049 14,926
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$168 million at March 31, 1997 and $178 million at December 31, 1996, 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 three months ended March 31, 1997,
certain of these notes were converted into 2,150,000 shares of Series A TCI
Group Stock and 810,000 shares of Series A Liberty Group Stock. At March 31,
1997, the notes were convertible, at the option of the holders, into an
aggregate of 34,933,772 shares of Series A TCI Group Stock and 13,100,153
shares of Series A Liberty Group Stock.
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 116,853,195 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 its Time Warner common stock with an estimated market value of $2.2
billion.
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 $15,049 million, was $15,098
million at March 31, 1997.
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 (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.1% to 9.3% and receives variable interest rates on
notional amounts of $410 million at March 31, 1997 and (ii) pays variable
interest rates (the "Variable Rate Agreements") and receives fixed interest
rates ranging from 4.8% to 9.7% on notional amounts of $2,250 million at March
31, 1997. During the three months ended March 31, 1997 and 1996, the Company's
net receipts pursuant to the Fixed Rate Agreements were $3 million and $5
million, respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were $1 million and $8 million, respectively.
F-37
<PAGE> 245
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
- ----------------------------------------------- -----------------------------------------------
INTEREST RATE NOTIONAL INTEREST RATE NOTIONAL
EXPIRATION DATE TO BE PAID AMOUNT EXPIRATION DATE TO BE RECEIVED AMOUNT
--------------- ------------- -------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
October 1997......... 7.1%-9.3% $180 April 1997.......... 7.0% $ 200
December 1997........ 8.7% 230 September 1998...... 4.8%-5.4% 450
----
$410 April 1999.......... 7.4% 50
====
February 2000....... 5.8%-6.6% 300
March 2000.......... 5.8%-6.0% 675
September 2000...... 5.1% 75
March 2027.......... 9.7% 300
December 2036....... 9.7% 200
------
$2,250
======
</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
March 31, 1997, taking into consideration current interest rates and the current
creditworthiness of the counterparties. At March 31, 1997, the Company would be
required to pay an estimated $47 million to terminate the Fixed Rate Agreements
and an estimated $7 million to terminate the Variable Rate 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.
(8) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF TCIC
In 1996 and 1997, the Company, through certain subsidiary trusts, (the
"Trusts"), issued preferred securities as follows:
<TABLE>
<CAPTION>
SUBSIDIARY TRUST INTEREST RATE FACE AMOUNT
---------------- ------------- -----------
IN MILLIONS
<S> <C> <C>
TCI Communications Financing I.............................. 8.72% $ 500
TCI Communications Financing II............................. 10.00% 500
TCI Communications Financing III............................ 9.65% 300
TCI Communications Financing IV............................. 9.72% 200
------
$1,500
======
</TABLE>
The Trusts exist for the exclusive purpose of issuing the Trust Preferred
Securities and investing the proceeds thereof into Subordinated Deferrable
Interest Notes (the "Subordinated Debt Securities") of TCIC. The Subordinated
Debt Securities have interest rates equal to the interest rate of the
corresponding Trust Preferred Securities and have maturity dates ranging from 30
to 49 years from the date of issuance. The
F-38
<PAGE> 246
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Subordinated Debt Securities, the Trust
Preferred Securities will be mandatorily redeemable. TCIC effectively provides a
full and unconditional guarantee of the Trusts' obligations under the Trust
Preferred Securities.
The Trust Preferred Securities are presented together in a separate line
item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely subordinated debt securities of TCI Communications, Inc."
Dividends accrued on the Trust Preferred Securities are included in minority
interests in losses (earnings) of consolidated subsidiaries in the accompanying
consolidated financial statements.
(9) STOCKHOLDERS' EQUITY
In August 1995, TCI issued the Liberty Group Stock which reflects the
separate performance of TCI's business which produces and distributes
programming services ("Liberty Media Group").
As of March 31, 1997, the TCI Group Stock reflects the separate performance
of TCI's 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 did 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 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.
On March 12, 1997, the TCI stockholders authorized the TCI Board of
Directors to issue two new series of the Company's common stock, par value $1.00
per share, (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 and Tele-Communications, Inc. Series B Telephony
Group common stock (collectively, the "Telephony Group Stock"). The Telephony
Group Stock, if issued, would be intended to reflect the separate performance of
Telephony Group, which initially consists of the Company's investments in
certain entities engaged in the domestic wireline and wireless telephony
businesses. A total of 750 million shares of Series A Telephony Group Stock and
75 million shares of Series B Telephony Group Stock were authorized. As of March
31, 1997, no shares of Telephony Group Stock have been issued.
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 March 31, 1997, 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
At March 31, 1997, there were 126,384,805 shares of Series A TCI Group
Stock and 30,616,358 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 1,496.65 shares of Series A TCI Group Stock.
F-39
<PAGE> 247
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at March 31, 1997, these agreements
require minimum payments aggregating approximately $651 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. 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 March 31, 1997, such
commitments aggregated $215 million.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $252
million at March 31, 1997. 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.
Certain key employees of the Company hold restricted stock awards, options
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.
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been recorded in the
accompanying combined financial statements, but is subject to future adjustment
based upon a valuation model derived from such subsidiary's cash flow, working
capital and debt. Effective January 1, 1994, these employees have a put right
that requires such subsidiary to purchase their respective PSARs. The subsidiary
may call the PSARs on or after January 1, 1996.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the opinion
of management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
F-40
<PAGE> 248
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
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.
On August 3, 1995, the stockholders of TCI authorized the Board to issue
the Liberty Group Stock which reflects the separate performance of Liberty Media
Group. 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. 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, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution represented one hundred percent of the equity
value attributable to Liberty Media Group. As of December 31, 1996, the TCI
Group Stock reflects 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".
On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share, (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
and Tele-Communications, Inc. Series B Telephony Group Common Stock. The
Telephony Group Stock, if issued, would be intended to reflect the separate
performance of Telephony Group, which initially consists of the Company's
investments in certain entities engaged in the domestic wireline and wireless
telephony businesses. A total of 750 million shares of Series A Telephony Group
Stock and 75 million shares of Series B Telephony Group Stock were authorized.
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming ("TINTA");
and Technology/Venture Capital. Within the Domestic Cable and Communications
line of business, the Company operates three strategic business units: Cable,
Telephony and Internet. The Company's organizational structure 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 the
International Cable and Programming unit, Telephony unit, Internet unit or 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.
Notwithstanding the foregoing, the Company currently has significant
operations 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 home shopping services have
been provided to enhance the readers understanding of the Company. The
Technology/Venture Capital, Telephony, Internet 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.
F-41
<PAGE> 249
Cable and Communications Services
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 the Company. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
DOLLAR AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. 100% $6,790 100% $5,145 100% $4,043
Operating, selling, general and
administrative expenses(1)........ 69 4,678 61 3,173 56 2,275
Compensation (adjustment to
compensation) relating to stock
appreciation rights............... -- (30) 1 45 -- (5)
Restructuring charges............... -- 41 -- -- -- --
Depreciation and amortization....... 23 1,555 25 1,274 25 992
--- ------ --- ------ --- ------
Operating income............... 8% $ 546 13% $ 653 19% $ 781
=== ====== === ====== === ======
</TABLE>
- ---------------
(1) Includes intercompany programming charges of $107 million, $80 million and
$33 million in 1996, 1995 and 1994, respectively. Such programming charges
eliminate in consolidation.
The operation of the Company's cable television systems is regulated at the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of
1996 (together with the 1992 Cable Act, the "Cable Acts") established rules
under which the Company's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are regulated if a complaint is
filed or if the appropriate franchise authority is certified. At December 31,
1996, approximately 78% of the Company's basic customers were served by cable
television systems that were subject to such rate regulation.
During the year ended December 31, 1996, 61% of the Company's revenue from
Cable and Communications Services was derived from Regulated Services. As noted
above, any increases in rates charged for Regulated Services are regulated by
the Cable Acts. Moreover, competitive factors may limit the Company's ability to
increase its service rates.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with the Company's.
See note 7 to the accompanying consolidated financial statements for the effect
of the Satellite Spin-off on the Company's results of operations and financial
position.
Revenue from Cable and Communications services increased 32% and 27% for
the years ended December 31, 1996 and 1995, respectively, as compared to the
prior years. In the Company's regulated cable systems, the Company implemented
rate increases for its Regulated Services in June 1996. As allowed by Federal
Communications Commission ("FCC") regulations, such rate increases included
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 1996 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (18%), increases in the rates charged to the
Company's customers due to inflation, programming cost increases as previously
discussed and channel additions (7%), growth in the Company's satellite
customers through the date of the Satellite Spin-off (3%), net growth in basic
customer levels within the Company's
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cable television systems (1%) and an increase in the Company's international
programming revenue, advertising sales and other revenue (3%).
The 1995 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (13%), growth in the Company's satellite
customers (4%), increases in the rates charged to the Company's customers from
inflation, programming cost increases and channel additions (4%), net growth in
basic customer levels within the Company's cable television systems (4%) and an
increase in the Company's long-distance voice and data service and other revenue
(2%).
Operating, selling, general and administrative expenses increased 47% and
39% for the years ended December 31, 1996 and 1995, respectively, as compared to
the prior year. Exclusive of the effects of acquisitions (21% and 13%) and
Primestar (5% and 8%), such expenses increased 21% and 18%, respectively.
Programming expenses accounted for the majority of such increase. In this
regard, programming expenses, including intercompany programming charges,
represented $1,782 million (38%), $1,331 million (42%) and $936 million (41%) of
operating, selling, general and administrative expenses during 1996, 1995 and
1994, 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. During the fourth quarter of 1995,
the Company incurred $25 million in expenses related to payment of bonuses to
the majority of its employees.
During the fourth quarter of 1996, the Company restructured certain of its
operating and accounting functions (the "Restructuring"). In connection with the
Restructuring, the Company recognized a charge of $41 million related primarily
to work force reductions. As of December 31, 1996, $8 million of such
restructuring charges had been paid. The Company anticipates that the majority
of the remaining charges will be paid during the six months ended June 30, 1997.
The increase in the Company's depreciation expense in 1996 and 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
increase in amortization expense in 1996 and 1995 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.
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Programming Services
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 the Company. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
DOLLAR AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Electronic Retailing Services:
Net sales......................... 100% $ 984 100% $ 920 100% $ 432
Cost of sales..................... 61 605 66 603 61 263
Operating, selling, general and
administrative expenses........ 31 306 37 342 34 145
Restructuring charges............. -- -- 2 17 -- --
Depreciation and amortization..... 4 37 4 43 3 15
--- ------ --- ------ --- ------
Operating income (loss)........ 4% $ 36 (9)% $ (85) 2% $ 9
=== ====== === ====== === ======
Other Programming Services
Revenue(1)........................ 100% $ 355 100% $ 521 100% $ 240
Operating, selling, general and
administrative expenses........ 74 264 92 480 97 234
Compensation (adjustment to
compensation) relating to stock
appreciation rights............ 5 17 2 12 (1) (3)
Depreciation and amortization..... 7 24 11 55 5 11
--- ------ --- ------ --- ------
Operating income (loss)........ 14% $ 50 (5)% $ (26) (1)% $ (2)
=== ====== === ====== === ======
</TABLE>
- ---------------
(1) Includes intercompany programming revenue of $107 million, $80 million and
$33 million in 1996, 1995 and 1994, respectively. Such programming revenue
eliminates in consolidation.
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 and ceased to be a consolidated subsidiary in December
1996 pursuant to the transactions described below. 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.
Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time) and
$3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a
corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV
Agreement, in which Liberty Media Group owns over 99% of the equity and none of
the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty Media
Group in Silver King not exceed 21.37% without the prior approval of the FCC
(the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger") where HSN is the surviving
corporation and a subsidiary of Silver King following the HSN Merger. In order
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to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group
agreed to defer receiving certain shares of Silver King that would otherwise
have become issuable to it in the HSN Merger until such time as it was permitted
to own such shares. As a result, the HSN Merger was structured so that Liberty
Media Group received (i) 7,809,111 shares of Class B common stock of Silver
King, all of which shares Liberty Media Group contributed to BDTV II INC.
("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up
to an additional 2,591,752 shares of Class B common stock of Silver King from
time to time upon the occurrence of certain events which would allow Liberty
Media Group to own additional shares in compliance with the FCC Order (including
events resulting in the dilution of Liberty Media Group's percentage equity
interest), and (iii) 739,141 shares of Class B common stock and 17,566,702
shares of common stock of HSN (representing approximately 19.9% of the equity of
HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty Media Group and Mr. Diller are substantially the same as
their respective equity ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although Liberty
Media Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV-I and BDTV-II as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II
are accounted for using the equity method.
During the year ended December 31, 1996, HSN's net sales increased 7%, as
compared to the prior year. Such increase is due primarily to the net effect of
an 11.5% increase in the number of packages shipped partially offset by an 8.5%
decrease in the average price per unit sold.
Net sales from electronic retailing services increased from $432 million in
1994 to $920 million in 1995. 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 11%. Such annualized
decrease is the net affect of a 19% decrease in the number of packages shipped,
partially offset by a 9% increase in the average price per unit sold.
For the year ended December 31, 1996, cost of sales increased $2 million or
less than 1% as compared to 1995. As a percentage of net sales, cost of sales
decreased from 66% to 61% from 1995 to 1996. Such decrease is 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.
Cost of sales increased from $263 million in 1994 to $603 million in 1995.
As a percent of sales, cost of sales increased from 61% in 1994 to 66% 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 were inconsistent with HSN's then new sales and merchandise
philosophy.
HSN believes that seasonality does impact its business, but not to the same
extent it impacts the retail industry in general.
Other Programming Services
On April 1, 1996, United Video Satellite Group, Inc. ("UVSG"), a subsidiary
of TCI Group, and Netlink USA ("Netlink"), a subsidiary of Liberty Media Group,
formed Superstar/Netlink Group LLC ("Superstar/Netlink"), a limited liability
company comprised of UVSG's Superstar Satellite Entertainment and Netlink's
retail C-band satellite business. Liberty Media Group and UVSG each own 50% of
Superstar/ Netlink. As of April 1, 1996, Netlink's retail C-band business is no
longer consolidated with the financial results of Liberty Media Group.
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures both of which
are accounted for using the equity method. In
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the United States, Liberty Media Group and News Corp. formed the Liberty/Fox
U.S. Sports LLC ("Fox Sports") 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 Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of
Liberty Media Group, and TINTA formed a venture ("Fox Sports International") 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. Liberty/TINTA owns 50% of Fox Sports International with
News Corp. owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. Liberty/TINTA 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. Liberty/TINTA
also contributed its 50% interest in Premier Sports and All-Star Sports. Both
are Australian 24-hour sports services available via multichannel, multipoint
distribution systems or cable television.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/ TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Revenue from the Company's Other Programming Services decreased $166
million or 32% from 1995 to 1996. Such decrease is due to the net effect of the
deconsolidation of (i) the Company's sports programming entities upon the
formation of Fox Sports and Fox Sports International and (ii) Netlink's retail
C-band satellite business offset by a $50 million increase in revenue from
Encore Media Corporation and a $9 million increase from other 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 $246 million or 105%. Such increases are
primarily due to the TCI/Liberty Combination.
Other Income and Expense
The Company's interest expense increased $86 million or 9% during 1996, as
compared to 1995 and $225 million or 29% during 1995, as compared to 1994. The
increase in 1996 is the net result of an increase due to higher debt balances
partially offset by a decrease due to a lower weighted average interest rate.
The 1995 increase is the result of higher interest rates and debt balances. The
Company's weighted average interest rate on borrowings was 7.8%, 8.1% and 7.5%
during 1996, 1995 and 1994, respectively.
During the year ended December 31, 1996, in order to reduce future interest
costs, the Company redeemed certain notes payable which had an aggregate
principle balance of $904 million and fixed interest rates ranging from 7.88% 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.
Also, during the year ended December 31, 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
$9 million related to the retirement of deferred loan costs.
At December 31, 1996, the Company had an effective ownership interest of
approximately 27% in Telewest Communications 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, 1996 of $488 million and comprised
$109 million,
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$70 million and $43 million of the Company's share of its affiliates' losses in
1996, 1995, and 1994, respectively. The increase in the Company's share of
losses of Telewest in 1996 and 1995 is due, in part, to an increase in
Telewest's interest expense and foreign currency translation losses related to
the 1995 issuance of U.S. dollar denominated debentures by Telewest. 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 $422
million at December 31, 1996 and accounted for $79 million, $62 million and $50
million of the Company's share of its affiliates' losses in 1996, 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) ("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.
The Company's share of losses of affiliates was $473 million, $193 million
and $112 million (exclusive of share of earnings of Liberty prior to the
TCI/Liberty Combination) in 1996, 1995 and 1994, respectively. The increases in
1996 and 1995 are due in part to the aforementioned share of losses of Telewest
and the Company's other international investments. Additionally, included in
share of losses of affiliates for the year ended December 31, 1996 is $168
million attributable to Sprint Spectrum Holding Company, L.P. ("Sprint
Spectrum"). Such amount includes $34 million associated with prior periods.
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.
Teleport Communications Group Inc. ("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).
During the year ended December 31, 1995, the Company recognized a gain
amounting to $123 million in connection with the sale by TINTA to the public of
20 million shares of TINTA common stock (the "IPO") and the issuance by TINTA of
shares of common stock for an investment in an Argentine programming entity (the
"TYC Acquisition").
Minority interests in earnings of consolidated subsidiaries aggregated $56
million for the year ended December 31, 1996, as compared to minority interests
in losses of consolidated subsidiaries in 1995 and 1994. Such change in 1996 is
due primarily to the accrual of dividends on preferred securities issued by
certain subsidiaries of the Company.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner
Broadcasting System, Inc. ("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 held, 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. Prior to
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the TBS/Time Warner Merger, the Company owned shares of TBS common stock and
shares of a class of TBS preferred stock that were convertible into TBS common
stock. Time Warner, TBS, TCI and Liberty entered into an Agreement Containing
Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996,
as amended September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC
Consent Decree, among other things, Liberty agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger for shares
of a separate series of Time Warner common stock with limited voting rights (the
"TW Exchange Stock") in exchange for its TBS common and preferred stock. Holders
of the TW Exchange Stock are entitled to one one-hundredth of a vote for each
share with respect to the election of directors. Holders of the TW Exchange
Stock will not have any other voting rights, except as required by law or with
respect to limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications laws, each
share of the TW Exchange Stock will be convertible at any time at the option of
the holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably with the
Time Warner common stock and to share ratably with the holder of Time Warner
common stock in assets remaining for common stockholders upon dissolution,
liquidation or winding up of Time Warner. In connection with the TBS/Time Warner
Merger, the Company received approximately 50.6 million shares of TW Exchange
Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner
Merger, the Company recognized a pre-tax gain of approximately $1.5 billion in
the fourth quarter of 1996.
Net Earnings
The Company's net earnings (before preferred stock dividend requirements)
of $278 million for the year ended December 31, 1996 represents an increase of
$449 million as compared to the Company's net loss (before preferred stock
dividend requirements) of $171 million for 1995. Such increase is due to the net
effect of the gains recorded in connection with the TBS/Time Warner Merger and
the HSN Merger partially offset by an increase in share of losses of affiliates,
income tax expense and interest expense. Additionally, the Company recognized
gains in 1995 related to the TeleWest Merger and TINTA IPO.
The Company's net loss (before preferred stock dividend requirements) of
$171 million for the year ended December 31, 1995 represents a decrease of $233
million as compared to the Company's net earnings (before preferred stock
dividend requirements) of $62 million for the corresponding period of 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.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1996.
Liquidity and Capital Resources
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. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds. The Viacom
Acquisition has been accounted for by the purchase method and accordingly, the
Company recorded Cable Sub's assets and liabilities at fair value.
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
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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 exchange rate of 5.447 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.
In addition to the Viacom Acquisition, the Company consummated certain
other acquisitions during 1996. See note 3 to the accompanying consolidated
financial statements for additional information regarding assets acquired and
liabilities assumed in connection with all acquisitions.
During the year ended December 31, 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) $500 million in face value 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) $500 million in face value 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 6.1% 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 other
indebtedness.
During March 1997, the Company, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial paper
and repay certain other indebtedness.
Additionally, 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.
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of TCI Group Stock, assumed $584
million of TKR Cable's debt and paid cash of $88 million and shares of Time
Warner common stock valued at $41 million upon consummation of such acquisition.
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
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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).
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 December 31, 1996, subsidiaries of the Company had approximately
$1.8 billion in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although such
subsidiaries 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 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, compensation relating to
stock appreciation rights, adjustment to compensation relating to stock
appreciation rights and restructuring charges) ($2,276 million, $1,988 million
and $1,798 million in 1996, 1995 and 1994, respectively) to interest expense
($1,096 million, $1,010 million and $785 million in 1996, 1995 and 1994,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 208%, 197% and 229% for
1996, 1995 and 1994, respectively. 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. However, the Company's current intent is to reduce
its outstanding indebtedness such that its interest coverage ratio could be
increased. There is no assurance that the Company will be able to achieve such
objective. 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 ($1,228 million, $957 million and $908 million
in 1996, 1995 and 1994, 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
F-50
<PAGE> 258
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.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions and capital expenditures have
exceeded net cash provided by operating activities. In this regard, the amount
of capital expended by the Company for property and equipment was $2,055
million, $1,782 million and $1,264 million in 1996, 1995 and 1994, respectively.
The Company has reevaluated its capital expenditure strategy and currently
anticipates that it will expend significantly less for property and equipment in
1997 than it did in 1996. To the extent that net cash provided by operating
activities exceeds net cash used in investing activities in 1997, the Company
currently anticipates that such excess cash will initially be used to reduce
outstanding debt.
In late April 1996, TCIC was notified by Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit Rating Co. ("Duff and Phelps") 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. ("Fitch") 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. On January 24, 1997,
Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior
debt is currently rated BBB- by Standard & Poor's (the last level of investment
grade) with a negative outlook. 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.
The Company is a partner 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 residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast, Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company has a 30% partnership interest in each of the Sprint PCS
Partnerships and a 35.3% interest as a partner in PhillieCo and accounts for its
interests in the PCS Ventures by the equity method.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the FCC that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which
owns a PCS license for and operates a PCS system in the Baltimore/Washington,
D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS
license for the Los Angeles/San Diego MTA and currently operates a PCS system in
San Diego, California. The Sprint PCS Partnerships may invest in other entities
that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA,
which was acquired at a license cost of $85 million. During December 1996, the
Sprint PCS Partnerships initiated the commercial launch of PCS service in seven
markets.
From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships
F-51
<PAGE> 259
to contribute up to an aggregate of approximately $4.2 billion of equity
thereto, from inception through fiscal 1999, subject to certain requirements.
The Company expects that the remaining approximately $1.2 billion of such amount
(of which the Company's share is approximately $0.4 billion) will be contributed
by the end of the second quarter of 1998 (although there can be no assurance
that any additional capital will be contributed). The Company expects that the
Sprint PCS Partnerships will require additional equity thereafter.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $278
million at December 31, 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 guarantees, 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 (the "Film Licensing
Obligations"). Based on customer levels at December 31, 1996, these agreements
require minimum payments aggregating approximately $571 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. 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 foreign sports program rights through 2004. At December 31, 1996,
such commitments aggregated $226 million.
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.
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 (i)
pays fixed interest rates ranging from 7.2% to 9.3% and receives variable
interest rates on notional amounts of $310 million at December 31, 1996 (the
"Fixed Rate Agreements") and (ii) pays variable interest rates and receives
fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750
million at December 31, 1996 (the "Variable Rate Agreements"). During the year
ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to
the Fixed Rate Agreements were $14 million, $13 million and $26 million,
respectively; and the Company's net receipts (payments) pursuant to the Variable
Rate Agreements were $15 million, (less than $1 million) and $36 million,
respectively. During the year ended December 31, 1996, the Company terminated
certain Variable Rate Agreements with an aggregate notional amount of $700
million. The Company received $16 million upon such terminations. The Company
will amortize the termination settlement over the remainder of the original
terms of the terminated Variable Rate Agreements. 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.
At December 31, 1996, after considering the net effect of the
aforementioned interest rate exchange agreements, the Company had $7,349 million
(or 49%) of fixed-rate debt with a weighted average interest rate of 8.5% and
$7,577 million (or 51%) of variable-rate debt with a weighted average interest
rate of 6.3%.
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 ("Y"), 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
F-52
<PAGE> 260
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-seven percent of the franchises held by the Company,
involving approximately 4.5 million basic customers, 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.
During 1996, the Company has experienced a competitive impact from medium
power and high power direct broadcast satellites ("DBS") that use high
frequencies to transmit signals that can be received by dish antennas ("HSDs")
much smaller in size than traditional HSDs. The Primestar partners distribute a
multi-channel programming service via a medium power communications satellite to
HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the
Company provided this satellite service. DirecTv, Inc. ("DirecTv"), United
States Satellite Broadcasting Corporation ("USSB") and EchoStar Communications
Corp. ("EchoStar"), transmit from high power satellites and generally use
smaller dishes to receive their signals. Alphastar, Inc. ("Alphastar") began
offering medium power service in the second quarter of 1996. On February 24,
1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky. The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television on a nationwide basis (not all of which would be
available to each subscriber), Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
households upon the launch of Sky and 75% of all television households by the
end of 1998. DBS operators have the right to distribute substantially all of the
significant cable television programming services currently carried by cable
television systems. Estimated DBS customers nationwide increased from
approximately 2.2 million at the end of 1995 to approximately 4.4 million at the
end of 1996, and the Company expects that competition from DBS will continue to
increase. However, the Company is unable to predict what effect such competition
will have on the Company's financial position.
F-53
<PAGE> 261
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, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 24, 1997
F-54
<PAGE> 262
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------- ------
AMOUNTS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 394 118
Trade and other receivables, net............................ 448 407
Inventories, net............................................ -- 104
Prepaid expenses............................................ 81 65
Prepaid program rights...................................... 49 47
Committed film inventory.................................... 136 122
Investments in affiliates, accounted for under the equity
method, and related receivables (note 4).................. 3,012 2,372
Investment in Time Warner, Inc. ("Time Warner") (note 5).... 2,027 --
Investment in Turner Broadcasting System, Inc. ("TBS") (note
5)........................................................ -- 955
Property and equipment, at cost:
Land...................................................... 77 88
Distribution systems...................................... 10,078 9,545
Support equipment and buildings........................... 1,541 1,429
------- ------
11,696 11,062
Less accumulated depreciation............................. 4,168 3,653
------- ------
7,528 7,409
------- ------
Franchise costs............................................. 17,875 14,322
Less accumulated amortization............................. 2,439 2,092
------- ------
15,436 12,230
------- ------
Other assets, at cost, net of amortization.................. 1,133 1,748
------- ------
$30,244 25,577
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 216 243
Accrued interest............................................ 274 233
Accrued programming expense................................. 347 318
Other accrued expenses...................................... 812 1,114
Debt (note 8)............................................... 14,926 13,211
Deferred income taxes (note 14)............................. 6,012 4,584
Other liabilities........................................... 253 195
------- ------
Total liabilities................................... 22,840 19,898
------- ------
Minority interests in equity of consolidated subsidiaries... 1,493 651
Redeemable preferred stocks (note 9)........................ 658 478
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Securities")
holding solely subordinated debt securities of TCI
Communications, Inc. ("TCIC") (note 10)................... 1,000 --
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
696,325,478 shares in 1996 and 672,211,009 shares in
1995.................................................... 696 672
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value. Authorized 150,000,000 shares; issued
84,647,065 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 227,844,437 shares in 1996 and
224,942,830 shares in 1995.............................. 228 225
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value. Authorized 75,000,000
shares; issued 21,189,369 shares in 1996 and 21,196,868
shares in 1995.......................................... 21 21
Additional paid-in capital................................ 3,672 3,986
Cumulative foreign currency translation adjustment, net of
taxes................................................... 26 (9)
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 15 338
Accumulated deficit....................................... (176) (454)
------- ------
4,567 4,864
Series A TCI Group common stock, at cost, held by
subsidiaries (116,853,196 shares and 100,524,364 shares
in 1996 and 1995, respectively)......................... (314) (314)
------- ------
Total stockholders' equity.......................... 4,253 4,550
------- ------
Commitments and contingencies (note 15)
$30,244 25,577
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE> 263
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -----
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C>
Revenue (note 16):
Communications and programming services (note 6).......... $ 7,038 5,586 4,250
Net sales from electronic retailing services.............. 984 920 432
------- ------ -----
8,022 6,506 4,682
------- ------ -----
Operating costs and expenses:
Operating................................................. 2,917 2,161 1,507
Cost of sales from electronic retailing services.......... 605 603 263
Selling, general and administrative....................... 2,224 1,754 1,114
Compensation (adjustment to compensation) relating to
options and stock appreciation rights.................. (13) 57 (8)
Restructuring charges..................................... 41 17 --
Depreciation.............................................. 1,093 899 700
Amortization.............................................. 523 473 318
------- ------ -----
7,390 5,964 3,894
------- ------ -----
Operating income (note 16)............................. 632 542 788
Other income (expense):
Interest expense.......................................... (1,096) (1,010) (785)
Interest and dividend income.............................. 64 52 36
Share of losses of affiliates, net (note 4)............... (473) (193) (112)
Share of earnings of Liberty Media Corporation............ -- -- 128
Loss on early extinguishment of debt (note 8)............. (71) (6) (9)
Minority interests in losses (earnings) of consolidated
subsidiaries, net...................................... (56) 17 2
Gain on sale of subsidiary stock (note 13)................ -- 123 --
Gain on sale of stock by equity investee (note 4)......... 12 165 161
Gain (loss) on disposition of assets...................... 1,593 49 (10)
Other, net................................................ (65) (30) (17)
------- ------ -----
(92) (833) (606)
------- ------ -----
Earnings (loss) before income taxes.................... 540 (291) 182
Income tax benefit (expense) (note 14)...................... (262) 120 (120)
------- ------ -----
Net earnings (loss) (note 16).......................... 278 (171) 62
Dividend requirements on preferred stocks................... (35) (34) (8)
------- ------ -----
Net earnings (loss) attributable to common stockholders
(note 6)............................................... $ 243 (205) 54
======= ====== =====
Net earnings (loss) attributable to common stockholders
(note 2):
TCI Class A and Class B common stock...................... $ -- (71) 54
TCI Group Series A and Series B common stock.............. (813) (107) --
Liberty Media Group Series A and Series B common stock.... 1,056 (27) --
------- ------ -----
$ 243 (205) 54
======= ====== =====
Primary net earnings (loss) attributable to common
stockholders per common and common equivalent share (notes
2 and 6):
TCI Class A and Class B common stock...................... $ -- (.11) .10
TCI Group Series A and Series B common stock.............. $ (1.22) (.16) --
Liberty Media Group Series A and Series B common stock.... $ 3.97 (.11) --
Fully diluted net earnings (loss) attributable to common
stockholders per common and common equivalent share (notes
2 and 6):
TCI Class A and Class B common stock...................... $ -- (.11) .10
TCI Group Series A and Series B common stock.............. $ (1.22) (.16) --
Liberty Media Group Series A and Series B common stock.... $ 3.88 (.11) --
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE> 264
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993*........... $ -- 482 47 -- -- -- -- 2,293
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994...................... -- -- -- -- -- -- -- --
Net earnings........................... -- -- -- -- -- -- -- --
Conversion of redeemable preferred
stock (note 9)....................... -- 1 -- -- -- -- -- 17
Issuance of common stock upon
conversion of notes (note 8)......... -- 3 -- -- -- -- -- --
Issuance of common stock upon exercise
of stock option...................... -- -- -- -- -- -- -- 3
Acquisition and retirement of common
stock................................ -- -- -- -- -- -- -- (2)
Issuance of common stock for
acquisition.......................... -- 85 42 -- -- -- -- 383
Accreted dividends on all classes of
preferred stock...................... -- -- -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements.... -- -- -- -- -- -- -- 4
Foreign currency translation
adjustment........................... -- -- -- -- -- -- -- --
Issuance of TCI Class A common stock to
subsidiaries of TCI in
Reorganization....................... -- -- -- -- -- -- -- (23)
Issuance of Class A common stock for
investment........................... -- 6 -- -- -- -- -- 124
Repayment of note receivable from
related party........................ -- -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities........ -- -- -- -- -- -- -- --
--- ---- --- -- - -- - ---
Balance at December 31, 1994............ $ -- 577 89 -- -- -- -- 2,791
=== ==== === == == == == ===
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993*........... (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 9)....................... -- -- -- -- -- 18
Issuance of common stock upon
conversion of notes (note 8)......... -- -- -- -- -- 3
Issuance of common stock upon exercise
of stock option...................... -- -- -- -- -- 3
Acquisition and retirement of common
stock................................ -- -- -- -- -- (2)
Issuance of common stock for
acquisition.......................... -- 4 (15) -- (285) 214
Accreted dividends on all classes of
preferred stock...................... -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements.... -- -- -- -- -- 4
Foreign currency translation
adjustment........................... 25 -- -- -- -- 25
Issuance of TCI Class A common stock to
subsidiaries of TCI in
Reorganization....................... -- -- -- -- 23 --
Issuance of Class A common stock for
investment........................... -- -- -- -- -- 130
Repayment of note receivable from
related party........................ -- -- 15 -- (15) --
Change in unrealized holding gains for
available-for-sale securities........ -- (207) -- -- -- (207)
-- --- -- --- --- ---
Balance at December 31, 1994............ (4) 94 -- (282) (610) 2,655
== === == === === ===
</TABLE>
F-57
<PAGE> 265
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... $ -- 577 89 -- -- -- -- 2,791
Net loss.............................. -- -- -- -- -- -- -- --
Issuance of common stock in public
offering............................ -- 20 -- -- -- -- -- 381
Issuance of common stock in private
offering............................ -- 1 -- -- -- -- -- 29
Issuance of common stock for
acquisitions and investments (note
6).................................. -- 59 -- -- -- -- -- 1,329
Issuance of Class A common stock to
subsidiary of TCI in
Reorganization...................... -- -- -- -- -- -- -- (6)
Issuance of Class A common stock to
subsidiary in exchange for
investment.......................... -- -- -- -- -- -- -- (1)
Retirement of Class A common stock
previously held by subsidiary....... -- -- -- -- -- -- -- 29
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") (note 9).................... -- (86) (4) -- -- -- -- (542)
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock.................. -- -- -- 101 -- -- -- 213
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders (note 1).... -- -- -- -- -- 225 21 (246)
Costs associated with Distribution to
stockholders........................ -- -- -- -- -- -- -- (8)
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..................... -- -- -- -- -- -- -- (34)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- -- -- 10
Payment of preferred stock
dividends........................... -- -- -- -- -- -- -- (10)
Issuance of common stock by subsidiary
(note 13)........................... -- -- -- -- -- -- -- 51
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........ -- -- -- -- -- -- -- --
--- ---- --- -- - -- - ---
Balance at December 31, 1995........... $ -- -- -- 672 85 225 21 3,986
=== ==== === === == === == =====
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... (4) 94 -- (282) (610) 2,655
Net loss.............................. -- -- -- (171) -- (171)
Issuance of common stock in public
offering............................ -- -- -- -- -- 401
Issuance of common stock in private
offering............................ -- -- -- -- -- 30
Issuance of common stock for
acquisitions and investments (note
6).................................. -- -- -- -- -- 1,388
Issuance of Class A common stock to
subsidiary of TCI in
Reorganization...................... -- -- -- -- 6 --
Issuance of Class A common stock to
subsidiary in exchange for
investment.......................... -- -- -- -- 1 --
Retirement of Class A common stock
previously held by subsidiary....... -- -- -- -- (29) --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") (note 9).................... -- -- -- -- 632 --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock.................. -- -- -- -- (314) --
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders (note 1).... -- -- -- -- -- --
Costs associated with Distribution to
stockholders........................ -- -- -- -- -- (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)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- 10
Payment of preferred stock
dividends........................... -- -- -- -- -- (10)
Issuance of common stock by subsidiary
(note 13)........................... -- -- -- -- -- 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........ -- -- -- (1) -- (1)
-- --- -- --- --- ---
Balance at December 31, 1995........... (9) 338 -- (454) (314) 4,550
== === == === === ===
</TABLE>
F-58
<PAGE> 266
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... $ -- -- -- 672 85 225 21 3,986
Net earnings................... -- -- -- -- -- -- -- --
Issuance of common stock for
acquisition (note 6)......... -- -- -- 11 -- 4 -- 250
Issuance of common stock upon
conversion of notes.......... -- -- -- 2 -- 1 -- (1)
Issuance of common stock upon
conversion of preferred
stock........................ -- -- -- 1 -- -- -- 15
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock........... -- -- -- (6) -- (2) -- (122)
Contribution of common stock to
subsidiary................... -- -- -- 16 -- -- -- (16)
Spin-off of TCI Satellite
Entertainment, Inc. (note
7)........................... -- -- -- -- -- -- -- (405)
Accreted dividends on all
classes of preferred stock... -- -- -- -- -- -- -- (35)
Accreted dividends on all
classes of preferred stock
not subject to mandatory
redemption requirements...... -- -- -- -- -- -- -- 10
Payment of preferred stock
dividends.................... -- -- -- -- -- -- -- (10)
Foreign currency translation
adjustment................... -- -- -- -- -- -- -- --
Recognition of unrealized
holding gains on
available-for-sale securities
(note 5)..................... -- -- -- -- -- -- -- --
Recognition of unrealized
holding losses on
available-for-sale
securities................... -- -- -- -- -- -- -- --
Change in unrealized holding
gains for available-for-sale
securities................... -- -- -- -- -- -- -- --
--- ---- --- -- - -- - ---
Balance at December 31, 1996.... $ -- -- -- 696 85 228 21 3,672
= =
=== ==== === == == ===
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... (9) 338 -- (454) (314) 4,550
Net earnings................... -- -- -- 278 -- 278
Issuance of common stock for
acquisition (note 6)......... -- -- -- -- -- 265
Issuance of common stock upon
conversion of notes.......... -- -- -- -- -- 2
Issuance of common stock upon
conversion of preferred
stock........................ -- -- -- -- -- 16
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock........... -- -- -- -- -- (130)
Contribution of common stock to
subsidiary................... -- -- -- -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. (note
7)........................... -- -- -- -- -- (405)
Accreted dividends on all
classes of preferred stock... -- -- -- -- -- (35)
Accreted dividends on all
classes of preferred stock
not subject to mandatory
redemption requirements...... -- -- -- -- -- 10
Payment of preferred stock
dividends.................... -- -- -- -- -- (10)
Foreign currency translation
adjustment................... 35 -- -- -- -- 35
Recognition of unrealized
holding gains on
available-for-sale securities
(note 5)..................... -- (428) -- -- -- (428)
Recognition of unrealized
holding losses on
available-for-sale
securities................... -- 64 -- -- -- 64
Change in unrealized holding
gains for available-for-sale
securities................... -- 41 -- -- -- 41
-- --- -- --- --- ---
Balance at December 31, 1996.... 26 15 -- (176) (314) 4,253
== === == === === ===
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE> 267
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
AMOUNTS IN MILLIONS
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 278 (171) 62
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,616 1,372 1,018
Compensation (adjustment to compensation) relating to
options and stock appreciation rights.................. (13) 57 (8)
Payments of stock appreciation rights................... (3) (9) --
Restructuring charges................................... 41 17 --
Payments of restructuring charges....................... (8) (17) --
Share of losses of affiliates........................... 473 193 112
Share of earnings of Liberty Media Corporation.......... -- -- (128)
Loss on early extinguishment of debt.................... 71 6 9
Minority interests in earnings (losses)................. 56 (17) (2)
Gain on sale of subsidiary stock........................ -- (123) --
Gain on sale of stock by equity investee................ (12) (165) (161)
Loss (gain) on disposition of assets.................... (1,593) (49) 10
Deferred income tax expense (benefit)................... 224 (153) 37
Other noncash charges (credits)......................... 11 (28) (2)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................. (115) (70) 15
Change in inventories................................. (8) 16 (26)
Change in prepaids.................................... (23) (86) (97)
Change in accrued interest............................ 40 45 13
Change in other accruals and payables................. 193 139 56
------- ------ ------
Net cash provided by operating activities.......... 1,228 957 908
------- ------ ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (598) (477) (358)
Capital expended for property and equipment............... (2,055) (1,782) (1,264)
Cash proceeds from disposition of assets.................. 341 166 39
Additional investments in and loans to affiliates and
others.................................................. (798) (1,134) (445)
Repayments of loans to affiliates and others.............. 679 18 148
Other investing activities................................ (38) (135) (15)
------- ------ ------
Net cash used in investing activities.............. (2,469) (3,344) (1,895)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt........................................ 8,163 8,152 4,676
Repayments of debt........................................ (7,969) (6,567) (3,607)
Prepayment penalties...................................... (60) -- --
Proceeds from sale of subsidiary stock.................... 223 445 --
Proceeds from issuances of common stock................... -- 431 1
Proceeds from issuance of Trust Securities................ 971 -- --
Contributions by minority shareholders of subsidiaries.... 319 -- --
Payment of dividends on subsidiary preferred stock and
Trust Securities........................................ (95) (6) (6)
Payment of preferred stock dividends...................... (35) (24) (4)
Costs associated with Distribution to stockholders........ -- (8) --
Other financing activities................................ -- 8 --
------- ------ ------
Net cash provided by financing activities.......... 1,517 2,431 1,060
------- ------ ------
Net increase in cash and cash equivalents.......... 276 44 73
Cash and cash equivalents at beginning of year..... 118 74 1
------- ------ ------
Cash and cash equivalents at end of year........... $ 394 118 74
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE> 268
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(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. 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.
Industry Segments
The Company currently has significant operations principally in two
industry segments: cable and communications services ("Communications") 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. The Company's cable and communications segment is comprised of
five lines of business: Domestic Cable and Communications (the "Cable Unit");
International Cable and Programming ("TINTA"); Telephony; Internet; and
Technology/Venture Capital. TINTA, Telephony, Internet and Technology/Venture
Capital are not separately reportable segments due to their relative
insignificance. The Company has investments accounted for under the equity
method and the cost method, which also operate in the Communications and
Programming industries. See note 16 for additional segment information.
Targeted Stock
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (the "Board") to issue two new series of stock ("Liberty Group Stock")
which reflect the separate performance of TCI's business which produces and
distributes programming services ("Liberty Media Group"). 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 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, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution (the "Distribution") represented one hundred
percent of the equity value attributable to the Liberty Media Group.
As of December 31, 1996, the TCI Group Stock reflects the separate
performance of TCI's subsidiaries and assets not attributed to Liberty Media
Group, including TCI's Cable Unit, TINTA, Telephony unit, Internet unit and
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 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
F-61
<PAGE> 269
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
A number of wholly-owned subsidiaries of the Company which are part of TCI
Group owned shares of TCI Class A common stock and TCI preferred stock
("Subsidiary Shares"). Because the Distribution 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 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 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, TCI determined to exchange all of the
outstanding Subsidiary Shares for shares of Series F Preferred Stock. See note
9. 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.
Stock Dividend
Effective January 13, 1997, the Company issued a stock dividend to holders
of Liberty Group Stock consisting of one share of Series A Liberty Group Stock
for every two shares of Series A Liberty Group Stock owned and one share of
Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock
Dividend has been treated as a stock split, and accordingly, all share and per
share amounts have been retroactively restated to reflect the Liberty Group
Stock Dividend.
Telephony Group Stock Proposal
On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share, (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
and Tele-Communications, Inc. Series B Telephony Group common stock
(collectively, the "Telephony Group Stock"). The Telephony Group Stock, if
issued, would be intended to reflect the separate performance of Telephony
Group, which initially consists of the Company's investments in certain entities
engaged in the
F-62
<PAGE> 270
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
domestic wireline and wireless telephony businesses. A total of 750 million
shares of Series A Telephony Group Stock and 75 million shares of Series B
Telephony Group Stock were authorized. As of March 24, 1997, no shares of
Telephony Group Stock have been issued.
Upon authorization of the Telephony Group Stock and until shares of
Telephony Group Stock are issued, the investments attributed to Telephony Group
will be included in TCI Group. The TCI Group Stock will continue to reflect all
of the assets, liabilities and common stockholders' equity value of the Company
attributable to 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 Telephony
Group); international cable, telephony and programming businesses; technology/
venture capital business; and any other business of the Company not attributed
to either Liberty Media Group or Telephony Group. As shares of Telephony Group
Stock are issued and distributed or sold, the percentage of the common
stockholders' equity value of the Company attributable to Telephony Group that
is or is intended to be reflected in the TCI Group Stock will be reduced
accordingly. The composition of Liberty Media Group was not affected by the
authorization, and will not be affected by the issuance, of Telephony Group
Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of investments which are readily
convertible into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1995 was not material.
Program Rights
Prepaid program rights are amortized on a film-by-film basis 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 less prepayments. These amounts are amortized on a
film-by-film basis over the specific number of exhibitions.
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. Realized gains and losses are
determined on a specific-identification basis.
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.
F-63
<PAGE> 271
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996, 1995 and 1994, 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.
(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 negotiating and renewing franchise
agreements are 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. 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.
Pursuant to Statement No. 121, the Company periodically reviews the
carrying amounts 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.
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 term of the derivative
financial instruments. The Company does not use such instruments for trading
purposes.
F-64
<PAGE> 272
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$902 million and $49 million in 1996 and 1995, respectively, of preferred stocks
(and accumulated dividends thereon) of certain subsidiaries. The current
dividend requirements on these preferred stocks aggregate $47 million per annum
and such dividend requirements are reflected as minority interests in the
accompanying consolidated statements of operations.
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 reduced by incentive discounts and sales
returns to arrive at net sales from electronic retailing 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.
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. As allowed by Statement No. 123, the Company continues to account
for stock-based employee compensation pursuant to APB Opinion No. 25. The
Company has included the disclosures required by Statement No. 123 in note 11.
Earnings (Loss) Per Common and Common Equivalent Share
(a) TCI CLASS A AND B COMMON STOCK
Loss per common share attributable to common stockholders 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 (648.2 million). Common stock
equivalents were not included in the computation of weighted average shares
outstanding because their inclusion would be antidilutive.
Primary earnings per common and common equivalent share attributable
to common stockholders for the year ended December 31, 1994 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).
Fully diluted earnings per common and common equivalent share
attributable to common stockholders for the year ended December 31, 1994
was computed by dividing earnings attributable to common stockholders by
the weighted average number of common and common equivalent shares
outstanding (540.8 million). Shares issuable upon conversion of the
Convertible Preferred Stock, Series C ("Series C Preferred Stock") (see
note 9) have not been included in the computation of weighted average
shares because their effect would be anti-dilutive.
F-65
<PAGE> 273
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) TCI GROUP STOCK
The loss attributable to TCI Group stockholders per common share for
the year ended December 31, 1996 and 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
(664.8 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.
(c) LIBERTY GROUP STOCK
Primary earnings attributable to Liberty Media Group stockholders per
common and common equivalent share for the year ended December 31, 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 and common equivalent shares outstanding of Liberty Media Group
Series A and Series B common stock during the period, as adjusted for the
effect of the Liberty Group Stock Dividend (266.3 million).
Fully diluted earnings attributable to Liberty Media Group
stockholders per common and common equivalent share for the year ended
December 31, 1996 was computed by dividing earnings attributable to Liberty
Media Group Series A and Series B common stockholders by the weighted
average number of common and common equivalent shares outstanding of
Liberty Media Group Series A and Series B common stock during the period,
as adjusted for the effect of the Liberty Group Stock Dividend (272.4
million). Shares issuable upon conversion of the Series C Preferred Stock,
the Convertible Preferred Stock, Series D (the "Series D Preferred Stock"),
and the Redeemable Convertible Liberty Media Group Preferred Stock, Series
H have been included in the computation of weighted average shares.
The loss attributable to Liberty Media Group stockholders 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, as adjusted
for the effect of the Liberty Group Stock Dividend (246.1 million). Common
stock equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
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.
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
presentation.
F-66
<PAGE> 274
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $1,056 million, $965 million and $758 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid
for income taxes was $25 million in 1996, $63 million in 1995 and was not
material in 1994.
Significant noncash investing and financing activities are reflected in the
following table. See also note 7 for the impact of the spin-off of TCI Satellite
Entertainment, Inc.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired............................. $ 4,998 3,571 1,921
Liabilities assumed, net of current assets................ (1,811) (445) (648)
Deferred tax liability recorded in acquisitions........... (1,379) (1,083) (190)
Minority interests in equity of acquired entities......... (113) 49 (35)
Note receivable from related party assumed................ -- -- 15
Common stock and preferred stock issued in acquisitions... (457) (1,615) (808)
Preferred stock of subsidiaries issued in acquisitions.... (640) -- --
Common stock issued to subsidiaries....................... -- -- 285
Unrealized gains on available-for-sale securities of
acquired entities...................................... -- -- (182)
------- ------ -----
Cash paid for acquisitions............................. $ 598 477 358
======= ====== =====
Exchange of consolidated subsidiaries for note receivable
and equity investments.................................... $ 894 -- --
======= ====== =====
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 --
======= ====== =====
</TABLE>
(4) INVESTMENTS IN AFFILIATES
The Company has various investments accounted for under the equity method.
The following table includes the Company's carrying value and percentage
ownership of the more significant investments at December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
PERCENTAGE CARRYING
OWNERSHIP VALUE
---------- --------------
AMOUNTS IN
MILLIONS
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and
PhillieCo, L.P........................................ 30%-35.3% $830
Teleport Communications Group, Inc. ("TCG")............. 31.1% 276
Home Shopping Network, Inc. ("HSN")..................... 19.9% 142
BDTV INC. and BDTV II, INC.............................. 99% 200
Telewest Communications plc ("Telewest")................ 27% 488
Various foreign equity investments (other than
Telewest)............................................. var. 422
Discovery Communications, Inc........................... 49% 118
QVC, Inc................................................ 43% 104
</TABLE>
F-67
<PAGE> 275
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited financial information for affiliates is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Combined Financial Position
Property and equipment, net............................... $ 4,770 3,464
Franchise costs, net...................................... 3,392 1,302
Other assets, net......................................... 13,287 8,127
------- ------
Total assets...................................... $21,449 12,893
======= ======
Debt...................................................... $ 8,657 5,438
Due to TCI................................................ 42 47
Other liabilities......................................... 5,539 1,803
Owners' equity............................................ 7,211 5,605
------- ------
Total liabilities and equity...................... $21,449 12,893
======= ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Combined Operations
Revenue............................................... $ 5,996 4,540 3,033
Operating expenses.................................... (5,488) (3,956) (2,678)
Depreciation and amortization......................... (1,037) (542) (261)
------- ------ ------
Operating income (loss)............................ (529) 42 94
Interest expense...................................... (631) (349) (112)
Other, net............................................ (369) (151) 13
------- ------ ------
Net loss........................................... $(1,529) (458) (5)
======= ====== ======
</TABLE>
The Company is a partner 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 residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox")
and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and
the Company. The Company has a 30% partnership interest in each of the Sprint
PCS Partnerships and a 35.3% interest as a partner in PhillieCo.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the Federal Communications Commission ("FCC") that ended in March
1995, for an aggregate license cost of approximately $2.1 billion. The Sprint
PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with
American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS
system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P.
("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA
and currently operates a PCS system in San Diego, California. The Sprint PCS
Partnerships may invest in other entities that hold PCS Licenses. PhillieCo
holds the license for the Philadelphia MTA, which was
F-68
<PAGE> 276
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired at a license cost of $85 million. During December 1996, the Sprint PCS
Partnerships initiated the commercial launch of PCS service in seven markets.
From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and CoxCalifornia will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. The Company
expects that the remaining approximately $1.2 billion of such amount (of which
the Company's share is approximately $0.4 billion) will be contributed by the
end of the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed). The Company expects that the Sprint PCS
Partnerships will require additional equity thereafter.
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 Liberty/Fox U.S. Sports LLC
("Fox Sports") 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 Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of
Liberty Media Group, and TINTA formed a venture ("Fox Sports International") 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. Liberty/TINTA owns 50% of Fox Sports International with
News Corp. owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. Liberty/TINTA 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. Liberty/TINTA
also contributed its 50% interest in Premier Sports and All-Star Sports. Both
are Australian 24-hour sports services available via multichannel, multipoint
distribution systems or cable television. Fox Sports International is accounted
for using the equity method.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/ TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time) and
$3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a
corporation formed by Liberty Media Group and Mr. Diller
F-69
<PAGE> 277
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of
the equity and none of the voting power (except for protective rights with
respect to certain fundamental corporate actions) and Mr. Diller owns less than
1% of the equity and all of the voting power. BDTV-I exercised the option
shortly after its contribution, thereby becoming the controlling stockholder of
Silver King. Such change in control of Silver King had been approved by the FCC
in June 1996, subject, however, to the condition that the equity interest of
Liberty Media Group in Silver King not exceed 21.37% without the prior approval
of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger
of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger")
where HSN is the surviving corporation and a subsidiary of Silver King following
the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a
portion of its investment in HSN and accordingly, recorded a pre-tax gain of
approximately $47 million. In order to effect the HSN Merger in compliance with
the FCC Order, Liberty Media Group agreed to defer receiving certain shares of
Silver King that would otherwise have become issuable to it in the HSN Merger
until such time as it was permitted to own such shares. As a result, the HSN
Merger was structured so that Liberty Media Group received (i) 7,809,111 shares
of Class B common stock of Silver King, all of which shares Liberty Media Group
contributed to BDTV II INC. ("BDTVII"), (ii) the contractual right (the
"Contingent Right") to be issued up to an additional 2,591,752 shares of Class B
common stock of Silver King from time to time upon the occurrence of certain
events which would allow Liberty Media Group to own additional shares in
compliance with the FCC Order (including events resulting in the dilution of
Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of
Class B common stock and 17,566,702 shares of common stock of HSN (representing
approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by
Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which
the relative equity ownership and voting power of Liberty Media Group and Mr.
Diller are substantially the same as their respective equity ownership and
voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although Liberty
Media Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV-I and BDTV-II as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II
are accounted for using the equity method.
Telewest is a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). 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 Telewest's net assets.
Telewest contributed $109 million, $70 million and $43 million of the
Company's share of its affiliates' losses during the years ended December 31,
1996, 1995 and 1994, 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 accounted for $79 million, $62 million and $50 million of the
Company's share of its affiliates' losses in 1996, 1995 and 1994, respectively.
F-70
<PAGE> 278
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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.
(5) INVESTMENT IN TIME WARNER
At December 31, 1995, TCI owned shares of TBS common stock and shares of
TBS preferred stock that were convertible into TBS common stock. The Company's
total holdings represented an approximate 7.5% voting interest for those matters
which preferred and common voted as a single class. On October 10, 1996, 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 held, 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.
Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered
into an Agreement Containing Consent Order with the Federal Trade Commission
("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent
Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed
to exchange the shares of Time Warner common stock to be received in the
TBS/Time Warner Merger for shares of a separate series of Time Warner common
stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW
Exchange Stock are entitled to one one-hundredth ( 1/10th) of a vote for each
share with respect to the election of directors. Holders of the TW Exchange
Stock will not have any other voting rights, except as required by law or with
respect to limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications laws, each
share of the TW Exchange Stock will be convertible at any time at the option of
the holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably with the
Time Warner common stock and to share ratably with the holders of Time Warner
common stock in assets remaining for common stockholders upon dissolution,
liquidation or winding up of Time Warner.
In connection with the TBS/Time Warner Merger, the Company received
approximately 50.6 million shares of the TW Exchange Stock in exchange for its
TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized
a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996.
At December 31, 1996, the Company's investment in Time Warner, carried at
cost, had an aggregate fair value of approximately $2 billion based upon the
market value of the marketable common stock into which it is convertible.
Subject to a number of conditions, including receipt of a ruling from the
Internal Revenue Service ("IRS") 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 signal in the United States and Canada. The level of
Liberty Media Group's ownership interest in Time Warner will be restricted until
the Spin-Off occurs, at which time, such restriction would be eased for Spinco.
F-71
<PAGE> 279
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Spin-Off occurs, certain control stockholders of TCI 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.
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. The Contract Option will be granted no
later than the fifth business day following the earlier of May 31, 1997, the
receipt of a favorable IRS ruling and the determination that the IRS ruling will
not be obtained. On the date of grant, Time Warner will issue to Southern, in
consideration for the Contract Option and certain noncompetition covenants, an
aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to
Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the
Contract Option and enters into the Distribution Contract, Time Warner will be
obligated to make quarterly payments to Southern in an amount which, when added
to Southern's net cash flow, would aggregate approximately $213.3 million on a
present value basis discounted to the effective date of the Distribution
Contract.
(6) ACQUISITIONS
On July 31, 1996, pursuant to certain agreements entered into among TCIC, a
subsidiary of TCI, 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. 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 exchange
rate of 5.447 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
F-72
<PAGE> 280
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, and the Company recorded
Cable Sub's assets and liabilities at fair value. 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 $280 million, $55 million and $.08, respectively, for the
year ended December 31, 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 $446 million, $115 million, $.07 and $.10, respectively, for the
year ended December 31, 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.
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 Series D Preferred Stock with an aggregate initial
liquidation value of $300 million (see note 9).
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.
(7) SPIN-OFF OF TCI SATELLITE ENTERTAINMENT, INC.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which
the Company accounted for under the equity method. Primestar provides
programming and marketing support to each of its cable partners who provide
satellite television service to their customers. On December 4, 1996, the
Company distributed (the "Satellite Spin-off") to the holders of shares of TCI
Group Stock all of the issued and outstanding common stock of TCI Satellite
Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off,
Satellite's assets and operations included the Company's interest in Primestar,
the Company's business of distributing Primestar programming and two
communications satellites. As a result of the Satellite Spin-off, Satellite's
operations are no longer consolidated with the Company's. In addition, the
Satellite Spin-off effected a change in the conversion rate for each of the
Company's equity and debt securities that are convertible into Series A TCI
Group Stock. See notes 8, 9 and 11.
F-73
<PAGE> 281
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of Satellite as of and through the date of
the Satellite Spin-off is as follows (amounts in millions):
<TABLE>
<CAPTION>
<S> <C>
Financial Position
Cash, receivables and other assets........................ $ 104
Investment in PRIMESTAR Partners L.P. .................... 32
Property and equipment, net............................... 1,111
------
$1,247
======
Accounts payable and accrued liabilities.................. $ 60
Due to PRIMESTAR Partners L.P............................. 458
Due to TCI................................................ 324
Equity.................................................... 405
------
$1,247
======
Operations
Revenue................................................... $ 377
Operating expenses........................................ (373)
Depreciation.............................................. (166)
------
Loss before income tax benefit......................... (162)
Income tax benefit........................................ 53
------
Net loss............................................... $ (109)
======
</TABLE>
(8) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT -------------------
DECEMBER 31, 1996 1996 1995
----------------- -------- -------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Debt of subsidiaries:
Notes payable.................................. 8.3% $ 9,308 7,713
Bank credit facilities......................... 6.6% 4,813 3,854
Commercial paper............................... 6.1% 638 1,469
Convertible notes(a)........................... 9.5% 43 45
Other debt..................................... 124 130
------- ------
$14,926 13,211
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$178 million and $186 million at December 31, 1996 and 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. During 1996, certain of these notes
were converted into 1,623,800 shares of Series A TCI Group Stock and 608,925
shares of Series A Liberty Group Stock. During 1995 and 1994, certain of
these notes were converted into 3,416 shares and 2,350,000 shares of TCI
Class A common stock, respectively. At December 31, 1996, the notes were
convertible, at the option of the holders, into an aggregate of 37,083,773
shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty
Group Stock (as adjusted to give effect to the Liberty Group Stock
Dividend).
During the year ended December 31, 1996, in order to reduce future interest
costs, the Company redeemed certain notes payable which had an aggregate
principle balance of $904 million and fixed interest rates ranging from 7.88% 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.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also, during the year ended December 31, 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 $9 million related to the retirement of deferred loan
costs. At December 31, 1996, subsidiaries of the Company had approximately $1.8
billion in unused lines of credit, excluding amounts related to lines of credit
which provide availability to support commercial paper.
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
116,853,195 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 Time Warner common stock.
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 $14,926 million, was $15,523
million at December 31, 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 (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on
notional amounts of $310 million at December 31, 1996 and (ii) pays variable
interest rates (the "Variable Rate Agreements") and receives fixed interest
rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at
December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, the
Company's net payments pursuant to the Fixed Rate Agreements were $14 million,
$13 million and $26 million, respectively; and the Company's net receipts
(payments) pursuant to the Variable Rate Agreements were $15 million, (less than
$1 million), and $36 million, respectively. During the year ended December 31,
1996, the Company terminated certain Variable Rate Agreements with an aggregate
notional amount of $700 million. The Company received $16 million upon such
terminations. After giving effect to the Company's interest rate exchange
agreements, approximately 49% of the Company's indebtedness bears interest at
fixed rates.
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
- ----------------------------------------------- ------------------------------------------------
INTEREST RATE NOTIONAL INTEREST RATE NOTIONAL
EXPIRATION DATE TO BE PAID AMOUNT EXPIRATION DATE TO BE RECEIVED AMOUNT
--------------- ------------- -------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
October 1997......... 7.2%-9.3% $ 80 April 1997........... 7.0% $ 200
December 1997........ 8.7% 230 September 1998....... 4.8%-5.4% 450
----
April 1999........... 7.4% 50
$310
====
February 2000........ 5.8%-6.6% 300
March 2000........... 5.8%-6.0% 675
September 2000....... 5.1% 75
------
$1,750
======
</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,
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996, taking into consideration current interest rates and assuming
the current creditworthiness of the counterparties. At December 31, 1996, the
Company would be required to pay an estimated $15 million to terminate the
Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate
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.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1997........................................................ $1,418*
1998........................................................ 490
1999........................................................ 721
2000........................................................ 766
2001........................................................ 1,079
</TABLE>
- ---------------
* Includes $638 million of commercial paper.
(9) REDEEMABLE PREFERRED STOCKS
The conversion rates identified below for the redeemable preferred stocks
that are convertible into Series A TCI Group Stock were adjusted, as applicable,
on December 4, 1996 as a result of the Satellite Spin-off. See note 7. The
conversion rates for the redeemable preferred stocks that are convertible into
Series A Liberty Group Stock have been adjusted to give effect to the Liberty
Group Stock Dividend. See note 1.
Convertible Preferred Stock, Series C. TCI 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. There were 80,000 shares of Series C Preferred Stock authorized and 70,575
shares outstanding at December 31, 1996.
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 116.24 shares of Series A TCI Group Stock and 37 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.
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
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-77
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 6). At December 31, 1996, there were
997,222 shares of Series D Preferred Stock outstanding.
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.
Each share of Series D Preferred Stock is convertible into 10 shares of
Series A TCI Group Stock and 3.5 shares of Series A Liberty Group Stock, subject
to adjustment upon certain events specified in the certificate of designation
establishing Series D Preferred Stock. In addition to the aforementioned shares
of TCI common stock, holders of Series D Preferred Stock are entitled to one
share of Satellite common stock for each share of Series D Preferred Stock
converted. Such shares of Satellite common stock represent the number of shares
of Satellite common stock that they would have received had they converted their
Series D Preferred Stock into TCI Group Stock prior to the Satellite Spin-off.
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.
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.
Convertible Redeemable Participating Preferred Stock, Series F. 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
(278,307 shares). 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. 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.
F-78
<PAGE> 286
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each holder of Series F Preferred Stock has the right to receive upon
conversion 1,496.65 shares of Series A TCI Group 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 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.
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.
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"). In January, 1996, 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. At December 31, 1996, there were 6,695,427 shares of each of
Series G Preferred Stock and Series H Preferred Stock outstanding.
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. 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 1.19 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. However, the shares of Series A Liberty Group
Stock issuable upon conversion of the Series H Preferred Stock shall be adjusted
to
F-79
<PAGE> 287
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provide for the Liberty Group Stock Dividend. 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.
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.
(10) 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, and issued $500 million of 8.72% Trust
F-80
<PAGE> 288
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 statements of operations.
(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 $35 million, $28 million and $21
million for 1996, 1995 and 1994, respectively.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. The Company is authorized to issue 50,000,000 shares of Series Preferred
Stock.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respect to matters which the Board is expressly authorized by the TCI Charter to
determine in the resolution or resolutions proving for the issue of any series
of the TCI Series Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. The Company is authorized
to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par
value $.01. Subsidiaries of TCI held all of the issued and outstanding shares of
such stock, amounting to 246,402 shares. 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.
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" and
together with the 1994 Plan and the 1995 Plan, the "Incentive Plans") which was
approved by stockholders at the TCI 1996 annual meeting. The 1996 Plan provides
(i) for stock-based awards to be made in respect of a maximum of 16 million
shares of Series A TCI Group Stock and a maximum of 6 million shares of Series A
Liberty Group Stock (subject to certain adjustments described below) and (ii)
for cash awards in amounts determined by the TCI compensation committee. Series
A TCI Group Stock and Series A Liberty Group Stock shall be hereinafter
collectively referred to as the "Common Stock".
Awards may be made as grants of stock options ("Options"), stock
appreciation rights ("SARs"), restricted shares ("Restricted Shares"), stock
units ("Stock Units"), performance awards ("Performance Awards"), or any
combination thereof (collectively, "Awards"). Shares in respect of which Awards
are made may be either authorized but unissued shares of Common Stock or issued
shares reacquired by the Company, including shares purchased in the open market.
Shares of Common Stock that are subject to Awards that expire, terminate or are
annulled for any reason without having been exercised (or, with respect to
Tandem SARs deemed exercised, by virtue of the exercise of a related Option), or
are Restricted Shares or Stock Units that are forfeited prior to becoming
vested, or are subject to Awards of SAR's that are exercised for cash, will
return to the pool of such shares available for grant under the 1996 Plan.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Awards of Series A TCI Group Stock made under the Incentive Plans were
adjusted in connection with the Satellite Spin-off such that immediately prior
to the Satellite Spin-off, each option was divided into two separately
exercisable options: (i) an option to purchase Satellite Series A common stock
(an "Add-on Satellite Option"), exercisable for the number of shares of
Satellite Series A common stock that would have been issued in the Satellite
Spin-off in respect of the shares of Series A TCI Group Stock subject to the
applicable TCI option, if such TCI option had been exercised in full immediately
prior to the record date of the Satellite Spin-off, and containing substantially
equivalent terms as the existing TCI option, and (ii) an option to purchase
Series A TCI Group Stock (an "Adjusted TCI Option"), exercisable for the same
number of shares of Series A TCI Group Stock as the corresponding TCI option had
been. The aggregate exercise price of each TCI option was allocated between the
Add-on Satellite Option and the Adjusted TCI Option into which it is divided,
and all other terms of the Add-on Satellite Option and Adjusted TCI Option will
in all material respects be the same as such TCI option. Similar adjustments
were made to the outstanding TCI SARs, resulting in the holders thereof holding
Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs, effective
immediately prior to the Satellite Spin-off.
As a result of the foregoing, certain persons who remain TCI employees or
non-employee directors after the Satellite Spin-off and certain persons who were
TCI employees prior to the Satellite Spin-off but became Satellite employees
after the Satellite Spin-off hold both Adjusted TCI Options and separate Add-on
Satellite Options and/or hold both Adjusted TCI SARs and separate Add-on
Satellite SARs. The obligations with respect to the Adjusted TCI Options, Add-on
Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI
employees and non-employee directors following the Satellite Spin-off are
obligations solely of TCI. The obligations with respect to the Adjusted TCI
Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs
held by persons who are Satellite employees at the time of the Satellite
Spin-off and following the Satellite Spin-off are no longer TCI employees are
obligations solely of Satellite. Prior to the Satellite Spin-off, TCI and
Satellite entered into an agreement to sell to each other from time to time at
the then current market price shares of Series A TCI Group Stock and Satellite
Series A common stock, respectively, as necessary to satisfy their respective
obligations under such securities.
As a result of the Liberty Stock Dividend, options to purchase shares of
Liberty Group Stock were increased by one option for each two options previously
granted, and the exercise price was also adjusted accordingly. The following
Liberty Group Stock option disclosures have been adjusted to reflect such
changes.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the number and weighted average exercise price
("WAEP") of certain options in tandem with SARs to purchase Class A common
stock, Series A TCI Group Stock and Series A Liberty Group Stock pursuant to the
Incentive Plans:
<TABLE>
<CAPTION>
SERIES A
CLASS A SERIES A LIBERTY
COMMON TCI GROUP GROUP
STOCK WAEP STOCK WAEP STOCK WAEP
----------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,
1994........................ 8,309,336 $16.61 -- --
Granted................... 3,220,000 22.00 -- --
Assumed................... 54,600 19.56 -- --
Exercised................. (217,483) 17.26 -- --
Canceled.................. (45,625) 20.13 -- --
----------- ---------- ----------
Outstanding at December 31,
1994........................ 11,320,828 18.13 -- --
Converted from Class A
options................. (11,218,866) 18.15 11,218,866 $13.58 --
Adjustment for
Distribution............ -- -- 4,207,056 $12.10
Granted................... -- 7,507,500 16.99 3,879,000 15.95
Exercised................. (91,962) 16.07 (933,516) 12.45 (340,504) 11.11
Canceled.................. (10,000) 17.25 (90,500) 13.07 (33,936) 11.66
----------- ---------- ----------
Outstanding at December 31,
1995........................ -- 17,702,350 15.08 7,711,616 14.08
Exercised................. -- (196,300) 12.70 (87,730) 11.89
Canceled.................. -- (132,200) 15.35 (27,900) 12.68
----------- ---------- ----------
Outstanding at December 31,
1996........................ -- 17,373,850 12.97 7,595,986 14.11
=========== ========== ==========
Exercisable at December 31,
1994........................ 3,053,348 16.35 -- --
=========== ========== ==========
Exercisable at December 31,
1995........................ -- 4,717,230 12.87 1,774,222 11.48
=========== ========== ==========
Exercisable at December 31,
1996........................ -- 8,189,828 11.89 3,290,718 12.71
=========== ========== ==========
Vesting Period....... 4-5 yrs 4-5 yrs
========== ==========
</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 45,000
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.
SARs with respect to 1,357,875 shares of Series A TCI Group Stock and
533,811 shares of Series A Liberty Group Stock were outstanding at December 31,
1996. These rights have an adjusted strike price of $0.52 and $0.54 per share,
respectively, and become exercisable and vest evenly over seven years, beginning
March 28, 1991. The SARs expire on March 28, 2001. The Company has the option of
paying the holder in stock or cash. During the year ended December 31, 1996,
SARs with respect to 65,625 shares of Series A TCI Group Stock were exercised.
On August 3, 1995, stockholders of the Company approved the Director Stock
Option Plan (the "DSOP") 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase 50,000 shares of TCI Class A common stock. Pursuant to the DSOP,
options to purchase 300,000 shares of TCI Class A common stock were granted at
an exercise price of $22.00 per share. Such options had a weighted average fair
value of $16.49 on the date of grant. Options issued pursuant to the DSOP vest
and become exercisable over a five-year period from the date of grant and expire
10 years from the date of grant. During the year ended December 31, 1995,
options to purchase 50,000 shares of Series A TCI Group Stock and options to
purchase 18,750 shares of Series A Liberty Group Stock were canceled. During the
year ended December 31, 1996, options to purchase 150,000 shares of Series A TCI
Group Stock and options to purchase 56,250 shares of Series A Liberty Group
stock with a WAEP of $14.75 and $17.28, respectively, were issued pursuant to
the DSOP. Such options had a weighted average fair value of $9.83 and $11.51,
respectively, on the date of grant.
At December 31, 1996, 400,000 options with respect to TCI Group Stock
granted pursuant to the DSOP were outstanding, 100,000 of which were
exercisable. Such options had a range of exercise prices of $12.25 to $16.99,
with a WAEP of $14.06, and a weighted average remaining contractual life of 8.63
years.
At December 31, 1996, 150,000 options with respect to Liberty Group Stock
granted pursuant to the DSOP were outstanding, 37,500 of which were exercisable.
Such options had a range of exercise prices of $14.67 to $17.50, with a WAEP of
$15.65, and a weighted average remaining contractual life of 8.63 years.
The estimated fair values noted above are based on the Black-Scholes model
and are stated in current annualized dollars on a present value basis. The key
assumptions used in the model for purposes of these calculations include the
following: (a) a discount rate equal to the 10-year Treasury rate on the date of
grant; (b) a 35% volatility factor, (c) the 10-year option term; (d) the closing
price of the respective common stock on the date of grant; and (e) an expected
dividend rate of zero. The actual value that the subject directors may realize
will depend upon the extent to which the stock price exceeds the exercise price
on the date the options are exercised. Accordingly, the value realized by such
directors will not necessarily be the value determined by the model.
Estimated compensation relating to restricted stock awards, options with
tandem SARs and SARs has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate 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. Had the Company
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of compensation would not
have been materially different from what has been reflected in the accompanying
consolidated financial statements.
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. The Company recorded the net assumed
note receivable, amounting to $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 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, 1996, there were 127,607,438 shares of Series A TCI Group
Stock and 30,090,303 shares of Series A Liberty Group Stock (as adjusted to give
effect to the Liberty Group Stock Dividend) 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 8 and 9. 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. ("WestMarc," 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.
On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an
executive officer of TCI was transferred all of TCI's right title and interest
in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock
of WestMarc owned by TCI. Such preferred stock has a liquidation value of
$1,999,500 and is subject to forfeiture by such officer in the event of certain
circumstances from the date of grant through December 13, 2005.
Effective December 1, 1996, an executive officer of the Company and an
executive officer of TCIC were each granted options representing 1.0% of the
Company's common equity in TCI Telephony Services, Inc., a consolidated
subsidiary of the Company, ("Telephony Services"). The aggregate exercise price
for each such option is equal to 1.0% of (i) the Company's cumulative investment
in Telephony Services as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax
benefits generated by Telephony Services (up to $500 million) as and when used
by TCI. Each such executive officer was also granted a similar option
representing 1.0% of the Company's common equity in TCI Wireline, Inc., another
consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise
price for each such Wireline option is equal to 1.0% of the Company's cumulative
investment in Wireline as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise. Any exercise by one of such executive officers of all or part of one
of such options (as to either the Telephony Services option or the Wireline
option) would need to be accompanied by the exercise by such executive officer
of a pro rata portion of the other such option. All of such options vest 20% per
annum beginning February 1, 1997, and will expire on February 1, 2006.
Effective December 1, 1996, two executive officers of the Company and an
executive officer of TCIC were each granted options representing 1.0% of the
Company's common equity in TCI.NET, Inc., a consolidated subsidiary of the
Company. The aggregate exercise price for each such TCI.NET, Inc. option is
equal to 1.0% of the Company's cumulative investment in TCI.NET, Inc. as of
December 31, 1996, adjusted for a 6% per annum interest factor from the date
each such investment was made to the date of such exercise price. Such options
vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006.
On the date of the Satellite Spin-off, the Company granted options to two
of its executive officers to purchase 1.0% and an option to an employee of TCIC
to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise
price for each such option is equal to 1.0% or 0.5%, as applicable, of the
Company's net investment in Satellite on the date of the Satellite Spin-off.
Such options vest 20% per annum beginning February 1, 1997 and expire on
February 1, 2006.
Estimated compensation relating to the aforementioned restricted stock
award and options has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate 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. Had the Company
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation would not have been materially different from what has been
reflected in the accompanying consolidated financial statements.
(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 recognized a gain amounting to $123
million.
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.
(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, 1996, 1995
and 1994 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal................................................. $(25) (175) (200)
State and local......................................... (13) (49) (62)
---- ---- ----
$(38) (224) (262)
==== ==== ====
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)
==== ==== ====
</TABLE>
F-89
<PAGE> 297
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------
1996 1995 1994
------ ----- -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Computed "expected" tax benefit (expense)................... $(189) 102 (64)
Amortization not deductible for tax purposes................ (22) (25) (13)
Minority interest in losses (earnings) of consolidated
subsidiaries.............................................. (3) 9 (3)
Gain on sale of subsidiary stock............................ -- 43 --
Recognition of losses of consolidated partnership........... -- -- (10)
State and local income taxes, net of federal income tax
benefit................................................... (49) (4) (20)
Valuation allowance on foreign corporation.................. -- -- (10)
Other....................................................... 1 (5) --
----- --- ----
$(262) 120 (120)
===== === ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 679 583
Less -- valuation allowance............................ (121) (121)
Investment tax credit carryforwards....................... 118 118
Less -- valuation allowance............................ (41) (41)
Alternative minimum tax credit carryforwards.............. 95 95
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes
in excess of losses recognized for income tax
purposes............................................... 232 176
Future deductible amounts principally due to
non-deductible accruals................................ 79 90
Other..................................................... 11 10
------ -----
Net deferred tax assets................................ 1,052 910
------ -----
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... 1,193 1,111
Franchise costs, principally due to differences in
amortization........................................... 4,676 3,569
Investment in affiliates, due principally to undistributed
earnings of affiliates................................. 917 499
Intangible assets, principally due to differences in
amortization........................................... 36 42
Leases capitalized for tax purposes....................... 90 53
Other..................................................... 152 220
------ -----
Total gross deferred tax liabilities................... 7,064 5,494
------ -----
Net deferred tax liability............................. $6,012 4,584
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 was
$162 million. Such balance did not change from December 31, 1995.
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $1,499 million of which, if not
utilized to reduce taxable income in future periods,
F-90
<PAGE> 298
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$136 million expires in 2003, $117 million in 2004, $355 million in 2005, $288
million in 2006, $138 million in 2009, $167 million in 2010 and $298 million in
2011. Certain subsidiaries of the Company had additional net operating loss
carryforwards for income tax purposes aggregating approximately $236 million and
these net operating losses are subject to certain rules limiting their usage.
At December 31, 1996, 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 IRS for
the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues
related to the years 1981-1991 have been resolved in the Company's favor. The
IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the
opinion of management, any additional tax liability, not previously provided
for, resulting from the IRS Examinations or the IRS Appeals, ultimately
determined to be payable, should not have a material adverse effect on the
consolidated financial position of the Company.
(15) COMMITMENTS AND CONTINGENCIES
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.
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.
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 customer levels at December 31, 1996, these agreements
require minimum payments aggregating approximately $571 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. 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 December 31, 1996, such
commitments aggregated $226 million.
F-91
<PAGE> 299
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $278
million at December 31, 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 fulfill any of such guarantees, that
they will not be material to the Company.
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements and transponder lease agreements and uses
certain equipment under lease arrangements. Rental expense under such
arrangements amounted to $187 million, $142 million and $82 million in 1996,
1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in millions):
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ $173
1998........................................................ 163
1999........................................................ 149
2000........................................................ 126
2001........................................................ 116
Thereafter.................................................. 354
</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
1997.
Certain key employees of the Company hold restricted stock awards, options
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 pursuant to APB Opinion No. 25. Such estimates 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. Had the Company accounted for its stock
based compensation pursuant to the fair value based accounting method in
Statement No. 123, the amount of compensation would not have been materially
different from what has been reflected in the accompanying consolidated
financial statements.
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been recorded in the
accompanying combined financial statements, but is subject to future adjustment
based upon a valuation model derived from such subsidiary's cash flow, working
capital and debt. Effective January 1, 1994, these employees have a put right
that requires such subsidiary to purchase their respective PSARs. The subsidiary
may call the PSARs on or after January 1, 1996.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the opinion
of management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
F-92
<PAGE> 300
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) INFORMATION ABOUT THE COMPANY'S OPERATIONS
The following is selected information about the Company's operations for
the years ended December 31, 1996, 1995 and 1994. Separate amounts of the
Company's home shopping service have been provided to enhance the readers
understanding of the Company.
<TABLE>
<CAPTION>
PROGRAMMING
-------------------------
COMMUNI- ELECTRONIC OTHER INTERSEGMENT
CATIONS RETAILING PROGRAMMING ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C>
1996
Revenue................... $ 6,790 984 355 (107) 8,022
======= === ===== ==== ======
Operating income (loss)... $ 546 36 50 -- 632
======= === ===== ==== ======
Depreciation and
amortization........... $ 1,555 37 24 -- 1,616
======= === ===== ==== ======
Capital expenditures...... $ 2,043 5 7 -- 2,055
======= === ===== ==== ======
Identifiable assets....... $27,154 442 2,617 31 30,244
======= === ===== ==== ======
1995
Revenue................... $ 5,145 920 521 (80) 6,506
======= === ===== ==== ======
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....... $23,059 725 1,793 -- 25,577
======= === ===== ==== ======
1994
Revenue................... $ 4,043 432 240 (33) 4,682
======= === ===== ==== ======
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>
F-93
<PAGE> 301
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
1996:
Revenue:
As previously reported.................................. $1,959.. 2,022 2,135
Adjustment to reclassify franchise fee revenue.......... (67) (70) (74)
Adjustment to reclassify shipping and handling
revenue............................................... (27) -- --
Adjustment to reflect optical fiber leases as capital
leases................................................ (4) (4) (3)
------ ----- -----
As adjusted $1,861 1,948 2,058 2,155
====== ===== ===== =====
Operating income:
As previously reported.................................. $ 176 173 223
Adjustment to reflect optical fiber leases as capital
leases................................................ (4) (4) (3)
------ ----- -----
As adjusted............................................. $ 172 169 220 71
====== ===== ===== =====
Net earnings (loss):
As previously reported.................................. $ (118) (184) (136)
Adjustment to reflect optical fiber leases as capital
leases................................................ (3) (3) (2)
------ ----- -----
As adjusted............................................. $ (121) (187) (138) 724
====== ===== ===== =====
Primary earnings (loss) attributable to common
stockholders per common and common equivalent share:
Series A and Series B TCI Group Stock:
As previously reported............................. $ (.22) (.29) (.24)
Adjustment to reflect optical fiber leases as
capital leases................................... -- (.01) (.01)
------ ----- -----
As adjusted........................................ $ (.22) (.30) (.25) (.46)
====== ===== ===== =====
Series A and Series B Liberty Group Stock (a)......... $ .06 .02 .07 3.83
Fully diluted earnings (loss) attributable to common
stockholders per common and common equivalent share:
Series A and Series B TCI Group Stock:
As previously reported............................. $ (.22) (.29) (.24)
Adjustment to reflect optical fiber leases as
capital leases................................... -- (.01) (.01)
------ ----- -----
As adjusted........................................ $ (.22) (.30) (.25) (.46)
====== ===== ===== =====
Series A and Series B Liberty Group Stock (a)......... $ .06 .02 .07 3.74
1995:
Revenue:
As previously reported.................................. $1,524 1,674 1,761 1,892
Adjustment to reclassify franchise fee.................. (56) (62) (63) (65)
Adjustment to reclassify shipping and handling
revenue............................................... (22) (26) (23) (28)
------ ----- ----- -----
As adjusted............................................. $1,446 1,586 1,675 1,799
====== ===== ===== =====
Operating income.......................................... $ 180 135 176 51
Net earnings (loss)....................................... $ (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.................... $ (.08) (.16) .12 N/A
Series A and Series B TCI Group Stock................... N/A N/A $(.09) (.07)
Series A and Series B Liberty Group Stock (a)........... N/A N/A $(.02) (.09)
</TABLE>
- ---------------
(a) Adjusted to give effect to the Liberty Group Stock Dividend.
F-94
<PAGE> 302
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the TCI Ventures Group's combined financial statements for the three months
ended March 31, 1997 and for the year ended December 31, 1996 and the TCI
Ventures Group's Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1996 included elsewhere
herein.
On May 14, 1997, the Board of Directors of Tele-Communications, Inc. (the
"Board") authorized, subject to shareholder approval (the "TCI Ventures Group
Stock Proposal"), the issuance of two new series of stock ("TCI Ventures Group
Common Stock") which are intended to reflect the separate performance of the TCI
Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
F-95
<PAGE> 303
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets and liabilities so attributed to the TCI
Ventures Group in the future would not include assets and liabilities of the
Company's domestic programming businesses and investments or its domestic cable
operations (including its businesses which utilize its cable plant to distribute
telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures 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 Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures 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.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Common Stock, respectively (representing approximately 30% of the shares of each
such series outstanding as of June 30, 1997, excluding shares held by majority
owned subsidiaries of the Company) in the ratio of one share of the applicable
series of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion,
F-96
<PAGE> 304
exercise or exchange subsequent to the closing of the Exchange Offers of certain
outstanding convertible notes issued by a subsidiary of the Company and upon
exercise of certain outstanding options. In lieu of a number of shares of Series
A TCI Group Stock equal to 30% of the number of shares of Series A TCI Group
Stock currently issuable upon exchange of such convertible notes, an equal
number of shares of TCI Ventures Group Common Stock would be issued upon such
exchange. Similarly, options to purchase shares of Series A TCI Group Stock that
are outstanding under the Company's various stock incentive plans will be
adjusted upon consummation of the Exchange Offers by dividing such options into
options to purchase shares of Series A TCI Ventures Group Common Stock and
options to purchase shares of Series A TCI Group Stock, with 30% of the shares
originally subject to the options being allocated to the options to purchase TCI
Ventures Group Common Stock and 70% of such shares being allocated to the
options to purchase shares of TCI Group Stock. The terms of each of such options
at the time of issuance will be the same as the terms of the option that they
replace, including as to the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures 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
Stock, Liberty Media Group Stock and TCI Ventures Group 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 Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group 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 Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
On January 25, 1996, the stockholders of UVSG adopted an agreement and plan
of merger dated as of July 10, 1995, as amended, among UVSG, TCI and TCI Merger
Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub was merged into UVSG,
with UVSG as the surviving corporation (the "UVSG Merger"). TCI Ventures Group
acquired 12,373,294 shares of UVSG Class B common stock and 2,145,466 shares of
UVSG Class A common stock, together representing approximately 40% of the issued
and outstanding common stock of UVSG and approximately 86% of the total voting
power of UVSG common stock immediately after the UVSG Merger, resulting in UVSG
becoming a majority-controlled subsidiary of TCI Ventures Group.
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Group (the
"Satellite Joint Venture"). The operations of the Satellite Joint Venture have
been consolidated, effective April 1, 1996, with the operating results of the
TCI Ventures Group.
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A., a cable
television operation in the west of the greater Buenos Aires metropolitan area,
for a purchase price of $112.2 million (the "OCC Acquisition"). Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt of approximately $45 million in order to fund such cash
payments. The remaining purchase price was satisfied by Cablevision's issuance
of $46.4 million principal amount of secured negotiable promissory notes.
F-97
<PAGE> 305
In January 1997, TCI Ventures Group reduced its voting interest in Flextech
p.1.c. ("Flextech") to 50% by issuing to a nominee an irrevocable proxy (the
"Proxy") to vote 960,850 Flextech ordinary shares ("Flextech Ordinary Shares")
at any shareholder meeting to be held through December 31, 1997. In April 1997,
Flextech and BBC Worldwide Limited formed two separate joint ventures (the "BBC
Joint Ventures") and entered into certain related transactions. The consummation
of the BBC Joint Ventures and related transactions resulted in, among other
things, a reduction of TCI Ventures Group's ownership interest in Flextech to
35.9% and the issuance to TCI Ventures Group by Flextech of a special voting
share (the "Special Voting Share"). The Special Voting Share when combined with
TCI Ventures Group's other share capital in Flextech, allows TCI Ventures Group
to cast 50% of the votes on most matters brought to the shareholders of Flextech
for vote. So long as the Proxy remains outstanding, TCI Ventures Group's 50%
voting interest will be reduced by the 960,850 votes represented by the Proxy.
The Special Voting Share will terminate upon the occurrence of the earlier of
(i) the third anniversary of issuance or (ii) any transfer of Flextech shares by
TCI Ventures Group outside a specified affiliated group. In light of TCI
Ventures Group's decreased voting interest in Flextech, TCI Ventures Group,
effective January 1, 1997, ceased to combine Flextech and began to account for
Flextech using the equity method of accounting.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The following table sets forth certain financial information for the TCI
Ventures Group and each of the combined businesses attributed to it:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
--------------- ---------------
AMOUNT % AMOUNT %
-------- --- -------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
Revenue:
UVSG........................................... $122,876 50% 50,163 31%
International.................................. 65,611 27 62,624 39
ETC w/tci...................................... 23,560 9 21,705 14
NDTC........................................... 24,013 10 16,703 10
WTCI........................................... 9,095 4 8,730 6
@Home.......................................... 809 -- -- --
Summitrak...................................... -- -- -- --
Other.......................................... 1,056 -- 337 --
-------- --- -------- ---
$247,020 100% 160,262 100%
======== === ======== ===
Operating, selling, general, administrative and
stock compensation:
UVSG........................................... $100,902 49% 39,664 30%
International.................................. 40,479 20 45,801 35
ETC w/tci...................................... 25,917 13 23,018 18
NDTC........................................... 12,396 6 10,168 8
WTCI........................................... 5,681 3 5,389 4
@Home.......................................... 8,326 4 3,122 2
Summitrak...................................... 898 -- 993 1
Other.......................................... 11,392 5 2,268 2
-------- --- -------- ---
$205,991 100% 130,423 100%
======== === ======== ===
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
--------------- ---------------
AMOUNT % AMOUNT %
-------- --- -------- ---
<S> <C> <C> <C> <C>
Depreciation and amortization:
UVSG........................................... $ 8,736 21% 3,966 13%
International.................................. 15,713 38 12,126 41
ETC w/tci...................................... 1,838 5 743 3
NDTC........................................... 7,103 17 7,443 25
WTCI........................................... 2,124 5 2,965 10
@Home.......................................... 1,574 4 27 --
Summitrak...................................... 3,983 10 2,035 7
Other.......................................... 73 -- 225 1
-------- --- -------- ---
$ 41,144 100% 29,530 100%
======== === ======== ===
Operating income (loss):
UVSG........................................... $ 13,238 n/a 6,533 n/a
International.................................. 9,419 4,697
ETC w/tci...................................... (4,195) (2,056)
NDTC........................................... 4,514 (908)
WTCI........................................... 1,290 376
@Home.......................................... (9,091) (3,149)
Summitrak...................................... (4,881) (3,028)
Other.......................................... (10,409) (2,156)
-------- --------
$ (115) 309
======== ========
</TABLE>
Revenue
Revenue increased by $87 million or 54% during the three months ended March
31, 1997 as compared to the same period in 1996. Such increase principally
results from growth from acquisitions consummated subsequent to January 1, 1996
net of the impact of the deconsolidation of Flextech in January of 1997.
Revenue from UVSG increased by $73 million or 145% during the three months
ended March 31, 1997 compared to revenue of $50 million for the three months
ended March 31, 1996. The increased revenue for the quarter was primarily due to
the inclusion of UVSG for two months in 1996 versus three months in 1997 as well
as $40 million of additional revenue attributable the Satellite Joint Venture.
International revenue increased $3 million or 5% during the three months
ended March 31, 1997 as compared to the corresponding prior year period. Such
amount was comprised of an increase in cable revenue of $16 million or 32%, net
of programming revenue from Flextech amounting to $13 million for the three
months ended March 31, 1996. The cable revenue increase is primarily
attributable to revenue amounting to $8 million associated with the OCC
Acquisition and a 10% increase in Cablevision's average number of basic
subscribers.
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation and amortization,
increased $76 million or 58% during the three months ended March 31, 1997 as
compared to the same period of 1996. Such increases were similarly the result of
acquisitions net of the impact of the deconsolidation of Flextech.
Operating costs and expenses, excluding depreciation and amortization, from
UVSG increased by $61 million or 154% during the three months ended March 31,
1997 compared to operating costs and expenses of $40 million for the three
months ended March 31, 1996. Such increased costs for the quarter were primarily
due to the inclusion of UVSG for two months in 1996 versus three months in 1997
as well as $36 million of additional costs attributable to the inclusion of the
Satellite Joint Venture only during 1997.
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International costs and expenses, excluding depreciation and amortization,
decreased $5.3 million or 12% during the three months ended March 31, 1997
compared to the corresponding prior period, including $15 million of costs and
expenses from Flextech for the three months ended March 31, 1996. International
cable expenses increased $9 million during the three months ended March 31,
1997.
Certain TCI corporate general and administrative costs are charged to TCI
Ventures 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 TCI Ventures
Group would incur for comparable services on a stand alone basis. During each of
the three months ended March 31, 1997 and 1996, TCI Ventures Group was allocated
$2 million in corporate general and administrative costs by TCI Group.
The $12 million or 39% increase in depreciation and amortization expense
during the three months ended March 31, 1997, as compared to the corresponding
prior year period, is the result of a net increase in the TCI Ventures Group's
assets that are subject to depreciation and amortization. The increases in such
assets that are attributable to acquisitions and capital expenditures more than
offset the decrease of $1 million that is attributable to the deconsolidation of
Flextech.
Other Income and Expense
Telewest Communications plc ("Telewest"), which is currently constructing
broadband cable television and telephony networks in the United Kingdom ("UK"),
has incurred losses since its inception. It is expected that the current
construction requirements of Telewest will be substantially complete by the end
of the year 2000. The TCI Ventures Group's share of Telewest's net losses
increased $11.1 million or 36% during the three months ended March 31, 1997, as
compared to the corresponding prior year period. Such increase is primarily
attributable to increases in depreciation and amortization, interest expense and
foreign currency transaction losses. In connection with a previous merger
transaction, Telewest issued United States (sometimes referred to herein as the
"U.S.") dollar denominated senior debentures ("Telewest Debentures"). Changes in
the exchange rate used to translate the Telewest Debentures into UK pounds
sterling and the adjustment of a foreign currency option contract to market
value caused Telewest to experience unrealized foreign currency transaction
losses of L24.1 million ($40.5 million using the applicable exchange rate) and
L16.7 million ($25.6 million using the applicable exchange rate) during the
three months ended March 31, 1997 and 1996, respectively. It is anticipated that
Telewest will continue to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest Debentures,
which mature in 2006 and 2007, if not redeemed earlier.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (collectively, "Sprint PCS" or the "Sprint PCS Partnership", and PhillieCo,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are
subsidiaries of Sprint, Cox and the Company. The Company, through TCI Telephony,
has a 30% interest as a partner in each of the Sprint PCS Partnerships and a
35.3% interest as a partner in PhillieCo. The share of losses from the TCI
Ventures Group's investment in the PCS Ventures was $64 million for the three
months ended March 31, 1997 which represents an increase of $44 million as
compared to 1996. The increase in the share of losses is attributed primarily to
general and administrative costs associated with the start-up of operations and
Sprint Spectrum's share of losses in American PCS L.P. The PCS Ventures are in
the development stage of operations. It is expected that Sprint PCS will
continue to incur significant operating losses and significant negative cash
flow from operating activities during the next several years while it develops
and constructs its PCS network and builds its customer base. If and when Sprint
PCS has successfully completed its network buildout, Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to market its products and services successfully, achieve its projected
market penetration, manage customer turnover rates effectively and price its
products and services competitively. There can be no assurance that Sprint PCS
will achieve or sustain operating profitability or positive cash flow from
operating activities in the future. If Sprint PCS does not achieve and maintain
operating profitability and positive cash flow from operating activities on a
timely basis, it may not be able to meet its debt service requirements.
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The share of losses from the TCI Ventures Group's investment in Teleport
was $14 million for the three months ended March 31, 1997 which represents a $6
million increase as compared to 1996. The increase in the share of losses is
largely attributed to costs incurred by Teleport 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.
Teleport has incurred net losses since its inception due to capital expenditures
associated with the acquisition, installation, development and expansion of its
existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. TCI
expects that Teleport will continue to incur net losses for the foreseeable
future as it acquires, installs, develops and expands its existing and new
telecommunications networks. There can be no assurance that Teleport will
achieve or sustain profitability or generate sufficient positive cash flow to
service its debt.
The TCI Ventures Group's share of the losses of the affiliates other than
Telewest, PCS Ventures and Teleport increased $1 million or 2% during the three
months ended March 31, 1997, as compared to the corresponding prior year period.
Such increase is primarily attributable to increased losses of Liberty/TINTA
LLC, Jupiter Telecommunications Co., Ltd. and MultiThematiques S.A.
("MultiThe-matiques"). As previously described, the TCI Ventures Group,
effective January 1, 1997, ceased to combine Flextech and began to account for
Flextech using the equity method of accounting.
In February 1997, TSX Corporation ("TSX"), an equity affiliate of the TCI
Venture Group, and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity. In connection with this
transaction, the TCI Ventures Group recognized a $28.9 million gain representing
the difference between the fair value of the Antec shares received and the
carrying value of its investment in TSX at the date of the transaction. Upon
completion of this transaction, the TCI Ventures Group holds an approximate 16%
ownership interest in Antec.
International sustained a net loss of $33 million for the three months
ended March 31, 1997, which includes International and its consolidated
subsidiaries' share of the losses of its affiliates of $64 million, for the
three months ended March 31, 1997. Most of International's affiliates have
incurred net losses since their respective inception dates and are expected to
continue to incur net losses for the foreseeable future. International expects
to continue to incur net losses for the foreseeable future due, in part, to the
relatively high level of depreciation and amortization that is common to growth
oriented companies operating within the capital intensive cable industry. Any
improvements in the results of operations of International are largely dependent
upon the ability of International's operating subsidiaries and affiliates to
increase their respective subscriber bases. No assurance can be given that any
such subscriber base increases will occur.
@Home has incurred net losses since its inception. Management of @Home
expects to incur significant additional losses as @Home continues to devote
capital to the building of its national network operations and services. To
achieve profitability, @Home must develop and market products and services which
are accepted on a broad commercial basis. @Home's products have not yet
demonstrated that they will achieve broad commercial acceptance. There can be no
assurance that @Home will ever achieve profitability.
The TCI Ventures Group's net loss of $77.3 million for the three months
ended March 31, 1997 represents an increase of $22.7 million, as compared to the
TCI Ventures Group's net loss of $54.6 million for the three months ended March
31, 1996. Such change is primarily the net result of increases in share of
losses of affiliates offset by the gain recognized in the TSX and Antec merger.
MATERIAL CHANGES IN FINANCIAL CONDITION
Substantially all of the entities the ownership of which, or the investment
in which, has been attributed to the TCI Ventures Group will require significant
additional capital in order to develop their respective businesses and assets,
to fund future operating losses and to fund future growth. In certain cases,
principally with respect to the Sprint PCS Partnerships, the TCI Ventures Group
has contractual commitments pursuant to which (subject to certain conditions) it
may be required to make significant additional capital contributions to the
entities in which it has investments.
F-101
<PAGE> 309
The Sprint PCS Partners, including TCI Telephony, have agreed to contribute
up to an aggregate of approximately $4.2 billion of equity to Sprint PCS from
inception through fiscal 1999 (of which TCI Telephony's share is approximately
$1.3 billion) if and to the extent required by annual budgets of Sprint PCS for
fiscal years in such period approved by the Sprint PCS Partners or requested
during such period by the affirmative vote of Sprint PCS Partners with
percentage interests in Sprint PCS of 75% or more in the aggregate. As of March
31, 1997 approximately $3.0 billion of such $4.2 billion had been contributed to
Sprint PCS, of which amount TCI Telephony had contributed approximately $900
million. TCI Telephony currently expects that the remaining approximately $1.2
billion of such amount (of which TCI Telephony's share would be approximately
$360 million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed by any or all of the Sprint PCS Partners). In
addition, in connection with certain debt financings by Sprint Spectrum, L.P., a
subsidiary of the Sprint PCS Partnerships ("Sprint Spectrum"), the corporate
parents of the Sprint PCS Partners (TCI, Cox, Comcast and Sprint, collectively,
the "Sprint PCS Parents") entered into a capital contribution agreement with
Sprint Spectrum (the "Capital Contribution Agreement"), of which the secured
creditors in such debt financings are beneficiaries, pursuant to which each
Sprint PCS Parent agreed to make certain contributions, or cause contributions
to be made, to Sprint Spectrum from time to time upon the occurrence of certain
events (including a payment default under or acceleration of Sprint Spectrum's
obligation pursuant to the debt financings agreements) up to a maximum aggregate
amount determined in accordance with a formula. The obligations of TCI under the
Capital Contribution Agreement have been attributed to the TCI Ventures Group.
As of March 31, 1997, approximately $500 million in cash of such agreed
contributions under the Capital Contribution Agreement had been contributed
directly or indirectly to Sprint Spectrum (of which TCI contributed
approximately $150 million), thereby reducing the Sprint PCS Parents' respective
obligations under the Capital Contribution Agreement by such amount and reducing
TCI's obligation to approximately $150 million as of December 31, 1996. Based on
the currently expected timing of additional contributions to Sprint PCS
(including the currently expected timing of Sprint PCS's expected capital
contributions to its affiliates and to its subsidiaries other than Sprint
Spectrum and its subsidiaries), TCI 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 TCI Telephony's
pro rata portion of the balance of the $4.2 billion that the Sprint PCS Partners
have agreed to contribute.
The TCI Ventures Group's ability to obtain sufficient capital resources to
make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. WTCI
and NDTC are the only wholly owned subsidiaries attributed to the TCI Ventures
Group that are operating companies and such entities are currently the TCI
Ventures Group's only source of cash provided by operating activities. As a
result, the TCI Ventures Group has limited ability to generate funds internally
to fund capital requirements and limited cash flow from operating activities to
support external financings. The other operating companies attributed to the TCI
Ventures Group have other investors, public or private, and the payment of
dividends, or the making of loans or advances by any one of such TCI Ventures
Group entities to any other of such TCI Ventures Group entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. Initially, therefore, the TCI
Ventures Group will rely on borrowings under a revolving loan facility (the
"Credit Facility") to TCI Ventures Group for a five-year period commencing on
the closing of the Exchange Offers. Such facility would permit aggregate
borrowings at any one time outstanding of up to $500 million (subject to
reduction as provided below), which borrowings would bear interest at a rate per
annum equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to 3/8% per
annum of the average unborrowed availability under the Revolving Credit Facility
would be payable by the TCI Ventures Group to the TCI Group on a quarterly
basis. The maximum amount of borrowings permitted under the Credit Facility will
be reduced on a dollar-for-dollar basis by up to $300 million if and to the
extent that the aggregate amount of any additional capital that TCI Ventures
Group is required to contribute to Sprint PCS Partnerships subsequent to the
closing of the Exchange Offers is less than $300 million. If the available
borrowings under the Credit Facility are not sufficient to fund the TCI Ventures
Group's capital requirements, no assurance can be given that the TCI Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for the
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TCI Ventures Group by, among other things, engaging in public offerings or
private placements of TCI Ventures Group common stock or through issuance of
debt securities or preferred equity securities attributed to the TCI Ventures
Group. The Company anticipates, however that for the foreseeable future the TCI
Ventures Group will continue to be dependent upon funding from the TCI Group.
The TCI Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to the TCI Ventures
Group.
The majority of the TCI Ventures Group entities currently have significant
capital requirements and TCI expects such entities will continue to have
significant capital requirements for the foreseeable future. TCI Ventures
Group's businesses and investments consist of entities which require the
acquisition, ownership, development and operation of broadband cable television
and telephony distribution networks and new programming services, all of which
require substantial capital investment. The buildout of Sprint PCS's network and
the development of @Home's network infrastructure and the development, marketing
and distribution of their respective products and services will require
substantial capital. Although Teleport has been operating its networks for over
ten years, its continuous acquisition, development and expansion of its existing
and new networks and services also require significant capital expenditures.
International expects to have substantial capital requirements for the
foreseeable future because its businesses and investments consist of entities
which require the acquisition, ownership, development and operation of broadband
cable television and telephony distribution networks and new programming
services. Many of International's subsidiaries and affiliates are incurring
substantial costs as they build or rebuild their cable networks or develop and
acquire programming. Until such companies begin generating profits and positive
cash flow from operating activities, they will need additional capital to fund
capital expenditures and working capital requirements. International has
commitments under various partnership and other funding agreements to contribute
capital or loan money to fund capital expenditures and other capital
requirements of certain affiliates. International believes that its actual
future cash requirements in order to fund the capital expenditures and working
capital requirements of its subsidiaries and affiliates will exceed the sum of
the amounts that International and its consolidated subsidiaries are currently
contractually obligated to fund and such additional funding commitments that
International and its consolidated subsidiaries are currently negotiating.
Further, International's business strategy requires that it have the ability to
access or raise sufficient funds to allow it to take advantage of new
acquisition and joint venture opportunities as they arise, which management of
International believes will require the availability of substantial additional
funds. Although International has $134 million proceeds remaining from the sale
of its 4 1/2% Convertible Subordinated Debentures due 2006 which were issued in
February 1996 (the "International Debentures") (which remaining proceeds have
been loaned to TCI pursuant to an unsecured promissory note pending its use by
International) and has a $200 million credit facility ("International Credit
Facility") with the TCI Ventures Group, International's ability to otherwise
obtain debt financing from unaffiliated entities to assist its operating
companies and to meet its capital obligations at other than the subsidiary level
will be limited because International does not conduct any operations directly.
No assurance can be given that International will be able to meet its
commitments to its subsidiaries and affiliates or to fund its operations or
liquidity requirements through the receipt of cash distributions or other
advances from its subsidiaries or affiliates. The only subsidiary of
International from which it presently is able to obtain funds is the subsidiary
which owns International's interest in the Puerto Rico cable systems (the
"Puerto Rico Subsidiary"). International believes that the remaining
consolidated operating activities of International will produce net cash flow
deficits for the foreseeable future. Accordingly, International anticipates that
it will be dependent upon its current levels of cash and cash equivalents
(exclusive of amounts held by its subsidiaries), the remaining proceeds from the
sale of the International Debentures and borrowings under the International
Credit Facility to meet its liquidity requirements, including its commitments to
its subsidiaries and its affiliates, for the foreseeable future. To the extent
that International seeks to make significant additional acquisitions or
significant new investments or is required to meet significant future liquidity
requirements, it will need to obtain additional financing.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
March 31, 1997 there were minimal subscribers to its @Home services. @Home
believes
F-103
<PAGE> 311
that the net proceeds of $88 million from its initial public offering on July
11, 1997, together with existing cash, cash equivalents and capital lease
financing, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 18 months. @Home may, however,
require additional funds if its estimates of working capital and/or capital
expenditure and/or lease financing requirements change or prove inaccurate or in
order for @Home to respond to unforeseen technological or marketing hurdles or
to take advantage of unanticipated opportunities. Over the longer term, it is
likely that @Home will require substantial additional funds to continue to fund
its infrastructure investment, product development, marketing, sales and
customer support needs. There can be no assurance that any such funds will be
available at the time or times needed, or available on terms acceptable to
@Home. If adequate funds are not available, or are not available on acceptable
terms, @Home may not be able to continue its network implementation, to develop
new products and services or otherwise to respond to competitive pressures. Such
inability could have a material adverse effect on @Home's business, operating
results and financial condition.
Because TCI's investment in @Home is attributed to the TCI Ventures Group
while the entity which will distribute the @Home service to subscribers of TCI's
cable systems is attributed to the TCI Group, certain conflicts of interest
between the TCI Group and the TCI Ventures Group may result in that actions
taken by the TCI Group, such as the speed at which TCI's cable television
systems are upgraded to the level necessary to support distribution of the @Home
service, will have a direct impact upon the value of the TCI Ventures Group's
interest in @Home. Similarly, the extent to which TCI elects to use @Home as the
provider of certain services which are not covered by TCI's exclusivity
obligations to @Home, rather than another third party, may have an effect upon
the business of @Home and therefore upon the value of the TCI Ventures Group.
For example, TCI's exclusivity obligations do not extend to work-related
services. TCI.NET, the entity in the TCI Group that has responsibility for the
provision of Internet services, may elect to use @Home as the provider of such
work-related services or a third party. To the extent the TCI Group utilizes
@Home to provide such services, the revenue derived therefrom by @Home would
presumably affect its valuation and therefore the overall value of the TCI
Ventures Group. TCI is under no obligation to use @Home as the provider of such
services. To the extent TCI does determine to use @Home as such provider, the
terms upon which @Home would provide such services will be subject to
negotiation, without regard for the terms upon which @Home provides high-speed
residential Internet services.
During the period in which each of TCI, Cox and Comcast have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
(approximately 23 million), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems which have in the aggregate approximately 2.5
million homes passed. In addition, TCI has announced that it is considering
various plans and proposals that may result in the disposition of other of its
cable systems. In the event that such cable systems continue to be exclusive to
@Home, such cable systems and their homes passed would continue to be included
in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to the other @Home
Cable Stockholders, even through such cable systems are no longer owned or
controlled by TCI. If TCI does not require that such cable systems remain
exclusive to @Home, the TCI Ventures Group could be required to sell shares to
Cox, Comcast and KPCB. There can be no assurance that, if the TCI Ventures Group
is required to sell shares of @Home, the price paid to the TCI Ventures Group
would represent adequate consideration to the TCI Ventures Group because such
fair market value may not adequately reflect the TCI Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox and
Comcast in the event TCI does not attain certain subscriber penetration levels
for the @Home service relative to the subscriber penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of the
TCI Ventures Group's interest in @Home.
F-104
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In addition, although TCI, Cox and Comcast are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Further, TCI, Cox and Comcast compete to some extent with @Home for advertising
and certain other revenues because @Home retains 100% of all national
advertising revenue delivered on the @Home service, while the local cable
operations of TCI, Cox and Comcast retain 100% of revenue generated from local
service offerings that do not require access to an Internet backbone or that
relate to programming within the local areas of the browser for the @Home
service, such as revenue from local advertising.
The TCI Group has agreements with UVSG for the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems attributed
to the TCI Group and for UVSG's subscriber management services, and UVSG
purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment is attributed to the TCI Ventures Group, situations may
arise where the entity attributed to one Group may make a decision which
adversely affects one of the other Groups. For example, UVTV markets and
distributes superstation WGN (Chicago) to several of the Company's cable systems
attributed to the TCI Group. TCI recently canceled WGN in certain of its wholly
owned systems which systems serve approximately 4.5 million subscribers. Such
cancellation was the primary cause for the number of WGN subscribers decreasing
by 3.5 million or 9% from March 1996 to March 1'997 (which decrease was
partially offset by new system launches and existing system subscriber growth
aggregating approximately 1.1 million subscribers).
There can be no assurance that any of the foregoing entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
it to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements described above will not
significantly increase due to changing circumstances, such as unanticipated
opportunities, technological or marketing hurdles, unanticipated expenses, and
the like. The failure to generate sufficient cash flow from operating activities
or to raise sufficient funds may require such entity to delay or abandon some or
all of its development and expansion plans or in certain instances, could result
in the failure to meet certain regulatory requirements, any and all of which
could have a material adverse effect on such entity's growth, its ability to
compete in its industry and its ability to service its debt.
Many of International's interests in its subsidiaries and affiliates are
governed by partnership and other agreements that require it to contribute
capital or make loans to such subsidiaries or affiliates. The failure of
International to meet its capital commitments to a particular operating company
may have adverse consequences to it and therefore to the TCI Ventures Group.
Such consequences may include, among others, (i) a breach of contract action for
damages against International, (ii) the dilution of International's interest in
such operating Company, (iii) the loss of any management rights in such entity
(such as a right to elect one or more directors), (iv) the right of the other
investors in such operating company to force International to sell its interest
at less than fair value or (v) the forced dissolution of such operating Company.
Similarly, with respect to Sprint PCS, if TCI Ventures Group fails to make
any portion of its required additional capital contributions to Sprint PCS
(other than an additional capital contribution that TCI Ventures Group is
entitled to decline to make), and does not cure such failure within the time
periods specified in the Amended and Restated Agreement of Limited Partnership
of Sprint Spectrum Holding Company, L.P., dated as of January 31, 1996 (the
"Sprint PCS Partnership Agreement"), such failure would constitute an Adverse
Act and TCI Telephony would become an Adverse Partner (each such term, as
defined in the Sprint PCS Partnership Agreement). If TCI Ventures Group were to
become an Adverse Partner, it would lose its right to appoint a representative
to the governing body of Sprint PCS (the "Sprint PCS Partnership Board"), and
the Sprint PCS Partnership Board, by action of the representatives of the other
Sprint PCS Partners that are not Adverse Partners, would be entitled to elect
(i) to commence procedures to allow such other Sprint PCS Partners to purchase
TCI Ventures Group's interest in Sprint PCS at a discount (which purchase price
in the case of a failure to make a required capital contribution would be the
lower of 90% of the net equity of TCI Ventures Group's interest in Sprint PCS
and 80% of TCI Ventures Group's prior capital contributions (less any
distributions paid to TCI Ventures Group)) and/or (ii) to cause Sprint PCS to
seek to obtain specific performance of TCI Ventures Group's obligations or to
sue for money damages. TCI
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Ventures Group could also become an Adverse Partner through, among other things,
the disposition of its interest in Sprint PCS other than in accordance with the
Sprint PCS Partnership Agreement or a material breach of a material covenant in
the Sprint PCS Partnership Agreement.
The failure by TCI Ventures Group to make its pro rata portion of any
additional capital contributions validly requested to be made to Sprint PCS
(whether or not required under the applicable provisions of the Sprint PCS
Partnership Agreement) would result in a decrease in TCI Ventures Group's
current 30% percentage interest in Sprint PCS. Such dilution would be calculated
on the basis of the relative amount of capital contributions made by the Sprint
PCS Partners until an aggregate of $5.0 billion had been contributed;
thereafter, the dilution formula would take into account the fair market value
of each Sprint PCS Partner's interest in Sprint PCS, subject to certain
exceptions. In the event TCI Ventures Group's percentage interest were to
decrease below the 8% minimum ownership requirement set forth in the Sprint PCS
Partnership Agreement, TCI Ventures Group's interest in Sprint PCS would convert
into that of an "Exclusive Limited Partner" and TCI Ventures Group would lose
the right to designate a representative to the Sprint PCS Partnership Board.
Neither PCS systems nor the delivery of Internet services over the cable
infrastructure have any significant commercial operating history in the United
States, and there can be no assurance that operation of either of these
businesses will become profitable. Neither Sprint PCS nor @Home can estimate
with any degree of certainty the potential demand for their services. The
inability of either Sprint PCS or @Home to obtain the necessary equipment for
its systems could have a material adverse effect on its financial condition and
results of operations. Both Sprint PCS and @Home are relying on new products and
technologies to operate their services which have not yet been widely tested on
a commercial basis. Failure of such products and technologies to operate in the
manner expected by such entity, or any delay or inability to obtain a sufficient
quantity of such products at acceptable price and performance levels could delay
or impair the expansion of such entity's business.
NDTC operates a development stage business in an emerging industry and
accordingly faces challenges similar to those described above. NDTC began
offering its "Headend in the Sky" or "HITS" services directly to cable systems
commercially during the fourth quarter of 1996. The HITS services consist of the
transport of compressed and encrypted digital television programming signals to
addressable set-top boxes and the authorization of such boxes. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC (which is presently utilizing HITS in a few of TCIC's major markets), but
there can be no assurance that such contracts will be finalized or will be
finalized on terms which will enable NDTC to be profitable. Cable systems are in
an early stage of rolling out digital services to their customers, and customer
acceptance of such services and accordingly, the demand for NDTC's HITS
services, is uncertain. In addition, the HITS service utilizes statistical
multiplexing of digitally compressed video signals, a new technology which has
not been tested or distributed on a large scale and accordingly, the
effectiveness of such technology is uncertain.
Both the wireless telecommunications industry and the Internet services
industry are experiencing significant technological change, evolving industry
standards, ongoing improvements in the capacity and quality of such services,
frequent new product and service introductions and enhancements and changes in
end-user requirements and preferences. Accordingly, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. With respect to PCS, there is uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly access rates
may continue to decline. With respect to Internet services, critical issues
concerning the commercial use of the Internet remain unresolved and may impact
the growth of Internet use, especially in the business market targeted by @Home.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed options, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, and inadequate protection of the confidentiality of stored data
and information moving across the Internet. There can be no assurance that
@Home's service will be able to meet any or all of these concerns. Market
acceptance of @Home's services is substantially dependent upon the adoption of
the Internet for commerce and communications. If either of
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@Home's or Sprint PCS's market fails to develop, develops more slowly than
expected, or becomes highly competitive, such entity's business, operating
results and financial condition may be materially adversely affected. For the
foregoing reasons, the future prospects of the PCS and Internet services
industries and of Sprint PCS and @Home remain uncertain.
For the year ended December 31, 1996, WTCI's six largest customers
accounted in the aggregate for approximately 70% of WTCI's consolidated gross
revenue. WTCI provides such services pursuant to master service contracts which
provide for transmission services pursuant to individual service orders. The
master service contracts expire when the last service order in effect thereunder
has terminated. WTCI's six largest customers' master service contracts all
contain many service orders (in some cases, in excess of 100 service orders)
with remaining terms varying from 1 month to approximately 15 months. A
significant reduction in the level of services WTCI provides for any of these
customers could have material adverse effect on WTCI's results of operations or
financial condition, unless WTCI located replacement customers willing to lease
the vacated channels on similar terms. In particular, WTCI's largest carrier
customer has the right to terminate its contract for use of the entire capacity
of a core backbone of WTCI's network between the Seattle and Denver areas in
October 1997, subject to certain conditions. Although this areas has been
overbuilt with fiber, management of WTCI does not believe such termination would
have a material adverse effect on WTCI because it believes that it is likely
that it would be able to re-lease all of such capacity based on current demand
in the area for its long distance transport services.
A significant number of NDTC's major customers are affiliates of TCI, such
as Encore Media Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
Communications, Inc., each of which is owned in part by Liberty Media
Corporation, a wholly owned subsidiary of the Company, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the year
ended December 31, 1996, revenue from services provided to TCI and its
consolidated subsidiaries accounted for 34% of NDTC's total revenue for 1996.
Although NDTC has been seeking, and intends to continue to seek, to expand its
customer base to increase the number of unaffiliated customers over time, there
can be no assurance that it will be successful.
Many of the assets attributed to the TCI Ventures Group consist of
noncontrolling interests in other entities, such as the investments in Sprint
PCS and Teleport. In addition, International has invested in most of its
subsidiaries and affiliates with strategic and local partners, and financial and
operational considerations, as well as laws that limit foreign equity positions,
will likely require International to continue to invest with partners. Many
foreign countries limit foreign investment to a minority equity position or
require the board of directors to be largely independent, which, as discussed
below, can result in International having diminished ability to implement
strategies that International may favor, or cause dividends or distributions to
be paid. For the most part, the Company has attempted to structure its
investments in a manner that allows it to participate in management decisions
(including through representation on the board of directors or other governing
body and veto rights (alone or with one or more of the other investors) over
significant business decisions); however, as is the case with the Company's
interests in Sprint PCS, Teleport and many of the operating companies in which
International has interests, TCI will often be unable to direct the operations,
strategies, and financial decisions of the companies in which it has acquired,
or will acquire, an interest without the concurrence of one or more of its
partners or other co-investors. Moreover, the ability of the Company (directly
or indirectly) to pledge, sell or otherwise dispose of its interest in many of
the operating companies in which it has investments is subject to shareholder or
similar agreements that severely limit the ability of the parties to transfer
their equity interests. Accordingly, the Company may not be able to cause its
subsidiaries or affiliates that are attributed to the TCI Ventures Group to make
distributions when the TCI Ventures Group may have a need for such distributions
and may not be able to timely dispose of its investment in many of such
companies if required for financial or other reasons.
In addition, in the case of Sprint PCS, the structure of the governance of
such TCI Ventures Group Entity allows for situations in which the failure of the
Sprint PCS Partners to agree on certain issues may give rise to a "deadlock
event," which, if unresolved after a certain period of time, may require the
dissolution or liquidation of Sprint PCS. Specifically, the Sprint PCS
Partnership Agreement provides that Sprint PCS will be dissolved upon the
failure of the Sprint PCS Partners to resolve a "Deadlock Event" which is deemed
to
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occur (i) if the Sprint PCS Partnership Board fails to approve a proposed annual
budget or business plan for two consecutive fiscal years or (ii) if the position
of chief executive officer remains vacant for 60 days after a candidate has been
proposed by at least two Sprint PCS Partners having an aggregate of at least 33%
of the voting percentage interests. Upon the occurrence of a Deadlock Event, the
Sprint PCS Partners that are general partners first are required for a period of
20 days to use their good faith efforts to try to resolve the Deadlock Event. If
the general partners are unable to resolve the matter, such matter will be
referred to the chief executive officers of the Sprint PCS Parents. In the event
the chief executive officers fail to reach a resolution, the matter will be
referred to a mediation service. If the mediator and the Sprint PCS Partners
fail to resolve the Deadlock Event, Sprint PCS will be liquidated unless the
Sprint PCS Partnership Board, by a majority vote of 75% determines not to
dissolve or the buy-sell arrangements contained in the Sprint PCS Partnership
Agreement are employed.
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group Entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group Entities. In addition, International and
certain of the other TCI Ventures Group Entities, such as Teleport and Sprint
PCS, are holding companies, the assets of which consist solely or primarily of
investments in their subsidiaries and affiliates. As such, the ability of such
holding companies to meet their respective financial obligations and their
funding and other commitments to their respective subsidiaries and affiliates,
is dependent upon the earnings of such subsidiaries and affiliates and the
distribution or other payment of such earnings to such holding companies in the
form of dividends, loans or other advances, payment or reimbursement for
management fees and expenses from their respective subsidiaries and affiliates,
or repayment of loans and advances from such holding companies. Accordingly,
such holding companies' ability to meet their respective liquidity requirements,
including debt service, is severely limited as a result of their dependence upon
the distribution of earnings and advances of funds by their respective
subsidiaries and affiliates. The payment of dividends or the making of loans or
advances to such holding companies by their respective subsidiaries and
affiliates may be subject to statutory, regulatory or contractual restrictions,
are contingent upon the earnings of those subsidiaries and affiliates, and are
subject to various business considerations. In the case of International,
distributions or other payments from foreign subsidiaries and affiliates may
also be subject to restrictions on expatriation of funds or adverse currency
exchange rates and, in the case of subsidiaries or affiliates that are located
in countries where the United States does not have a tax treaty, to increased
withholding taxes. Moreover, International does not have voting control over
many of the entities in which it has ownership interests and such entities will
have no obligation, contingent or otherwise, to make any funds available to
International, whether by dividends, advances, loans or other payments. Certain
of the subsidiaries or affiliates of such holding companies are, or may in the
future be, subject to loan agreements that prohibit or limit the transfer of
funds to such holding companies in the form of dividends, loans, or advances
and/or require that any indebtedness of such subsidiaries or affiliates to such
holding companies be subordinate to the indebtedness under such loan agreements.
Further, any right of any of such holding companies as an equity holder to
participate in the distribution of the assets of any of its subsidiaries upon
liquidation or reorganization will be subject to the prior claims of the
creditors (including trade creditors) or such subsidiary. To date,
International, for example, has not received any significant distributions or
advances from any of its subsidiaries or affiliates. Accordingly, it has had to
rely, and expects to rely for the foreseeable future, on outside sources for
financing.
Many of the TCI Ventures Group entities operate in industries, primarily
the telecommunications industry, which have experienced and are expected to
continue to experience rapid and significant changes in technology. The degree
to which these changes will affect such entities and the ability of such
entities to compete in their respective businesses cannot be predicted. Also,
alternative technologies may develop for the provision of services similar to
those provided by such entities. Such entities may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time such entity is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
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Currently International is the only TCI Ventures Group Entity that has
significant businesses outside the United States. International's subsidiaries
and affiliates operate solely outside the United States (with the exception of
Puerto Rico). @Home currently has distribution agreements with two of Canada's
leading cable operators, although such operators have not yet begun commercial
distribution of @Home's services. @Home's business strategy includes expansion
into Canada and other international markets; however, there can be no assurance
that @Home will be successful in expanding its product and service offerings
into foreign markets because of its extremely limited experience in developing
localized versions of its products and services and in developing relationships
with international cable system operators. If @Home does commence significant
international operations, or in the event any of the other TCI Ventures Group
Entities determined to expand into international markets, such entities (along
with International) will be subject to the risks inherent in doing business on
an international level, such as regulatory requirements and loss of revenue,
property and equipment from expropriation, nationalization and confiscatory
taxation. International is and such other TCI Ventures Group Entities would also
be exposed to the risk of changes to laws and policies that govern foreign
investment in countries where they have operations as well as, to a lesser
extent, changes in United States laws and regulations relating to investing in
or trading with countries in which International and such other TCI Ventures
Group Entities may have investment.
Certain of the countries in which International has operating companies or
in which International. @Home or another TCI Ventures Group Entity may operate
in the future, may be subject to a substantially greater degree of social,
political and economic instability than is the case in other countries. Such
instability may result from, among other things, (i) authoritarian governments
or military involvement in political and economic decision making, and changes
in government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of any
subsidiary or affiliate of International or any other TCI Ventures Group Entity
located within such country or that has significant operations there (and
thereby have a potentially material adverse effect on the results of operations
or financial condition of International or such Entity) and could result in the
loss of International's or such other TCI Ventures Group Entity's investment in
such subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
The TCI Ventures Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar (the functional currency of TCI Ventures Group)
against the UK pound sterling, the Japanese yen ("Y"), the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of the TCI Ventures Group's operating subsidiaries and affiliates. Since the
enactment of a convertibility plan in April 1991, the Argentine government has
maintained an exchange rate of one Argentine peso to one U.S. dollar. No
assurance can be given that such an exchange rate will be maintained in future
periods.
Because the TCI Ventures Group's functional currency is the U.S. dollar,
any increase or decrease in the value of the U.S. dollar against any foreign
currency in which the TCI Ventures Group has funding commitments effectively
reduces or increases the U.S. dollar equivalent of such funding commitments. At
the same time, any increase or 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 TCI Ventures Group will cause the TCI Ventures Group to
experience unrealized foreign currency translation losses or gains with respect
to amounts already invested in such foreign currencies.
The TCI Ventures Group and certain of its operating subsidiaries and
affiliates are also exposed to foreign currency risk to the extent that they
enter into transactions denominated in currencies other than their respective
functional currencies. In this regard, the TCI Ventures Group has experienced
realized and unrealized currency gains and losses with respect to (i) the UK
pound sterling denominated loans made by an indirect subsidiary of TCI Ventures
Group to Flextech and (ii) the TCI Ventures Group's French franc denominated
obligation (the "MultiThematiques Obligation") to make capital contributions to
MultiThematiques. In addition, Telewest has experienced realized and unrealized
foreign currency transaction gains and losses with respect to the Telewest
Debentures.
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Because TCI Ventures Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, the TCI Ventures 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, the TCI Ventures 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 become fixed. Although the TCI Ventures Group
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, the TCI Ventures Group
believes that, given the nature of its business, it is not possible or practical
to eliminate the TCI Ventures Group's exposure to unfavorable fluctuations in
foreign currency exchange rates.
On November 20, 1995, TCI Ventures Group announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that TCI Ventures Group
could be required to make cash contributions totaling $46 million over the next
three years in connection with the DTH Ventures.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of a joint
venture ("Sports Venture") formed among TCI Ventures Group, Liberty Media Group
and News Corporation Limited ("News Corp.") (the "Sports Venture Rights") to the
Sports Venture, TCI Ventures Group, News Corp. and Liberty Media Group have paid
their respective portion of any payments made with respect to the Sports Venture
Rights. Through March 31, 1997, payments made under the International/Torneos
Sports Agreement totaled $20.1 million.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the TCI Ventures Group's
affiliates. At March 31, 1997, the U.S. dollar equivalent of the amounts
borrowed pursuant to the Guaranteed Obligations was $16.6 million. The TCI
Ventures Group also has guaranteed the obligation of an affiliate ("The Premium
Movie Partnership") to pay fees for the license to exhibit certain films through
the year 2000. If the TCI Ventures Group were to fail to fulfill its obligations
under the guarantees, the beneficiaries have the right to demand an aggregate
payment of approximately $55 million. Although the TCI Ventures Group has not
had to perform under such guarantee to date, the TCI Ventures Group cannot be
certain that it will not be required to perform under such guarantee in the
future.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group (ii) the Hallmark Cards Incorporated ("Hallmark")
and U S WEST, Inc. ("U S WEST") subsidiaries' interests in Flextech acquired in
June of 1995 (the "Hallmark Subscription" and the "U S WEST Subscription"),
respectively, and (iii) Flextech securities acquired by International Family
Entertainment, Inc. ("IFE") pursuant to certain acquisitions in 1996 (the "IFE
Acquisitions") exceeds 75% of Flextech's issued and outstanding share capital,
or (y) subject to certain exceptions, the Flextech Ordinary Shares cease to be
admitted to trading on the Official List of the London Stock Exchange as a
result of the exercise by the TCI Ventures Group of any of its rights as a
Flextech shareholder, the TCI Ventures Group shall be obligated to offer to
purchase from the Hallmark and U S WEST subsidiaries, and from IFE any Flextech
Ordinary Shares held by them and which were originally acquired pursuant to the
Hallmark Subscription, the U S WEST Subscription, or the IFE Acquisitions, as
applicable. Under such circumstances, the offer price for such shares shall be
the higher of (i) the then current market price for the Flextech Ordinary Shares
and (ii) the highest price paid to any third party by the TCI Ventures Group for
any Flextech Ordinary Shares during the preceding 12 month period. In the event
the TCI Ventures Group is required to purchase any Flextech Ordinary Shares, as
described above, it may elect, subject to certain limited exceptions, to pay the
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purchase price thereof in cash or in shares of International Series A common
stock, or in certain securities of TCI.
On December 13, 1995, TCI Ventures Group invested in MultiThematiques with
two French media companies, CANAL+ S.A. ("Canal+") and Generale d'Images S.A.
("GDI"). Canal+ and GDI have contributed to MultiThematiques their combined
equity interests in four French thematic channels and Canal+ has also
contributed its equity interest in a Spanish classic movie channel. The TCI
Ventures Group contributed 123.1 million French Francs ("FF") ($24.7 million at
the applicable exchange rate), FF105.0 million ($20.4 million at the applicable
exchange rate) and FF100.00 million ($19.5 million at the applicable exchange
rate) to MultiThematiques in December 1995, December 1996 and February 1997,
respectively. The TCI Ventures Group is obligated to contribute an additional
FF164.0 million ($29.1 million) no later than December 13, 1997. In order to
manage the TCI Ventures Group's foreign exchange currency risk with respect to
its December 13, 1997 contribution obligation, the TCI Ventures Group entered
into a foreign currency option contract that allows the TCI Ventures Group to
purchase FF164.0 million at a price of FF5.5367 per U.S. dollar through December
13, 1997. Each of TCI Ventures Group, Canal+ and GDI own a one-third interest in
MultiThematiques.
On January 27, 1997, International announced that it was instituting a
stock repurchase program. Under the stock repurchase program, International may
repurchase from time to time up to 5% (approximately 5.3 million shares) of its
outstanding International Series A Common Stock. Through March 31, 1997,
International had repurchased 492,000 shares under such program for an aggregate
purchase price of $6.8 million. Subsequent to March 31, 1997, International
repurchased an additional 2.9 million shares of International Series A common
stock for an aggregate purchase price of $35.2 million under such program.
The board of directors of UVSG has authorized UVSG to repurchase from time
to time up to an aggregate of 1,000,000 shares of UVSG's Class A common stock
using existing cash resources. Through March 31, 1997, UVSG had repurchased
124,000 shares of stock for a total of $2.1 million.
The TCI Ventures Group has significant contingent obligations with respect
to Flextech's funding obligations to one of the BBC Joint Ventures (the
"Principal Joint Venture") provided by the TCI Ventures Group to the Principal
Joint Venture in April 1997. For additional information concerning the effects
of the formation of the BBC Joint Ventures and related transactions on the
liquidity and capital resources of the TCI Ventures Group and Flextech, see note
3 to the accompanying combined financial statements.
On May 1, 1997, the Puerto Rico Subsidiary paid cash consideration of
approximately $12.2 million, and assumed aggregate indebtedness of $32 million,
to acquire the 50% ownership interest in Caguas/Humacao Cable Systems which the
TCI Ventures Group did not already own (the "Caguas Acquisition"). In connection
with the Caguas Acquisition, the Puerto Rico Subsidiary entered into a credit
facility and used borrowings of approximately $45 million thereunder to fund the
cash portion of the purchase price and to repay the assumed indebtedness.
Cablevision's debt includes $100.5 million of bank borrowings due on or
before December 31, 1997. Although no assurance can be given, it is anticipated
that Cablevision will extend the maturity dates of, or otherwise refinance, such
bank borrowings.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in 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 in 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
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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
TCI Ventures Group, reflected as the creation of an, or an increase in any then
existing Inter-Group Interest of the TCI Group in such Group or, in the case of
a transfer from either the Liberty Media Group or the TCI Ventures Group to the
TCI Group, reflected as a reduction in any then existing Inter-Group Interest of
the TCI Group 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.
Except as described with respect to the Credit Facility, 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 TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
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.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group 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 TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures 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 TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is
F-112
<PAGE> 320
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 TCI Ventures Group.
The Board 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. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
F-113
<PAGE> 321
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Cash and cash equivalents................................... $ 51,091 105,527
Trade and other receivables, net............................ 93,988 115,491
Film inventory and other prepaid expenses................... 26,185 85,998
Investment in Telewest Communications plc ("Telewest"),
accounted for under the equity method (note 6)............ 426,810 488,495
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 7)...................... 728,246 829,651
Investment in Teleport Communications Group, Inc.
("Teleport"), accounted for under the equity method, and
related receivables (note 8).............................. 262,850 276,112
Investment in other affiliates, accounted for under the
equity method, and related receivables (note 9)........... 403,220 474,599
Property and equipment, at cost:
Land...................................................... 7,847 7,837
Distribution systems...................................... 796,013 761,191
Support equipment and buildings........................... 200,011 208,294
---------- ---------
1,003,871 977,322
Less accumulated depreciation............................. 258,478 240,322
---------- ---------
745,393 737,000
---------- ---------
Franchise costs and other intangible assets................. 960,902 1,029,842
Less accumulated amortization............................. 108,816 103,631
---------- ---------
852,086 926,211
---------- ---------
Other assets, net of amortization........................... 273,693 220,619
---------- ---------
$3,863,562 4,259,703
========== =========
LIABILITIES AND COMBINED EQUITY
Accounts payable............................................ $ 35,437 71,776
Accrued liabilities......................................... 129,388 148,962
Customer prepayments........................................ 115,590 100,670
MultiThematiques Obligation (note 9)........................ 27,044 47,902
Capital lease obligations................................... 193,832 199,961
Debt (note 10).............................................. 512,757 526,254
Deferred income taxes....................................... 189,107 220,306
Other liabilities........................................... 8,263 21,477
---------- ---------
Total liabilities................................. 1,211,418 1,337,308
---------- ---------
Minority interests in equity of subsidiaries................ 218,147 370,879
Combined equity:
Combined equity........................................... 2,556,643 2,686,794
Cumulative foreign currency translation adjustments....... 4,817 26,146
Unrealized holding gains for available-for-sale
securities............................................. 7,028 15,077
---------- ---------
2,568,488 2,728,017
Due from Tele-Communications, Inc. ("TCI" or the
"Company") ("TCI Note Receivable") (note 11)........... (134,491) (176,501)
---------- ---------
Total combined equity............................. 2,433,997 2,551,516
---------- ---------
Commitments and contingencies (notes 3, 5, 7, 9 and 12)
$3,863,562 4,259,703
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-114
<PAGE> 322
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
----------- ---------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C>
Revenue (note 11)........................................... $ 247,020 160,262
Operating costs and expenses:
Operating (note 11)....................................... 133,084 80,464
General and administrative (note 11)...................... 64,645 51,316
Stock compensation (note 12).............................. 8,262 (1,357)
Depreciation.............................................. 26,354 19,166
Amortization.............................................. 14,790 10,364
--------- -------
247,135 159,953
--------- -------
Operating income (loss)................................ (115) 309
Other income (expense):
Share of losses of Telewest (note 6)...................... (41,708) (30,597)
Share of losses of PCS Ventures (note 7).................. (63,536) (19,208)
Share of losses of Teleport (note 8)...................... (13,768) (7,962)
Share of losses of other affiliates (note 9).............. (23,108) (22,580)
Interest expense.......................................... (14,196) (12,354)
Interest income (note 11)................................. 3,034 6,387
Minority interests' share of losses....................... 616 3,601
Foreign currency transaction gains........................ 1,477 1,284
Gain on dispositions...................................... 28,893 414
Other, net................................................ 789 4,363
--------- -------
(121,507) (76,652)
--------- -------
Loss before income taxes............................... (121,622) (76,343)
Income tax benefit.......................................... 44,370 21,771
--------- -------
Net loss............................................... $ (77,252) (54,572)
========= =======
Pro forma net loss per common share (note 1)................ $ (.38)
=========
</TABLE>
See accompanying notes to combined financial statements.
F-115
<PAGE> 323
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
STATEMENT OF COMBINED EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE HOLDINGS
FOREIGN GAINS FOR
CURRENCY AVAILABLE-
TRANSLATION FOR-SALE TCI TOTAL
COMBINED ADJUSTMENT, SECURITIES, NOTE COMBINED
EQUITY NET OF TAXES NET OF TAXES RECEIVABLE EQUITY
---------- ------------ ------------ ---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997....... $2,686,794 26,146 15,077 (176,501) 2,551,516
Net loss....................... (77,252) -- -- -- (77,252)
Repurchases of International
common stock................ (6,798) -- -- -- (6,798)
Foreign currency translation
adjustment.................. -- (21,329) -- -- (21,329)
Unrealized holding gains for
available-for-sale
securities.................. -- -- (8,049) -- (8,049)
Repayment on TCI Note
Receivable.................. -- -- -- 42,010 42,010
Interest income on TCI Note
Receivable.................. (2,400) -- -- -- (2,400)
Stock compensation............. 8,262 -- -- -- 8,262
Revenue from TCI Group and
Liberty Media Group......... (13,541) -- -- -- (13,541)
Operating costs to TCI Group... 13,150 -- -- -- 13,150
Corporate general and
administrative cost
allocations................. 2,212 -- -- -- 2,212
Intergroup tax allocation...... (46,074) -- -- -- (46,074)
Other intercompany transfers... (7,710) -- -- -- (7,710)
---------- ------- ------ -------- ---------
Balance at March 31, 1997........ $2,556,643 4,817 7,028 (134,491) 2,433,997
========== ======= ====== ======== =========
</TABLE>
See accompanying notes to combined financial statements.
F-116
<PAGE> 324
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(77,252) (54,572)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 41,144 29,530
Stock compensation...................................... 8,262 (1,357)
Payments of stock compensation.......................... (57) --
Share of losses of PCS Ventures......................... 63,536 19,208
Share of losses of Teleport............................. 13,768 7,962
Share of losses of Telewest............................. 41,708 30,597
Share of losses of other affiliates..................... 23,108 22,580
Minority interests' share of losses..................... (616) (3,601)
Gain on dispositions.................................... (28,893) (414)
Foreign currency transaction gains...................... (2,653) (1,304)
Accretion of discount on MultiThematiques Obligation.... 966 1,595
Other noncash charges................................... 768 320
Deferred income tax expense (benefit)................... 1,417 (5,809)
Intergroup tax allocation............................... (46,074) (16,329)
Changes in operating assets and liabilities, net of the
effect of the deconsolidation of Flextech p.1.c.:
Change in receivables................................. (6,260) 4,666
Change in film inventory and other prepaid expenses... (2,328) (6,839)
Change in payables, accruals and other liabilities.... (3,542) (12,763)
-------- --------
Net cash provided by operating activities.......... 27,002 13,470
-------- --------
Cash flows from investing activities:
Effect of the deconsolidation of Flextech p.l.c. cash and
cash equivalents........................................ (38,142) --
Cash received in acquisitions............................. -- 10,073
Investments in and loans to affiliates and others......... (44,359) (72,614)
Capital expended for property and equipment............... (42,249) (29,920)
Repayments received on loans to affiliates................ 63,495 --
Cash paid to purchase minority interests.................. -- (4,296)
Other, net................................................ 13,162 10,815
-------- --------
Net cash used in investing activities.............. (48,093) (85,942)
-------- --------
Cash flows from financing activities:
Borrowings of debt........................................ 36,857 17,395
Repayments of debt........................................ (72,243) (38,218)
Repayments of capital lease obligations................... (2,956) (3,359)
Repurchases of International common stock................. (6,798) --
Issuance of debentures.................................... -- 345,000
Payment of deferred financing costs....................... -- (9,495)
Contributions from minority interest owners............... -- 2,235
Distribution to minority interest owners.................. (7,000) --
Repayment on TCI Note Receivable.......................... 42,010 --
Change in cash transfers to other Groups.................. (23,215) (268,098)
-------- --------
Net cash provided (used) by financing activities... (33,345) 45,460
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (1,329)
-------- --------
Net decrease in cash and cash equivalents.......... (54,436) (28,341)
Cash and cash equivalents:
Beginning of period.............................. 105,527 141,754
-------- --------
End of period.................................... $ 51,091 113,413
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-117
<PAGE> 325
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
On May 14, 1997, the Board of Directors of TCI (the "Board") authorized,
subject to shareholder approval (the "TCI Ventures Group Stock Proposal"), the
issuance of two new series of stock ("TCI Ventures Group Common Stock") which
are intended to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
F-118
<PAGE> 326
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets and liabilities so attributed to the TCI
Ventures Group in the future would not include assets and liabilities of the
company's domestic programming businesses and investments or its domestic cable
operations (including its businesses which utilize its cable plant to distribute
telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures 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 Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures 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.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing
F-119
<PAGE> 327
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of the Exchange Offers. Accrued dividends on the preferred equity interest would
accumulate and compound annually (but not be payable currently) until the fifth
anniversary of the closing the Exchange Offers.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group Common Stock would be issued upon such exchange. Similarly, options to
purchase shares of Series A TCI Group Stock that are outstanding under the
Company's various stock incentive plans will be adjusted upon consummation of
the Exchange Offers by dividing such options into options to purchase shares of
Series A TCI Ventures Group Common Stock and options to purchase shares of
Series A TCI Group Stock, with 30% of the shares originally subject to the
options being allocated to the options to purchase TCI Ventures Group Common
Stock and 70% of such shares being allocated to the options to purchase shares
of TCI Group Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of TCI contemplated by the TCI Ventures 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
Stock, Liberty Media Group Stock and TCI Ventures Group 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 Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group 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 Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
are based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
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 of such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These unaudited interim consolidated
financial statements should be read in conjunction with the TCI Ventures Group's
December 31, 1996 audited financial statements and notes thereto.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"). Statement No. 128 requires the presentation of basic
F-120
<PAGE> 328
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
earnings per share ("EPS") and, for companies with potentially dilutive
securities, such as convertible debt, options and warrants, diluted EPS.
Statement No. 128 is effective for annual and interim periods ending after
December 31, 1997. TCI Ventures Group does not expect that Statement No. 128
will have a material impact on the calculation of the TCI Ventures Group's loss
per share.
Pro forma loss attributable to common shareholders for the three months
ended March 31, 1997 assumes, solely for the purpose of this calculation, that
the Exchange Offers were consummated prior to January 1, 1997 and that, the
Exchange Offer was fully subscribed.
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 CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $15.4 million and $9.0 million during the three
months ended March 31, 1997 and 1996, respectively. Cash paid for income taxes
was $1.7 million during the three months ended March 31, 1997. Cash paid for
income taxes was not material during the three months ended March 31, 1996.
The net cash received by the TCI Ventures Group in acquisitions is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Fair value of assets acquired............................... $ -- 309,179
Liabilities assumed, net of current assets.................. -- (77,605)
Minority interest in equity of acquired entity.............. -- (45,643)
Increase in combined equity resulting from preferred stock
issued in acquisition..................................... -- (196,004)
-------- --------
Cash received in acquisitions............................. $ -- (10,073)
======== ========
Property and equipment purchased under capital leases....... $ -- 63,656
======== ========
</TABLE>
The non-cash effects of changing the method of accounting for the TCI
Venture Group's ownership interest in Flextech p.l.c. ("Flextech") (see note 3)
from the consolidation method to the equity method are summarized below (amounts
in thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments................... $ 177,003
Liabilities reclassified to equity investments.............. (72,512)
Minority interests in equity of subsidiaries reclassified to
equity investments........................................ (142,633)
---------
Decrease in cash and cash equivalents....................... $ (38,142)
=========
</TABLE>
(3) FLEXTECH TRANSACTIONS
TCI Ventures Group's ownership interest in the issued and outstanding share
capital of Flextech was 48.8% during the three months ended March 31, 1996,
46.2% from April 1996 through April 1997, and 35.9% from April 1997 to the
present. TCI Ventures Group's voting interest in Flextech was 50.6% during 1996
and approximately 50% from January 1997 to the present.
In January 1997, TCI Ventures Group reduced its voting interest in Flextech
to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to vote
960,850 Flextech ordinary shares ("Flextech Ordinary Shares") at any shareholder
meeting to be held through December 31, 1997. In April 1997, Flextech and BBC
Worldwide Limited ("BBC Worldwide") formed two separate joint ventures (the "BBC
Joint
F-121
<PAGE> 329
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ventures") and entered into certain related transactions. The consummation of
the BBC Joint Ventures and related transactions resulted in, among other things,
a reduction of TCI Ventures Group's ownership interest in Flextech to 35.9% and
the issuance to TCI Ventures Group by Flextech of a special voting share (the
"Special Voting Share"). The Special Voting Share when combined with TCI
Ventures Group's other share capital in Flextech, allows TCI Ventures Group to
cast 50% of the votes on most matters brought to the shareholders of Flextech
for vote. So long as the Proxy remains outstanding, TCI Ventures Group's 50%
voting interest will be reduced by the 960,850 votes represented by the Proxy.
The Special Voting Share will terminate upon the occurrence of the earlier of
(i) the third anniversary of issuance or (ii) any transfer of Flextech shares by
TCI Ventures Group outside a specified affiliated group. In light of TCI
Ventures Group's decreased voting interest in Flextech, TCI Ventures Group,
effective January 1, 1997, ceased to consolidate Flextech and began to account
for Flextech using the equity method of accounting.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UK Living
Limited ("UKLL") and UK Gold Television Limited ("UKGL") all of the share
capital in those two companies not already owned by Flextech and the TCI
Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding convertible non-preference shares ("Flextech
Non-Preference Shares") had been issued in connection with previous acquisition
transactions by Flextech due to the TCI Ventures Group's requirement that it
maintain specified voting interests in Flextech. With the issuance of the
Special Voting Share, the purpose for the Flextech Non-Preference Shares was
eliminated. Accordingly, and in order to simplify the capital structure of
Flextech, upon the issuance of the Special Voting Share, the Flextech Non-
Preference Shares were converted into Flextech Ordinary Shares. Immediately
following such conversion, and the issuance of additional Flextech Ordinary
Shares in connection with the UKGL and UKLL transactions described above, (i)
the TCI Ventures Group's interest in the equity share capital of Flextech was
35.9% and (ii) the TCI Ventures Group's voting interest was 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). If Flextech
defaults in its funding obligation to the Principal Joint Venture and fails to
cure within 42 days after receipt of notice from BBC Worldwide, BBC Worldwide is
entitled, within the following 90 days, to require that the TCI Ventures Group
assume all of Flextech's funding obligations to the Principal Joint Venture (the
"Standby Commitment"). In addition to Flextech's April 1997 purchase of L22
million ($36 million) of ordinary shares in the Principal Joint Venture,
Flextech is obligated to provide the Principal Joint Venture with a primary
credit facility of L88 million ($144 million) and, subject to certain
restrictions, a standby credit facility of L30 million ($49 million).
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit facilities, or (ii) the date on which Flextech delivers a
bank guarantee of all of its funding obligations to the Principal Joint Venture.
F-122
<PAGE> 330
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
So long as the TCI Ventures Group is contingently obligated under the
Standby Commitment, it has been agreed that (i) Flextech will not sell any of
its direct or indirect interests in the Principal Joint Venture, (ii) Flextech
will not conduct its business in such a way as is likely to cause it to be in
material breach of any material contracts or to have insufficient working
capital to meet its funding obligation to the Principal Joint Venture, and (iii)
Flextech will use its available resources to subscribe for any outstanding loan
stock of the Principal Joint Venture, if and to the extent required by the TCI
Ventures Group at any time after December 31, 2011.
(4) ACQUISITIONS
(a) OCC Acquisition
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation in the west of the greater Buenos Aires metropolitan area,
for a purchase price of $112.2 million (the "OCC Acquisition"). Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt of approximately $45 million in order to fund such cash
payments. The remaining purchase price was satisfied by Cablevision's issuance
of $46.4 million principal amount of secured negotiable promissory notes (the
"OCC Notes"). The OCC Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of OCC have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded OCC's assets and liabilities at fair value.
(b) UVSG Merger
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI and TCI
Merger Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub was merged into
UVSG, with UVSG as the surviving corporation (the "UVSG Merger"). TCI Ventures
Group acquired 12,373,294 shares of UVSG Class B common stock and 2,145,466
shares of UVSG Class A common stock, together representing approximately 40% of
the issued and outstanding common stock of UVSG and approximately 86% of the
total voting power of UVSG common stock immediately after the UVSG Merger,
resulting in UVSG becoming a majority-controlled subsidiary of TCI Ventures
Group. The UVSG Merger has been accounted for by the purchase method.
Accordingly, the results of operations of UVSG have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded UVSG's assets and liabilities at fair value.
(c) Satellite Joint Venture
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Media Group
(the "Satellite Joint Venture"). The combination was accounted for as a merger
of businesses under common control, whereby the assets and obligations of both
UVSG and Liberty Media Group which were contributed to the venture were
reflected at their historical cost. The operations of the Satellite Joint
Venture have been consolidated, effective April 1, 1996, with the operating
results of the TCI Ventures Group.
(5) CABLEVISION
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision. None of Cablevision's post-acquisition operating results have
been allocated to Cablevision's 49% minority interest because (i) the minority
interest has no obligation to provide any funding to Cablevision and (ii)
Cablevision's liabilities exceeded the minority interest's historical cost basis
in Cablevision's assets at
F-123
<PAGE> 331
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1997. To the extent that Cablevision's post-acquisition net earnings
(exclusive of the effects of purchase accounting) cause the minority interest's
historical cost basis in Cablevision's net assets to become positive, the TCI
Ventures Group would begin to allocate 49% of such net earnings to the minority
interest. If the minority interest's historical cost basis had been positive
during the three months ended March 31, 1997 and 1996, the TCI Ventures Group
would have allocated $3.5 million and $5.3 million, respectively, of
Cablevision's net earnings (exclusive of the effect of purchase accounting) to
the minority interest.
(6) INVESTMENT IN TELEWEST
At March 31, 1997, the TCI Ventures Group indirectly owned, through its 50%
ownership interest in TW Holdings, Inc., 132,638,250 or 26.7% of the issued and
outstanding non-voting Telewest convertible preference shares and 246,111,750 or
26.5% (assuming no conversion of the Telewest convertible preference shares) of
the issued and outstanding Telewest ordinary shares. On March 31, 1997, the
reported closing price on the London Stock Exchange of Telewest's ordinary
shares was L1.09 ($1.79).183
As a result of Telewest's 1995 issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate used to
convert the U.S. dollar into the United Kingdom ("UK") pound sterling will cause
Telewest to experience realized and unrealized foreign currency transaction
gains and losses throughout the term of the Telewest Debentures, which mature in
2006 and 2007, if not redeemed earlier. During the three months ended March 31,
1997 and 1996, Telewest experienced foreign currency transaction losses of L24.1
million ($40.5 million using the applicable exchange rate) and L16.7 million
($25.6 million using the applicable exchange rate), respectively, resulting from
the conversion of the Telewest Debentures into UK pounds sterling and the
adjustment of a foreign currency option contract to market value.
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the TCI Ventures Group's share of Telewest's
operating results from UK pounds to U.S. dollars was 1.6459 to 1 and 1.5362 to 1
during the three months ended March 31, 1997 and 1996, respectively. The spot
rate used to translate the TCI Ventures Group's share of Telewest's net assets
from UK pounds to U.S. dollars was 1.6395 to 1 and 1.7125 to 1 at March 31, 1997
and December 31, 1996, respectively.
Summarized unaudited results of operations of Telewest are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
--------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Revenue.................................................... $ 147,876 100,099
Operating, selling, general and administrative expenses.... (135,983) (105,856)
Depreciation and amortization.............................. (72,014) (49,940)
--------- ---------
Operating loss........................................... (60,121) (55,697)
Share of losses of affiliates.............................. (8,144) (5,464)
Interest expense, net...................................... (45,656) (26,376)
Foreign currency transaction loss.......................... (40,525) (25,602)
Other, net................................................. (126) 2
--------- ---------
Net loss................................................. $(154,572) (113,137)
========= =========
</TABLE>
F-124
<PAGE> 332
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INVESTMENTS IN PCS VENTURES
Summarized unaudited results of operations for the PCS Ventures, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 9,487 --
Operating expenses........................................ (167,582) (30,775)
Depreciation and amortization............................. (34,429) (254)
--------- -------
Operating loss......................................... (192,524) (31,029)
Interest expense.......................................... (1,590) (290)
Other, net................................................ (22,955) (36,186)
--------- -------
Net loss............................................... $(217,069) (67,505)
========= =======
</TABLE>
TCI Ventures Group is a partner 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
residential and business customers nationwide, using the "Sprint" brand. The PCS
Ventures include Sprint Spectrum Holding Company, L. P. ("Sprint Spectrum") and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation, Comcast Corporation, Cox Communications,
Inc. and the TCI Ventures Group. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the TCI Ventures Group.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the TCI
Ventures Group contributed an aggregate of approximately $0.9 billion). The
remaining capital that the Sprint PCS Partnerships will require to fund the
construction of the PCS systems and the commitments made to APC and
Cox-California will be substantial. The partners had agreed in forming the
Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2
billion of equity thereto, from inception through fiscal 1999, subject to
certain requirements. The TCI Ventures Group expects that the remaining
approximately $1.2 billion of such amount (of which the TCI Ventures Group's
share is approximately $0.4 billion) will be contributed by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed). The TCI Ventures Group expects that the Sprint PCS
Partnerships will require additional equity thereafter.
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
TCI Ventures Group currently believes that such agreement will not result in the
TCI Ventures Group's being required to make any incremental capital
contributions in addition to its pro rata portion of the aforementioned $4.2
billion amount.
(8) INVESTMENT IN TELEPORT
Teleport is a competitive local exchange carrier which provides integrated
local telecommunications services in major metropolitan markets nationwide.
Teleport's customers are principally telecommunications intensive businesses,
long distance carriers and resellers of wireless communications companies.
F-125
<PAGE> 333
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TCI Ventures Group's investment in Teleport is accounted for under the
equity method of accounting.
Summarized unaudited combined results of operations for Teleport, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 96,844 50,435
Operating expenses........................................ (90,708) (42,718)
Depreciation and amortization............................. (29,756) (12,849)
-------- -------
Operating loss......................................... (23,620) (5,132)
Interest expense.......................................... (29,508) (8,148)
Other, net................................................ 8,100 (5,413)
-------- -------
Net loss............................................... $(45,028) (18,693)
======== =======
</TABLE>
(9) INVESTMENTS IN OTHER AFFILIATES
The TCI Ventures Group's affiliates other than Telewest PCS Ventures and
Teleport that are accounted for using the equity method (the "Other Affiliates")
generally are engaged in the cable and/or programming businesses in various
foreign countries.
Certain of the Other Affiliates are general partnerships and any subsidiary
of the TCI Ventures Group that is a general partner in a general partnership
could be liable, depending upon the applicable partnership law, for all debts of
that partnership to the extent liabilities of that partnership were to exceed
its assets.
Agreements governing the TCI Ventures Group's investment in certain of the
Other Affiliates contain (i) buy-sell and other exit arrangements whereby the
TCI Ventures Group could be required to purchase another investor's ownership
interest and (ii) performance guarantees whereby the TCI Ventures Group and/or
other subsidiaries of TCI have guaranteed the performance of the TCI Ventures
Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying amount
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
CARRYING VALUE
-------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Flextech (note 3)........................................... $114,544 --
Flextech Affiliates(a)...................................... -- 129,563
MultiThematiques S.A. ("MultiThematiques").................. 79,289 84,007
Liberty/TINTA LLC(b)........................................ 60,009 63,227
Jupiter Telecommunications Co., Ltd. ("Jupiter")............ 39,200 47,251
Bresnan International Partners (Poland), L.P. .............. 27,848 27,951
Bresnan International Partners (Chile), L.P. ............... 20,993 34,408
Other....................................................... 61,337 88,192
-------- -------
$403,220 474,599
======== =======
</TABLE>
F-126
<PAGE> 334
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Flextech Affiliates
Due to the January 1, 1997 deconsolidation of Flextech described in note 3,
Flextech's equity method affiliates (the "Flextech Affiliates") are no longer
included with the Other Affiliates; the Flextech Affiliates are included with
Flextech.
At December 31, 1996, the Flextech Affiliates were comprised of European
Business News Partners (30%-owned by Flextech), HIT Entertainment PLC (23%-owned
by Flextech), Preview Investments B.V. (33%-owned by Flextech), Scottish
Television plc (20%-owned by Flextech), UKGL (25%-owned by Flextech) and UKLL
(31%-owned by Flextech). In connection with the April 1997 formation of the BBC
Joint Ventures, Flextech acquired all of the equity share capital of UKGL and
UKLL (75% and 68.75%, respectively) that Flextech did not already own.
(b) Liberty/TINTA LLC
TCI Ventures Group may make additional cash contributions totaling $29.0
million to the limited liability company owned in equal parts by subsidiaries of
TCI Ventures Group and Liberty Media Group (the "LLC") to fund the operations of
the joint venture between TCI Ventures Group, News Corporation Limited ("News
Corp.") and Liberty Media Group (the "Sports Venture"). As part of the formation
of the Sports Venture, the LLC is entitled to receive from News Corp. 7.5% of
the outstanding stock of STAR Television Limited. Upon the delivery of such
stock to the LLC, News Corp. is entitled to receive from the LLC up to $20.0
million and rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of the Sports
Venture (the "Sports Venture Rights") to the Sports Venture, TCI Ventures Group,
News Corp. and Liberty Media Group have paid their respective portion of any
payments made with respect to the Sports Venture Rights. Through March 31, 1997,
payments made under the International/Torneos Sports Agreement totaled $20.1
million.
The $33 million excess of TCI Ventures Group's aggregate historical cost
basis in the LLC over TCI Ventures Group's 50% proportionate share of the LLC's
net assets is being amortized over an estimated useful life of 20 years.
F-127
<PAGE> 335
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited results of operations of the Other Affiliates by
geographic region for the periods in which they were owned by the TCI Ventures
Group are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------
LATIN
AMERICA AND
ASIA AND THE UNITED
EUROPE(A) AUSTRALIA CARIBBEAN(B) STATES TOTAL
--------- --------- ------------ ------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
COMBINED OPERATIONS
Revenue...................................... $ 60,499 50,837 3,484 2,345 117,165
Operating, selling, general and
administrative expenses.................... (77,551) (56,652) (2,086) (2,035) (138,324)
Depreciation and amortization................ (6,457) (10,186) (856) (1,285) (18,784)
-------- ------- ------ ------- --------
Operating income (loss).................... (23,509) (16,001) 542 (975) (39,943)
Interest expense, net........................ (558) (2,883) (1,918) (497) (5,856)
Other, net................................... 276 (966) (6,797) (44) (7,531)
-------- ------- ------ ------- --------
Net loss................................... $(23,791) (19,850) (8,173) (1,516) (53,330)
======== ======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------------------
LATIN
AMERICA AND
ASIA AND THE UNITED
EUROPE(A) AUSTRALIA CARIBBEAN(B) STATES TOTAL
--------- --------- ------------ ------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
COMBINED OPERATIONS
Revenue...................................... $ 87,167 37,316 10,819 24,449 159,751
Operating, selling, general and
administrative expenses.................... (94,962) (42,361) (9,229) (20,354) (166,906)
Depreciation and amortization................ (2,146) (7,712) (972) (146) (10,976)
-------- ------- ------ ------- --------
Operating income (loss).................... (9,941) (12,757) 618 3,949 (18,131)
Interest expense, net........................ (1,809) (2,254) (3,387) (357) (7,807)
Other, net................................... (925) 277 (263) (104) (1,015)
-------- ------- ------ ------- --------
Net earnings (loss)........................ $(12,675) (14,734) (3,032) 3,488 (26,953)
======== ======= ====== ======= ========
</TABLE>
- ---------------
(a) The summarized combined operations for the three months ended March 31, 1997
include the results of operations of Flextech but exclude the results of
operations of the Flextech Affiliates. The summarized combined operations
for the three months ended March 31, 1996 include only the operations of the
Flextech Affiliates.
(b) The summarized operating results of Torneos are included in the combined
operations for the three months ended March 31, 1996 but are excluded from
the combined operations for the three months ended March 31, 1997 due to TCI
Ventures Group's contribution of its 35% ownership interest in Torneos to
the Sports Venture.
F-128
<PAGE> 336
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(10) DEBT
The components of debt are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Convertible Subordinated Debentures ("Debentures").......... $345,000 345,000
Cablevision notes........................................... -- 13,013
Cablevision bank loans...................................... 100,835 104,556
OCC Notes................................................... 43,691 46,418
Other....................................................... 23,231 17,267
-------- -------
$512,757 526,254
======== =======
</TABLE>
With the exception of the Debentures, which had a fair value of $259
million at March 31, 1997, the TCI Ventures Group believes that the fair value
and the carrying value of the TCI Ventures Group's debt were approximately equal
at March 31, 1997.
Subsequent to March 31, 1997, the subsidiary which conducts operations in
Puerto Rico (the "Puerto Rico Subsidiary") entered into a new reducing revolving
bank credit facility (the "Puerto Rico Bank Facility"). The Puerto Rico Bank
Facility is unsecured and provides for maximum borrowing commitments of $100
million. The availability of such commitments for borrowing is subject to the
Puerto Rico Subsidiary's compliance with applicable financial covenants and
other customary conditions. Commencing March 31, 2000, the maximum commitments
will be reduced quarterly in accordance with a schedule, until final maturity at
March 31, 2006. Borrowings under the Puerto Rico Bank Facility bear interest at
variable rates. In addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused portion of the
maximum borrowing commitments, payable quarterly in arrears and at maturity. The
Puerto Rico Bank Facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios (primarily the ratios
of cash flow to total debt and cash flow to debt service, as defined), and
includes certain limitations on indebtedness, investments, guarantees,
acquisitions, dispositions, dividends, liens and encumbrances, and transactions
with affiliates. If TCI's ownership interest in International were to fall below
50.1%, borrowings under the Puerto Rico Bank Facility would be secured by the
assets of the Puerto Rico Subsidiary and the variable interest rates on such
borrowings would be increased.
(11) COMBINED EQUITY
General
If the TCI Ventures Group Stock Proposal is approved by stockholders, the
Series A TCI Ventures Group Stock will have one vote per share and the Series B
TCI Ventures Group Stock will have ten votes per share.
Shares of Series B TCI Ventures Group Stock will be convertible at any time
at the option of the holder only into the same number of shares of Series A TCI
Ventures Group Stock.
The rights of holders of the TCI Ventures Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Ventures Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock, the TCI Ventures Group Stock and the Liberty
Media Group Stock.
Transactions with TCI Group, Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to TCI
Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
levels that management believes to be reasonable and that approximate the costs
TCI Ventures Group would incur for comparable services on a stand alone basis.
During the three months ended March 31, 1997 and 1996, TCI Ventures Group was
allocated $2,212,000 and $2,234,000, respectively, in corporate general and
administrative costs by TCI Group.
Certain of the companies with domestic operations that are attributed to
the TCI Ventures Group provide services to companies attributed to one or more
of the other Groups, and certain of the companies attributed to the other Groups
provide services and the use of facilities to companies attributed to the TCI
Ventures Group. Generally, services and rights to use facilities provided
pursuant to contractual arrangements to which a member of the TCI Ventures Group
that is not a wholly owned subsidiary of the Company is a party will continue to
be provided in accordance with the terms of such arrangements following the
consummation of the Exchange Offers. For example, Teleport has the indefeasible
right to use certain fiber optic and cable transmission facilities of the
Company for compensation based on the cost of construction of such facilities.
In general, such arrangements were entered into with Teleport by the Company and
other multiple cable system operators ("MSOs") that are stockholders of Teleport
several years ago when Teleport was a privately owned company. Similarly, @Home
has entered into arrangements for the distribution of its @Home service with its
stockholders that are MSO's. The TCI Group has agreements with UVSG for, among
other things, the carriage of UVSG's Prevue Networks and superstation
programming on certain of the cable systems attributed to the TCI Group, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Many of these contracts were entered into prior to the UVSG Merger. Because of
the presence in each of TCG, @Home and UVSG of other stockholders not affiliated
with the Company and the independent management teams at each of these
companies, the Company anticipates that future contractual arrangements between
these companies and entities attributed to the other Groups will be negotiated
on an arm's-length basis.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each of
which is a wholly owned subsidiary of the Company, provide or may provide
services to the other Groups. WTCI provides video transport services to the TCI
Group (in addition to services provided to third parties) based on published
tariffed rates. NDTC provides digital television services, including digital
compression of programming, satellite uplinking, and transponder management,
primarily to programming suppliers, many of which are affiliated with the
Liberty Media Group, and satellite distributors. Such services provided to
affiliated companies are governed by agreements which have been negotiated on a
basis which approximates arm's-length terms and the material terms of which are
substantially the same as those governing relationships with third parties,
except as appropriate to take into account volume differences. NDTC has also
recently begun offering on a commercial basis its newly developed service of
authorization of addressable set-top boxes and transmission of compressed and
encrypted digital programming signals directly to cable operators, and is
currently negotiating a long term contract with the TCI Group, for such
services. Such negotiations are being carried out on a basis which approximates
arm's-length terms and it is expected that the material terms made available to
the TCI Group will be substantially the same as those provided to unaffiliated
third parties, but will include pricing on a most favored nations basis due to
the importance to NDTC of the TCI Group's large customer base. SUMMITrak has
been funded by the TCI Group during its development and test phases, which are
substantially complete. Currently, the TCI Group is only utilizing SUMMITrak's
services on a test basis and has no agreement with SUMMITrak for commercial
deployment. If SUMMITrak's services are used by the TCI Group on a commercial
basis, such use will be at commercial rates and on a basis which approximates
arm's-length terms.
Amounts included in revenue for services provided to the other Groups by
WTCI and NDTC are $11,492,000 and $5,055,000 for the three months ended March
31, 1997 and 1996, respectively.
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During the three months ended March 31, 1997 and 1996, revenue earned by
UVSG from TCI Group was $2,049,000 and $2,464,000, respectively. UVSG purchased
programming from Liberty Media Group and certain affiliates during 1997 and 1996
amounting to $11,850,000 and $2,802,000, respectively.
Amounts outstanding under the TCI Note Receivable bear interest at variable
rates based on TCI's weighted average cost of bank borrowings of similar
maturities (6.2% at March 31, 1997). Principal and interest is due and payable
as mutually agreed from time to time by TCI and International. During the three
months ended March 31, 1997 and 1996, interest income related to the TCI Note
Receivable aggregated $2.4 million and $2.2 million, respectively.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in 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 in 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, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in any then existing, Inter-Group Interest of the TCI Group in such Group or, in
the case of a transfer from either the Liberty Media Group or the TCI Ventures
Group to the TCI Group, reflected as a reduction in any then existing
Inter-Group Interest of the TCI Group 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.
The TCI Ventures Group is expected to require additional advances from the
TCI Group for some period of time. To satisfy this need, the Company has agreed
to provide a revolving loan facility (the "Credit Facility") to TCI Ventures
Group for a five-year period commencing on the closing of the Exchange Offers.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction or increase as provided below), which
borrowings would bear interest at a rate per annum equal to The Bank of New
York's prime rate (as in effect from time to time) plus 1% per annum, payable
quarterly. A commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Revolving Credit Facility would be payable by the TCI
Ventures Group to the TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Ventures Group is required
to contribute to Sprint PCS Partnerships subsequent to the closing of the
Exchange Offers is less than $300 million.
Except as described above with respect to the Credit Facility, 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
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 of 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 TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
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.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group 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 TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures 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 TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group 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 TCI Ventures Group.
The Board 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. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
The Puerto Rico Subsidiary purchases programming services from the TCI
Group. The charges, which approximate the TCI Group's cost and are based on the
aggregate number of subscribers served by the Puerto Rico Subsidiary, aggregated
$1.3 million and $1.1 million during the three months ended March 31, 1997 and
1996, respectively. Such programming charges are included in operating costs and
expenses in the accompanying combined statements of operations.
(12) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the TCI Ventures
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of Sprint Spectrum. As previously
described, the Partners are obligated to make 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. Pursuant to an agreement entered
into in connection with certain financings by Sprint Spectrum, under certain
circumstances the Partners may be required to make additional contributions to
Sprint Spectrum to fund projected cash shortfalls to the extent that the amount
of the Partners' aggregate contributions to Sprint Spectrum (exclusive of
certain amounts, including amounts invested in certain affiliates of Sprint
Spectrum), following December 31, 1995 are less than $1.0 billion; however,
based on the currently expected timing and use of the Partners' contributions to
Sprint Spectrum, the TCI Ventures Group currently believes that such agreement
will not result in the TCI Ventures Group's being required to make any
incremental capital contributions in addition to its pro rata portion of such
$1.9 billion amount.
The TCI Ventures Group has guaranteed the obligation of an affiliate ("The
Premium Movie Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of The Premium Movie Partnership's license fee obligations is not currently
estimable, the TCI Ventures Group believes that the aggregate payments pursuant
to such obligations could be significant. If the TCI Ventures Group were to fail
to fulfill its obligations under the guarantee, the beneficiaries have the right
to demand an aggregate payment from the TCI Ventures Group of approximately $55
million. Although the TCI Ventures Group has not had to perform under such
guarantee to date, the TCI Ventures Group cannot be certain that it will not be
required to perform under such guarantee in the future.
In 1995, Flextech issued newly issued Flextech Ordinary Shares and Flextech
Non-Preference Shares to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and U S WEST, Inc. ("U S WEST") (the
"U S WEST Subscription").
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group, (ii) the Hallmark and U S WEST subsidiaries'
interests in Flextech acquired under the Hallmark Subscription and the U S WEST
Subscription, respectively, and (iii) Flextech securities acquired by
International Family Entertainment, Inc. ("IFE") pursuant to certain
acquisitions (the "IFE Acquisitions") exceeds 75% of Flextech's issued and
outstanding share capital, or (y) subject to certain exceptions, the Flextech
Ordinary Shares cease to be admitted to trading on the Official List of the
London Stock Exchange as a result of the exercise by the TCI Ventures Group of
any of its rights as a Flextech shareholder, the TCI Ventures Group shall be
obligated to offer to purchase from the Hallmark and U S WEST subsidiaries, and
from IFE any Flextech Ordinary Shares held by them and which were originally
acquired pursuant to the Hallmark Subscription, the U S WEST Subscription, or
the IFE Acquisitions, as applicable. Under such circumstances, the offer price
for such shares shall be the higher of (i) the then current market price for the
Flextech Ordinary Shares and (ii) the highest price paid to any third party by
the TCI Ventures Group for any Flextech Ordinary Shares during the preceding 12
month period. In the event the TCI Ventures Group is required to purchase any
Flextech Ordinary Shares, it may elect, subject to certain limited exceptions,
to pay the purchase price thereof in cash or in shares of International Series A
common stock, or in certain securities of TCI.
In light of certain change of control provisions contained in the articles
of association of UKGL and UKLL, TCI has agreed to maintain an indirect voting
interest of at least 50.01% in a wholly-owned subsidiary of Flextech so long as
Flextech continues to hold its ownership interests in UKGL and UKLL. Under
Flextech's Articles of Association, if the TCI Ventures Group becomes obligated
to purchase any of the Flextech Non-Preference Shares (as described above) and
fails to complete such purchase within 12 months from the date such purchase is
required to be completed, such Flextech Non-Preference Shares shall become
convertible into Flextech Ordinary Shares whether or not the TCI Ventures Group
ceases to own at least 50.01% of the voting interest attributable to Flextech's
then outstanding ordinary share capital.
On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that International could
be required to make cash contributions totaling $46 million over the next three
years in connection with the DTH Ventures.
Certain key employees of TCI involved with TCI Ventures Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock, Series A Liberty Media Group Stock and International Series A common
stock as well as restricted stock awards of Series A TCI Group Stock and
International Series A common stock. Additionally, in December of 1996, certain
employees of TCI involved with TCI Ventures Group were each granted options
representing 1.0% of the common equity of TCI Telephony Services, Inc., TCI
Wireline, Inc., and TCI.NET, Inc. The exercise price of each such option will be
adjusted for a 6% per annum interest factor to the date of exercise.
Additionally, in December of 1996, an
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
employee involved with TCI Ventures Group was granted options representing 1.0%
of TCI Satellite Entertainment, Inc.
Estimates of the compensation relating to the options and/or stock
appreciation rights as well as restricted stock awards granted to employees
involved with TCI Ventures Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
value of the underlying equity and, ultimately, on the final determination of
market value when the options or rights are exercised or the restricted shares
are vested.
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
On May 14, 1997, the Board of Directors of Tele-Communications, Inc. (the
"Board") authorized, subject to shareholder approval (the "TCI Ventures Group
Stock Proposal"), the issuance of two new series of stock ("TCI Ventures Group
Common Stock") which are intended to reflect the separate performance of the TCI
Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets
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and liabilities so attributed to the TCI Ventures Group in the future would not
include assets and liabilities of the company's domestic programming businesses
and investments or its domestic cable operations (including its businesses which
utilize its cable plant to distribute telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures 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 Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures 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.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group
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Common Stock would be issued upon such exchange. Similarly, options to purchase
shares of Series A TCI Group Stock that are outstanding under the Company's
various stock incentive plans will be adjusted upon consummation of the Exchange
Offers by dividing such options into options to purchase shares of Series A TCI
Ventures Group Common Stock and options to purchase shares of Series A TCI Group
Stock, with 30% of the shares originally subject to the options being allocated
to the options to purchase TCI Ventures Group Common Stock and 70% of such
shares being allocated to the options to purchase shares of TCI Group Stock. The
terms of each of such options at the time of issuance will be the same as the
terms of the option that they replace, including as to the exercise price per
share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures 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
Stock, Liberty Media Group Stock and TCI Ventures Group 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 Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group 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 Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision S.A. and certain affiliated companies ("Cablevision") for an
adjusted purchase price of $282.0 million, before liabilities assumed (the
"Cablevision Acquisition"). The purchase price was paid with cash consideration
of $195.2 million (including a previously paid $20 million deposit) and the TCI
Ventures Group's issuance of $86.8 million principal amount of secured
negotiable promissory notes payable to the selling shareholders.
In June 1995, the TCI Ventures Group acquired certain assets of
CareerTrack, Inc. ("CareerTrack") and DDP Realty Company and all of the
outstanding common stock of CareerTrack (collectively, the "CareerTrack
Acquisition") in exchange for cash in the amount of $17,998,000, non-interest
bearing promissory notes with a recorded amount of $12,790,000 (net of discount
of $2,612,000), and assumed debt of $6,922,000.
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended (the "UVSG Merger
Agreement"), among UVSG, TCI and TCI Merger Sub, Inc. ("Merger Sub"), pursuant
to which Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). TCI Ventures Group acquired 12,373,294 shares of UVSG Class
B common stock and 2,145,466 shares of UVSG Class A common stock, together
representing approximately 40% of the issued and outstanding common stock of
UVSG and approximately 86% of the total voting power of UVSG common stock
immediately after the UVSG Merger, resulting in UVSG becoming a majority-
controlled subsidiary of TCI Ventures Group.
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by UVSG and Liberty Media Group (the "Satellite
Joint Venture"). The operations of the Satellite Joint Venture have been
consolidated, effective April 1, 1996, with the operating results of the TCI
Ventures Group.
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On October 1, 1996, Cablevision acquired 99.99% of the issued and
outstanding capital stock of Oeste Cable Color S.A., a cable television
operation in the west of the greater Buenos Aires metropolitan area, for a
purchase price of $112.2 million (the "OCC Acquisition"). Cash consideration of
$43.7 million was paid at closing and an additional cash payment of $22.1
million was paid on December 1, 1996. The remaining purchase price was satisfied
by Cablevision's issuance of $46.4 million principal amount of secured
negotiable promissory notes.
On February 2, 1994, the TCI Ventures Group contributed its 100% ownership
interests in Flextech Television Limited ("FTV") and Bravo Classic Movies
Limited ("Bravo Ltd."), together with its equity method investments in UK Gold
Television Limited ("UKGL"), UK Living Limited ("UKLL") and Starstream Limited
("Starstream") (collectively, the "International UK Programming Assets") to
Flextech p.l.c. ("Flextech") in exchange for 60.4% of Flextech's issued and
outstanding ordinary shares (the "Flextech Combination").
On June 5, 1995, Flextech completed the sale of newly issued Flextech
ordinary shares ("Flextech Ordinary Shares") and newly issued convertible
non-preference shares ("Flextech Non-Preference Shares") to subsidiaries of
Hallmark Cards Incorporated ("Hallmark") (the "Hallmark Subscription") and U S
WEST, Inc. ("U S WEST") (the "U S WEST Subscription") in exchange for L48.4
million ($77.2 million using the applicable exchange rate) in cash and
convertible redeemable preferred shares of Thomson Directories Limited,
respectively. The Hallmark Subscription and the U S WEST Subscription are
collectively referred to herein as the "Flextech Transactions."
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in Maidstone
Broadcasting ("Maidstone"), which Flextech did not already own and (ii) a 100%
ownership interest in TVS Television Limited ("TVS"). Excluding liabilities
assumed, the total consideration paid by Flextech to acquire such ownership
interests was L31.4 million ($47.8 million using the applicable exchange rate),
of which L3.0 million ($4.5 million using the applicable exchange rate) was paid
in cash and the remaining balance was satisfied by Flextech's issuance of
convertible non-preference shares (the "IFE Consideration Shares").
The TCI Ventures Group owned, at December 31, 1996, 46.5% of the issued and
outstanding Flextech share capital and 50.9% of the aggregate voting interests
attributable to such Flextech share capital.
In January 1997, the TCI Ventures Group reduced its voting interest in
Flextech to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to
vote 960,850 Flextech Ordinary Shares at any shareholder meeting to be held
through December 31, 1997. In April 1997, Flextech and BBC Worldwide Limited
("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions. The consummation of the BBC Joint
Ventures and related transactions resulted in, among other things, a reduction
of TCI Ventures Group's ownership interest in Flextech to 35.9% and the issuance
to the TCI Ventures Group by Flextech of a special voting share (the "Special
Voting Share"). The Special Voting Share when combined with International's
other share capital in Flextech, allows TCI Ventures Group to cast 50% of the
votes on most matters brought to the shareholders of Flextech for vote. So long
as the Proxy remains outstanding, TCI Ventures Group's 50% voting interest will
be reduced by the 960,850 votes represented by the Proxy. The Special Voting
Share will terminate upon the occurrence of the earlier of (i) the third
anniversary of issuance or (ii) any transfer of Flextech shares by the TCI
Ventures Group outside a specified affiliated group. In light of the TCI
Ventures Group's decreased voting interest in Flextech, as described above, the
TCI Ventures Group, effective January 1, 1997, ceased to consolidate Flextech
and began to account for Flextech using the equity method of accounting.
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SUMMARY OF OPERATIONS
Combined Operations
The following table sets forth certain financial information for the TCI
Ventures Group and each of the combined businesses attributed to it during the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- ------- --- ------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Revenue:
UVSG.......................... $409,616 44% -- --% -- --%
International................. 314,560 34 190,533 59 43,982 42
ETC w/tci..................... 90,598 10 49,994 15 -- --
NDTC.......................... 74,881 8 53,393 16 26,051 25
WTCI.......................... 31,857 4 31,877 10 33,811 33
Summitrak..................... -- -- -- -- -- --
@Home......................... 673 -- -- -- -- --
Other......................... 3,491 -- 194 -- -- --
-------- --- ------- --- ------- ---
$925,676 100% 325,991 100% 103,844 100%
======== === ======= === ======= ===
Operating, selling, general,
administrative and stock
compensation:
UVSG.......................... $342,544 42% -- --% -- --%
International................. 279,170 34 165,389 58 62,196 61
ETC w/tci..................... 107,785 13 51,360 18 -- --
NDTC.......................... 44,171 5 30,867 11 20,390 20
WTCI.......................... 19,530 2 19,399 7 17,798 18
Summitrak..................... 1,649 -- 1,657 1 644 1
@Home......................... 23,950 3 2,845 1 -- --
Other......................... 8,145 1 12,318 4 (311) --
-------- --- ------- --- ------- ---
$826,944 100% 283,835 100% 100,717 100%
======== === ======= === ======= ===
Depreciation and amortization:
UVSG.......................... $ 29,775 20% -- --% -- --%
International................. 58,747 40 36,360 48 8,590 30
ETC w/tci..................... 4,953 3 3,900 5 -- --
NDTC.......................... 28,776 19 18,737 25 6,918 24
WTCI.......................... 10,595 7 10,164 14 11,478 40
Summitrak..................... 11,680 8 5,582 7 1,684 6
@Home......................... 1,774 1 21 -- -- --
Other......................... 2,989 2 333 1 -- --
-------- --- ------- --- ------- ---
$149,289 100% 75,097 100% 28,670 100%
======== === ======= === ======= ===
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- ------- --- ------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss):
UVSG.......................... $ 37,297 n/a -- n/a -- n/a
International................. (23,357) (11,216) (26,804)
ETC w/tci..................... (22,140) (5,266) --
NDTC.......................... 1,934 3,789 (1,257)
WTCI.......................... 1,732 2,314 4,535
Summitrak..................... (13,329) (7,239) (2,328)
@Home......................... (25,051) (2,866) --
Other......................... (7,643) (12,457) 311
-------- ------- -------
$(50,557) (32,941) (25,543)
======== ======= =======
</TABLE>
Revenue
Revenue increased by $600 million or 184% during the year ended December
31, 1996 as compared to 1995. Revenue increased by $222 million or 214% during
the year ended December 31, 1995 as compared to 1994. Such increases are
principally the result of revenue from acquired companies.
Revenue from UVSG, amounting to $410 million, represents in excess of
two-thirds of the combined increase in revenue for 1996. Such increase is
principally the result of the acquisition in January of 1996 of UVSG by the TCI
Ventures Group. Additionally, such increase reflects $121 million additional
revenue resulting from the Satellite Joint Venture.
International revenue increased $124 million or 65% during the year ended
December 31, 1996 as compared to the corresponding prior year period. Such
increase was comprised of an increase in cable revenue of $78 million or 55% and
an increase in programming revenue from Flextech of $46 million or 97% during
the year ended December 31, 1996. The increase in cable revenue is primarily
attributable to the effect of the Cablevision Acquisition and the OCC
Acquisition. A significant component of the increase in programming revenue is
attributable to the inclusion of Maidstone and TVS in the TCI Ventures Group's
results of operations in 1996.
International revenue increased $147 million during the year ended December
31, 1995 as compared to the corresponding prior period, representing a 333%
increase. Of such amount, international cable revenue increased $124 million
(649%) primarily as the result of the Cablevision Acquisition and the OCC
Acquisition. International programming revenue increased $23 million or 93%
during the year ended December 31, 1995. The majority of such increase is
attributable to 92% and 64% increases in revenue from Bravo, Ltd. and
Starstream, respectively.
Revenue from ETC w/tci increased $41 million or 81% during the year ended
December 31, 1996 as compared to 1995. Revenue from ETC w/tci increased $50
million from 1994 to 1995. Such increases are attributable to the CareerTrack
Acquisition consummated in June of 1995.
The TCI Ventures Group, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. During the years ended December 31, 1996, 1995 and 1994, revenue
attributable to Flextech of $94 million, $48 million and $25 million,
respectively, was included in the TCI Ventures Group's statements of operations.
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation and amortization,
increased by $543 million or 191% during the year ended December 31, 1996 as
compared to 1995. Operating costs and expenses, excluding depreciation and
amortization, increased by $183 million or 182% during the year ended December
31, 1995 as compared to 1994. Such increases are principally the result of
operating costs and expenses from acquired companies.
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Operating costs and expenses, excluding depreciation and amortization, from
UVSG represents 63% of the combined increase in operating costs and expenses for
1996. Such increase is principally the result of the acquisition in January of
1996 of UVSG by the TCI Ventures Group. Additionally, such increase reflects
$110 million additional expense resulting from the Satellite Joint Venture.
International operating costs and expenses, excluding depreciation and
amortization, increased $114 million or 69% for the year ended December 31,
1996, as compared to the corresponding prior year period. International
programming costs and expenses increased $64 million during 1996, a 103%
increase. Such increase is attributable to the inclusion of Maidstone and TVS in
the TCI Ventures Group's results of operations in 1996 and higher programming
and stock compensation costs during 1996. International cable costs and expenses
increased $44 million (48%) during the year ended December 31, 1996, primarily
as a result of the Cablevision Acquisition, the OCC Acquisition, and increased
programming costs.
International operating costs and expenses, excluding depreciation and
amortization, increased $103 million during the year ended December 31, 1995 as
compared to the corresponding prior year period, representing a 166% increase.
Of such amount, cable operating costs and expenses increased $76 million or 512%
during 1995, of which $69 million was attributable to the Cablevision
Acquisition. International programming costs and expenses increased $23 million
or 58% during 1995 as compared to the 1994 period. The majority of such increase
is attributable to higher transponder, marketing and programming costs of Bravo,
Ltd. and Starstream.
During 1996, the TCI Ventures Group revised its estimate of future revenue
to be earned from certain programming rights. As a result of such revisions, the
TCI Ventures Group has recorded an adjustment of $9 million to reduce the
carrying value of the affected programming rights.
The TCI Ventures Group, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. During the years ended December 31, 1996, 1995 and 1994, programming
operating costs and expenses (including any programming rights provisions)
attributable to Flextech of $131 million, $62 million and $39 million,
respectively, were included in the TCI Ventures Group's statements of
operations.
Operating costs and expenses from ETC w/tci, excluding depreciation and
amortization, increased $56 million or 110% during the year ended December 31,
1996 as compared to 1995. Operating costs and expenses from ETC w/tci, excluding
depreciation and amortization, increased $51 million from 1994 to 1995. Such
increases are attributable to the CareerTrack Acquisition consummated in
mid-1995.
Certain TCI corporate general and administrative costs are charged to TCI
Ventures 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 TCI Ventures
Group would incur for comparable services on a stand alone basis. During the
years ended December 31, 1996, 1995 and 1994, TCI Ventures Group was allocated
$8 million, $4 million and less than $1 million, respectively, in corporate
general and administrative costs by TCI Group.
The $74 million or 99% and $46 million or 162% increases in depreciation
and amortization expense during the years ended December 31, 1996 and 1995,
respectively, are the result of increases in the TCI Ventures Group's assets
that are subject to depreciation and amortization. The increases in such assets
were primarily attributable to acquisitions, as described above, and capital
expenditures.
Other Income and Expense
Telewest Communications plc ("Telewest"), which is currently constructing
broadband cable television and telephony networks in the United Kingdom ("UK"),
has incurred losses since its inception. It is expected that the current
construction requirements of Telewest will be substantially complete by the end
of the year 2000. The TCI Ventures Group's indirect ownership interest in
Telewest decreased from 50% to 37.8% in November 1994, from 37.8% to 26.8% in
October 1995 and from 26.8% to 26.6% during 1996. Despite such decreased
ownership interests, the TCI Ventures Group's share of Telewest's net losses
increased $39.1 million or 56% and $27.8 million or 65% during 1996 and 1995,
respectively. In general, such increases are attributable to Telewest incurring
higher amounts of interest expense, depreciation and amortization. Such
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higher amounts include certain effects of a previous merger transaction (the
"SBCC Transaction"). In connection with the SBCC Transaction, Telewest issued
United States (sometimes referred to herein as the "U.S.") dollar denominated
senior debentures (the "Telewest Debentures"). In light of the issuance of the
Telewest Debentures and Telewest's use of purchase accounting to account for the
SBCC Transaction, Telewest's interest expense, depreciation and amortization
were significantly higher during the fourth quarter of 1995 and the year ended
December 31, 1996 (and will be significantly higher in future periods) as
compared to the amounts incurred by Old Telewest prior to the consummation of
the SBCC Transaction. In addition, changes in the exchange rate used to
translate the Telewest Debentures into UK pounds sterling and the adjustment of
a foreign currency option contract to market value caused Telewest to experience
unrealized foreign currency transaction gains (losses) of $1.7 million and
$(23.0 million) during 1996 and 1995, respectively. It is anticipated that
Telewest will continue to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest Debentures,
which mature in 2006 and 2007, if not redeemed earlier.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (collectively, "Sprint PCS" or the "Sprint PCS Partnership"), and
PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the Company. The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The
Company, through TCI Telephony, has a 30% interest as a partner in each of the
Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. The
share of losses from the TCI Ventures Group's investment in the PCS Ventures was
$133 million for the year ended December 31, 1996 which represents an increase
of $99 million as compared to 1995. The share of losses from the PCS Ventures
was $34 million for the year ended December 31, 1995 which represents an
increase of $33 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 Sprint Spectrum's share of losses in American PCS
L.P. The PCS Ventures are in the development stage of operations. It is expected
that Sprint PCS will continue to incur significant operating losses and
significant negative cash flow from operating activities during the next several
years while it develops and constructs its PCS network and builds its customer
base. If and when Sprint PCS has successfully completed its network buildout,
Sprint PCS's operating profitability will depend upon many factors, including,
among others, its ability to market its products and services successfully,
achieve its projected market penetration, manage customer turnover rates
effectively and price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.
The share of losses from the TCI Ventures Group's investment in Teleport
was $51 million for the year ended December 31, 1996 which represents a $21
million increase as compared to 1995. The share of losses from Teleport was $30
million for the year ended December 31, 1995 which represents an increase of $11
million, as compared to the share of losses of $19 million for the year ended
December 31, 1994. The increase in the share of losses is largely attributed to
costs incurred by Teleport 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. Teleport
has incurred net losses since its inception due to capital expenditures
associated with the acquisition, installation, development and expansion of its
existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. TCI
expects that Teleport will continue to incur net losses for the foreseeable
future as it acquires, installs, develops and expands its existing and new
telecommunications networks. There can be no assurance that Teleport will
achieve or sustain profitability or generate sufficient positive cash flow to
service its debt.
The TCI Ventures Group's share of the losses of affiliates other than
Telewest, PCS Ventures and Teleport (the "Other Affiliates") increased $14
million or 23% and $25 million or 70% during the years ended
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December 31, 1996 and 1995, as compared to the corresponding prior year periods.
The majority of the 1996 increase is attributable to (i) increased losses of
certain of its affiliates in 1996 and (ii) the TCI Ventures Group's share of
losses of affiliates that were acquired in 1996 and late 1995. The majority of
the 1995 increase is attributable to the TCI Ventures Group's share of losses of
affiliates that were acquired in 1995 or late 1994.
Interest income increased $15 million or 97% and $12 million or 364% during
the years ended December 31, 1996 and 1995, respectively. The 1996 increase is
primarily attributable to interest income earned on amounts loaned to TCI. Such
loans were funded with the net proceeds received upon the February 9, 1996
issuance of International's 4 1/2% Convertible Subordinated Debentures (the
"Debentures"). The 1995 increase is attributable to the increase in cash and
cash equivalents that resulted from the International initial public offering
("International IPO").
Interest expense increased $9 million or 23% and $29 million or 222% during
the years ended December 31, 1996 and 1995, respectively, as a result of an
increase in the outstanding debt balance. The 1996 increase is primarily
attributable to the issuance of the Debentures. The 1995 increase is primarily
attributable to debt incurred in connection with the Cablevision Acquisition and
borrowings incurred by Flextech in 1995.
In connection with the dilution of the TCI Ventures Group's ownership
interest in Telewest that occurred in connection with the October 1995 SBCC
Transaction and the November 1994 initial public offering of Telewest's
predecessor, the TCI Ventures Group recognized non-cash gains of $165 million
and $161 million (before deducting the related tax expense of $58 million and
$57 million, respectively) during the years ended December 31, 1995 and 1994,
respectively. During 1996, the TCI Ventures Group also recognized a non-cash
gain of $258,000 in connection with the issuance of stock by Telewest. Such
gains represent the differences, at the respective transaction dates, between
the TCI Ventures Group's recorded cost for its ownership interest in Telewest
and the TCI Ventures Group proportionate share of Telewest's net assets. No
assurance can be given that any such gains will be recognized in the future.
Teleport conducted an initial public offering (the "Teleport 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 Teleport IPO, the TCI Ventures Group's ownership interest in
Teleport was reduced from approximately 35% to approximately 31%. Accordingly,
the TCI Ventures Group recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
The TCI Ventures Group recognized net gains upon the disposition of assets
of $12 million and $49 million during 1996 and 1995, respectively. The 1996 gain
is primarily attributable to the dissolution of the TeleWest Europe Group, an
entity in which International held a 50% ownership interest. The 1995 gain is
attributable to the sale of the cable television subsidiaries of IVS Cable
Holdings Limited, a subsidiary of Flextech.
On July 18, 1995, International completed the International IPO in which
20,000,000 shares of International's Series A common stock were sold to the
public for net proceeds of approximately $301 million. In connection with such
sale, the TCI Ventures Group recognized a non-recurring gain of $123 million.
The minority interests' share of net losses (earnings) was $28 million,
$(15 million) and $10 million during the years ended December 31, 1996, 1995,
and 1994, respectively. Such minority interests are attributable to Flextech
since none of Cablevision's $65 million of net liabilities at the April 25, 1995
acquisition date and none of Cablevision's post-acquisition operating results
have been allocated to Cablevision's 49% minority interest because (i) the
Cablevision minority interest has no obligation to provide any funding to
Cablevision and (ii) the minority interest continued to have a negative
historical cost basis in Cablevision's net assets at December 31, 1996. To the
extent that Cablevision's post-acquisition net earnings (exclusive of the
effects of purchase accounting) cause the minority interest's historical cost
basis in Cablevision's net assets to become positive, the TCI Ventures Group
would begin to allocate 49% of such net earnings to the minority interest. If
the minority interest's historical cost basis had been positive during the
periods ended December 31, 1996 and 1995, the TCI Ventures Group would have
allocated $16 million and $12 million, respectively, of Cablevision's net
earnings (exclusive of the effects of purchase accounting) to the minority
interest.
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The TCI Ventures Group recognized realized and unrealized foreign currency
transaction gains (losses) of $7 million, $(3) million and $1 million during the
years ended December 31, 1996, 1995, and 1994, respectively. The 1996 amount
includes (i) a $3.6 million unrealized gain with respect to the remeasurement
into the U.S. dollar of the French franc denominated obligation (the
"MultiThematiques Obligation") to make capital contributions to MultiThematiques
S.A. ("MultiThematiques") and (ii) a $3.6 million unrealized gain with respect
to the remeasurement into the U.S. dollar of the UK pound denominated
intercompany debt owed by Flextech to an indirect subsidiary of International.
During 1996, holding losses on certain available-for-sale securities were
determined to be other than temporary. Accordingly, the TCI Ventures Group
recognized a $59 million loss during 1996 in connection with the write-off of
such securities.
Income Taxes
The TCI Ventures Group's income tax benefit (expense) was $110 million, $2
million and $(21 million) during the years ended December 31, 1996, 1995 and
1994, respectively. A tax sharing agreement (the "Tax Sharing Agreement") among
TCI Ventures Group, TCI and certain other subsidiaries of TCI was implemented
effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of
a pre-existing tax sharing arrangement and contains additional provisions
regarding the allocations of certain consolidated income tax attributes and the
settlement procedures with respect to the intercompany allocation of current tax
attributes.
Net Earnings (Losses)
The TCI Ventures Group reported net earnings (losses) of $(258 million),
$60 million and $13 million during the years ended December 31, 1996, 1995 and
1994, respectively. Included in such amounts was the recognition of certain
nonoperating gains aggregating $33 million, $336 million and $155 million during
1996, 1995 and 1994, respectively. TCI Ventures Group would have reported net
loss in all periods presented excluding the impact of such gains. The losses are
principally due to operating losses and share of losses of affiliates.
International sustained operating losses of $23 million for the year ended
December 31, 1996. International's net earnings (loss) was $130 million for the
year ended December 31, 1996, which includes International and its consolidated
subsidiaries' share of the losses of its affiliates of $179 million, for the
year ended December 31, 1996. Most of International's affiliates have incurred
net losses since their respective inception dates and are expected to continue
to incur net losses for the foreseeable future. International expects to
continue to incur net losses for the foreseeable future due, in part, to the
relatively high level of depreciation and amortization that is common to growth
oriented companies operating within the capital intensive cable industry. Any
improvements in the results of operations of International are largely dependent
upon the ability of International's operating subsidiaries and affiliates to
increase their respective subscriber bases. No assurance can be given that any
such subscriber base increases will occur.
@Home has incurred net losses since its inception. Management of @Home
expects to incur significant additional losses as @Home continues to devote
capital to the building of its national network operations and services. To
achieve profitability, @Home must develop and market products and services which
are accepted on a broad commercial basis. @Home's products have not yet
demonstrated that they will achieve broad commercial acceptance. There can be no
assurance that @Home will ever achieve profitability.
Liquidity and Capital Resources
Substantially all of the entities the ownership of which, or the investment
in which, has been attributed to the TCI Ventures Group will require significant
additional capital in order to develop their respective businesses and assets,
to fund future operating losses and to fund future growth. In certain cases,
principally with respect to the Sprint PCS Partnerships, the TCI Ventures Group
has contractual commitments pursuant to which (subject to certain conditions) it
may be required to make significant additional capital contributions to the
entities in which it has investments.
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The Sprint PCS Partners, including TCI Telephony, have agreed to contribute
up to an aggregate of approximately $4.2 billion of equity to Sprint PCS from
inception through fiscal 1999 (of which TCI Telephony's share is approximately
$1.3 billion) if and to the extent required by annual budgets of Sprint PCS for
fiscal years in such period approved by the Sprint PCS Partners or requested
during such period by the affirmative vote of Sprint PCS Partners with
percentage interests in Sprint PCS of 75% or more in the aggregate. As of March
31, 1997 approximately $3.0 billion of such $4.2 billion had been contributed to
Sprint PCS, of which amount TCI Telephony had contributed approximately $900
million. TCI Telephony currently expects that the remaining approximately $1.2
billion of such amount (of which TCI Telephony's share would be approximately
$360 million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed by any or all of the Sprint PCS Partners). In
addition, in connection with certain debt financings by Sprint Spectrum, L.P., a
subsidiary of the Sprint PCS Partnerships ("Sprint Spectrum"), the corporate
parents of the Sprint PCS Partners (TCI, Cox, Comcast and Sprint, collectively,
the "Sprint PCS Parents") entered into a capital contribution agreement with
Sprint Spectrum (the "Capital Contribution Agreement"), of which the secured
creditors in such debt financings are beneficiaries, pursuant to which each
Sprint PCS Parent agreed to make certain contributions, or cause contributions
to be made, to Sprint Spectrum from time to time upon the occurrence of certain
events (including a payment default under or acceleration of Sprint Spectrum's
obligation pursuant to the debt financings agreements) up to a maximum aggregate
amount determined in accordance with a formula. The obligations of TCI under the
Capital Contribution Agreement have been attributed to the TCI Ventures Group.
As of March 31, 1997, approximately $500 million in cash of such agreed
contributions under the Capital Contribution Agreement had been contributed
directly or indirectly to Sprint Spectrum (of which TCI contributed
approximately $150 million), thereby reducing the Sprint PCS Parents' respective
obligations under the Capital Contribution Agreement by such amount and reducing
TCI's obligation to approximately $150 million as of December 31, 1996. Based on
the currently expected timing of additional contributions to Sprint PCS
(including the currently expected timing of Sprint PCS's expected capital
contributions to its affiliates and to its subsidiaries other than Sprint
Spectrum and its subsidiaries), TCI 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 TCI Telephony's
pro rata portion of the balance of the $4.2 billion that the Sprint PCS Partners
have agreed to contribute.
The TCI Ventures Group's ability to obtain sufficient capital resources to
make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. WTCI
and NDTC are the only wholly owned subsidiaries attributed to the TCI Ventures
Group that are operating companies and such entities are currently the TCI
Ventures Group's only source of cash provided by operating activities. As a
result, the TCI Ventures Group has limited ability to generate funds internally
to fund capital requirements and limited cash flow from operating activities to
support external financings. The other operating companies attributed to the TCI
Ventures Group have other investors, public or private, and the payment of
dividends, or the making of loans or advances by any one of such TCI Ventures
Group entities to any other of such TCI Ventures Group entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. Initially, therefore, the TCI
Ventures Group will rely on borrowings under a revolving loan facility (the
"Credit Facility") to TCI Ventures Group for a five-year period commencing on
the closing of the Exchange Offers. Such facility would permit aggregate
borrowings at any one time outstanding of up to $500 million (subject to
reduction as provided below), which borrowings would bear interest at a rate per
annum equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to 3/8% per
annum of the average unborrowed availability under the Revolving Credit Facility
would be payable by the TCI Ventures Group to the TCI Group on a quarterly
basis. The maximum amount of borrowings permitted under the Credit Facility will
be reduced on a dollar-for-dollar basis by up to $300 million if and to the
extent that the aggregate amount of any additional capital that TCI Ventures
Group is required to contribute to Sprint PCS Partnerships subsequent to the
closing of the Exchange Offers is less than $300 million. If the available
borrowings under the Credit Facility are not sufficient to fund the TCI Ventures
Group's capital requirements, no assurance can be given that the TCI Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for the
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TCI Ventures Group by, among other things, engaging in public offerings or
private placements of TCI Ventures Group common stock or through issuance of
debt securities or preferred equity securities attributed to the TCI Ventures
Group. The Company anticipates, however that for the foreseeable future the TCI
Ventures Group will continue to be dependent upon funding from the TCI Group.
The TCI Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to the TCI Ventures
Group.
The majority of the TCI Ventures Group entities currently have significant
capital requirements and TCI expects such entities will continue to have
significant capital requirements for the foreseeable future. TCI Ventures
Group's businesses and investments consist of entities which require the
acquisition, ownership, development and operation of broadband cable television
and telephony distribution networks and new programming services, all of which
require substantial capital investment. The buildout of Sprint PCS's network and
the development of @Home's network infrastructure and the development, marketing
and distribution of their respective products and services will require
substantial capital. Although Teleport has been operating its networks for over
ten years, its continuous acquisition, development and expansion of its existing
and new networks and services also require significant capital expenditures.
International expects to have substantial capital requirements for the
foreseeable future because its businesses and investments consist of entities
which require the acquisition, ownership, development and operation of broadband
cable television and telephony distribution networks and new programming
services. Many of International's subsidiaries and affiliates are incurring
substantial costs as they build or rebuild their cable networks or develop and
acquire programming. Until such companies begin generating profits and positive
cash flow from operating activities, they will need additional capital to fund
capital expenditures and working capital requirements. International has
commitments under various partnership and other funding agreements to contribute
capital or loan money to fund capital expenditures and other capital
requirements of certain affiliates. International believes that its actual
future cash requirements in order to fund the capital expenditures and working
capital requirements of its subsidiaries and affiliates will exceed the sum of
the amounts that International and its consolidated subsidiaries are currently
contractually obligated to fund and such additional funding commitments that
International and its consolidated subsidiaries are currently negotiating.
Further, International's business strategy requires that it have the ability to
access or raise sufficient funds to allow it to take advantage of new
acquisition and joint venture opportunities as they arise, which management of
International believes will require the availability of substantial additional
funds. Although, as of March 31, 1997, International has $134 million proceeds
remaining from the sale of its 4 1/2% Convertible Subordinated Debentures due
2006 which were issued in February 1996 (the "International Debentures") (which
remaining proceeds have been loaned to TCI pursuant to an unsecured promissory
note pending its use by International) and has a $200 million credit facility
("International Credit Facility") with the TCI Ventures Group, International's
ability to otherwise obtain debt financing from unaffiliated entities to assist
its operating companies and to meet its capital obligations at other than the
subsidiary level will be limited because International does not conduct any
operations directly. No assurance can be given that International will be able
to meet its commitments to its subsidiaries and affiliates or to fund its
operations or liquidity requirements through the receipt of cash distributions
or other advances from its subsidiaries or affiliates. The only subsidiary of
International from which it presently is able to obtain funds is the subsidiary
which owns International's interest in the Puerto Rico cable systems.
International believes that the remaining consolidated operating activities of
International will produce net cash flow deficits for the foreseeable future.
Accordingly, International anticipates that it will be dependent upon its
current levels of cash and cash equivalents (exclusive of amounts held by its
subsidiaries), the remaining proceeds from the sale of the International
Debentures and borrowings under the International Credit Facility to meet its
liquidity requirements, including its commitments to its subsidiaries and its
affiliates, for the foreseeable future. To the extent that International seeks
to make significant additional acquisitions or significant new investments or is
required to meet significant future liquidity requirements, it will need to
obtain additional financing.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
March 31, 1997 there were minimal subscribers to its @Home services. @Home
believes that the net proceeds of $88 million from its initial public offering
on July 11, 1997, together with existing
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cash, cash equivalents and capital lease financing, will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
18 months. @Home may, however, require additional funds if its estimates of
working capital and/or capital expenditure and/or lease financing requirements
change or prove inaccurate or in order for @Home to respond to unforeseen
technological or marketing hurdles or to take advantage of unanticipated
opportunities. Over the longer term, it is likely that @Home will require
substantial additional funds to continue to fund its infrastructure investment,
product development, marketing, sales and customer support needs. There can be
no assurance that any such funds will be available at the time or times needed,
or available on terms acceptable to @Home. If adequate funds are not available,
or are not available on acceptable terms, @Home may not be able to continue its
network implementation, to develop new products and services or otherwise to
respond to competitive pressures. Such inability could have a material adverse
effect on @Home's business, operating results and financial condition.
Because TCI's investment in @Home is attributed to the TCI Ventures Group
while the entity which will distribute the @Home service to subscribers of TCI's
cable systems is attributed to the TCI Group, certain conflicts of interest
between the TCI Group and the TCI Ventures Group may result in that actions
taken by the TCI Group, such as the speed at which TCI's cable television
systems are upgraded to the level necessary to support distribution of the @Home
service, will have a direct impact upon the value of the TCI Ventures Group's
interest in @Home. Similarly, the extent to which TCI elects to use @Home as the
provider of certain services which are not covered by TCI's exclusivity
obligations to @Home, rather than another third party, may have an effect upon
the business of @Home and therefore upon the value of the TCI Ventures Group.
For example, TCI's exclusivity obligations do not extend to work-related
services. TCI.NET, the entity in the TCI Group that has responsibility for the
provision of Internet services, may elect to use @Home as the provider of such
work-related services or a third party. To the extent the TCI Group utilizes
@Home to provide such services, the revenue derived therefrom by @Home would
presumably affect its valuation and therefore the overall value of the TCI
Ventures Group. TCI is under no obligation to use @Home as the provider of such
services. To the extent TCI does determine to use @Home as such provider, the
terms upon which @Home would provide such services will be subject to
negotiation, without regard for the terms upon which @Home provides high-speed
residential Internet services.
During the period in which each of TCI, Cox and Comcast have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
(approximately 23 million), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems which have in the aggregate approximately 2.5
million homes passed. In addition, TCI has announced that it is considering
various plans and proposals that may result in the disposition of other of its
cable systems. In the event that such cable systems continue to be exclusive to
@Home, such cable systems and their homes passed would continue to be included
in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to the other @Home
Cable Stockholders, even through such cable systems are no longer owned or
controlled by TCI. If TCI does not require that such cable systems remain
exclusive to @Home, the TCI Ventures Group could be required to sell shares to
Cox, Comcast and KPCB. There can be no assurance that, if the TCI Ventures Group
is required to sell shares of @Home, the price paid to the TCI Ventures Group
would represent adequate consideration to the TCI Ventures Group because such
fair market value may not adequately reflect the TCI Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox and
Comcast in the event TCI does not attain certain subscriber penetration levels
for the @Home service relative to the subscriber penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of the
TCI Ventures Group's interest in @Home.
In addition, although TCI, Cox and Comcast are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are
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subject to a number of exceptions which allow them to compete with @Home in
certain circumstances. Further, TCI, Cox and Comcast compete to some extent with
@Home for advertising and certain other revenues because @Home retains 100% of
all national advertising revenue delivered on the @Home service, while the local
cable operations of TCI, Cox and Comcast retain 100% of revenue generated from
local service offerings that do not require access to an Internet backbone or
that relate to programming within the local areas of the browser for the @Home
service, such as revenues from local advertising.
The TCI Group has agreements with UVSG for the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems attributed
to the TCI Group and for UVSG's subscriber management services, and UVSG
purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment is attributed to the TCI Ventures Group, situations may
arise where the entity attributed to one Group may make a decision which
adversely affects one of the other Groups. For example, UVTV markets and
distributes superstation WGN (Chicago) to several of the Company's cable systems
attributed to the TCI Group. TCI recently canceled WGN in certain of its wholly
owned systems which systems serve approximately 4.5 million subscribers. Such
cancellation was the primary cause for the number of WGN subscribers decreasing
by 3.5 million or 9% from March 1996 to March 1997 (which decrease was partially
offset by new system launches and existing system subscriber growth aggregating
approximately 1.1 million subscribers).
There can be no assurance that any of the foregoing entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
it to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements described above will not
significantly increase due to changing circumstances, such as unanticipated
opportunities, technological or marketing hurdles, unanticipated expenses, and
the like. The failure to generate sufficient cash flow from operating activities
or to raise sufficient funds may require such entity to delay or abandon some or
all of its development and expansion plans or in certain instances, could result
in the failure to meet certain regulatory requirements, any and all of which
could have a material adverse effect on such entity's growth, its ability to
compete in its industry and its ability to service its debt.
Many of International's interests in its subsidiaries and affiliates are
governed by partnership and other agreements that require it to contribute
capital or make loans to such subsidiaries or affiliates. The failure of
International to meet its capital commitments to a particular operating company
may have adverse consequences to it and therefore to the TCI Ventures Group.
Such consequences may include, among others, (i) a breach of contract action for
damages against International, (ii) the dilution of International's interest in
such operating Company, (iii) the loss of any management rights in such entity
(such as a right to elect one or more directors), (iv) the right of the other
investors in such operating company to force International to sell its interest
at less than fair value or (v) the forced dissolution of such operating Company.
Similarly, with respect to Sprint PCS, if TCI Ventures Group fails to make
any portion of its required additional capital contributions to Sprint PCS
(other than an additional capital contribution that TCI Ventures Group is
entitled to decline to make), and does not cure such failure within the time
periods specified in the Amended and Restated Agreement of Limited Partnership
of Sprint Spectrum Holding Company, L.P., dated as of January 31, 1996 (the
"Sprint PCS Partnership Agreement"), such failure would constitute an Adverse
Act and TCI Telephony would become an Adverse Partner (each such term, as
defined in the Sprint PCS Partnership Agreement). If TCI Ventures Group were to
become an Adverse Partner, it would lose its right to appoint a representative
to the governing body of Sprint PCS (the "Sprint PCS Partnership Board"), and
the Sprint PCS Partnership Board, by action of the representatives of the other
Sprint PCS Partners that are not Adverse Partners, would be entitled to elect
(i) to commence procedures to allow such other Sprint PCS Partners to purchase
TCI Ventures Group's interest in Sprint PCS at a discount (which purchase price
in the case of a failure to make a required capital contribution would be the
lower of 90% of the net equity of TCI Ventures Group's interest in Sprint PCS
and 80% of TCI Ventures Group's prior capital contributions (less any
distributions paid to TCI Ventures Group)) and/or (ii) to cause Sprint PCS to
seek to obtain specific performance of TCI Ventures Group's obligations or to
sue for money damages. TCI Ventures Group could also become an Adverse Partner
through, among other things, the disposition of its
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interest in Sprint PCS other than in accordance with the Sprint PCS Partnership
Agreement or a material breach of a material covenant in the Sprint PCS
Partnership Agreement.
The failure by TCI Ventures Group to make its pro rata portion of any
additional capital contributions validly requested to be made to Sprint PCS
(whether or not required under the applicable provisions of the Sprint PCS
Partnership Agreement) would result in a decrease in TCI Ventures Group's
current 30% percentage interest in Sprint PCS. Such dilution would be calculated
on the basis of the relative amount of capital contributions made by the Sprint
PCS Partners until an aggregate of $5.0 billion had been contributed;
thereafter, the dilution formula would take into account the fair market value
of each Sprint PCS Partner's interest in Sprint PCS, subject to certain
exceptions. In the event TCI Ventures Group's percentage interest were to
decrease below the 8% minimum ownership requirement set forth in the Sprint PCS
Partnership Agreement, TCI Ventures Group's interest in Sprint PCS would convert
into that of an "Exclusive Limited Partner" and TCI Ventures Group would lose
the right to designate a representative to the Sprint PCS Partnership Board.
Neither PCS systems nor the delivery of Internet services over the cable
infrastructure have any significant commercial operating history in the United
States, and there can be no assurance that operation of either of these
businesses will become profitable. Neither Sprint PCS nor @Home can estimate
with any degree of certainty the potential demand for their services. The
inability of either Sprint PCS or @Home to obtain the necessary equipment for
its systems could have a material adverse effect on its financial condition and
results of operations. Both Sprint PCS and @Home are relying on new products and
technologies to operate their services which have not yet been widely tested on
a commercial basis. Failure of such products and technologies to operate in the
manner expected by such entity, or any delay or inability to obtain a sufficient
quantity of such products at acceptable price and performance levels could delay
or impair the expansion of such entity's business.
NDTC operates a development stage business in an emerging industry and
accordingly faces challenges similar to those described above. NDTC began
offering its "Headend in the Sky" or "HITS" services directly to cable systems
commercially during the fourth quarter of 1996. The HITS services consist of the
transport of compressed and encrypted digital television programming signals to
addressable set-top boxes and the authorization of such boxes. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC (which is presently utilizing HITS in a few of TCIC's major markets), but
there can be no assurance that such contracts will be finalized or will be
finalized on terms which will enable NDTC to be profitable. Cable systems are in
an early stage of rolling out digital services to their customers, and customer
acceptance of such services and accordingly, the demand for NDTC's HITS
services, is uncertain. In addition, the HITS service utilizes statistical
multiplexing of digitally compressed video signals, a new technology which has
not been tested or distributed on a large scale and accordingly, the
effectiveness of such technology is uncertain.
Both the wireless telecommunications industry and the Internet services
industry are experiencing significant technological change, evolving industry
standards, ongoing improvements in the capacity and quality of such services,
frequent new product and service introductions and enhancements and changes in
end-user requirements and preferences. Accordingly, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. With respect to PCS, there is uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly access rates
may continue to decline. With respect to Internet services, critical issues
concerning the commercial use of the Internet remain unresolved and may impact
the growth of Internet use, especially in the business market targeted by @Home.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed options, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, and inadequate protection of the confidentiality of stored data
and information moving across the Internet. There can be no assurance that
@Home's service will be able to meet any or all of these concerns. Market
acceptance of @Home's services is substantially dependent upon the adoption of
the Internet for commerce and communications. If either of @Home's or Sprint
PCS's market fails to develop, develops more slowly than expected, or becomes
highly
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competitive, such entity's business, operating results and financial condition
may be materially adversely affected. For the foregoing reasons, the future
prospects of the PCS and Internet services industries and of Sprint PCS and
@Home remain uncertain.
For the year ended December 31, 1996, WTCI's six largest customers
accounted in the aggregate for approximately 70% of WTCI's consolidated gross
revenue. WTCI provides such services pursuant to master service contracts which
provide for transmission services pursuant to individual service orders. The
master service contracts expire when the last service order in effect thereunder
has terminated. WTCI's six largest customers' master service contracts all
contain many service orders (in some cases, in excess of 100 service orders)
with remaining terms varying from 1 month to approximately 15 months. A
significant reduction in the level of services WTCI provides for any of these
customers could have material adverse effect on WTCI's results of operations or
financial condition, unless WTCI located replacement customers willing to lease
the vacated channels on similar terms. In particular, WTCI's largest carrier
customer has the right to terminate its contract for use of the entire capacity
of a core backbone of WTCI's network between the Seattle and Denver areas in
October 1997, subject to certain conditions. Although this areas has been
overbuilt with fiber, management of WTCI does not believe such termination would
have a material adverse effect on WTCI because it believes that it is likely
that it would be able to re-lease all of such capacity based on current demand
in the area for its long distance transport services.
A significant number of NDTC's major customers are affiliates of TCI, such
as Encore Media Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
Communications, Inc., each of which is owned in part by Liberty Media
Corporation, a wholly owned subsidiary of the Company, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the year
ended December 31, 1996, revenue from services provided to TCI and its
consolidated subsidiaries accounted for 34% of NDTC's total revenue for 1996.
Although NDTC has been seeking, and intends to continue to seek, to expand its
customer base to increase the number of unaffiliated customers over time, there
can be no assurance that it will be successful.
Many of the assets attributed to the TCI Ventures Group consist of
noncontrolling interests in other entities, such as the investments in Sprint
PCS and Teleport. In addition, International has invested in most of its
subsidiaries and affiliates with strategic and local partners, and financial and
operational considerations, as well as laws that limit foreign equity positions,
will likely require International to continue to invest with partners. Many
foreign countries limit foreign investment to a minority equity position or
require the board of directors to be largely independent, which, as discussed
below, can result in International having diminished ability to implement
strategies that International may favor, or cause dividends or distributions to
be paid. For the most part, the Company has attempted to structure its
investments in a manner that allows it to participate in management decisions
(including through representation on the board of directors or other governing
body and veto rights (alone or with one or more of the other investors) over
significant business decisions); however, as is the case with the Company's
interests in Sprint PCS, Teleport and many of the operating companies in which
International has interests, TCI will often be unable to direct the operations,
strategies, and financial decisions of the companies in which it has acquired,
or will acquire, an interest without the concurrence of one or more of its
partners or other co-investors. Moreover, the ability of the Company (directly
or indirectly) to pledge, sell or otherwise dispose of its interest in many of
the operating companies in which it has investments is subject to shareholder or
similar agreements that severely limit the ability of the parties to transfer
their equity interests. Accordingly, the Company may not be able to cause its
subsidiaries or affiliates that are attributed to the TCI Ventures Group to make
distributions when the TCI Ventures Group may have a need for such distributions
and may not be able to timely dispose of its investment in many of such
companies if required for financial or other reasons.
In addition, in the case of Sprint PCS, the structure of the governance of
such TCI Ventures Group Entity allows for situations in which the failure of the
Sprint PCS Partners to agree on certain issues may give rise to a "deadlock
event," which, if unresolved after a certain period of time, may require the
dissolution or liquidation of Sprint PCS. Specifically, the Sprint PCS
Partnership Agreement provides that Sprint PCS will be dissolved upon the
failure of the Sprint PCS Partners to resolve a "Deadlock Event" which is deemed
to occur (i) if the Sprint PCS Partnership Board fails to approve a proposed
annual budget or business plan for
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two consecutive fiscal years or (ii) if the position of chief executive officer
remains vacant for 60 days after a candidate has been proposed by at least two
Sprint PCS Partners having an aggregate of at least 33% of the voting percentage
interests. Upon the occurrence of a Deadlock Event, the Sprint PCS Partners that
are general partners first are required for a period of 20 days to use their
good faith efforts to try to resolve the Deadlock Event. If the general partners
are unable to resolve the matter, such matter will be referred to the chief
executive officers of the Sprint PCS Parents. In the event the chief executive
officers fail to reach a resolution, the matter will be referred to a mediation
service. If the mediator and the Sprint PCS Partners fail to resolve the
Deadlock Event, Sprint PCS will be liquidated unless the Sprint PCS Partnership
Board, by a majority vote of 75% determines not to dissolve or the buy-sell
arrangements contained in the Sprint PCS Partnership Agreement are employed.
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group Entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group Entities. In addition, International and
certain of the other TCI Ventures Group Entities, such as Teleport and Sprint
PCS, are holding companies, the assets of which consist solely or primarily of
investments in their subsidiaries and affiliates. As such, the ability of such
holding companies to meet their respective financial obligations and their
funding and other commitments to their respective subsidiaries and affiliates,
is dependent upon the earnings of such subsidiaries and affiliates and the
distribution or other payment of such earnings to such holding companies in the
form of dividends, loans or other advances, payment or reimbursement for
management fees and expenses from their respective subsidiaries and affiliates,
or repayment of loans and advances from such holding companies. Accordingly,
such holding companies' ability to meet their respective liquidity requirements,
including debt service, is severely limited as a result of their dependence upon
the distribution of earnings and advances of funds by their respective
subsidiaries and affiliates. The payment of dividends or the making of loans or
advances to such holding companies by their respective subsidiaries and
affiliates may be subject to statutory, regulatory or contractual restrictions,
are contingent upon the earnings of those subsidiaries and affiliates, and are
subject to various business considerations. In the case of International,
distributions or other payments from foreign subsidiaries and affiliates may
also be subject to restrictions on expatriation of funds or adverse currency
exchange rates and, in the case of subsidiaries or affiliates that are located
in countries where the United States does not have a tax treaty, to increased
withholding taxes. Moreover, International does not have voting control over
many of the entities in which it has ownership interests and such entities will
have no obligation, contingent or otherwise, to make any funds available to
International, whether by dividends, advances, loans or other payments. Certain
of the subsidiaries or affiliates of such holding companies are, or may in the
future be, subject to loan agreements that prohibit or limit the transfer of
funds to such holding companies in the form of dividends, loans, or advances
and/or require that any indebtedness of such subsidiaries or affiliates to such
holding companies be subordinate to the indebtedness under such loan agreements.
Further, any right of any of such holding companies as an equity holder to
participate in the distribution of the assets of any of its subsidiaries upon
liquidation or reorganization will be subject to the prior claims of the
creditors (including trade creditors) or such subsidiary. To date,
International, for example, has not received any significant distributions or
advances from any of its subsidiaries or affiliates. Accordingly, it has had to
rely, and expects to rely for the foreseeable future, on outside sources for
financing.
Many of the TCI Ventures Group entities operate in industries, primarily
the telecommunications industry, which have experienced and are expected to
continue to experience rapid and significant changes in technology. The degree
to which these changes will affect such entities and the ability of such
entities to compete in their respective businesses cannot be predicted. Also,
alternative technologies may develop for the provision of services similar to
those provided by such entities. Such entities may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time such entity is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
Currently International is the only TCI Ventures Group Entity that has
significant businesses outside the United States. International's subsidiaries
and affiliates operate solely outside the United States (with the
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exception of Puerto Rico). @Home currently has distribution agreements with two
of Canada's leading cable operators, although such operators have not yet begun
commercial distribution of @Home's services. @Home's business strategy includes
expansion into Canada and other international markets; however, there can be no
assurance that @Home will be successful in expanding its product and service
offerings into foreign markets because of its extremely limited experience in
developing localized versions of its products and services and in developing
relationships with international cable system operators. If @Home does commence
significant international operations, or in the event any of the other TCI
Ventures Group Entities determined to expand into international markets, such
entities (along with International) will be subject to the risks inherent in
doing business on an international level, such as regulatory requirements and
loss of revenue, property and equipment from expropriation, nationalization and
confiscatory taxation. International is and such other TCI Ventures Group
Entities would also be exposed to the risk of changes to laws and policies that
govern foreign investment in countries where they have operations as well as, to
a lesser extent, changes in United States laws and regulations relating to
investing in or trading with countries in which International and such other TCI
Ventures Group Entities may have investment.
Certain of the countries in which International has operating companies or
in which International. @Home or another TCI Ventures Group Entity may operate
in the future, may be subject to a substantially greater degree of social,
political and economic instability than is the case in other countries. Such
instability may result from, among other things, (i) authoritarian governments
or military involvement in political and economic decision making, and changes
in government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of any
subsidiary or affiliate of International or any other TCI Ventures Group Entity
located within such country or that has significant operations there (and
thereby have a potentially material adverse effect on the results of operations
or financial condition of International or such Entity) and could result in the
loss of International's or such other TCI Ventures Group Entity's investment in
such subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
The TCI Ventures Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar (the functional currency of TCI Ventures Group)
against the UK pound sterling, the Japanese yen ("Y"), the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of the TCI Ventures Group's operating subsidiaries and affiliates. Since the
enactment of a convertibility plan in April 1991, the Argentine government has
maintained an exchange rate of one Argentine peso to one U.S. dollar. No
assurance can be given that such an exchange rate will be maintained in future
periods.
Because the TCI Ventures Group's functional currency is the U.S. dollar,
any increase or decrease in the value of the U.S. dollar against any foreign
currency in which the TCI Ventures Group has funding commitments effectively
reduces or increases the U.S. dollar equivalent of such funding commitments. At
the same time, any increase or 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 TCI Ventures Group will cause the TCI Ventures Group to
experience unrealized foreign currency translation losses or gains with respect
to amounts already invested in such foreign currencies.
The TCI Ventures Group and certain of its operating subsidiaries and
affiliates are also exposed to foreign currency risk to the extent that they
enter into transactions denominated in currencies other than their respective
functional currencies. In this regard, the TCI Ventures Group has experienced
realized and unrealized currency gains and losses with respect to (i) the UK
pound sterling denominated loans made by an indirect subsidiary of TCI Ventures
Group to Flextech and (ii) the MultiThematiques Obligation. In addition,
Telewest has experienced realized and unrealized foreign currency transaction
gains and losses with respect to the Telewest Debentures.
Because TCI Ventures Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, the TCI Ventures 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, the TCI Ventures Group
historically has sought to reduce its exposure to short-term
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(generally no more than 90 days) movements in the applicable exchange rates once
the timing and amount of such funding commitments become fixed. Although the TCI
Ventures Group monitors foreign currency exchange rates with the objective of
mitigating its exposure to unfavorable fluctuations in such rates, the TCI
Ventures Group believes that, given the nature of its business, it is not
possible or practical to eliminate the TCI Ventures Group's exposure to
unfavorable fluctuations in foreign currency exchange rates.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UKLL and UKGL
all of the share capital in those two companies not already owned by Flextech
and the TCI Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding Flextech Non-Preference Shares had been issued in
connection with previous acquisition transactions by Flextech due to the TCI
Ventures Group's requirement that it maintain specified voting interests in
Flextech. With the issuance of the Special Voting Share, the purpose for the
Flextech Non-Preference Shares was eliminated. Accordingly, and in order to
simplify the capital structure of Flextech, upon the issuance of the Special
Voting Share, the Flextech Non-Preference Shares were converted into Flextech
Ordinary Shares. Immediately following such conversion, and the issuance of
additional Flextech Ordinary Shares in connection with the UKGL and UKLL
transactions described above, (i) the TCI Ventures Group's interest in the
equity share capital of Flextech was 35.9% and (ii) the TCI Ventures Group's
voting interest was approximately 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). To support
its funding obligations, Flextech has obtained a revolving credit facility with
current borrowing availability of up to L85 million ($139 million), and with a
term of up to 5 years, from a syndicate of banks (the "Flextech Revolving Credit
Facility"). If Flextech defaults in its funding obligation to the Principal
Joint Venture and fails to cure within 42 days after receipt of notice from BBC
Worldwide, BBC Worldwide is entitled, within the following 90 days, to require
that the TCI Ventures Group assume all of Flextech's funding obligations to the
Principal Joint Venture (the "Standby Commitment"). In addition to Flextech's
April 1997 purchase of L22 million ($36 million) of ordinary shares in the
Principal Joint Venture, Flextech is obligated to provide the Principal Joint
Venture with a primary credit facility of L88 million ($144 million) and,
subject to certain restrictions, a standby credit facility of L30 million ($49
million). Borrowings under the primary and standby credit facility would be
represented by shares of loan stock of the Principal Joint Venture, bearing
interest at 2% above LIBOR, which interest would be capitalized quarterly.
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit facilities, or (ii) the date on which Flextech delivers a
bank guarantee of all of its funding obligations to the Principal Joint Venture.
The TCI Ventures Group has significant contingent obligations with respect
to Flextech's funding obligations to one of the BBC Joint Ventures (the
"Principal Joint Venture") provided by the TCI Ventures Group to the Principal
Joint Venture in April 1997. For additional information concerning the effects
of the formation of the BBC Joint Ventures and related transactions on the
liquidity and capital resources of the TCI Ventures Group and Flextech, see note
4 to the accompanying combined financial statements.
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On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). Through December 31, 1996, TCI Ventures
Group had contributed $17.9 million to the DTH Ventures. It is anticipated that
TCI Ventures Group could be required to make cash contributions totaling $46
million over the next three years in connection with the DTH Ventures.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of a joint
venture ("Sports Venture") formed among TCI Ventures Group, Liberty Media Group
and News Corporation Limited ("News Corp.") (the "Sports Venture Rights") to the
Sports Venture, TCI Ventures Group, News Corp. and Liberty Media Group have paid
their respective portion of any payments made with respect to the Sports Venture
Rights. Through March 31, 1997, payments made under the International/Torneos
Sports Agreement totaled $20.1 million.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the TCI Ventures Group's
affiliates (the "Guaranteed Obligations"). At December 31, 1996, the U.S. dollar
equivalent of the amounts borrowed pursuant to the Guaranteed Obligations was
$39.3 million. Certain of the Guaranteed Obligations allow for additional
borrowings in future periods. The TCI Ventures Group also has guaranteed the
obligation of an affiliate ("The Premium Movie Partnership") to pay fees for the
license to exhibit certain films through the year 2000. If the TCI Ventures
Group were to fail to fulfill its obligations under the guarantees, the
beneficiaries have the right to demand an aggregate payment of approximately $58
million at December 31, 1996. Although the TCI Ventures Group has not had to
perform under such guarantee to date, the TCI Ventures Group cannot be certain
that it will not be required to perform under such guarantee in the future.
On January 10, 1997, the TCI Ventures Group signed an agreement to pay cash
consideration of approximately $12.7 million, and to assume certain
indebtedness, to acquire the 50% ownership interest in Caguas/Humacao Cable
Systems which the TCI Ventures Group did not already own (the "Caguas
Acquisition"). At December 31, 1996, the indebtedness to be assumed had a
principal balance of $32 million.
Certain of the agreements underlying the Flextech Transactions and the IFE
Acquisitions required the TCI Ventures Group to repurchase an aggregate of
10,467,090 Flextech Non-Preference Shares at fair value (or in the case of the
IFE Consideration Shares, at the greater of fair value or L3.64 ($6.23 per
share) if such shares have not become convertible into Flextech Ordinary Shares
by June 1, 1997. In connection with the closing of the BBC Joint Venture and the
issuance to the TCI Ventures Group of the Special Voting Share, all of the
Flextech Non-Preference Shares are to be converted into Flextech Ordinary
Shares, thereby eliminating TCI Ventures Group's put obligations with respect to
such shares, insofar as such obligations are based on the convertibility of such
shares.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group (ii) the Hallmark and U S WEST subsidiaries'
interests in Flextech acquired under the Hallmark Subscription and the U S WEST
Subscription, respectively, and (iii) Flextech securities acquired by IFE
pursuant to the IFE Acquisitions exceeds 75% of Flextech's issued and
outstanding share capital, or (y) subject to certain exceptions, the Flextech
Ordinary Shares cease to be admitted to trading on the Official List of the
London Stock Exchange as a result of the exercise by the TCI Ventures Group of
any of its rights as a Flextech shareholder, the TCI Ventures Group shall be
obligated to offer to purchase from the Hallmark and U S WEST subsidiaries, and
IFE any Flextech Ordinary Shares or Flextech Non-Preference Shares held by them
and which were originally acquired pursuant to the Hallmark Subscription, the U
S WEST Subscription, or the IFE Acquisitions, as applicable. Under such
circumstances, the offer price for such shares shall be the higher of (i) the
then current market price for the Flextech Ordinary Shares and (ii) the highest
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price paid to any third party by the TCI Ventures Group for any Flextech
Ordinary Shares or Flextech Non-Preference Shares during the preceding 12 month
period. In the event the TCI Ventures Group is required to purchase any Flextech
Non-Preference Shares or Flextech Ordinary Shares, as described above, it may
elect, subject to certain limited exceptions, to pay the purchase price thereof
in cash or in shares of International Series A common stock, or in certain
securities of TCI.
On December 13, 1995, International invested in MultiThematiques with two
French media companies, CANAL + S.A. ("Canal +") and General d'Images S.A.
("GDI"). Canal + and GDI have contributed to MultiThematiques their combined
equity interests in four French thematic channels and Canal + has also
contributed its equity interest in a Spanish classic movie channel. The TCI
Ventures Group contributed 123.1 million French Francs ("FF") ($24.7 million at
the applicable exchange rate), FF105.0 million ($20.2 million) and FF100.00
million ($19.3 million) to MultiThematiques in December 1995, December 1996 and
February 1997, respectively. The TCI Ventures Group is obligated to contribute
an additional FF164.0 million ($31.6 million) no later than December 13, 1997.
In order to manage the TCI Ventures Group's foreign exchange currency risk with
respect to its December 13, 1997 contribution obligation, the TCI Ventures Group
entered into a foreign currency option contract that allows the TCI Ventures
Group to purchase FF 164.0 million at a price of FF 5.5367 per U.S. dollar
through December 13, 1997. Each of International, Canal + and GDI own a
one-third interest in MultiThematiques.
On January 27, 1997, International announced that it was instituting a
stock repurchase program. Under the stock repurchase program, International may
repurchase from time to time up to 5% (approximately 5.3 million shares) of its
outstanding Series A common stock. As of March 31, 1997, International had
repurchased 492,000 shares under such program for an aggregate purchase price of
$6.8 million.
The board of directors of UVSG has authorized it to repurchase from time to
time up to an aggregate of 1,000,000 shares of its Class A common stock using
existing cash resources. No shares of stock were repurchased during 1996;
however, through March 20, 1997, UVSG had repurchased 124,000 shares of stock.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in 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 in 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, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in, Inter-Group Interest of the TCI Group in such Group or, in the case of a
transfer from either the Liberty Media Group or the TCI Ventures Group to the
TCI Group, reflected as a reduction in any then existing Inter-Group Interest of
the TCI Group 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.
Except as described with respect to the Credit Facility, 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,
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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 TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
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.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group 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 TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures 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 TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group 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 TCI Ventures Group.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
will be based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
The Board 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. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is
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presented to TCI or any of its controlled affiliates, including those that are a
part of the Liberty Media Group. The foregoing does not apply to (1)
international programming services owned or managed, directly or indirectly (in
whole or in part), by TCI or any of its controlled affiliates other than
International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
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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, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996.
We have also audited the accompanying combined balance sheets of TCI
Ventures Group (a combination of certain assets of Tele-Communications, Inc., as
defined in note 1) as of December 31, 1996 and 1995, and the related combined
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. 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 Ventures 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 Ventures Group are intended to reflect
the performance of the businesses of Tele-Communications, Inc. consisting of
Tele-Communications, Inc.'s principal international assets and substantially all
of Tele-Communications, Inc.'s domestic non-cable and non-programming assets.
The combined financial statements of TCI Ventures Group should be read in
conjunction with the consolidated financial statements of Tele-Communications,
Inc. and subsidiaries.
In our opinion, the financial statements referred to in the second
paragraph above present fairly, in all material respects, the combined financial
position of TCI Ventures Group as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
May 30, 1997, except for the
second paragraph in
note 1 and the second,
third and fourth
paragraphs of note 14,
which are as of
July 11, 1997.
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 105,527 141,754
Trade and other receivables, net............................ 115,491 32,600
Film inventory and other prepaid expenses................... 85,998 45,451
Investment in Telewest Communications plc ("Telewest"),
accounted for under the equity method (note 8)............ 488,495 550,216
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 9)...................... 829,651 689,062
Investments in Teleport Communications Group, Inc., TCG
Partners and certain local market partnerships
("Teleport"), accounted for under the equity method, and
related receivables (note 10)............................. 276,112 244,012
Investments in other affiliates, accounted for under the
equity method, and related receivables (note 11).......... 474,599 391,649
Property and equipment, at cost:
Land...................................................... 7,837 3,950
Distribution systems...................................... 761,191 470,449
Support equipment and buildings........................... 208,294 120,455
---------- ----------
977,322 594,854
Less accumulated depreciation............................. 240,322 146,312
---------- ----------
737,000 448,542
---------- ----------
Franchise costs and other intangible assets................. 1,029,842 620,914
Less accumulated amortization............................. 103,631 47,585
---------- ----------
926,211 573,329
---------- ----------
Other assets, net of amortization........................... 220,619 330,554
---------- ----------
$4,259,703 3,447,169
========== ==========
LIABILITIES AND COMBINED EQUITY
Accounts payable............................................ $ 71,776 28,766
Accrued liabilities......................................... 148,962 60,927
Customer prepayments........................................ 100,670 2,407
MultiThematiques Obligation (note 11)....................... 47,902 65,876
Capital lease obligations (note 15)......................... 199,961 116,872
Debt (note 12).............................................. 526,254 204,189
Deferred income taxes (note 14)............................. 220,306 254,816
Other liabilities........................................... 21,477 8,434
---------- ----------
Total liabilities.................................. 1,337,308 742,287
---------- ----------
Minority interests in equity of subsidiaries (notes 4 and
5)........................................................ 370,879 326,160
Combined equity (notes 4, 5 and 13):
Combined equity........................................... 2,686,794 2,326,106
Cumulative foreign currency translation adjustment, net of
taxes................................................... 26,146 (8,555)
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 15,077 61,171
---------- ----------
2,728,017 2,378,722
Due from Tele-Communications, Inc. ("TCI" or the
"Company")("TCI Note Receivable")(note 13).............. (176,501) --
---------- ----------
Total combined equity.............................. 2,551,516 2,378,722
---------- ----------
Commitments and contingencies (notes 4, 5, 9, 11 and 15).... $4,259,703 3,447,169
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-160
<PAGE> 368
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue (note 13)........................................... $ 925,676 325,991 103,844
Operating costs and expenses:
Operating (note 13)....................................... 536,457 137,038 75,045
Programming rights provision.............................. 8,706 -- --
General and administrative (note 13)...................... 288,735 142,183 26,428
Stock compensation (note 15).............................. (6,954) 4,614 (756)
Depreciation.............................................. 90,411 49,125 22,674
Amortization.............................................. 58,878 25,972 5,996
--------- ------- -------
976,233 358,932 129,387
--------- ------- -------
Operating loss......................................... (50,557) (32,941) (25,543)
Other income (expense):
Share of losses of Telewest (note 8)...................... (109,357) (70,274) (42,520)
Share of losses of the PCS Ventures (note 9).............. (133,497) (33,890) (992)
Share of losses of Teleport (note 10)..................... (50,543) (29,975) (19,366)
Share of losses of other affiliates (note 11)............. (74,941) (60,951) (35,791)
Interest income (note 13)................................. 30,040 15,267 3,290
Interest expense.......................................... (51,128) (41,730) (12,979)
Gain on sale of subsidiary stock (note 7)................. -- 122,660 --
Gain on issuance of stock by equity investees (notes 8 and
10).................................................... 12,668 164,900 161,481
Gain (loss) on disposition of assets, net................. 12,225 48,710 (6,133)
Recognized holding gain for available-for-sale securities,
net.................................................... 8,048 -- --
Minority interests' share of losses (earnings)............ 28,177 (14,924) 10,279
Foreign currency transaction gains (losses)............... 6,994 (2,649) 1,389
Other, net................................................ 3,104 (5,960) 500
--------- ------- -------
(318,210) 91,184 59,158
--------- ------- -------
Earnings (loss) before income taxes.................... (368,767) 58,243 33,615
Income tax benefit (expense) (note 14)...................... 110,345 1,797 (20,965)
--------- ------- -------
Net earnings (loss).................................... $(258,422) 60,040 12,650
========= ======= =======
Pro forma net loss per common share (note 2)................ $ (1.26)
=========
</TABLE>
See accompanying notes to combined financial statements.
F-161
<PAGE> 369
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
STATEMENTS OF COMBINED EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING
FOREIGN GAINS FOR
CURRENCY AVAILABLE-
TRANSLATION FOR-SALE
ADJUSTMENT, SECURITIES, TOTAL
COMBINED NET OF NET OF TCI NOTE COMBINED
EQUITY TAXES TAXES RECEIVABLE EQUITY
---------- ----------- ------------ ---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993....................... $ 634,009 (13,504) -- -- 620,505
Net earnings..................................... 12,650 -- -- -- 12,650
Foreign currency translation adjustment.......... -- 9,851 -- -- 9,851
Change in unrealized holding gains for
available-for-sale securities.................. -- -- 575 -- 575
Stock compensation............................... (756) -- -- -- (756)
Revenue from TCI Group and Liberty Media Group... (7,274) -- -- -- (7,274)
Operating costs to TCI Group..................... 2,600 -- -- -- 2,600
Corporate general and administrative cost
allocations.................................... 445 -- -- -- 445
Intergroup tax allocation........................ 31,909 -- -- -- 31,909
Other intercompany transfers..................... 498,277 -- -- -- 498,277
---------- ------- ------- -------- ---------
Balance at December 31, 1994....................... 1,171,860 (3,653) 575 -- 1,168,782
Net earnings..................................... 60,040 -- -- -- 60,040
Foreign currency translation adjustment.......... -- (4,902) -- -- (4,902)
Change in unrealized holding gains for
available-for-sale securities.................. -- -- 60,596 -- 60,596
Adjustment in connection with the issuance of
ordinary shares by Flextech p.l.c. (note 4).... 50,900 -- -- -- 50,900
Issuance of International common stock in 1995
initial public offering........................ 301,343 -- -- -- 301,343
Issuance of International common stock as partial
consideration for investment................... 11,000 -- -- -- 11,000
Stock compensation............................... 4,614 -- -- -- 4,614
Revenue from TCI Group and Liberty Media Group... (20,881) -- -- -- (20,881)
Operating costs to TCI Group..................... 3,400 -- -- -- 3,400
Corporate general and administrative cost
allocations.................................... 4,120 -- -- -- 4,120
Intergroup tax allocation........................ (55,941) -- -- -- (55,941)
Other intercompany transfers..................... 795,651 -- -- -- 795,651
---------- ------- ------- -------- ---------
Balance at December 31, 1995....................... 2,326,106 (8,555) 61,171 -- 2,378,722
Net loss......................................... (258,422) -- -- -- (258,422)
Issuance of International common stock........... 9,990 -- -- -- 9,990
Minority interest deficit in Satellite Joint
Venture at formation........................... (49,169) -- -- -- (49,169)
Excess of earnings over distributions to minority
interest in Satellite Joint Venture............ 8,454 -- -- -- 8,454
Foreign currency translation adjustment.......... -- 34,701 -- -- 34,701
Recognition of unrealized gain for
available-for-sale securities, net............. -- -- (8,048) -- (8,048)
Change in unrealized holding gain for
available-for-sale securities.................. -- -- (38,046) -- (38,046)
TCI Note Receivable.............................. -- -- -- (336,375) (336,375)
Repayment on TCI Note Receivable................. -- -- -- 159,874 159,874
Stock compensation............................... (6,954) -- -- -- (6,954)
Revenue from TCI Group and Liberty Media Group... (38,292) -- -- -- (38,292)
Operating costs to TCI Group..................... 38,400 -- -- -- 38,400
Corporate general and administrative cost
allocations.................................... 7,918 -- -- -- 7,918
Interest income on TCI Note Receivable........... (14,000) -- -- -- (14,000)
Intergroup tax allocation........................ (52,660) -- -- -- (52,660)
Other intercompany transfers..................... 715,423 -- -- -- 715,423
---------- ------- ------- -------- ---------
Balance at December 31, 1996....................... $2,686,794 26,146 15,077 (176,501) 2,551,516
========== ======= ======= ======== =========
</TABLE>
See accompanying notes to combined financial statements.
F-162
<PAGE> 370
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(258,422) 60,040 12,650
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................... 149,289 75,097 28,670
Programming rights provision............................ 8,706 -- --
Stock compensation...................................... (6,954) 4,614 (756)
Payment of stock compensation........................... -- (3,270) --
Share of losses of Telewest............................. 109,357 70,274 42,520
Share of losses of PCS Ventures......................... 133,497 33,890 992
Share of losses of Teleport............................. 50,543 29,975 19,366
Share of losses of other affiliates..................... 74,941 60,951 35,791
Gain on sale of subsidiary stock........................ -- (122,660) --
Gain on issuance of stock by equity investees........... (12,668) (164,900) (161,481)
Loss (gain) on disposition of assets.................... (12,225) (48,710) 6,133
Recognized holding gain for available-for-sale
securities............................................. (8,048) -- --
Minority interests' share of earnings (losses).......... (28,177) 14,924 (10,279)
Foreign currency transaction losses (gains)............. (6,287) 1,761 (1,389)
Accretion of discount on MultiThematiques Obligation.... 5,751 271 --
Other noncash charges (credits)......................... 6,445 (1,259) 8
Deferred income tax expense (benefit)................... (71,643) 45,063 (10,949)
Intergroup tax allocation............................... (52,660) (55,941) 31,909
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................. (13,394) (4,147) (9,810)
Change in film inventory and other prepaid expenses... (16,667) (31,199) (2,272)
Change in payables and accruals....................... 34,471 42,124 (6,602)
--------- ---------- --------
Net cash provided (used) by operating activities.... 85,855 6,898 (25,499)
--------- ---------- --------
Cash flows from investing activities:
Investments in and loans to affiliates and others......... (499,685) (1,040,896) (393,137)
Cash paid for acquisitions, net........................... (108,790) (189,752) --
Payment of deposit on pending acquisition................. -- -- (20,000)
Capital expended for property and equipment............... (209,378) (141,569) (76,050)
Cash paid to purchase minority interests.................. (4,636) (24,735) --
Proceeds from repayment of loans by affiliates and
others.................................................. 21,628 12,062 1,640
Proceeds from dispositions of assets...................... 142,854 99,335 63
Other, net................................................ 3,304 (47,931) (56)
--------- ---------- --------
Net cash used in investing activities............... (654,703) (1,333,486) (487,540)
--------- ---------- --------
Cash flows from financing activities:
Issuance of debentures.................................... 345,000 -- --
TCI Note Receivable....................................... (336,375) -- --
Repayments on TCI Note Receivable......................... 159,874 -- --
Net proceeds from initial public offering................. -- 301,343 --
Borrowings of debt........................................ 191,219 314,815 12,772
Repayments of debt........................................ (282,541) (310,216) (9,282)
Repayments of capital lease obligations................... (11,724) (5,742) (1,394)
Net proceeds from issuance of common stock................ 9,990 -- --
Cash proceeds from issuance of shares by Flextech plc..... -- 74,779 --
Payment of deferred financing costs....................... (9,524) (2,105) --
Change in cash transfers from other Groups................ 457,954 1,081,757 497,285
Contributions from minority interest owners............... 4,822 -- 16,162
Other, net................................................ -- 8,707 --
--------- ---------- --------
Net cash provided by financing activities........... 528,695 1,463,338 515,543
--------- ---------- --------
Effect of exchange rate changes on cash..................... 3,926 (3,142) 224
--------- ---------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (36,227) 133,608 2,728
Cash and cash equivalents:
Beginning of year....................................... 141,754 8,146 5,418
--------- ---------- --------
End of year............................................. $ 105,527 141,754 8,146
========= ========== ========
</TABLE>
See accompanying notes to combined financial statements.
F-163
<PAGE> 371
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) BASIS OF PRESENTATION
On May 14, 1997, the Board of Directors of TCI (the "Board") authorized,
subject to shareholder approval (the "TCI Ventures Group Stock Proposal"), the
issuance of two new series of stock ("TCI Ventures Group Common Stock") which
are intended to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
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 residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses,
F-164
<PAGE> 372
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities as the Company or any of its subsidiaries may in the
future acquire for the TCI Ventures Group, as determined by the Board. It is
currently the intention of the Company that any businesses, assets and
liabilities so attributed to the TCI Ventures Group in the future would not
include assets and liabilities of the Company's domestic programming businesses
and investments or its domestic cable operations (including its businesses which
utilize its cable plant to distribute telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures 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 Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures 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.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
F-165
<PAGE> 373
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group Common Stock would be issued upon such exchange. Similarly, options to
purchase shares of Series A TCI Group Stock that are outstanding under the
Company's various stock incentive plans will be adjusted upon consummation of
the Exchange Offers by dividing such options into options to purchase shares of
Series A TCI Ventures Group Common Stock and options to purchase shares of
Series A TCI Group Stock, with 30% of the shares originally subject to the
options being allocated to the options to purchase TCI Ventures Group Common
Stock and 70% of such shares being allocated to the options to purchase shares
of TCI Group Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures 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
Stock, Liberty Media Group Stock and TCI Ventures Group 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 Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group 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 Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
are based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
TCI Ventures Group considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1995 was not material.
F-166
<PAGE> 374
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Investments
For those investments in affiliates in which the TCI Ventures 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 the TCI Ventures Group's share of the net earnings or
losses of affiliates as they occur rather than as dividends or other
distributions are received. The TCI Ventures Group's share of net earnings or
losses of affiliates includes the amortization of purchase adjustments.
Investments in debt securities and marketable equity securities in which
the TCI Ventures Group's voting interest is less than 20% are classified as
available-for-sale and are carried at fair value. Any unrealized holding gains
and losses (net of the related deferred income tax effect) are carried as a
separate component of combined equity. Any unrealized holding losses which are
deemed to be other than temporary are charged to operations. Other investments
in which the TCI Ventures Group's ownership interest is less than 20% are
generally carried at cost.
Changes in the TCI Ventures Group's proportionate share of the underlying
equity of a subsidiary or equity method investee, which result from the issuance
of additional equity by such subsidiary or equity method investee, are generally
recognized as gains or losses in the TCI Ventures Group's statements of
operations.
Film Inventory
Film inventory includes exhibition and other exploitation rights acquired
under license agreements or through production and output agreements. Such
rights, along with the related obligation, are recorded at the face amount of
the contract at the time the programming becomes available.
Film inventory is carried at the lower of unamortized cost or net
realizable value. Exhibition rights are amortized on a straight-line basis over
the available runs in the contract period. Other exploitation rights are
amortized based on the percentage that current year revenues bear to estimated
future revenues on a program-by-program basis. Estimates of future revenues are
periodically reviewed by management and revised when warranted by changing
conditions, such as changes in the distribution marketplace or changes in the
expected usage of a program.
Long-Lived Assets
(a) Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Equipment acquired under capital leases
are stated at the present value of minimum lease payments, not to exceed the
fair value of the leased asset. Construction and initial subscriber installation
costs, including interest during construction, material, labor and applicable
overhead, are capitalized. Interest capitalized during 1996, 1995 and 1994 was
not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 20 years for distribution systems (3 to 5 years for converters and
in-home wiring and 10 to 20 years for the remaining components of the
distribution system) and 3 to 40 years for support equipment and buildings (3 to
5 years for support equipment and 10 to 40 years for buildings and
improvements). Equipment held under capital leases are depreciated on a
straightline basis over the shorter of the lease term or estimated useful life
of the asset.
Repairs and maintenance are charged to operations, and additions are
capitalized. At the time of ordinary retirements, sales or other dispositions of
cable property, the original cost and cost of removal of such property are
charged to accumulated depreciation, and salvage, if any, is credited thereto.
Gains and losses relating to cable are only recognized in connection with sales
of properties in their entirety. Gains and losses relating to all other assets
are recognized at the time of disposal.
F-167
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Franchise Costs and Other Intangible Assets
Franchise costs and other intangible assets generally include the
difference between the cost of acquiring cable, telephony and programming
companies and amounts allocated to their tangible assets. Such amounts are
amortized on a straight-line basis over their useful lives (10 to 40 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. The TCI Ventures 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 the
TCI Ventures Group. In accordance with Statement No. 121, the TCI Ventures 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. The TCI Ventures
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").
The TCI Ventures Group deems Assets to be impaired if the TCI Ventures Group is
unable to recover the carrying value of its 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 values. The TCI Ventures 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.
Foreign Currency Translation
The functional currency of TCI Ventures Group is the United States ("U.S.")
dollar. The functional currency of the TCI Ventures Group's foreign operations
generally is the applicable local currency for each foreign subsidiary and
foreign equity method investee. In this regard, the functional currency of
Cablevision S.A. and certain affiliated companies ("Cablevision"), Flextech
p.1.c. ("Flextech") and the multi-channel video and telecommunications
distribution business in Puerto Rico (the "Consolidated Puerto Rico Entities")
is the Argentine peso, the United Kingdom ("UK") pound sterling ("L" or
"pounds") and the U.S. dollar, respectively. All amounts presented herein with
respect to Cablevision are stated in U.S. dollars because the Argentine
government has maintained an exchange rate of one U.S. dollar to one Argentine
peso since April of 1991. However, no assurance can be given that the Argentine
government will maintain such an exchange rate in future periods. Assets and
liabilities of foreign subsidiaries and foreign equity investees are translated
at the spot rate in effect at the applicable reporting date, and the combined
statements of operations and the TCI Ventures Group's share of the results of
operations of its foreign equity affiliates are translated at the average
exchange rates in effect during the applicable period. The resulting unrealized
cumulative translation adjustment, net of applicable income taxes, is recorded
as a separate component of combined equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in the combined statements of operations as unrealized
(based on the applicable period end translation) or realized upon settlement of
the transactions.
F-168
<PAGE> 376
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash flows from the TCI Ventures Group's consolidated foreign subsidiaries
are calculated in their functional currencies. The effect of exchange rate
changes on cash balances held in foreign currencies is reported as a separate
line item in the accompanying statements of cash flows.
Foreign Currency Derivatives
From time to time, the TCI Ventures Group uses certain derivative financial
instruments to manage its foreign currency risks. Amounts receivable or payable
pursuant to derivative financial instruments that qualify as hedges of existing
assets, liabilities and firm commitments are deferred and reflected as an
adjustment of the carrying amount of the hedged item. Market value changes in
all other derivative financial instruments are recognized currently in the
combined statements of operations. At December 31, 1996 and 1995, the TCI
Ventures Group had no material deferred hedging gains or losses.
Proforma Loss Per Common Share
Pro forma loss attributable to common shareholders for the year ended
December 31, 1996 assumes, solely for the purpose of this calculation, that the
Exchange Offers were consummated prior to January 1, 1996 and that, the Exchange
Offers were fully subscribed.
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. As allowed by Statement No. 123, the TCI Ventures Group continues
to account for stock-based employee compensation pursuant to Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"). For the year ending
December 31, 1996, the TCI Ventures Group estimates that compensation expense
would not be materially different under Statement No. 123.
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.
(3) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid for interest was $36.3 million, $38.0 million and $12.7 million
for years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for
income taxes was $12.5 million during the year ended December 31, 1996 and was
not material during the years ended December 31, 1995 and 1994.
F-169
<PAGE> 377
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net cash paid by the TCI Ventures Group for acquisitions is as follows
(amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Fair value of assets acquired...................... $ 632,768 589,193 92,536
Issuance of notes payable.......................... (51,727) (86,755) --
Liabilities assumed (including deferred income tax
liabilities of $36.6 million and $177.7 million
in 1996 and 1995, respectively), net of current
assets........................................... (151,273) (310,022) (33,857)
Historical cost of contributed net assets.......... -- -- (40,017)
Increase in minority interests in equity of
subsidiaries due to issuance of shares by
Flextech......................................... (43,223) -- --
Minority interest in equity of acquired entity..... (81,751) (2,664) (18,662)
Increase in combined equity resulting from
preferred stock issued in acquisition............ (196,004) -- --
--------- -------- -------
Cash paid for acquisitions....................... $ 108,790 189,752 --
========= ======== =======
Property and equipment purchased under capital
leases........................................... $ 63,656 77,076 34,058
========= ======== =======
</TABLE>
(4) FLEXTECH TRANSACTIONS
On February 2, 1994, the TCI Ventures Group contributed its 100% ownership
interests in Flextech Television Limited ("FTV") and Bravo Classic Movies
Limited ("Bravo Ltd."), together with its equity method investments in UK Gold
Television Limited ("UKGL"), UK Living Limited ("UKLL") and Starstream Limited
("Starstream") (collectively, the "International UK Programming Assets") to
Flextech in exchange for 60.4% of Flextech's issued and outstanding ordinary
shares.
The TCI Ventures Group owned, at December 31, 1996, 56,340,598 Flextech
Ordinary Shares representing 46.5% of the issued and outstanding Flextech share
capital and 50.9% of the aggregate voting interests attributable to such
Flextech share capital.
On June 5, 1995, Flextech completed the sale of newly issued Flextech
Ordinary Shares and newly issued convertible non-preference shares ("Flextech
Non-Preference Shares") to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and U S WEST, Inc. ("U S WEST") (the
"U S WEST Subscription") in exchange for L48.4 million ($77.2 million using the
applicable exchange rate) in cash and convertible redeemable preferred shares of
Thomson Directories Limited, respectively. The Hallmark Subscription and the U S
WEST Subscription are collectively referred to herein as the "Flextech
Transactions."
In connection with the Flextech Transactions, the TCI Ventures Group
recorded a $50.9 million increase to combined equity and a $93.2 million
increase to minority interests in equity of subsidiaries. No gain was recognized
due primarily to the existence of the TCI Ventures Group's contingent
obligations to purchase Flextech Non-Preference Shares and/or Flextech Ordinary
Shares from U S WEST (UK) and Hallmark.
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in Maidstone
Broadcasting ("Maidstone"), which Flextech did not already own and (ii) a 100%
ownership interest in TVS Television Limited. Excluding liabilities assumed, the
total consideration paid by Flextech to acquire such ownership interests was
L31.4 million ($47.8 million using the applicable exchange rate), of which L3.0
million ($4.5 million using the applicable exchange rate) was paid in cash and
the remaining balance was satisfied by Flextech's issuance of convertible
non-preference shares (the "IFE Consideration Shares"). In connection with the
above-described transactions (collectively, the "IFE Acquisitions"), the TCI
Ventures Group granted to IFE the right to put the IFE Consideration Shares to
the TCI
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<PAGE> 378
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ventures Group under certain circumstances. Due primarily to the TCI Ventures
Group's contingent purchase obligations under the above-described put option,
the TCI Ventures Group recognized no gain in connection with the dilution of the
TCI Ventures Group's ownership interest in Flextech that resulted from the
issuance of the IFE Consideration Shares. Accordingly, the full value ascribed
to the IFE Consideration Shares has been reflected as an increase to minority
interests in equity of subsidiaries as set forth in the accompanying December
31, 1996 combined balance sheet. In connection with the BBC Joint Ventures, as
defined below, and certain related transactions, all of the IFE Consideration
Shares were converted into Flextech Ordinary Shares thereby eliminating the TCI
Ventures Group's put obligation with respect to such shares.
In January 1997, the TCI Ventures Group reduced its voting interest in
Flextech to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to
vote 960,850 Flextech Ordinary Shares at any shareholder meeting to be held
through December 31, 1997. In April 1997, Flextech and BBC Worldwide Limited
("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions. The consummation of the BBC Joint
Ventures and related transactions resulted in, among other things, a reduction
of TCI Ventures Group's ownership interest in Flextech to 35.9% and the issuance
to the TCI Ventures Group by Flextech of a special voting share (the "Special
Voting Share"). The Special Voting Share when combined with TCI Ventures Group's
other share capital in Flextech, allows TCI Ventures Group to cast 50% of the
votes on most matters brought to the shareholders of Flextech for vote. So long
as the Proxy remains outstanding, TCI Ventures Group's 50% voting interest will
be reduced by the 960,850 votes represented by the Proxy. The Special Voting
Share will terminate upon the occurrence of the earlier of (i) the third
anniversary of issuance or (ii) any transfer of Flextech shares by the TCI
Ventures Group outside a specified affiliated group. In light of the TCI
Ventures Group's decreased voting interest in Flextech, the TCI Ventures Group,
effective January 1, 1997, ceased to consolidate Flextech and began to account
for Flextech using the equity method of accounting.
In connection with the Flextech Combination, the TCI Ventures Group
purchased L9.4 million ($14.2 million using the applicable exchange rate) of
certain unsecured convertible debt of Flextech (the "Flextech Convertible
Debt"). The Flextech Convertible Debt may be converted into Flextech ordinary
shares ("Flextech Ordinary Shares") at the rate of L3.00 ($5.14) per Flextech
Ordinary Share for a period of 180 days commencing in September 1997. The
conversion of such debt, however, would not increase the TCI Ventures Group's
voting interest attributable to Flextech share capital so long as the Proxy
remains outstanding.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UKLL and UKGL
all of the share capital in those two companies not already owned by Flextech
and the TCI Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding Flextech Non-Preference Shares had been issued in
connection with previous acquisition transactions by Flextech due to the TCI
Ventures Group's requirement that it maintain specified voting interests in
Flextech. With the issuance of the Special Voting Share, the purpose for the
Flextech Non-Preference Shares was eliminated. Accordingly, and in order to
simplify the capital structure of Flextech, upon the issuance of the Special
Voting Share, the Flextech Non-Preference Shares were converted into Flextech
Ordinary Shares. Immediately following such conversion, and the issuance of
additional Flextech Ordinary Shares in connection with the UKGL and UKLL
transactions described above, (i) the TCI Ventures Group's interest in the
equity share capital of Flextech was 35.9% and (ii) the TCI Ventures Group's
voting interest was 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). If Flextech
defaults in
F-171
<PAGE> 379
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
its funding obligation to the Principal Joint Venture and fails to cure within
42 days after receipt of notice from BBC Worldwide, BBC Worldwide is entitled,
within the following 90 days, to require that the TCI Ventures Group assume all
of Flextech's funding obligations to the Principal Joint Venture (the "Standby
Commitment"). In addition to Flextech's April 1997 purchase of L22 million ($36
million) of ordinary shares in the Principal Joint Venture, Flextech is
obligated to provide the Principal Joint Venture with a primary credit facility
of L88 million ($144 million) and, subject to certain restrictions, a standby
credit facility of L30 million ($49 million).
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit facilities, or (ii) the date on which Flextech delivers a
bank guarantee of all of its funding obligations to the Principal Joint Venture.
So long as the TCI Ventures Group is contingently obligated under the
Standby Commitment, it has been agreed that (i) Flextech will not sell any of
its direct or indirect interests in the Principal Joint Venture, (ii) Flextech
will not conduct its business in such a way as is likely to cause it to be in
material breach of any material contracts or to have insufficient working
capital to meet its funding obligation to the Principal Joint Venture, and (iii)
Flextech will use its available resources to subscribe for any outstanding loan
stock of the Principal Joint Venture, if and to the extent required by TCI
Ventures Group at any time after December 31, 2011.
(5) ACQUISITIONS
(a) OCC Acquisition
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation, for a purchase price of $112.2 million (the "OCC
Acquisition"). Cash consideration of $43.7 million was paid at closing and an
additional cash payment of $22.1 million was paid on December 1, 1996. The
remaining purchase price was satisfied by Cablevision's issuance of $46.4
million principal amount of secured negotiable promissory notes (the "OCC
Notes"). The OCC Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of OCC have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded OCC's assets and liabilities at fair value.
(b) UVSG Merger
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended (the "UVSG Merger
Agreement"), among UVSG, TCI and TCI Merger Sub, Inc. ("Merger Sub"), pursuant
to which Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). TCI Ventures Group acquired 12,373,294 shares of UVSG Class
B common stock and 2,145,466 shares of UVSG Class A common stock, together
representing approximately 40% of the issued and outstanding common stock of
UVSG and approximately 86% of the total voting power of UVSG common stock
immediately after the UVSG Merger, resulting in UVSG becoming a majority-
F-172
<PAGE> 380
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
controlled subsidiary of TCI Ventures Group. The UVSG Merger has been accounted
for by the purchase method. Accordingly, the results of operations of UVSG have
been consolidated with those of the TCI Ventures Group since the date of
acquisition and the TCI Ventures Group recorded UVSG's assets and liabilities at
fair value.
(c) Satellite Joint Venture
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Media Group
(the "Satellite Joint Venture"). The combination was accounted for as a merger
of businesses under common control, whereby the assets and obligations of both
UVSG and Liberty Media Group which were contributed to the venture were
reflected at their historical cost. The operations of the Satellite Joint
Venture have been consolidated, effective April 1, 1996, with the operating
results of the TCI Ventures Group.
Assets contributed by Liberty Media Group to the Satellite Joint Venture
totaled $14.7 million and consisted primarily of $14.3 million of accounts
receivable. These assets were subject to liabilities of $64.0 million,
consisting of $50.9 million of customer prepayments and $13.1 million of
accounts payable and accrued liabilities and resulted in Liberty Media Group
contributing net liabilities to the venture. UVSG contributed net liabilities in
the same amount to the venture. UVSG has classified the capital deficit of
Liberty Media Group in the venture as a reduction to combined equity.
Unaudited pro forma summarized operating results of the TCI Ventures Group
assuming the OCC Acquisition, IFE Acquisitions, the UVSG Merger and the
Satellite Joint Venture had been, in each case, consummated on January 1, 1995,
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ---------
<S> <C> <C>
Revenue..................................................... $1,017,447 763,001
========== =======
Net earnings (loss)......................................... $ (259,359) 66,679
========== =======
</TABLE>
The foregoing unaudited pro forma information is based upon historical
results of operations and is not necessarily indicative of the results that
would have been obtained had the OCC Acquisition, IFE Acquisitions, the UVSG
Merger and the Satellite Joint Venture actually occurred on January 1, 1995.
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision for an adjusted purchase price of $282.0 million, before
liabilities assumed (the "Cablevision Acquisition"). The purchase price was paid
with cash consideration of $195.2 million (including a previously paid $20
million deposit) and the TCI Ventures Group's issuance of $86.8 million
principal amount of secured negotiable promissory notes payable (the
"Cablevision Notes") to the selling shareholders. The Cablevision Acquisition
has been accounted for by the purchase method. Accordingly, the results of
operations of Cablevision have been consolidated with those of the TCI Ventures
Group since the date of acquisition and the TCI Ventures Group recorded
Cablevision's assets and liabilities at fair value.
None of Cablevision's $65.0 million of net liabilities at the April 25,
1995 acquisition date, and none of Cablevision's post-acquisition operating
results have been allocated to Cablevision's 49% minority interest because (i)
the minority interest has no obligation to provide any funding to Cablevision
and (ii) the minority interest continued to have a negative historical cost
basis in Cablevision's net assets at December 31, 1996. To the extent that
Cablevision's post-acquisition net earnings (exclusive of the effects of
purchase accounting) cause the minority interest's historical cost basis in
Cablevision's net assets to become positive, the TCI Ventures Group would begin
to allocate 49% of such net earnings to the minority interest. If the minority
F-173
<PAGE> 381
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interest's historical cost basis had been positive for the periods ended
December 31, 1996 and 1995, the TCI Ventures Group would have allocated $15.9
million and $11.7 million, respectively, of Cablevision's net earnings
(exclusive of the effects of purchase accounting) to the minority interest.
(6) DISPOSITION
On October 17, 1995, IVS Cable Holdings Limited ("IVS"), a consolidated
subsidiary of Flextech, completed the sale of a group of cable television
subsidiaries to an unaffiliated third party for aggregate cash proceeds of L62.6
million ($98.9 million using the applicable exchange rate) (the "IVS Subsidiary
Sale"). Flextech, which, at the time, indirectly owned 91.7% of IVS, received
L59.3 million ($93.7 million using the applicable exchange rate) of the cash
proceeds from the IVS Subsidiary Sale.
(7) SALE OF SUBSIDIARY STOCK
On July 18, 1995, International completed an initial public offering (the
"IPO") in which it sold 20 million shares of International 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 International's total issued and outstanding
common stock. As a result of the IPO, the TCI Ventures Group recognized a gain
amounting to $123 million.
(8) INVESTMENT IN TELEWEST
From December 18, 1991 through November 22, 1994, the TCI Ventures Group
and certain affiliates of U S WEST, Inc. (the "U S WEST Affiliates") each held a
50% ownership interest in the TCI/U S WEST Cable Communications Group (the
"Telewest UK Joint Venture").
On November 22, 1994, the TCI Ventures Group and the U S WEST UK Affiliates
each entered into a series of transactions that resulted in the conversion of
their respective 50% ownership interests in the Telewest UK Joint Venture into
302,250,000 ordinary shares and 76,500,000 convertible preference shares of
Telewest's predecessor ("Old Telewest") (the "Old Telewest Exchange"). In
connection with the Old Telewest Exchange, the TCI Ventures Group and the U S
WEST Affiliates entered into an agreement to vote their shares together in such
a manner as may be mutually agreed, or in the absence of such agreement, to vote
their shares together in such a manner that would be most likely to continue the
status quo, without materially increasing Old Telewest's financial obligations,
or materially deviating from its approved business plan.
Following the completion of the Old Telewest Exchange, Old Telewest
conducted an initial public offering on November 30, 1994 in which it sold
243,740,000 ordinary shares for aggregate net proceeds of approximately L401.3
million ($627.8 million using the applicable exchange rate) (the "Old Telewest
IPO"). Upon completion of the Old Telewest Exchange and the Old Telewest IPO,
TCI and the U S WEST Affiliates each indirectly held approximately 36% of the
ordinary shares (assuming no conversion of the convertible preference shares)
and approximately 38% of the total outstanding ordinary and convertible
preference shares of Old Telewest. As a result of the Old Telewest IPO, and the
associated dilution of the TCI Ventures Group's ownership interest in Old
Telewest, the TCI Ventures Group recognized a $161.5 million non-cash gain
(before deducting the related tax expense of $56.5 million) during 1994.
During the second quarter of 1995, the Old Telewest shares owned by the TCI
Ventures Group and the U S WEST Affiliates were contributed to TW Holdings,
L.L.C. ("TW Holdings"), an entity in which the TCI Ventures Group and the U S
WEST Affiliates each hold an indirect 50% ownership interest.
On October 3, 1995, the merger of Old Telewest and SBC CableComms (UK)
("SBCC") was consummated whereby a new entity, Telewest (formerly Telewest plc),
acquired all of the outstanding share capital of Old Telewest and SBCC (the
"SBCC Transaction"). The SBCC Transaction effectively resulted in the conversion
of the TCI Ventures Group's 37.8% indirect ownership interest in Old Telewest
into a 26.8% indirect ownership interest in Telewest. As a result of the SBCC
Transaction, and the associated dilution of
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<PAGE> 382
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the TCI Ventures Group's ownership interest in Telewest, the TCI Ventures Group
recognized a non-cash gain of $164.9 million (before deducting estimated
deferred income taxes of $57.7 million) during the fourth quarter of 1995. In
connection with the SBCC Transaction, Telewest received $1.2 billion of net cash
proceeds from the issuance of U.S. dollar denominated senior debentures having
an aggregate principal amount of $1.8 billion at maturity (the "Telewest
Debentures"). As a result of Telewest's issuance of the Telewest Debentures,
changes in the exchange rate used to translate the U.S. dollar into the UK pound
sterling will cause Telewest to experience realized and unrealized foreign
currency transaction gains and losses throughout the term of the Telewest
Debentures, which mature in 2006 and 2007, if not redeemed earlier. During the
year ended December 31, 1996 and the period in 1995 following the issuance of
the Telewest Debentures, Telewest experienced unrealized foreign currency
transaction gains (losses) of $1.7 million and $(23.0 million) respectively,
with respect to the Telewest Debentures.
At December 31, 1996, the TCI Ventures Group indirectly owned through TW
Holdings, 132,638,250 or 26.7% of Telewest's convertible preference shares,
246,111,750 or 26.5% (assuming no conversion of the Telewest convertible
preference shares) of Telewest's ordinary shares, and 26.6% of Telewest's
aggregate convertible preference and ordinary share capital. The rights and
privileges of Telewest's convertible preference shares are similar to those of
the Telewest ordinary shares except that the Telewest convertible preference
shares may only be voted upon resolutions involving the winding up of Telewest
or resolutions involving any modification of the rights or privileges of the
Telewest convertible preference shares. In accordance with the requirements of
the London Stock Exchange, the Telewest convertible preference shares are
convertible into Telewest ordinary shares on a one-for-one basis only to the
extent that, following conversion, at least 25% of the Telewest ordinary shares
remain publicly held. In connection with the formation of TW Holdings, the TCI
Ventures Group and the U S WEST Affiliates entered into certain agreements which
contain provisions regarding, among other matters, the voting and disposition of
the Telewest ordinary and convertible preference shares, which shares represent
the only assets of TW Holdings.
On December 31, 1996, the reported closing price on the London Stock
Exchange of the Telewest ordinary shares was L1.24 per share ($2.12 per share).
Unless the context indicates otherwise, references herein to "Telewest"
include Telewest and its predecessor entities (Old Telewest and the Telewest UK
Joint Venture).
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the TCI Ventures Group's share of Telewest's
operating results from UK pounds to U.S. dollars was 1.5718 to 1, 1.5799 to 1
and 1.5393 to 1 during the years ended December 31, 1996, 1995 and 1994,
respectively. The spot rate used to translate the TCI Ventures Group's share of
Telewest's net assets from UK pounds to U.S. dollars was 1.7125 to 1 and 1.5530
to 1 at December 31, 1996 and 1995, respectively.
F-175
<PAGE> 383
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for Telewest is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Consolidated Financial Position
Cash and receivables, net................................. $ 241,117 797,618
Investments............................................... 162,816 157,426
Property and equipment, net............................... 2,478,030 1,652,094
Franchise costs and other assets, net..................... 956,910 948,797
---------- ---------
Total assets........................................... $3,838,873 3,555,935
========== =========
Debt...................................................... $1,505,713 1,277,465
Other liabilities......................................... 499,635 224,242
Shareholders' equity...................................... 1,833,525 2,054,228
---------- ---------
Total liabilities and equity........................... $3,838,873 3,555,935
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Consolidated Operations
Revenue......................................... $ 455,923 228,744 110,871
Operating, selling, general and administrative
expenses..................................... (454,458) (264,014) (139,504)
Depreciation and amortization................... (245,566) (107,233) (49,484)
--------- -------- --------
Operating loss.......................... (244,101) (142,503) (78,117)
Interest expense................................ (164,757) (42,101) (15,499)
Interest income................................. 26,163 24,718 3,527
Share of losses of affiliates................... (25,076) (20,186) (13,032)
Foreign exchange gain (loss).................... 1,670 (23,029) (32)
Other, net (including realized loss on interest
rate swap of $13,601,000 in 1995 and
extraordinary gain of $11,217,000 in 1994)... 242 (14,184) 13,797
--------- -------- --------
Net loss................................ $(405,859) (217,285) (89,356)
========= ======== ========
</TABLE>
F-176
<PAGE> 384
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INVESTMENTS IN THE PCS VENTURES
Summarized financial information for the PCS Ventures, accounted for under
the equity method, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Financial Position
Cash...................................................... $ 14,427 1,149
Investments and related receivables....................... 2,611,088 2,296,130
Other assets, net......................................... 2,028,530 31,972
---------- ---------
Total assets...................................... $4,654,045 2,329,251
========== =========
Debt...................................................... $ 686,192 --
Other liabilities......................................... 1,407,929 53,436
Owners' equity............................................ 2,559,924 2,275,815
---------- ---------
Total liabilities and equity...................... $4,654,045 2,329,251
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Combined Operations
Revenue........................................... $ 12,647 -- --
Operating expenses................................ (354,593) (66,720) (3,295)
Depreciation and amortization..................... (11,297) (211) (38)
--------- -------- ------
Operating loss............................ (353,243) (66,931) (3,333)
Other, net........................................ (91,327) (45,749) 24
--------- -------- ------
Net loss.................................. $(444,570) (112,680) (3,309)
========= ======== ======
</TABLE>
TCI Ventures Group is a partner 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
residential and business customers nationwide, using the "Sprint" brand. The PCS
Ventures include Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum") and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation, Comcast Corporation, Cox Communications,
Inc. and the TCI Ventures Group. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the TCI Ventures Group.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the TCI
Ventures Group contributed an aggregate of approximately $0.9 billion). The
remaining capital that the Sprint PCS Partnerships will require to fund the
construction of the PCS systems and the commitments made to APC and
Cox-California will be substantial. The partners had agreed in forming the
Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2
billion of equity thereto, from inception through fiscal 1999, subject to
certain requirements. The TCI Ventures Group expects that the remaining
approximately $1.2 billion of such amount (of which the TCI Ventures Group's
share is approximately $0.4 billion) will be contributed by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed). The TCI Ventures Group expects that the Sprint PCS
Partnerships will require additional equity thereafter.
F-177
<PAGE> 385
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
TCI Ventures Group currently believes that such agreement will not result in the
TCI Ventures Group's being required to make any incremental capital
contributions in addition to its pro rata portion of the aforementioned $4.2
billion amount.
(10) INVESTMENT IN TELEPORT
Teleport 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 TCI Ventures Group acquired a 30% ownership interest in
Teleport. Subsequent to the acquisition, the TCI Ventures Group advanced funds
to Teleport in the form of notes receivable. Such notes receivable bore interest
at a variable rate 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 Teleport. 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, Teleport, with Cox, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG Partners to
invest, with Teleport, the Cable Stockholders and other cable operators, in 14
partnerships (the "Local Market Partnership") to develop and operate local
telecommunications networks.
The TCI Ventures Group's investment in Teleport is accounted for under the
equity method of accounting.
Summarized financial information for Teleport, accounted for under the
equity method, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Financial Position
Cash...................................................... $ 277,540 32,835
Investments and related receivables....................... 124,891 99,299
Other assets, net......................................... 1,655,054 931,297
---------- ---------
Total assets...................................... $2,057,485 1,063,431
========== =========
Debt...................................................... $ 985,567 356,500
Other liabilities......................................... 275,048 236,421
Minority interest......................................... -- 4,409
Owners' equity............................................ 796,870 466,101
---------- ---------
Total liabilities and equity...................... $2,057,485 1,063,431
========== =========
</TABLE>
F-178
<PAGE> 386
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Combined Operations
Revenue......................................... $ 267,669 216,445 144,426
Operating expenses.............................. (242,615) (215,861) (160,233)
Depreciation and amortization................... (78,416) (61,482) (30,149)
--------- -------- --------
Operating loss.......................... (53,362) (60,898) (45,956)
Interest expense................................ (73,633) (28,953) (9,862)
Other, net...................................... 12,146 (12,819) (7,182)
--------- -------- --------
Net loss................................ $(114,849) (102,670) (63,000)
========= ======== ========
</TABLE>
In June 1996, Teleport and the Cable Stockholders agreed to simplify the
Teleport capital structure by consolidating the ownership of TCG Partners and
the Local Market Partnerships as wholly owned subsidiaries of Teleport. As part
of this process, certain of the other cable operators agreed to exchange their
interests in the Local Market Partnerships with Teleport directly or through a
Cable Stockholder for Teleport common stock.
Teleport and the Cable Stockholders entered into a reorganization agreement
pursuant to which Teleport, TCG Partners and the Local Market Partnerships were
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization include:
The acquisition by Teleport of TCG Partners in exchange for Teleport
Class B common stock issued to the Cable Stockholders.
The acquisition by Teleport of all interests in 12 of the 14 Local
Market Partnerships in exchange for Teleport Class B common stock issued to
the Cable Stockholders and Teleport Class A common stock issued to other
cable operators.
The contribution to Teleport of $269 million in aggregate principal
amount of indebtedness, plus accrued interest from May 1995, owed by
Teleport to the Cable Stockholders (except that the TCI Ventures Group
retained a $26 million subordinated note due from Teleport) in exchange for
Teleport Class B common stock issued to the Cable Stockholders.
Teleport conducted an initial public offering (the "Teleport 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 Teleport IPO, the TCI Ventures Group's ownership interest in
Teleport was reduced from approximately 35% to approximately 31%. Accordingly,
the TCI Venture Group recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
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 Teleport of the indebtedness described above, Teleport issued
immediately prior to the Teleport IPO approximately 69 million additional shares
of Class B common stock to the Cable Stockholders.
The issuance of shares received by the TCI Ventures Group in the
Reorganization assumed that subsequent to the Teleport IPO, the TCI Ventures
Group would contribute its partnership interests in TCG San Francisco and TCG
Seattle to Teleport. The transfer of such interests occurred in the fourth
quarter of 1996.
Additionally as part of the Reorganization, the TCI Ventures Group was
issued 638,862 shares of Teleport Class A common stock in consideration for the
transfer to Teleport of the partnership interest which
F-179
<PAGE> 387
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the TCI Ventures Group acquired from MicroNet, Inc. in TCG San Francisco. The
TCI Ventures Group also has acquired a 4.2% interest in TCG San Francisco from
InterMedia Partners. The TCI Ventures Group was issued 372,666 shares of
Teleport Class A common stock for the transfer to Teleport of such acquired
partnership interest. These transfers also occurred in the fourth quarter of
1996.
On December 31, 1996, the reported closing price on the Nasdaq financial
market for Teleport's Class A common stock was $30.50 per share.
(11) INVESTMENTS IN OTHER AFFILIATES
The TCI Ventures Group's affiliates other than Telewest, PCS Ventures and
Teleport (the "Other Affiliates") generally are engaged in the cable and/or
programming businesses in the U.S. and in various foreign countries.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the Other Affiliates (the
"Guaranteed Obligations"). At December 31, 1996, the U.S. dollar equivalent of
the amounts borrowed pursuant to the Guaranteed Obligations aggregated $39.3
million. Certain of the Guaranteed Obligations allow for additional borrowings
in future periods.
Certain of the Other Affiliates are general partnerships and any subsidiary
of the TCI Ventures Group that is a general partner in a general partnership
could be liable, depending upon the applicable partnership law, for all debts of
that partnership to the extent liabilities of that partnership were to exceed
its assets.
Agreements governing the TCI Ventures Group's investment in certain of the
Other Affiliates contain (i) buy-sell and other exit arrangements whereby the
TCI Ventures Group could be required to purchase another investor's ownership
interest and (ii) performance guarantees whereby the TCI Ventures Group and/or
other subsidiaries of TCI have guaranteed the performance of the TCI Ventures
Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying value
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Flextech Affiliates(a)...................................... $129,563 123,156
MultiThematiques S.A. ("MultiThematiques")(b)............... 84,007 89,705
Liberty/TINTA LLC(c)........................................ 63,227 29,118
Jupiter Telecommunications Co., Ltd. ("Jupiter")(d)......... 47,251 16,268
Bresnan International Partners (Chile), L.P................. 34,408 59,286
Bresnan International Partners (Poland), L.P................ 27,951 16,739
DMX, Inc.................................................... -- 6,981
Telewest Europe Group ("Telewest Europe")(e)................ -- (16,800)
Other....................................................... 88,192 67,196
-------- -------
$474,599 391,649
======== =======
</TABLE>
(a) Flextech Affiliates
At December 31, 1996, the "Flextech Affiliates" were comprised of European
Business News Partners (30%-owned by Flextech), HIT Entertainment plc (23%-owned
by Flextech), Preview Investments B.V. ("Preview") (33%-owned by Flextech),
Scottish Television plc ("STV") (20%-owned by Flextech), UKGL (25%-owned by
Flextech) and UKLL (31%-owned by Flextech). Prior to the Maidstone acquisition
described in note 4, the "Flextech Affiliates" also included Flextech's 39%
interest in Maidstone. The functional currency of Preview is the Netherlands
guilder. The functional currency of all other Flextech
F-180
<PAGE> 388
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Affiliates is the UK pound sterling. In connection with the April 1997 formation
of the BBC Joint Ventures, Flextech acquired all of the equity share capital of
UKGL and UKLL (75% and 68.75%, respectively) that Flextech did not already own.
The aggregate excess cost over Flextech's proportionate share of the net
assets of the Flextech Affiliates is being amortized over estimated useful lives
ranging from 10 to 20 years. At December 31, 1996, such aggregate excess cost
was approximately $61 million.
(b) MultiThematiques
On December 13, 1995, International invested in MultiThematiques, a newly
formed European programming company that is one-third-owned by each of the TCI
Ventures Group and two French media companies, CANAL + S.A. ("Canal +") and
Generale d'Images S.A. ("GDI"). On December 13, 1995, (i) International
contributed to MultiThematiques 123.1 million French francs ("FF") ($24.7
million at the applicable exchange rate), (ii) Canal + and GDI contributed to
MultiThematiques a combined 70% interest in Planete (a French documentary
channel), a combined 85% interest in Canal Jimmy (a lifestyle and entertainment
channel) and a combined 60% interest in each of two movie services, Cine Cinema
and Cine Cinefil, and (iii) Canal + contributed to MultiThematiques a 50%
ownership interest in Cine Classics, a start-up classic movie service. In
addition, International contributed FF105.0 million ($20.2 million) and FF100.0
million ($19.3 million) on December 13, 1996 and February 13, 1997,
respectively, to MultiThematiques. International also has agreed to contribute
FF164.0 million ($31.6 million) no later than December 13, 1997. In order to
manage the TCI Ventures Group's foreign currency exchange risk with respect to
its December 13, 1997 contribution obligation, the TCI Ventures Group entered
into a forward currency option contract that allows the TCI Ventures Group to
purchase FF164.0 million at a price of FF5.5367 per U.S. dollar through December
31, 1997.
Whereas Canal + and GDI were not required to make additional contributions
on a pro rata basis, International's obligation to make the above-described
additional FF369.1 million ($71.1 million) payment was viewed as additional
consideration to be paid by International to acquire its one-third interest in
MultiThematiques. Accordingly, the U.S. dollar equivalent of the estimated net
present value (using a discount rate of 10%) of the remaining future
contributions at December 31, 1996 and 1995 has been reflected as a liability
(the "MultiThematiques Obligation") in the accompanying combined balance sheets.
The $58.6 million excess of the TCI Ventures Group's investment in
MultiThematiques over the TCI Ventures Group's proportionate share of
MultiThematiques' net assets is being amortized over an estimated useful life of
twenty years. The majority of such excess was created in connection with the
recognition of the MultiThematiques Obligation.
TCI Ventures Group, Canal + and GDI have each agreed not to dispose of any
shares in MultiThematiques prior to November 21, 1999. Thereafter, each
shareholder may sell all (but not less than all) of its shares to a third party
subject to a pro rata right of first refusal by the non-selling shareholders. In
the event that any two shareholders propose to sell their shares of
MultiThematiques or jointly receive an offer to purchase such shares, the other
shareholder has the right to participate in such sale by selling its shares to
the prospective buyer on the same terms.
(c) Liberty/TINTA LLC
Effective April 29, 1996, TCI Ventures Group, Liberty Media Group and News
Corporation Limited ("News Corp.") formed a joint venture including a number of
partnerships or other entities under common ownership, (the "Sports Venture"),
to operate currently existing sports services in Latin America and Australia and
a variety of new sports services throughout the world, excluding the United
States, Canada and certain other defined geographic areas. News Corp. owns a 50%
interest in the Sports Venture with the remaining 50% owned by Liberty/TINTA
LLC, a limited liability company owned in equal parts by
F-181
<PAGE> 389
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries of TCI Ventures Group and Liberty Media Group (the "LLC"). As of
December 31, 1996, TCI Ventures Group had contributed to the LLC $49.0 million
in cash and its 35% equity interest in Torneos y Competencias S.A. ("Torneos"),
an Argentinean sports programming production company, and Liberty Media Group
had contributed to the LLC its interests in Latin American and Australian Sports
programming services and its rights under various television sports programming
agreements. The LLC contributed the non-cash assets contributed to it by TCI
Ventures Group and Liberty Media Group to the Sports Venture. News Corp.
contributed various international sports rights and certain trademark rights in
exchange for its 50% interest in the Sports Venture. The carrying value and the
TCI Ventures Group's share of earnings (losses) of Torneos prior to its
contribution to the LLC have been included with the LLC in the above table.
TCI Ventures Group may make additional cash contributions totaling $29.0
million to the LLC to fund the operations of the Sports Venture. As part of the
formation of the Sports Venture, the LLC is entitled to receive from News Corp.
7.5% of the outstanding stock of STAR Television Limited. Upon the delivery of
such stock to the LLC, News Corp. is entitled to receive from the LLC up to
$20.0 million and rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of the Sports
Venture (the "Sports Venture Rights") to the Sports Venture, TCI Ventures Group,
News Corp. and Liberty Group have paid their respective portion of any payments
made with respect to the Sports Venture Rights. Through December 31, 1996,
payments made under the International/Torneos Sports Agreement totaled $9.4
million.
The $33.0 million excess of the TCI Ventures Group's aggregate historical
cost basis in the LLC over the TCI Ventures Group's 50% proportionate share of
the LLC's net assets is being amortized over an estimated useful life of 20
years.
(d) Jupiter
On January 18, 1995, the TCI Ventures Group and Sumitomo Corporation
("Sumitomo"), a company incorporated in Japan, formed Jupiter for the purpose of
owning and operating cable television and telephony businesses in Japan and
other parts of Asia. The TCI Ventures Group and Sumitomo own 40% and 60%,
respectively of Jupiter. The functional currency of Jupiter is the Japanese yen
("Y").
The TCI Ventures Group has entered into an option agreement whereby the TCI
Ventures Group is entitled to sell Y1.6 billion in exchange for $17.5 million
through April 4, 2002. The option is treated as a hedge of the TCI Ventures
Group's foreign currency risk with respect to its existing investment in
Jupiter.
(e) TeleWest Europe
U S WEST Cable Europe, Inc. ("U S WEST Europe"), an indirect wholly-owned
subsidiary of U S WEST, and the TCI Ventures Group each owned 50% of TeleWest
Europe. TeleWest Europe owned a 91.7% paid-in interest in United Communications
International ("UCI"). UCI is a general partnership between TeleWest Europe and
UPC.
During the first quarter of 1996, the TCI Ventures Group and U S WEST
Europe agreed to initiate a course of action designed to result in the
liquidation and dissolution of TeleWest Europe. During the fourth quarter of
1996, the TCI Ventures Group received a cash distribution of $2.6 million and
recognized a gain of $13.0 million in connection with the dissolution of
TeleWest Europe.
F-182
<PAGE> 390
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of the Other Affiliates by geographic
region for the periods in which they were owned by the TCI Ventures Group are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Financial Position
Property and equipment, net...... $101,612 158,924 13,019 23,317 296,872
Intangible assets, net........... 293,061 118,083 6,413 -- 417,557
Other assets....................... 336,102 132,997 103,498 96,338 668,935
-------- ------- ------- ------- ---------
Total assets............. $730,775 410,004 122,930 119,655 1,383,364
======== ======= ======= ======= =========
Debt............................. $162,814 171,248 99,496 35,858 469,416
Other liabilities................ 200,069 107,653 7,807 43,435 358,964
Owners' equity................... 367,892 131,103 15,627 40,362 554,984
-------- ------- ------- ------- ---------
Total liabilities and
equity................. $730,775 410,004 122,930 119,655 1,383,364
======== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Financial Position
Property and equipment, net...... $200,132 126,109 14,672 14,027 354,940
Intangible assets, net........... 134,624 30,365 34,735 -- 199,724
Other assets..................... 260,535 60,090 80,956 70,910 472,491
-------- ------- ------- ------- ---------
Total assets............. $595,291 216,564 130,363 84,937 1,027,155
======== ======= ======= ======= =========
Debt............................. $176,188 87,828 140,778 21,078 425,872
Other liabilities.................. 146,482 78,643 17,297 30,282 272,704
Owners' equity (deficit)........... 272,621 50,093 (27,712) 33,577 328,579
-------- ------- ------- ------- ---------
Total liabilities and
equity................. $595,291 216,564 130,363 84,937 1,027,155
======== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
--------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue........................ $ 418,874 165,925 24,262 88,362 697,423
Operating expenses............. (437,048) (190,836) (16,882) (86,933) (731,699)
Depreciation and
amortization................ (18,330) (32,365) (3,411) (6,168) (60,274)
--------- -------- ------- ------- ---------
Operating income
(loss)............... (36,504) (57,276) 3,969 (4,739) (94,550)
Interest expense, net.......... (7,623) (11,885) (11,199) (2,328) (33,035)
Other, net..................... 25,706 (86) (31,866) (504) (6,750)
--------- -------- ------- ------- ---------
Net loss............... $ (18,421) (69,247) (39,096) (7,571) (134,335)
========= ======== ======= ======= =========
</TABLE>
F-183
<PAGE> 391
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
--------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue......................... $ 333,487 84,445 28,911 90,117 536,960
Operating expenses.............. (347,204) (90,817) (22,369) (88,927) (549,317)
Depreciation and amortization... (19,851) (26,861) (3,617) (2,172) (52,501)
--------- ------- ------- ------- ---------
Operating income
(loss)................ (33,568) (33,233) 2,925 (982) (64,858)
Interest expense, net........... (20,966) (9,065) (11,148) (342) (41,521)
Other, net...................... 995 (1,672) (4,426) (6,813) (11,916)
--------- ------- ------- ------- ---------
Net loss................ $ (53,539) (43,970) (12,649) (8,137) (118,295)
========= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue.......................... $233,723 46,475 21,612 57,381 359,191
Operating expenses............... (233,443) (70,622) (15,226) (57,296) (376,587)
Depreciation and amortization.... (35,269) (3,521) (6,759) (2,056) (47,605)
-------- ------- ------- ------- ---------
Operating loss........... (34,989) (27,668) (373) (1,971) (65,001)
Interest expense, net............ (15,971) (4,909) (3,939) (823) (25,642)
Other, net....................... (3,122) (19) 5,874 (2,595) 138
-------- ------- ------- ------- ---------
Net income (loss)........ $(54,082) (32,596) 1,562 (5,389) (90,505)
======== ======= ======= ======= =========
</TABLE>
(12) DEBT
The components of debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Debentures(a)............................................... $345,000 --
Cablevision Notes(b)........................................ 13,013 65,066
Cablevision bank loans(c)................................... 104,556 58,166
OCC Notes(d)................................................ 46,418 --
Flextech Bank Facility...................................... -- 67,794
Other....................................................... 17,267 13,163
-------- -------
$526,254 204,189
======== =======
</TABLE>
- ---------------
(a) On February 8, 1996, International received net cash proceeds of
approximately $336 million from the issuance of 4-1/2% Convertible
Subordinated Debentures (the "Debentures") due 2006 having an aggregate
principal amount of $345 million. The Debentures are convertible into shares
of International Series A common stock at a price of $27.30 per share of
International Series A common stock, subject to anti-dilution adjustments.
Interest on the Debentures is payable on February 15 and August 15 of each
F-184
<PAGE> 392
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year, commencing August 15, 1996. The Debentures may be redeemed by
International in whole or in part, at any time on or after February 15,
1999.Pending its use by International, the net proceeds from the sale of the
Debentures were loaned to TCI pursuant to an unsecured promissory note. See
note 13.
(b) The Cablevision Notes are secured by the TCI Ventures Group's pledge of the
stock representing its 51% interest in Cablevision. The Cablevision Notes
bore interest at 10% until May 1, 1996, when interest began to accrue at a
bank's prime rate plus 1% (9.25% at December 31, 1996). The Cablevision
Notes were paid during the three months ended March 31, 1997.
(c) Cablevision's bank debt, which is denominated in U.S. dollars, bears
interest at fixed rates. Including value added tax, the weighted average
interest rate of Cablevision's bank debt at December 31, 1996 was 7.81%.
(d) In connection with the OCC Acquisition, Cablevision issued $46.4 million
principal amount of secured negotiable promissory notes. The OCC Notes will
be repaid in 21 consecutive equal monthly installments commencing on January
10, 1997 and will accrue interest at 9.25%. The OCC Notes are secured by the
pledge of 51% of the stock of OCC.
The U.S. dollar equivalent of the annual maturities of the TCI Ventures
Group's debt for each of the next five years are as follows (amounts in
thousands):
<TABLE>
<S> <C>
1997........................................................ $199,692
1998........................................................ 24,798
1999........................................................ 2,786
2000........................................................ 940
2001........................................................ 940
</TABLE>
With the exception of the Debentures, which had a fair value of $259.6
million at December 31, 1996, the TCI Ventures Group believes that the fair
value and the carrying value of the TCI Ventures Group's debt were approximately
equal at December 31, 1996.
(13) COMBINED EQUITY
General
If the TCI Ventures Group Stock Proposal is approved by stockholders, the
Series A TCI Ventures Group Stock will have one vote per share and the Series B
TCI Ventures Group Stock will have ten votes per share.
Shares of Series B TCI Ventures Group Stock will be convertible at any time
at the option of the holder only into the same number of shares of Series A TCI
Ventures Group Stock.
The rights of holders of the TCI Ventures Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Ventures Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock, the TCI Ventures Group Stock and the Liberty
Media Group Stock.
Transactions with TCI Group, Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to TCI
Ventures 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 TCI Ventures
Group would incur for comparable services on a stand alone basis. During the
years ended December 31, 1996, 1995 and 1994, TCI Ventures Group was allocated
$7,918,000, $4,120,000 and $445,000, respectively, in corporate general and
administrative costs by TCI Group.
F-185
<PAGE> 393
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the companies with domestic operations that are attributed to
the TCI Ventures Group provide services to companies attributed to one or more
of the other Groups, and certain of the companies attributed to the other Groups
provide services and the use of facilities to companies attributed to the TCI
Ventures Group. Generally, services and rights to use facilities provided
pursuant to contractual arrangements to which a member of the TCI Ventures Group
that is not a wholly owned subsidiary of the Company is a party will continue to
be provided in accordance with the terms of such arrangements following the
consummation of the Exchange Offers. For example, Teleport has the indefeasible
right to use certain fiber optic and cable transmission facilities of the
Company for compensation based on the cost of construction of such facilities.
In general, such arrangements were entered into with Teleport by the Company and
other multiple cable system operators ("MSOs") that are stockholders of Teleport
several years ago when Teleport was a privately owned company. Similarly, @Home
has entered into arrangements for the distribution of its @Home service with its
stockholders that are MSO's. The TCI Group has agreements with UVSG for, among
other things, the carriage of UVSG's Prevue Networks and superstation
programming on certain of the cable systems attributed to the TCI Group, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Many of these contracts were entered into prior to the UVSG Merger. Because of
the presence in each of TCG, @Home and UVSG of other stockholders not affiliated
with the Company and the independent management teams at each of these
companies, the Company anticipates that future contractual arrangements between
these companies and entities attributed to the other Groups will be negotiated
on an arm's-length basis.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each of
which is a wholly owned subsidiary of the Company, provide or may provide
services to the other Groups. WTCI provides video transport services to the TCI
Group (in addition to services provided to third parties) based on published
tariffed rates. NDTC provides digital television services, including digital
compression of programming, satellite uplinking, and transponder management,
primarily to programming suppliers, many of which are affiliated with the
Liberty Media Group, and satellite distributors. Such services provided to
affiliated companies are governed by agreements which have been negotiated on a
basis which approximates arm's-length terms and the material terms of which are
substantially the same as those governing relationships with third parties,
except as appropriate to take into account volume differences. NDTC has also
recently begun offering on a commercial basis its newly developed service of
authorization of addressable set-top boxes and transmission of compressed and
encrypted digital programming signals directly to cable operators, and is
currently negotiating a long term contract with the TCI Group, for such
services. Such negotiations are being carried out on a basis which approximates
arm's-length terms and it is expected that the material terms made available to
the TCI Group will be substantially the same as those provided to unaffiliated
third parties, but will include pricing on a most favored nations basis due to
the importance to NDTC of the TCI Group's large customer base. SUMMITrak has
been funded by the TCI Group during its development and test phases, which are
substantially complete. Currently, the TCI Group is only utilizing SUMMITrak's
services on a test basis and has no agreement with SUMMITrak for commercial
deployment. If SUMMITrak's services are used by the TCI Group on a commercial
basis, such use will be at commercial rates and on a basis which approximates
arm's-length terms.
During the year ended December 31, 1996, revenue earned by UVSG from TCI
Group was $8.1 million. Additionally, TCI Group purchased system integration
services from UVSG totaling $3.1 million during 1996. UVSG purchases programming
from Liberty Media Group and certain affiliates. These purchases totaled $34.1
million for the year ended December 31, 1996.
Amounts included in revenue for services provided to the other Groups by
WTCI and NDTC are $27,092,000, $20,881,000 and $7,274,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Consolidated Puerto Rico Entities purchase programming services from
the TCI Group. The charges, which approximate the TCI Group's cost and are based
on the aggregate number of subscribers
F-186
<PAGE> 394
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
served by the Consolidated Puerto Rico Entities, aggregated $4.3 million, $3.4
million and $2.6 million during the years ended December 31, 1996, 1995 and
1994, respectively. Through December 31, 1995, the Consolidated Puerto Rico
Entities also had management arrangements with certain subsidiaries of the TCI
Group whereby such subsidiaries' management provided administrative services. As
compensation for these services, the Consolidated Puerto Rico Entities paid a
monthly fee calculated on a per-subscriber basis. Charges for such services were
$680,000 and $676,000 during the years ended December 31, 1995 and 1994,
respectively. The above-described programming and management fee charges are
included in operating costs in the accompanying combined statements of
operations.
Amounts outstanding under the TCI Note Receivable bear interest at variable
rates based on TCI's weighted average cost of bank borrowings of similar
maturities (6.25% at December 31, 1996). Principal and interest is due and
payable as mutually agreed from time to time by TCI and TINTA. During the year
ended December 31, 1996, interest income related to the TCI Note Receivable
aggregated $14.0 million.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) 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, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in any then existing, Inter-Group Interest of the Company in such Group or, in
the case of a transfer from either the Liberty Media Group or the TCI Ventures
Group to the TCI Group, reflected as a reduction in any then existing
Inter-Group Interest of the TCI Group 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.
The TCI Ventures Group is expected to require additional advances from the
TCI Group for some period of time. To satisfy this need, the Company has agreed
to provide a revolving loan facility (the "Credit Facility") to TCI Ventures
Group for a five-year period commencing on the closing of the Exchange Offers.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction or increase as provided below), which
borrowings would bear interest at a rate per annum equal to The Bank of New
York's prime rate (as in effect from time to time) plus 1% per annum, payable
quarterly. A commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Revolving Credit Facility would be payable by the TCI
Ventures Group to the TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Ventures Group
F-187
<PAGE> 395
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
is required to contribute to Sprint PCS Partnerships subsequent to the closing
of the Exchange Offers is less than $300 million.
Except as described above with respect to the Credit Facility, 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 TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
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.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group 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 TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures 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 TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group 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 TCI Ventures Group.
The Board 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
F-188
<PAGE> 396
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operational strategies through one Group or one or more of the other Groups,
after consideration of such factors as it deems relevant. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manager and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
Certain subsidiaries of TCI Group have provided guarantees and other credit
enhancements on the TCI Ventures Group's behalf. In this respect, the TCI
Ventures Group has entered into an indemnification agreement with TCI Group
whereby the TCI Ventures Group will indemnify TCI Group for any loss, claim or
liability that TCI Group may incur by reason of certain guarantees and credit
enhancements made by TCI Group on the TCI Ventures Group's behalf.
(14) INCOME TAXES
The TCI Ventures Group and its 80%-or-more-owned domestic subsidiaries are
included in the consolidated federal and state income tax returns of TCI. The
TCI Ventures Group's income taxes include those items in the consolidated
calculation applicable to the TCI Ventures Group ("intercompany tax allocation")
and any income taxes of TCI Ventures Group's consolidated foreign or domestic
subsidiaries that are excluded from the consolidated federal and state income
tax returns of TCI. Intercompany tax allocation represents an apportionment of
tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in
relation to their respective amounts of taxable earnings or losses. The payable
arising from the intercompany tax allocation was recorded as an increase in
equity through March 31, 1997.
F-189
<PAGE> 397
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A tax sharing agreement (the "Old Tax Sharing Agreement") among entities
attributed to the TCI Ventures Group, Liberty Media Group, the TCI Group and
certain subsidiaries of TCI was implemented effective July 1, 1995 for all
periods after such effective date and prior to October 1, 1997. The Old Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. Under the Old
Tax Sharing Agreement, tax liabilities and benefits of the entities attributed
to the TCI Ventures Group, Liberty Media Group, and TCI Group are charged or
credited to intercompany accounts between TCI and each of its first tier
subsidiaries. The Old Tax Sharing Agreement encompasses U.S. federal, state,
local and foreign tax consequences and relies upon the Code, and any applicable
state, local and foreign tax law and related regulations. In Connection with the
formation of the TCI Ventures Group, the net amount of the balance of each
intercompany account under the Old Tax Sharing Agreement that is attributable to
entities included in the TCI Ventures Group for the period beginning July 1,
1995 and ending prior to the consummation of the Exchange Offers will be
reflected as a component of the TCI Ventures Group's combined equity. The
intercompany account existing between TCI and International for the period
beginning July 1, 1995 and ending prior to the consummation of the Exchange
Offers will be required to be settled by the TCI Ventures Group and
International when International ceases to be a member of the TCI consolidated
group for federal income tax purposes. Tax liabilities and benefits, as
determined under the Old Tax Sharing Agreement, that are generated by the
entities comprising the TCI Ventures Group for the period beginning on the
consummation of the Exchange Offers and ending prior to October 1, 1997 will be
credited or debited to an intercompany account between TCI and the TCI Ventures
Group as described below. For the period beginning on the consummation of the
Exchange Offers and ending prior to October 1, 1997, the TCI Ventures Group will
be responsible to TCI for its share of consolidated income tax liabilities
(computed as if the Company was not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement. TCI will be
responsible to the TCI Venture Group to the extent that the TCI Ventures Group's
income tax attributes generated during the period beginning on the consummation
of the Exchange Offers and ending prior to October 1, 1997 are utilized by TCI
to reduce its consolidated income tax liabilities (computed as if the Company
was not liable for the alternative minimum tax). Accordingly, all tax attributes
generated by the TCI Ventures Group's operations for the period beginning on the
consummation of the Exchange Offers and ending prior to October 1, 1997
(including, but not limited to, net operating losses, tax credits, deferred
intercompany gains, and the tax basis of assets) will be inventoried and tracked
for the entities comprising the TCI Ventures Group. All intercompany accounts
existing under the Old Tax Sharing Agreement with respect to entities attributed
to the TCI Group, entities attributed to the Liberty Media Group and, for the
period beginning on the consummation of the Exchange Offers, entities attributed
to the TCI Ventures Group, will be required to be settled only upon the date
that an entity ceases to be a member of the TCI consolidated group for federal
income tax purposes. Under the Old Tax Sharing Agreement, TCI retains the burden
of any alternative minimum tax and has the right to receive the tax benefits
from any alternative minimum tax credit attributable to any tax period beginning
on or after July 1, 1995 and ending on or before October 1, 1997.
For periods from and after October 1, 1997, federal income taxes will be
computed pursuant to a new tax sharing agreement (the "New Tax Sharing
Agreement") based upon the type of tax paid by the Company (on a regular tax or
alternative minimum tax basis) on a separate basis for each Group (applying
provisions of the Code, and related regulations as if such Group filed a
separate consolidated return for federal income tax purposes, with certain
adjustments, but was subject to the same type of tax as the Company). Based upon
these separate calculations, an allocation of tax liabilities and benefits will
be made such that each Group will be required to make cash payments to the
Company based on its allocable share of the Company's consolidated federal
income tax liabilities (on a regular tax or alternative minimum tax basis, as
applicable). The Company may be required at the times and under the
circumstances described below to make cash
F-190
<PAGE> 398
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
payments to each Group for tax benefits (on a regular tax or alternative minimum
tax basis, as applicable) attributable to such Group and actually used by the
Company in reducing its consolidated federal income tax liability. Tax
attributes, including but not limited to net operating losses, foreign tax
credits, investment tax credits, alternative minimum tax net operating losses,
deferred intercompany gains, and tax basis in assets would be inventoried and
tracked for ultimate credit to or charge against each Group. Similarly, in each
taxable period that the Company pays alternative minimum tax, the federal income
tax liabilities and federal income tax benefits of each Group, computed as if
such Group were subject to regular tax, would be inventoried and tracked for
payment to or payment by each Group (at the difference between the amount such
Group would have paid or received under the New Tax Sharing Agreement if the
Company had paid regular tax during such taxable period and the amount such
Group paid or received under the New Tax Sharing Agreement on an alternative
minimum tax basis for such taxable period) in years that the Company utilizes
the alternative minimum tax credit associated with such taxable period. Even
though the tax benefits of a Group are utilized by the Company in reducing its
consolidated federal income tax liability, such Group may not receive current
cash payments for such benefit (or the difference between such Group's benefits
computed under the New Tax Sharing Agreement on a regular tax basis and on an
alternative minimum tax basis) if the Group against the income of which the tax
benefits are applied had other separate taxable losses (not currently utilized
by the Company) which would offset income attributable to such Group. The Group
generating the utilized tax benefits would receive a cash payment only if, and
when, the utilized taxable losses of the other Group are actually utilized. If
the utilized taxable losses expire without ever being utilized, the Group
generating the utilized tax benefits will never receive payment for such
benefits. In addition, if the utilized taxable losses are connected with a Group
or part of a Group which ceases to be part of the TCI consolidated group for
federal income tax purposes, there can be no assurance that the transferee will
agree to pay for the eventual use of the utilized taxable losses. In addition,
pursuant to the New 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 among 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.
As detailed elsewhere, unutilized taxable losses of the TCI Ventures Group
may be used to offset the obligation of the TCI Ventures Group to pay dividends
on the TCI Ventures Group Preferred Interest. Any such taxable losses which are
so used will be considered taxable losses of the TCI Group for all calculations
under the New Tax Sharing Agreement relating to federal income taxes. Such
taxable losses will continue to be treated as taxable losses of the TCI Ventures
Group for all calculations relating to state and local income taxes. In
addition, any amount owed by the TCI Group with respect to utilized taxable
losses of the TCI Ventures Group may be canceled as an offset to the obligation
of the TCI Ventures Group to pay dividends on the TCI Ventures Group Preferred
Interest.
F-191
<PAGE> 399
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit (expense) attributable to the TCI Ventures Group's
pre-tax earnings (loss) for the years ended December 31, 1996, 1995 and 1994
consists of (amounts in thousands):
<TABLE>
<CAPTION>
DEFERRED CURRENT TOTAL
-------- -------- -------
<S> <C> <C> <C>
December 31, 1996:
Intercompany tax allocation........................ $ 52,660 -- 52,660
Federal............................................ -- 76,120 76,120
State and local.................................... (1,721) 3,464 1,743
Foreign............................................ (12,237) (7,941) (20,178)
-------- ------- -------
$ 38,702 71,643 110,345
======== ======= =======
December 31, 1995:
Intercompany tax allocation........................ $ 55,941 -- 55,941
Federal............................................ -- (27,689) (27,689)
State and local.................................... -- (2,715) (2,715)
Foreign............................................ (9,080) (14,659) (23,739)
-------- ------- -------
$ 46,861 (45,063) 1,798
======== ======= =======
December 31, 1994:
Intercompany tax allocation........................ $(31,909) -- (31,909)
Federal............................................ -- 10,018 10,018
State and local.................................... (5) 931 926
Foreign............................................ -- -- --
-------- ------- -------
$(31,914) 10,949 (20,965)
======== ======= =======
</TABLE>
Income tax benefit (expense) attributable to the TCI Ventures Group's
pre-tax earnings (loss) differs from the amounts computed by applying the U.S.
federal income tax rate of 35%, as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit (expense)............ $129,069 (20,385) (11,766)
Effect of foreign tax rate differential on earnings
of foreign subsidiary.............................. 1,051 4,516 --
Minority interest in earnings of consolidated
subsidiaries....................................... 4,657 (8,130) --
Increase in valuation allowance for deferred tax
assets resulting from certain unused tax loss
carryforwards...................................... (23,552) (7,935) (5,197)
Adjustment to deferred tax assets and liabilities for
enacted change in foreign income tax rate.......... (952) -- --
Amortization not deductible for tax purposes......... (6,232) (5,150) (217)
Gain of sale of subsidiary stock..................... -- 42,931 --
State taxes, net of federal tax effect............... 1,116 (1,743) 4
Other, net........................................... 5,188 (2,306) (3,789)
-------- ------- -------
$110,345 1,798 (20,965)
======== ======= =======
</TABLE>
F-192
<PAGE> 400
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 98,633 57,204
Less-valuation allowance.................................. (62,288) (42,154)
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes
in excess of losses recognized for tax purposes........ 35,556 --
Foreign currency translation adjustments included in
equity but not recognized for income tax purposes...... -- 2,637
Future deductible amounts, principally due to accruals not
currently deductible................................... 15,732 7,066
Other..................................................... -- 812
--------- --------
Net deferred tax assets........................... 87,633 25,565
--------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... (91,626) (61,506)
Franchise costs, not deductible for income tax purposes... (188,635) (162,732)
Foreign currency translation adjustments included in
equity but not recognized for income tax purposes...... (13,328) --
Unrecognized gain on sale of assets....................... (14,128) (12,812)
Investments in affiliates, due principally to losses of
affiliates recognized for tax in excess of losses
recognized for financial statement purposes............ -- (43,330)
Other..................................................... (222) --
--------- --------
Total gross deferred tax liabilities.............. (307,939) (280,380)
--------- --------
Net deferred tax liability........................ $(220,306) (254,815)
========= ========
</TABLE>
At December 31, 1996, the TCI Ventures Group had federal net operating loss
carryforwards for income tax purposes aggregating approximately $100 million
which, if not utilized to reduce taxable income in future periods, will begin to
expire at various dates beginning in the year 2004.
The TCI Ventures Group has net operating loss carryforwards of
approximately $130.1 million available in certain foreign tax jurisdictions.
These foreign net operating loss carryforwards may be utilized to reduce taxable
income in the applicable foreign tax jurisdictions indefinitely.
In addition, the TCI Ventures Group has net operating loss carryforwards of
approximately $14.4 million available in the Puerto Rico tax jurisdiction. If
unused, these net operating loss carryforwards expire at various dates over the
next 7 years.
(15) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the TCI Ventures
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of Sprint Spectrum. As previously
described, the Partners are obligated to make 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. Pursuant to an agreement entered
into in connection with certain financings by Sprint
F-193
<PAGE> 401
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Spectrum, under certain circumstances the Partners may be required to make
additional contributions to Sprint Spectrum to fund projected cash shortfalls to
the extent that the amount of the Partners' aggregate contributions to Sprint
Spectrum (exclusive of certain amounts, including amounts invested in certain
affiliates of Sprint Spectrum), following December 31, 1995 are less than $1.0
billion; however, based on the currently expected timing and use of the
Partners' contributions to Sprint Spectrum, the TCI Ventures Group currently
believes that such agreement will not result in the TCI Ventures Group's being
required to make any incremental capital contributions in addition to its pro
rata portion of such $1.9 billion amount.
The TCI Ventures Group has guaranteed the obligation of an affiliate ("The
Premium Movie Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount of The Premium Movie Partnership's
license fee obligations is not currently estimable, the TCI Ventures Group
believes that the aggregate payments pursuant to such obligations could be
significant. If the TCI Ventures Group were to fail to fulfill its obligations
under the guarantee, the beneficiaries have the right to demand an aggregate
payment from the TCI Ventures Group of approximately $58 million. Although the
TCI Ventures Group has not had to perform under such guarantee to date, the TCI
Ventures Group cannot be certain that it will not be required to perform under
such guarantee in the future.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group, (ii) Hallmark's and U S WEST's interest in
Flextech acquired under the Hallmark Subscription and the U S WEST Subscription,
respectively, and (iii) Flextech securities acquired by IFE pursuant to the IFE
Acquisitions exceeds 75% of Flextech's issued and outstanding share capital, or
(y) subject to certain exceptions, the Flextech Ordinary Shares cease to be
admitted to trading on the Official List of the London Stock Exchange as a
result of the exercise by the TCI Ventures Group of any of its rights as a
Flextech shareholder, the TCI Ventures Group shall be obligated to offer to
purchase from Hallmark, U S WEST and IFE any Flextech Ordinary Shares or
Flextech Non-Preference Shares held by them and which were originally acquired
pursuant to the Hallmark Subscription, the U S WEST Subscription, or the IFE
Acquisitions, as applicable. Under such circumstances, the offer price for such
shares shall be the higher of (i) the then current market price for the Flextech
Ordinary Shares and (ii) the highest price paid to any third party by the TCI
Ventures Group for any Flextech Ordinary Shares or Flextech Non-Preference
Shares during the preceding 12 month period. In the event the TCI Ventures Group
is required to purchase any Flextech Non-Preference Shares or Flextech Ordinary
Shares, it may elect, subject to certain limited exceptions, to pay the purchase
price thereof in cash or in shares of International Series A common stock, or in
certain securities of TCI.
In light of certain change of control provisions contained in the articles
of association of UKGL and UKLL, TCI has agreed to maintain an indirect voting
interest of at least 50.01% in a wholly-owned subsidiary of Flextech so long as
Flextech continues to hold its ownership interests in UKGL and UKLL. Under
Flextech's Articles of Association, if the TCI Ventures Group becomes obligated
to purchase any of the Flextech Non-Preference Shares (as described above) and
fails to complete such purchase within 12 months from the date such purchase is
required to be completed, such Flextech Non-Preference Shares shall become
convertible into Flextech Ordinary Shares whether or not the TCI Ventures Group
ceases to own at least 50.01% of the voting interest attributable to Flextech's
then outstanding ordinary share capital.
On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that International could
be required to make cash contributions totaling $46 million over the next three
years in connection with the DTH Ventures.
The TCI Ventures Group leases business offices, has entered into pole
rental and transponder lease agreements, and uses certain equipment under lease
arrangements. Rental costs under such arrangements
F-194
<PAGE> 402
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounted to $62 million, $41 million and $27 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
A summary of future minimum lease payments under noncancellable operating
and capital leases as of December 31, 1996 follows (amounts in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
Years ending December 31:
1997................................................... $ 64,979 31,354
1998................................................... 57,679 31,376
1999................................................... 51,641 31,487
2000................................................... 32,416 31,716
2001................................................... 25,464 30,164
Thereafter............................................. 105,427 128,169
--------- --------
$ 337,606 284,266
=========
Less amounts representing interest.......................... 84,305
--------
Capital lease obligations................................... 199,961
========
</TABLE>
It is expected that in the normal course of business, leases that expire
generally 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.
Flextech has commitments to acquire distribution and exhibition rights for
a variety of programming under license agreements with Hallmark Entertainment
Inc. ("Hallmark Entertainment"). The rights are limited to the United Kingdom
and certain other European markets and have a term for a period of ten years
once the license period commences. Through December 31, 1996, programming with
an aggregate contractual value of L19.8 million ($33.9 million) had been
delivered to Flextech under such agreements. It is estimated that Flextech's
remaining commitments to acquire programming will be L10.5 million ($18.0
million). Hallmark Entertainment has provided Flextech a guarantee that it will
recover at least L14.6 million ($25.0 million) from the exploitation of such
rights. Flextech also agreed to purchase certain programming from STV during the
next two years. Flextech's aggregate remaining obligations at December 31, 1996
under such STV programming agreements were expected to range from L1.4 million
($2.4 million) to L6.5 million ($11.1 million).
Flextech's programming commitments will not be included in TCI Ventures
Group's disclosure of its consolidated commitments and contingencies upon the
January 1, 1997 deconsolidation of Flextech.
Certain key employees of TCI involved with TCI Ventures Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock, Series A Liberty Media Group Stock and International Series A common
stock as well as restricted stock awards of Series A TCI Group Stock and
International Series A common stock. Additionally, in December of 1996, certain
employees of TCI involved with TCI Ventures Group were each granted options
representing 1.0% of the common equity of TCI Telephony Services, Inc., TCI
Wireline, Inc., and TCI.NET, Inc. The exercise price of each such option will be
adjusted for a 6% per annum interest factor to the date of exercise.
Additionally, in December of 1996, an employee involved with TCI Ventures Group
was granted options representing 1.0% of TCI Satellite Entertainment, Inc.
Estimates of the compensation relating to the options and/or stock
appreciation rights as well as restricted stock awards granted to employees
involved with TCI Ventures Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
F-195
<PAGE> 403
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
value of the underlying equity and, ultimately, on the final determination of
market value when the options or rights are exercised or the restricted shares
are vested.
Estimated compensation relating to the aforementioned restricted stock
award and options has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate 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. Had TCI Group
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of compensation would not
have been materially different from what has been reflected in the accompanying
combined financial statements.
F-196
<PAGE> 404
ANNEX A
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
@Home....................................................... (ii)
@Home Cable Partners........................................ 54
@Home IPO................................................... 4
@Home Principal Cable Stockholders.......................... 142
@Home Principal Stockholders................................ 147
@Home Stockholders Agreement................................ 147
@Network.................................................... 5
1940 Act.................................................... 72
1988 Agreement.............................................. 86
1992 Cable Act.............................................. 67
1996 Act.................................................... 56
ABN......................................................... 102
Acclaim..................................................... 152
ADC......................................................... 104
Adjustable Options.......................................... 10
Adjusted Liberty Media Group Outstanding Interest
Fraction.................................................. 184
Adjusted Outstanding Shares of Liberty Media Group Common
Stock..................................................... 179
Adjusted Outstanding Shares of TCI Ventures Group Common
Stock..................................................... 177
Adjusted TCI Ventures Group Outstanding Interest Fraction... 160
Affiliated Franchises....................................... 103
Affiliated LCO.............................................. 143
Agent's Message............................................. 80
Agreement................................................... 90
Amended Charter............................................. (iv)
America Online.............................................. 145
Ameritech................................................... 133
Annual Meeting.............................................. (ii)
Antec....................................................... 152
APC......................................................... 3
Appraisal Date.............................................. 160
Appraiser................................................... 160
Aster City.................................................. 102
At-Large Directors.......................................... 147
AT&T........................................................ 145
Available Shares............................................ 196
B*box....................................................... 144
BBC......................................................... 105
BBC Joint Ventures.......................................... 101
BBC Worldwide............................................... 58
BIP Poland.................................................. 102
BIP-Chile................................................... 109
BizTel...................................................... 122
Board....................................................... (iv)
Board of Directors.......................................... (iv)
Book-Entry Confirmation..................................... 80
Book-Entry Transfer Facilities.............................. 80
</TABLE>
A-1
<PAGE> 405
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
BSkyB....................................................... 59
BT.......................................................... 104
BTA......................................................... 116
business combination........................................ 44
business day................................................ 80
Cablevision................................................. 108
CALEA....................................................... 65
Canal +..................................................... 107
Capital Contribution Agreement.............................. 46
CAPs........................................................ 4
CareerTrack................................................. 150
Carrier Services............................................ 127
CEI......................................................... 108
CERFnet..................................................... 122
Charter Amendments.......................................... (ii)
Chile Restructuring Agreements.............................. 109
CIT......................................................... 135
Class A Preferred Stock..................................... 159
Class B Preferred Stock..................................... 159
CLEC........................................................ 3
CMRS........................................................ 75
Code........................................................ 11
Comcast..................................................... 3
COMFER...................................................... 108
Committed Acquisition Shares................................ 160
Common Stock................................................ (iii)
Communications Act.......................................... 65
Company..................................................... (i)
Company Charter............................................. (ii)
CompuServe.................................................. 145
Consumer Purpose............................................ 143
Contingent TCI Shares....................................... 88
Contributed Systems......................................... 109
Convertible Securities...................................... 160
Copyright Act............................................... 67
Cordillera.................................................. 109
Corporation Earnings (Loss) Attributable to the Liberty
Media Group............................................... 172
Corporation Earnings (Loss) Attributable to the TCI Group... 171
Corporation Earnings (Loss) Attributable to the TCI Ventures
Group..................................................... 171
Cox......................................................... 3
Cox PCS..................................................... 3
CTC......................................................... 109
DBS......................................................... 63
Deadlock Event.............................................. 57
DGCL........................................................ 21
DigiVentures................................................ 151
Disposition................................................. 160
Dow Jones................................................... 112
DTH......................................................... 2
DTH Ventures................................................ 110
</TABLE>
A-2
<PAGE> 406
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
ECO......................................................... 129
Eligible Institution........................................ 81
ESMR........................................................ 59
Estate...................................................... 86
Estate Swap................................................. 86
ETC......................................................... (ii)
Exchange Act................................................ (v)
Exchange Agent.............................................. (iv)
Exchange Offers............................................. (ii)
Exchange Ratio.............................................. (i)
Exclusive Limited Partner................................... 50
Existing Stock Plans........................................ 161
Expiration Date............................................. (i)
FAA......................................................... 65
FCC......................................................... 61
First Appraiser............................................. 160
Flextech.................................................... 2
FM Cubed.................................................... 138
GCI......................................................... 6
GDI......................................................... 107
Governmental Body........................................... 84
Grants...................................................... 89
Group....................................................... (iii)
Hallmark Entertainment...................................... 106
Headend in the Sky.......................................... 53
HFC......................................................... 5
Higher Appraised Amount..................................... 160
HITS........................................................ 53
HKP......................................................... 102
ICM I Transaction........................................... 87
ICM III..................................................... 87
ICM III Transaction......................................... 87
ICM IV...................................................... 87
ICM IV Transaction.......................................... 87
ICM VI...................................................... 88
ICM VI Transaction.......................................... 88
ILECs....................................................... 3
Independent Committee....................................... 177
Information Agent........................................... (v)
Initial Price............................................... 89
Initial Ventures Options.................................... 160
Inter-Group Interest........................................ 161
Interconnection Orders...................................... 132
InterLATA services.......................................... 62
International............................................... (ii)
International Credit Facility............................... 46
International Debentures.................................... 45
International Programming Opportunity....................... 157
International Sports Territory.............................. 110
Internet Options............................................ 89
</TABLE>
A-3
<PAGE> 407
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
IP I........................................................ 87
IP I Interest............................................... 87
IP IV....................................................... 5
IP VI....................................................... 88
IP VI Effective Date........................................ 88
ISDN........................................................ 63
ISPs........................................................ 63
ITC......................................................... 103
IXC......................................................... 56
JPC......................................................... 2
Jupiter..................................................... 2
Kansas City Fiber Network................................... 48
Kbps........................................................ 55
Kearns-Tribune.............................................. 77
Kearns-Tribune Merger....................................... 77
KPCB........................................................ 4
Lehman...................................................... 86
Liberty..................................................... 56
Liberty Group Stock Dividend................................ 27
Liberty Media Group......................................... 161
Liberty Media Group Available Dividend Amount............... 172
Liberty Media Group Common Stock............................ (iii)
Liberty Media Group Common Stock Per Share Value............ 179
Liberty Media Group Distribution............................ 29
Liberty Media Group Inter-Group Interest Fraction........... 162
Liberty Media Group Net Proceeds............................ 162
Liberty Media Group Optional Conversion Ratio............... 178
Liberty Media Group Outstanding Interest Fraction........... 162
Liberty Media Group Private Market Value.................... 178
Liberty Media Group Subsidiaries............................ 185
LLC......................................................... 110
LMDS........................................................ 145
Loan........................................................ 89
Lower Appraised Amount...................................... 163
Market Capitalization....................................... 163
Market Value................................................ 163
Master Agreements........................................... 86
Mbps........................................................ 55
Media One................................................... 73
Melita...................................................... 101
Merrill Lynch............................................... 86
Metropolis-Intercom......................................... 109
Microsoft................................................... 143
milestones.................................................. 53
MMDS........................................................ 59
MPT......................................................... 112
MSN......................................................... 145
MSO......................................................... 111
MTAs........................................................ 3
MultiThematiques............................................ 2
</TABLE>
A-4
<PAGE> 408
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
Mutually Appraised Amount................................... 163
Mutually Designated Appraiser............................... 163
NASD........................................................ (vi)
NDTC........................................................ (ii)
NDTC Video Services......................................... 149
Netlink..................................................... 136
Netscape.................................................... 6
New ICM I................................................... 87
New Tax Sharing Agreement................................... 156
News Corp................................................... 102
Nonresident Alien........................................... 95
Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest................................ 163
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest................................ 164
Old ICM I................................................... 87
Old Tax Sharing Agreement................................... 155
operating cash flow......................................... 46
OSPs........................................................ 64
PCIA........................................................ 74
PCS......................................................... (ii)
PCS Ventures................................................ 1
Percentage Interest......................................... 119
Permitted Transaction....................................... 120
Phase I Closing............................................. 87
Phase I Closing Date........................................ 87
Phase II Closing Date....................................... 87
PhillieCo................................................... 3
PMP......................................................... 112
Pops........................................................ 3
Pre-Distribution Convertible Securities..................... 165
Pre-Exchange Offer Securities............................... 165
Prevue Networks............................................. 134
PrimeCo..................................................... 61
Princes..................................................... 101
Principal Joint Venture..................................... 105
Programming Companies....................................... 61
Programming Distributors.................................... 135
PTO......................................................... 104
PUCs........................................................ 129
Purchaser................................................... 121
Qualifying Subsidiary....................................... 165
RBOC........................................................ 62
Related Business Transaction................................ 165
Representatives............................................. 119
Reserved Property........................................... 182
Restricted Business......................................... 143
Revolving Credit Facility................................... 34
RF.......................................................... 54
Rogers...................................................... 4
</TABLE>
A-5
<PAGE> 409
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
Satco Spin-off.............................................. 26
Schedule 13E-4.............................................. (vi)
SEC......................................................... (v)
Second Appraiser............................................ 166
Second Joint Venture........................................ 105
Securities Act.............................................. (v)
Selection Date.............................................. 166
Series A Directors.......................................... 147
Series A Exchange Offer..................................... (i)
Series A Exchange Ratio..................................... (i)
Series A Liberty Media Group Common Stock................... (iii)
Series A Maximum............................................ (i)
Series A Number............................................. 169
Series A TCI Group Common Stock............................. (i)
Series A TCI Ventures Group Common Stock.................... (i)
Series A Telephony Group Common Stock....................... (ii)
Series B Directors.......................................... 147
Series B Exchange Offer..................................... (i)
Series B Exchange Ratio..................................... (i)
Series B Liberty Media Group Common Stock................... (iii)
Series B Maximum............................................ (i)
Series B Number............................................. 169
Series B TCI Group Common Stock............................. (i)
Series B TCI Ventures Group Common Stock.................... (i)
Series B Telephony Group Common Stock....................... (ii)
Series C Preferred Stock.................................... 159
Series D Preferred Stock.................................... 159
Series E Preferred Stock.................................... 159
Series F Preferred Stock.................................... 159
Series G Preferred Stock.................................... 159
Series H Preferred Stock.................................... 159
Series Preferred Stock...................................... 159
Service..................................................... 11
share distribution.......................................... 173
Shaw........................................................ 4
SHVA........................................................ 67
Sky Network................................................. 102
SMATV....................................................... 59
SMG......................................................... 106
SNG......................................................... 4
SONET....................................................... 123
SpaceCom.................................................... 134
Sports Venture.............................................. 110
Sprint...................................................... 3
Sprint Communications....................................... 118
Sprint PCS.................................................. 3
Sprint PCS Parents.......................................... 46
Sprint PCS Partners......................................... 3
Sprint PCS Partnership Agreement............................ 49
Sprint PCS Partnership Board................................ 49
</TABLE>
A-6
<PAGE> 410
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
Sprint PCS Partnerships..................................... 3
Sprint Spectrum............................................. 46
Sprint Spectrum Notes....................................... 47
Sprint Spectrum Registration Statement...................... 121
SSDS........................................................ 4
StarSight................................................... 71
STE......................................................... 106
Subsidiary.................................................. 166
Substantial Portion......................................... 121
Sumitomo.................................................... 111
SUMMITrak................................................... (ii)
Superstar................................................... 134
TCG......................................................... (ii)
TCG Reorganization.......................................... 56
TCI......................................................... (i)
TCI Group................................................... 166
TCI Group Available Dividend Amount......................... 171
TCI Group Common Stock...................................... (i)
TCI Internet................................................ 89
TCI Music................................................... 102
TCI Shares.................................................. 87
TCI Telephony............................................... 3
TCI Ventures Group.......................................... 167
TCI Ventures Group Available Dividend Amount................ 171
TCI Ventures Group Common Stock............................. (i)
TCI Ventures Group Common Stock Per Share Value............. 178
TCI Ventures Group Entities................................. 45
TCI Ventures Group Entity................................... 45
TCI Ventures Group Inter-Group Interest Fraction............ 168
TCI Ventures Group Net Proceeds............................. 169
TCI Ventures Group Optional Conversion Ratio................ 177
TCI Ventures Group Outstanding Interest Fraction............ 169
TCI Ventures Group Preferred Interest....................... 169
TCI Ventures Group Private Market Value..................... 177
TCI Ventures Group Subsidiaries............................. 184
TCI Wireline................................................ 88
TCI.NET..................................................... 89
TCI-Estates Agreement....................................... 86
TCI-KT Agreement............................................ 87
TCI-UA Notes................................................ 167
TCIC........................................................ 1
TeleCable Nacional.......................................... 109
Telephony Business.......................................... (ii)
Telephony Options........................................... 88
Teleport.................................................... (ii)
Teleport Cable Stockholders................................. 73
Teleport Class A Stock...................................... 122
Teleport Class B Stock...................................... 59
Teleport Stockholders Agreement............................. 125
Telewest.................................................... 2
</TABLE>
A-7
<PAGE> 411
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED IN
THE OFFERING CIRCULAR
---------------------
<S> <C>
Term Sheet.................................................. 108
Tevel....................................................... 101
Time Warner................................................. 146
TIN......................................................... 95
TINTA Common Stock.......................................... 100
TINTA Series A Common Stock................................. 2
TINTA Series B Common Stock................................. 2
Torneos..................................................... 110
TPZS........................................................ 107
Trading Day................................................. 170
Treaty...................................................... 68
TTS-Delaware................................................ 88
TW Holdings................................................. 101
U.K......................................................... 2
U.S......................................................... 2
UII......................................................... 107
UKGL........................................................ 105
UKLL........................................................ 105
United States Real Property Interest........................ 95
UPC......................................................... 107
US WEST..................................................... 102
UVSG........................................................ (ii)
UVTV........................................................ 134
Ventures LLC................................................ 13
Video Services.............................................. 127
VII Cable Acquisition....................................... 26
WCS......................................................... 128
WIPO........................................................ 68
Wireless Business........................................... 59
Wireline Options............................................ 88
WTCI........................................................ (ii)
WTO......................................................... 129
xDSL........................................................ 64
</TABLE>
A-8
<PAGE> 412
ANNEX B
GLOSSARY OF SELECTED TERMS
Access charges: The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
Analog: One of the two fundamental methods (the other is digital) of
transmitting information, such as voice, data, or video. The analog method of
transmission employs a continuous electric signal which carries information by
means of variations in its amplitude or frequency. In an analog transmission,
the wave form of the output signal is analogous to the wave form of the input
signal.
Basic subscriber: A subscriber to a cable or other television distribution
system who receives the lowest level of television service offered by the
distributor and who is usually charged a flat monthly rate for such basic
channels.
Broadband: A general term used to describe wide bandwidth or bit speed
(typically greater than that required for voice transmission). A broadband
communications system can deliver multiple channels and other services.
Browser: Any computer software program used to search through automated
information system storage to locate or acquire information without necessarily
knowing of the existence or the format of the information being sought.
Cable television: A facility consisting of a set of closed transmission
paths, associated signal generation, reception and control equipment that is
designed to provide cable service to multiple subscribers within a community. A
cable television system uses coaxial and/or fiber-optic cable to transmit
multiple channels carrying images, sound and data between a central facility
(i.e. a headend) and individual customer's television sets. Such systems may
allow one-way (from a headend to a residence and/or business) or two-way (from a
headend to a residence and/or business with a return path to the headend)
transmission.
Cable television franchise or license: An initial authorization, or
renewal thereof, granted by the applicable governing body pursuant to its
authority under the communications laws of a country for the purpose of
providing cable television services for a specific franchise/license area.
Caching: A process by which high-speed memory stores and sends frequently
accessed information to and from the computer's central microprocessor faster
than if multiple transmissions of the same data were stored and sent by a hard
disk.
CAP (Competitive Access Provider): A company that provides interexchange
access and dedicated telecommunications services (private line, local transport
and special access) as an alternative to the incumbent local exchange carrier.
C-Band: A range of frequencies between 3.7 - 4.2 GHz and 5.925 - 6.425 GHz
used primarily for microwave and satellite communications.
CDMA (Code Division Multiple Access): A digital spread-spectrum technology
which allows a large number of users to access a single frequency band that
assigns a code to all information bits, sends a scrambled transmission of the
encoded information and reassembles the information to its original format.
Churn: A term used to describe the disconnection of cable television
customers.
CLEC (Competitive Local Exchange Carrier): A company that provides local
exchange services in competition with the incumbent local exchange carrier.
CMRS: Commercial Mobile Radio Service.
Coaxial cable: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional cable systems. Signals are transmitted through it at
B-1
<PAGE> 413
different frequencies, giving greater channel capacity than is possible with
twisted pair cable, but generally less than is allowed by optical fiber.
DBS (Direct Broadcast Satellite): Systems using Ku-band frequencies that
can be received by significantly smaller and less expensive receive terminals
than those home satellite dishes that receive C-Band frequencies.
Digital: A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal.
Digital compression: The use of mathematical algorithms to send fewer
binary digits to represent the information in a particular transmission, so as
to facilitate multiple channel transmission through a single channel's
bandwidth.
Digital protocols: A pre-established set of rules or procedures, such as
CDMA and TDMA which manages the communication for digital signal transmission.
DTH (Direct-to-home): A service by which television programming is
transmitted to individual dwellings, each served by a single satellite receiving
dish.
ESMR (Enhanced Specialized Mobile Radio): A radio communications system
that employs digital technology with a multi-site configuration that permits
reuse of frequencies in the SMR frequency bands, offering enhanced dispatch and
other services (such as voice and data services) to traditional SMR users.
FCC: The United States Federal Communications Commission.
Footprint: The area on the Earth's surface where the signals from a
specific satellite can be received.
Frame relay: An efficient, high-speed packetized switching and transport
technology, or protocol, used to send digital information that flows in short
bursts with relatively long, silent intervals over wide area networks. Frame
relays use smaller bundles and require less error checking than traditional
forms of digital data transmission.
Frequency: The number of cycles per second, expressed in hertz, of a
periodic oscillation or wave in radio propagation.
GSM (Global System for Mobile Communications): The standard digital
cellular telephone service in Europe and Japan, guided by a set of standards
specifying the infrastructure for digital cellular service, which has also been
adopted by some providers of other digital wireless services (such as PCS).
Headend: A collection of hardware, typically including satellite
receivers, modulators, amplifiers and video cassette playback machines. Signals,
when processed, are then combined for distribution within the cable network.
HFC (Hybrid Fiber Coaxial): A technology consisting of fiber optic
distribution facilities and coaxial cable deployed to the home or business. This
technology enables the operator to offer a wide variety of two-way broadband
services, including telecommunications and entertainment.
High-capacity: A term used to describe, among other things, the increased
capacity for video, voice and data transmission over hybrid fiber optic/coaxial
distribution networks (generally 750 MHz) as compared to copper coaxial systems
(generally 550 MHz or less).
Homes passed: Homes that can be connected to a video distribution system
without further extension of the distribution network.
ILECs (Incumbent Local Exchange Carriers): The established local phone
companies, including those affiliated with an RBOC or an independent company
(such as GTE), which provide local exchange services.
Interactive services: Video, voice, data and/or multimedia services which
allow subscribers to interact with a remote database and/or other subscribers,
including pay-on-demand, shop-at-home, video games or
B-2
<PAGE> 414
such other interactive services as video phone and telephony which can be more
easily provided with the development of high-capacity hybrid fiber optic/coaxial
distribution networks.
InterLATA service: Telecommunications between a point located in one LATA
and a point located in a different LATA.
Internet: The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
Internet backbone: Connections running at up to 655 Mbps linked up by
national Internet service providers at specified interconnection points called
national access points, which are located in major metropolitan areas.
ISDN (Integrated Services Digital Network): ISDN is an internationally
agreed-upon standard which, through special equipment, allows two-way,
simultaneous voice and data transmission in digital formats over the same
transmission line. ISDN permits video conferencing over a single line, for
example, and also supports a multitude of value-added switched service
applications such as Incoming Calling Line Identification.
IXC (Interexchange Carrier): A telephone company that provides long
distance telephone service between LATAs or within a LATA.
Java: Sun Microsystems' programming language that is used for adding
animation and other action to Internet sites.
Kbps: KiloBits Per Second. One thousand bits per second.
Ku-band: The portion of the electromagnetic spectrum in the 12 to 14 GHz
range used for satellites.
LATA (Local Access and Transport Area): A contiguous geographic area (i)
established before the date of enactment of the 1996 Act by a Bell Operating
Company such that no exchange area includes points within more than one
metropolitan statistical area, consolidated metropolitan statistical area, or
state, except as expressly permitted by the divestiture order known as the
Modification of Final Judgment (MFJ) and orders entered pursuant thereto; or
(ii) established or modified by a Bell Operating Company after such date of
enactment and approved by the FCC.
LEC (Local Exchange Carrier): A provider of local exchange telephone
service.
LMDS (Local Multipoint Distribution Service): A two-way analog, or digital
transmission system operating at 28 GHz from a fixed station transmitting to
multiple receiving facilities located at fixed points, capable of providing
video, data and voice services. Digital LMDS has not yet been offered on a
commercial basis.
Local Area Networks (LANs): The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
Local Exchange: A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted without
toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service: Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
Low Earth Orbit Satellite (LEO Satellite): An LEO Satellite moves in a
relatively low orbit (between 500 and 1,500 nautical miles) above the Earth. The
primary advantage of LEO Satellites is that the terrestrial-based transmitting
terminal does not have to be very powerful because the LEO Satellite is closer
to the Earth than traditional geostationary satellites which are placed in
geosynchronous orbit (22,300 statute miles) directly over the Earth's equator.
Mbps: MegaBits Per Second. One million bits per second.
B-3
<PAGE> 415
Microwave Relocation: The migration to other frequencies of the radio
transmission facilities operated by businesses and public safety agencies which
currently utilize radio spectrum within or adjacent to the spectrum allocated to
PCS licensees by the FCC.
MMDS (Multi-channel multi-point distribution system): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MSO (Multiple system operator): A cable company which owns multiple cable
systems in varying locations, under the control and direction of a single,
common management organization. Such an organizational structure is used to
improve operating efficiencies, such as lower programming and equipment costs.
Node: An individual point of origination and termination or intersection
on the network, usually where electronics are housed.
Optical fiber: Cable made of glass fibers through which signals are
transmitted as pulses of light. Capacity for a very large number of channels can
be more easily provided.
Overbuild: The construction and operation by more than one cable operator
of cable systems in the same geographic location, which compete for the same
customers.
Pops: A short-hand abbreviation for the population covered by a license or
group of licenses. Unless otherwise noted, as used herein Pops means the
Donnelley Marketing Service estimate of the December 31, 1995 population of a
geographic area.
Premium service: A cable programming service offered for a charge on a
per-channel or per-program basis.
Private line: A transmission line exclusively dedicated to connecting two
or more customer locations.
PUC (Public Utility Commission): A state regulatory body, established in
most states, which regulates utilities, including telecommunications companies
providing intrastate services. In some states this regulatory body may have a
different name, such as public service commission.
RBOC (Regional Bell Operating Company): The holding company which owns an
incumbent local exchange carrier (such as NYNEX).
Rebuild: The replacement or upgrade of an existing cable system usually to
improve either its technological performance, or to expand its channel bandwidth
capacity, in order to provide more services.
Reciprocal Compensation: An arrangement in which two local exchange
carriers agree to terminate traffic originating on each other's networks in
exchange for a negotiated level of compensation.
RF (Radio Frequency): Electromagnetic energy whose wavelengths are between
the audio range and the light range.
Roaming: A service offered by mobile communications carriers which allows
subscribers to use their handset while in the service area of another carrier.
Roaming agreements are negotiated between carriers.
Route Miles: The number of miles traversed by the routes of a microwave
relay system or an optical fiber network.
SMATV (Satellite Master Antenna Television): A television delivery system
to multiple dwelling units that utilizes one or more satellite dishes and a
small distribution network.
SMR (Specialized Mobile Radio): A two-way analog mobile radio telephone
system typically used for dispatch services such as truck and taxi fleets.
SONET (Synchronous Optical Network): A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed
B-4
<PAGE> 416
in optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors' equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
Special Access Services: The lease of private, dedicated (i.e.,
non-switched) telecommunications lines or circuits on an ILEC's or a CAP's
network which run to or from the long distance carrier's point of presence.
Special access services do not require the use of switches. Examples of special
access services are telecommunications circuits running between the points of
presence of a single long distance carrier, from one long distance carrier's
point of presence to another long distance carrier's point of presence or from
an end-user to its long distance carrier's point of presence.
Statistical Multiplexing: A mathematical process by which all of the
individual signals to be transmitted in an assigned bandwidth are analyzed and
the bit rate of each individual signal is adjusted for the maximum utilization
of the available bit rate in the assigned bandwidth.
Streaming Video Transmission: Transmitting and displaying video data in
real time, as opposed to waiting until the data is all in one place for the
destination device to process and display it.
Switch: A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this Offering Circular, switches
generally refer to voice grade telecommunications switches unless specifically
stated otherwise.
Switched Access Services: The connection between a long distance carrier's
point of presence and an end user's premises through the switching facilities of
a local exchange carrier.
TDMA (Time Division Multiple Access): A digital coding and transmission
scheme which divides bandwidth into discrete time slots and assigns these slots
to various users in order to permit more than one simultaneous conversation on a
single RF channel.
Telephony: The provision of telephone service.
Terrestrial channel: Broadcast television channels that may be received by
television sets without special equipment.
Transponder: Transmitting apparatus of a communications satellite. For an
analog signal there is one transmitted channel per transponder. For a digital
signal, the use of compression technologies allows the transmission of multiple
channels per transponder.
Trunk: The "transportation" component within cable television and/or
broadband network architecture that carries the system product to the
distribution portion of the architecture which in turn goes to the customer's
home.
B-5
<PAGE> 417
ANNEX C
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of any
Inter-Group Interest in the TCI Ventures Group which the TCI Group may create
following the Exchange Offers, and the application of certain terms of the
Amended Charter based on the assumptions set forth herein and using 825 million
shares as the number of authorized shares of TCI Ventures Group Common Stock,
160 million shares as the number of shares of TCI Ventures Group Common Stock
issued in the Exchange Offers (the "Outstanding Shares of TCI Ventures Group
Stock"), zero as the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest immediately following the Exchange Offers and 30
million shares as the number of TCI Ventures Group Common Stock issuable upon
the conversion, exercise or exchange of Pre-Exchange Offer Securities. Unless
otherwise specified, each illustration below should be read independently as if
none of the other transactions illustrated in this Annex C 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 Offering Circular.
Please note that the following illustrations are purely hypothetical and the
numbers used herein (including assumptions of market values) were chosen to
simplify the calculations and are not intended to represent estimates of actual
numbers or values. Capitalized terms used herein have the respective meanings
ascribed to them in the Offering Circular. See Annex A -- Index of Certain
Defined Terms.
At any given time, the TCI Ventures Group Outstanding Interest Fraction,
which represents the percentage interest in the equity value of the Company
attributable to the TCI Ventures Group that is represented by the outstanding
shares of TCI Ventures Group Common Stock, will be equal to:
<TABLE>
<CAPTION>
Outstanding Shares of TCI Ventures Group Common Stock
- -----------------------------------------------------------------------------------------------
<C> <C> <C>
Number of Shares Issuable with Respect to
Outstanding Shares of TCI Ventures Group the
Common Stock + TCI Ventures Group Inter-Group Interest
</TABLE>
The balance of the equity of the TCI Ventures Group is represented by the
TCI Group's Inter-Group Interest in the TCI Ventures Group and, at any given
time, the TCI Ventures Group Inter-Group Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the TCI
Ventures Group that is attributed to the TCI Group, will be equal to:
<TABLE>
<CAPTION>
Number of Shares Issuable with Respect to the TCI Ventures Group Common Stock
- -----------------------------------------------------------------------------------------------
<C> <C> <C>
Number of Shares Issuable with Respect to
Outstanding Shares of TCI Ventures Group the
Common Stock + TCI Ventures Group Inter-Group Interest
</TABLE>
The sum of the TCI Ventures Group Outstanding Interest Fraction and the TCI
Ventures Group Inter-Group Interest Fraction will always equal 100%.
The Adjusted TCI Ventures Group Outstanding Interest Fraction is a measure
that differs from the TCI Ventures Group Outstanding Interest Fraction in that
it takes into account the dilutive effect of certain convertible securities and
options. It is used instead of the TCI Ventures Group Outstanding Interest
Fraction in certain situations and would be equal to:
<TABLE>
<S> <C> <C> <C> <C>
Outstanding Shares of TCI Ventures Group Common Stock
----------------------------------------------------------------------------------------------------------
Outstanding Shares of Number of Shares Issuable with Number of Shares of TCI Ventures Group
TCI Ventures Group + Respect to the TCI Ventures Group + Common Stock Issuable upon Conversion,
Common Stock Inter-Group Interest Exercise or Exchange of Pre-Exchange
Offer Securities
</TABLE>
C-1
<PAGE> 418
EXCHANGE OFFERS
The following illustration assumes the initial issuance by the Company of
160 million shares of TCI Ventures Group Common Stock in the Exchange Offers.
- Assuming that the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest is zero immediately following the
Exchange Offers, the TCI Ventures Group Outstanding Interest Fraction
will be 100%, calculated as follows:
160 million
----------------
160 million + 0
The TCI Ventures Group Inter-Group Interest Fraction will accordingly
represent an interest of 0% in the TCI Ventures Group.
- In this case, the TCI Group would not be credited, and the TCI Ventures
Group would not be charged, with any amount with respect to any dividend
or other distribution paid on the outstanding shares of TCI Ventures
Group Common Stock.
- Immediately after the Exchange Offers, the Company would have 665 million
authorized and unissued shares of TCI Ventures Group Common Stock
remaining (825 million minus 160 million issued and outstanding).
PURCHASES OF TCI VENTURES GROUP COMMON STOCK
The following two illustrations reflect the purchase by the Company of 80
million shares of TCI Ventures Group Common Stock, which are retired or
otherwise cease to be outstanding following their purchase.
PURCHASE WITH TCI VENTURES GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TCI Ventures Group, with the TCI Ventures Group being charged
with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Shares purchased............................................ 80 million
-----------
Total shares issued and outstanding after purchase.......... 80 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be changed by the purchase of any shares
of TCI Ventures Group Common Stock which are purchased with funds
attributed to the TCI Ventures Group.
- The TCI Ventures Group Outstanding Interest Fraction would be 100%,
calculated as follows:
80 million
---------------
80 million + 0
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 0% in the TCI Ventures Group.
- In this case, the TCI Group would not be credited, and the TCI Ventures
Group would not be charged, with any amount with respect to any dividend
or other distribution paid on the outstanding shares of TCI Ventures
Group Common Stock.
- The Company would have 745 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 80 million issued and
outstanding).
C-2
<PAGE> 419
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.................... 160 million
Shares purchased............................................ 80 million
-----------
Total shares issued and outstanding after purchase.......... 80 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be increased by the number of shares of TCI
Ventures 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 TCI Ventures
Group Inter- Group Interest prior to purchase............. 0
Shares purchased............................................ 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest after purchase................. 80 million
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 50%,
calculated as follows:
80 million
------------------------
80 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 50% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 100% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (50%) to the TCI
Ventures Group Outstanding Interest Fraction (50%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities). If, for example, a dividend of $1 per share
were declared and paid on the 80 million shares of TCI Ventures Group
Common Stock outstanding (an aggregate of $80 million), the TCI Group
would be credited with $80 million, and the TCI Ventures Group would be
charged with that amount in addition to the $80 million dividend on the
outstanding shares of TCI Ventures Group Common Stock (a total of $160
million). An example of the effects of a distribution of TCI Ventures
Group Common Stock is set forth under the caption "TCI Ventures Group
Common Stock Dividends."
- The Company would have 745 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 80 million issued and
outstanding).
TRANSFERS OF ASSETS BETWEEN THE TCI GROUP AND THE TCI VENTURES GROUP
CONTRIBUTION OF ASSETS FROM THE TCI GROUP TO THE TCI VENTURES GROUP
The following illustration reflects the contribution by the TCI Group to
the TCI Ventures Group of $1.6 billion of assets attributed to the TCI Group on
a date on which the Market Value of the TCI Ventures Group Common Stock is $20
per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 0
-----------
Total shares issued and outstanding after contribution...... 160 million
===========
</TABLE>
C-3
<PAGE> 420
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased to reflect the contribution to the TCI Ventures Group
of assets theretofore attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter- Group Interest prior to contribution......... 0
Adjustment to reflect contribution to the TCI Ventures Group
of assets attributed to the TCI Group ($1.6 billion
divided by $20)........................................... 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest after contribution............. 80 million
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 67%,
calculated as follows:
160 million
--------------------------
160 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 33% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 50% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (33%) to the TCI
Ventures Group Outstanding Interest Fraction (67%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities).
- The Company would have 665 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 160 million issued and
outstanding).
TRANSFER OF ASSETS FROM THE TCI VENTURES GROUP TO THE TCI GROUP
The following illustration reflects the transfer by the TCI Ventures Group
to the TCI Group of $800 million of assets attributed to the TCI Ventures Group
on a date on which the Market Value of the TCI Ventures Group Common Stock is
$20 per share and the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest is 80 million.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Shares purchased............................................ 0
-----------
Total shares issued and outstanding after transfer.......... 160 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be decreased to reflect the contribution to
the TCI Group of assets theretofore attributed to the TCI Ventures Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to transfer.................... 80 million
Adjustment to reflect transfer to the TCI Group of assets
attributed to the TCI Ventures Group ($800 million divided
by $20)................................................... 40 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after transfer....................... 40 million
==========
</TABLE>
The TCI Ventures 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 TCI
C-4
<PAGE> 421
Ventures Group Inter-Group Interest to less than zero. The TCI Ventures Group
cannot have an interest in the TCI Group corresponding to the Inter-Group
Interest.
- The TCI Ventures Group Outstanding Interest Fraction would be 80%,
calculated as follows:
160 million
--------------------------
160 million + 40 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 20% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 25% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (20%) to the TCI
Ventures Group Outstanding Interest Fraction (80%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities).
- The Company would have 665 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 160 million issued and
outstanding).
FUTURE OFFERINGS OF TCI VENTURES GROUP COMMON STOCK
The following illustrations reflect the sale by the Company of 80 million
shares of TCI Ventures Group Common Stock on a date on which the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest is
80 million.
OFFERING FOR THE TCI VENTURES GROUP
Assume all such shares are identified as issued for the account of the TCI
Ventures Group, with the net proceeds credited to the TCI Ventures Group:
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after offering.......... 240 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be changed by the issuance of any shares
of TCI Ventures Group Common Stock for the account of the TCI Ventures
Group.
- The TCI Ventures Group Outstanding Interest Fraction would be 75%,
calculated as follows:
240 million
--------------------------
240 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 25% in the TCI Ventures Group.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 240 million
issued and outstanding).
OFFERING FOR THE TCI GROUP
Assume all 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.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after offering.......... 240 million
===========
</TABLE>
C-5
<PAGE> 422
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would decrease by the number of shares of TCI
Ventures Group Common Stock issued for the account of the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to offering.................... 80 million
Shares issued in offering................................... 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after offering....................... 0
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 100%,
calculated as follows:
240 million
----------------
240 million + 0
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 0% in the TCI Ventures Group.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 240 million issued and
outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE EXCHANGE OFFERS
If the Company were to issue any debt or preferred stock convertible into
shares of TCI Ventures Group Common Stock, the TCI Ventures Group Inter-Group
Interest Fraction and the TCI Ventures Group Outstanding Interest Fraction would
be unchanged at the time of such issuance. If any shares of TCI Ventures Group
Common Stock were issued upon conversion of such Convertible Security, however,
then the TCI Ventures Group Inter-Group Interest Fraction and the TCI Ventures
Group Outstanding Interest Fraction would be affected in a manner similar to
that shown above under "Offering for the TCI Ventures Group", if such
Convertible Security were attributed to the TCI Ventures Group, or under
"Offering for the TCI Group," if such Convertible Security were attributed to
the TCI Group. The foregoing will not apply to the conversion, exercise or
exchange of Pre-Exchange Offer Securities.
TCI VENTURES GROUP COMMON STOCK DIVIDENDS
The following illustrations reflect dividends of TCI Ventures Group Common
Stock on outstanding TCI Ventures Group Common Stock and outstanding TCI Group
Common Stock, respectively, on a date on which the Number of Shares Issuable
with Respect to the TCI Ventures Group Inter-Group Interest is 80 million.
TCI VENTURES GROUP COMMON STOCK DIVIDEND ON TCI VENTURES GROUP COMMON STOCK
Assume the Company declares a dividend of one-half of one share of TCI
Ventures Group Common Stock on each outstanding share of TCI Ventures Group
Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after dividend.......... 240 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be increased proportionately to reflect the
stock dividend payable in shares of TCI Ventures Group Common Stock to
holders of TCI Ventures Group Common Stock.
C-6
<PAGE> 423
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to dividend.................... 80 million
Adjustment to reflect dividend of shares on outstanding
shares of TCI Ventures Group Common Stock................. 40 million
-----------
Number of shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after dividend....................... 120 million
===========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 67%,
calculated as follows:
240 million
---------------------------
240 million + 120 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 33% in the TCI Ventures Group. The TCI Ventures
Group Outstanding Interest Fraction and the TCI Ventures Group Inter-Group
Interest fraction would be unchanged from the corresponding percentages
prior to the dividend.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 240 million
issued and outstanding).
TCI VENTURES GROUP COMMON STOCK DIVIDEND ON TCI GROUP COMMON STOCK
Assume an aggregate of 600 million shares of TCI Group Common are
outstanding and the Company declares a dividend of one-tenth of one share of TCI
Ventures Group Common Stock on each outstanding share of TCI Group Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 60 million
-----------
Total shares issued and outstanding after dividend.......... 220 million
===========
</TABLE>
- Subsequent to the Exchange Offers, any dividend of shares of TCI Ventures
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 TCI Ventures Group Inter-Group Interest. As a result,
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would decrease by the number of shares of TCI
Ventures 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 TCI Ventures
Group
Inter-Group Interest prior to dividend...................... 80 million
Shares distributed on outstanding shares of TCI Group Common
Stock..................................................... 60 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after dividend......................... 20 million
==========
</TABLE>
- The Company will not distribute to holders of TCI Group Common Stock as a
dividend a number of shares of TCI Ventures Group Common Stock exceeding
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest.
- The TCI Ventures Group Outstanding Interest Fraction would be 92%,
calculated as follows:
220 million
---------------------------
220 million + 20 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 8% in the TCI Ventures Group.
C-7
<PAGE> 424
- The Company would have 605 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 220 million
issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the TCI Ventures
Group Common Stock at the option of the Company, (b) mandatory dividend,
redemption or conversion of the TCI Ventures Group Common Stock following the
Disposition of all or substantially all of the properties and assets of the TCI
Ventures Group and (c) redemption of all the TCI Ventures Group Common Stock in
exchange for stock of a subsidiary holding all the assets and liabilities of the
TCI Ventures Group, in each case assuming that (i) the number of outstanding
shares of TCI Ventures Group Common Stock is 90 million and (ii) the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest is
30 million.
CONVERSION AT THE OPTION OF THE COMPANY
Assume that the Company elects to convert the TCI Ventures Group Common
Stock into TCI Group Common Stock at the TCI Ventures Group Optional Conversion
Ratio; the TCI Ventures Group Private Market Value is determined to be $4
billion and the number of shares of TCI Ventures Group Common Stock deemed to be
issued upon the conversion, exercise or exchange of Convertible Securities
(other than Pre-Exchange Offer Securities) is 10 million.
- The Adjusted Outstanding Shares of TCI Ventures Group Common Stock would
be 160 million (representing the sum of (i) the number of outstanding
shares of TCI Ventures Group Common Stock, (ii) the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest,
(iii) the number of shares of TCI Ventures Group Common Stock issuable
upon conversion, exercise or exchange of Pre-Exchange Offer Securities
and (iv) the number of shares of TCI Ventures Group Common Stock deemed
to be issued upon the conversion, exercise or exchange of Convertible
Securities) (other than Pre-Exchange Offer Securities)), calculated as
follows:
90 million + 30 million + 30 million + 10 million
- The TCI Ventures Group Common Stock Per Share Value would be $25
(representing the quotient of the TCI Ventures Group Private Market Value
($4 billion) and the Adjusted Outstanding Shares of TCI Ventures Group
Common Stock (160 million )).
- In this case, assuming that the average Market Value of one share of
Series A TCI Group Common Stock is $15 over the 20-Trading Day period
ending on the Trading Day preceding the date as of which the TCI Ventures
Group Private Market Value is determined, the TCI Ventures Group Optional
Conversion Ratio would be 1.67 (representing the quotient of the TCI
Ventures Group Common Stock Per Share Value ($25) and such average Market
Value of the Series A TCI Group Common Stock ($15)), and each outstanding
share of TCI Ventures Group Common would be converted into 1.67 shares of
TCI Group Common Stock.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF TCI VENTURES GROUP COMMON
STOCK
Assume that a Disposition of all (not merely substantially all) of the
properties and assets of the TCI Ventures Group occurs and the TCI Ventures
Group Net Proceeds from such Disposition equal $4 billion.
- If the Company elected to redeem all outstanding shares of TCI Ventures
Group Common Stock, the aggregate redemption price would be $2.4 billion
(representing the product of the Adjusted TCI Ventures Group Outstanding
Interest Fraction and the TCI Ventures Group Net Proceeds of such
Disposition), calculated as follows:
<TABLE>
<C> <S>
90 million
------------------------------------ X $4 billion
90 million + 30 million + 30 million
</TABLE>
In this case each outstanding share of TCI Ventures Group Common Stock
would be redeemed in exchange for $26.67 per share (representing the
quotient of the aggregate redemption price ($2.4 bil-
C-8
<PAGE> 425
lion) and the number of outstanding shares of TCI Ventures Group Common
Stock (90 million)). If Pre-Exchange Offer Securities remain outstanding
at the time of any redemption of all outstanding shares of TCI Ventures
Group Common Stock following the disposition of all (not merely
substantially all) of the properties and assets of the TCI Ventures Group,
the proportionate interest in the TCI Ventures Group Net Proceeds of the
Disposition to be distributed to the holders of TCI Ventures Group Common
Stock will be determined on the basis of the Adjusted TCI Ventures Group
Outstanding Interest Fraction, which will result in the allocation to the
TCI Group of a portion of such TCI Ventures Group Net Proceeds, in
addition to the portion attributable to any Inter-Group Interest in the
TCI Ventures Group, sufficient to provide for the delivery of the portion
of the consideration (if any) deliverable by the Company on any
post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group Common
Stock that would have been issuable upon such exchange if it had occurred
prior to the redemption.
- If the Company elected to convert the TCI Ventures Group Common Stock
into TCI Group Common Stock, assuming that the Market Value of one share
of Series A TCI Ventures 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 $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 TCI Ventures Group Common Stock would be converted
into TCI Group Common Stock at a ratio of 1.83 (representing 110% of the
average daily ratio during such period of the Market Value of one share
of Series A TCI Ventures 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 TCI Ventures Group Common Stock.
Assume that a Disposition of substantially all (but not all) of the
properties and assets of the TCI Ventures Group occurs and the TCI Ventures
Group Net Proceeds from the Disposition equal $3.2 billion.
- If the Company elected to pay a dividend to the holders of TCI Ventures
Group Common Stock, the aggregate amount of the dividend would be $2.4
billion (representing the product of the TCI Ventures Group Outstanding
Interest Fraction and the TCI Ventures Group Net Proceeds of the
Disposition), calculated as follows:
<TABLE>
<C> <S>
90 million
----------------------- X $3.2 billion
90 million + 30 million
</TABLE>
In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with $800 million, an amount equal to 33% (representing
the ratio of the TCI Ventures Group Inter-Group Interest Fraction (25%)
and the TCI Ventures Group Outstanding Interest Fraction (75%)) of the
aggregate amount of such dividend.
- If the Company elected to redeem shares of TCI Ventures Group Common
Stock, the aggregate redemption price would be $2.4 billion (representing
the product of the TCI Ventures Group Outstanding Interest Fraction and
the TCI Ventures Group Net Proceeds of such Disposition), calculated as
follows:
<TABLE>
<C> <S>
90 million
----------------------- X $3.2 billion
90 million + 30 million
</TABLE>
In this case, assuming that the average Market Value of one share of
Series A TCI Ventures Group Common Stock for the ten-Trading Day period
beginning on the 16th Trading Day following the consummation of such
Disposition is $33.33, an aggregate of 72 million (equal to the quotient
of the aggregate redemption price and such average Market Value) shares of
TCI Ventures Group Common Stock would be redeemed in exchange for $33.33
per share.
- If the Company elected to convert TCI Ventures Group Common Stock into
TCI Group Common Stock, assuming that the Market Value of one share of
Series A TCI Ventures Group Common Stock on each Trading Day during the
ten-Trading Day period referred to in the preceding paragraph was
C-9
<PAGE> 426
$33.33 and the Market Value of one share of Series A TCI Group Common
Stock on each Trading Day during such period was $15, the TCI Ventures
Group Common Stock would be converted into TCI Group Common Stock at a
ratio of 2.44 (representing 110% of the average daily ratio during such
period of the Market Value of one share of Series A TCI Ventures 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 TCI
Ventures Group Common Stock.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
Assume that the Company elects to redeem all of the outstanding shares of
TCI Ventures Group Common Stock in exchange for shares of common stock of the
TCI Ventures Group Subsidiary and that the total number of outstanding shares of
common stock of the TCI Ventures Group Subsidiary is 150 million.
- In this case, shares of TCI Ventures Group Common Stock would be redeemed
in exchange for an aggregate number of shares of common stock of the TCI
Ventures Group Subsidiary equal to 90 million (representing the product
of the Adjusted TCI Ventures Group Outstanding Interest Fraction and the
number of shares of common stock of the TCI Ventures Group Subsidiary),
calculated as follows:
<TABLE>
<C> <S>
90 million
------------------------------------ X 150 million
90 million + 30 million + 30 million
</TABLE>
In this case each outstanding share of TCI Ventures Group Common Stock
would be redeemed in exchange for one share of common stock of the TCI
Ventures Group Subsidiary, and the Company would retain 60 million shares
of common stock of the TCI Ventures Group Subsidiary. Thirty million of
such shares would be held by the Company to be used in connection with any
conversion, exercise or exchange of Pre-Exchange Offer Securities.
C-10
<PAGE> 427
THE EXCHANGE AGENT FOR THE EXCHANGE OFFERS IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
Tender & Exchange Department (for Eligible Institutions Only) Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
FOR CONFIRMATION TELEPHONE:
(800) 507-9357
Questions or requests for assistance and additional copies of this Offering
Circular and the related Letters of Transmittal may be obtained from:
THE INFORMATION AGENT
(GEORGESON & COMPANY, INC. LOGO)
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
Call Toll-Free: (800) 223-2064
<PAGE> 1
LETTER OF TRANSMITTAL
TO EXCHANGE SHARES OF SERIES A TCI VENTURES GROUP COMMON STOCK
OF
TELE-COMMUNICATIONS, INC.
FOR
SHARES OF SERIES A TCI GROUP COMMON STOCK
OF
TELE-COMMUNICATIONS, INC.
<TABLE>
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
IDENTIFICATION OF SHARES OF SERIES A TCI GROUP COMMON STOCK
TENDERED PURSUANT TO THE SERIES A EXCHANGE OFFER
------------------------------------------------------------------------------------------------------------------------------
(SEE INSTRUCTIONS 3 AND 4)
------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SERIES A TCI GROUP COMMON STOCK CERTIFICATE(S)
(PLEASE FILL IN, IF BLANK) (ATTACH SIGNED LIST, IF NECESSARY)
------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
SERIES A TCI GROUP NUMBER NUMBER
COMMON STOCK OF SHARES OF SHARES
CERTIFICATE REPRESENTED BY TENDERED FOR
NUMBER(S)* CERTIFICATE* EXCHANGE**
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
==================================================================
Total Shares of Series A TCI Group Common Stock
------------------------------------------------------------------------------------------------------------------------------
* Columns (1) and (2) need not be completed by stockholders who deliver shares of Series A TCI Group Common Stock by book-entry
transfer.
** If you desire to tender fewer than all shares of Series A TCI Group Common Stock evidenced by any certificate listed above,
please indicate in column (3) the number of shares you wish to tender. Otherwise, all shares of Series A TCI Group Common Stock
evidenced by such certificate will be deemed to have been tendered for exchange.
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EACH HOLDER OF TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK MAY
TENDER ANY OR ALL SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON
STOCK HELD BY SUCH HOLDER IN EXCHANGE FOR SHARES OF TELE-COMMUNICATIONS, INC.
SERIES A TCI VENTURES GROUP COMMON STOCK, ON A ONE FOR ONE BASIS. THE COMPANY IS
NOT OBLIGATED TO ACCEPT FOR EXCHANGE MORE THAN AN AGGREGATE OF 188,661,300
SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK IN THE
SERIES A EXCHANGE OFFER.
THE SERIES A EXCHANGE OFFER EXPIRES AT 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS EXTENDED.
(PLEASE CAREFULLY READ THE ACCOMPANYING INSTRUCTIONS ON PAGES 6 TO 9)
THE EXCHANGE AGENT FOR THE SERIES A EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
Tender & Exchange Department (for Eligible Institutions Only) Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
FOR CONFIRMATION TELEPHONE:
(800) 507-9357
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile to a number other than as set forth
above does not constitute a valid delivery to the Exchange Agent.
YOU MUST TENDER ONE SHARE OF SERIES A TCI GROUP COMMON STOCK FOR EACH SHARE
OF SERIES A TCI VENTURES GROUP COMMON STOCK YOU WISH TO RECEIVE.
<PAGE> 2
This Letter of Transmittal is to be used by all holders of shares of
Tele-Communications, Inc. Series A TCI Group Common Stock, par value $1.00 per
share (the "Series A TCI Group Common Stock"), desiring to exchange any or all
of the shares of Series A TCI Group Common Stock held by such holders for shares
of Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share (the "Series A TCI Ventures Group Common Stock"), pursuant to
the Series A Exchange Offer described in the Offering Circular of
Tele-Communications, Inc., a Delaware corporation (the "Company"), dated August
7, 1997 (the "Offering Circular"). This Letter of Transmittal is to be completed
by stockholders if (i) certificates representing shares of Series A TCI Group
Common Stock tendered are to be forwarded herewith, or (ii) the delivery of
shares of Series A TCI Group Common Stock is to be made by book-entry transfer
to the account(s) maintained by the Exchange Agent at The Depository Trust
Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC" and,
collectively with DTC, the "Book-Entry Transfer Facilities"), pursuant to the
procedures set forth in the Offering Circular. Stockholders whose certificates
for shares of Series A TCI Group Common Stock are not immediately available or
who cannot deliver such certificates and all other documents required hereby to
the Exchange Agent prior to 5:00 p.m., New York City time, on September 10,
1997, unless the Series A Exchange Offer is extended (such date as extended from
time to time, the "Expiration Date"), or who cannot comply with the procedure
for book-entry transfer on a timely basis, must tender their shares of Series A
TCI Group Common Stock according to the guaranteed delivery procedures described
in the Offering Circular. See Instruction 2. DELIVERY OF DOCUMENTS TO A
BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE> 3
TO TELE-COMMUNICATIONS, INC.:
The undersigned hereby tenders to Tele-Communications, Inc., a Delaware
corporation (the "Company"), the above described shares of Series A TCI Group
Common Stock, subject to the terms and conditions set forth in this Letter of
Transmittal and the Offering Circular, dated August 7, 1997 (collectively, the
"Series A Exchange Offer"), the receipt of which is hereby acknowledged.
Subject to, and effective upon, acceptance for exchange of the shares of
Series A TCI Group Common Stock tendered herewith in accordance with the terms
and subject to the conditions of the Series A Exchange Offer, the undersigned
hereby assigns and transfers to, or upon the order of, the Company all of the
shares of Series A TCI Group Common Stock tendered hereby which are accepted for
exchange and hereby irrevocably constitutes and appoints The Bank of New York,
as exchange agent (the "Exchange Agent") and as attorney-in-fact of the
undersigned, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), to (a) deliver
certificates evidencing the shares of Series A TCI Group Common Stock tendered
hereby, or transfer ownership of such shares of Series A TCI Group Common Stock
on the account books maintained by a Book-Entry Transfer Facility, together, in
either such case, with all accompanying evidences of transfer and authenticity,
to, or upon the order of, the Company, (b) present such certificates for shares
of Series A TCI Group Common Stock for transfer on the books of the Company, and
(c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such shares of Series A TCI Group Common Stock, all in accordance
with the terms of the Series A Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to validly tender, assign and transfer the shares of
Series A TCI Group Common Stock tendered hereby and that when the same are
accepted for exchange by the Company, the Company will acquire good title
thereto, free and clear of all security interests, liens, charges, encumbrances,
conditional sales agreements or other conditions relating to the sale or
transfer thereof, and not subject to any adverse claims. Upon request, the
undersigned will execute and deliver any additional documents necessary to
complete the transfer of the shares of Series A TCI Group Common Stock tendered
hereby. The undersigned represents that the undersigned has read and agrees to
all of the terms and conditions of the Series A Exchange Offer as set forth in
the Offering Circular and this Letter of Transmittal. All representations and
warranties set forth herein will survive consummation of the transactions
contemplated hereby.
The undersigned understands that the valid tender of shares of Series A TCI
Group Common Stock pursuant to any one of the procedures described in the
Offering Circular and in the instructions hereto will constitute a binding
agreement between the undersigned and the Company upon the terms and subject to
the conditions of the Series A Exchange Offer.
Each person executing this Letter of Transmittal (or facsimile hereof)
waives any right to receive notice of the acceptance for exchange of shares of
Series A TCI Group Common Stock tendered hereby.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
Unless otherwise indicated herein under "Special Issuance Instructions,"
the shares of Series A TCI Ventures Group Common Stock and any certificates for
any shares of Series A TCI Group Common Stock not tendered or not accepted for
exchange shall be issued in the name(s) of the registered holder(s) appearing
under "Identification of Shares of Series A TCI Group Common Stock Tendered
Pursuant to the Series A Exchange Offer." Similarly, unless otherwise indicated
under "Special Delivery Instructions," the shares of Series A TCI Ventures Group
Common Stock and any certificates for any shares of Series A TCI Group Common
Stock not tendered or not accepted for exchange will be returned to the
undersigned at the address indicated under "Identification of Shares of Series A
TCI Group Common Stock Tendered Pursuant to the Series A Exchange Offer." The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" to transfer any shares of Series A TCI Group
Common Stock from the name(s) of the registered holder(s) thereof, if the
Company does not accept for exchange the shares of Series A TCI Group Common
Stock so tendered.
3
<PAGE> 4
================================================================================
[ ] CHECK HERE IF SHARES OF SERIES A TCI GROUP COMMON STOCK TENDERED FOR
EXCHANGE ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT(S)
MAINTAINED BY THE EXCHANGE AGENT WITH ONE OF THE BOOK-ENTRY TRANSFER FACILITIES
AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER FACILITY
MAY DELIVER SHARES OF SERIES A TCI GROUP COMMON STOCK BY BOOK-ENTRY TRANSFER):
Name of Tendering Institution:
-------------------------------------------------
- --------------------------------------------------------------------------------
Check Box of Applicable Book-Entry Transfer Facility:
[ ] DTC [ ] PDTC (check one box)
Account Number:
----------------------------------------------------------------
Transaction Code Number:
-------------------------------------------------------
================================================================================
================================================================================
[ ] CHECK HERE IF CERTIFICATES FOR SHARES OF SERIES A TCI GROUP COMMON STOCK
ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT
TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
------------------------------------------------
Date of Execution of Notice of Guaranteed
Delivery:
----------------------------------------------------------------------
Window Ticket Number (if available):
-------------------------------------------
Name of Institution Which Guaranteed Delivery:
- --------------------------------------------------------------------------------
If Delivered by Book-Entry Transfer, Check Box of Applicable Book-Entry
Transfer Facility:
[ ] DTC [ ] PDTC (check one box)
Account Number:
----------------------------------------------------------------
Transaction Code Number:
-------------------------------------------------------
================================================================================
================================================================================
[ ] SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 4, 5 and 7)
To be completed ONLY if (a) certificates for shares of Series A TCI Group
Common Stock not accepted for exchange or not tendered, and/or (b) any
certificates for shares of Series A TCI Ventures Group Common Stock to be
issued upon exchange, are to be issued in the name of someone other than the
undersigned.
Issue Certificates To:
NAME:
- --------------------------------------------------------------------------------
(Please Print)
ADDRESS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Tax Identification or Social Security No.(s))
================================================================================
================================================================================
[ ] SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 4, 5 and 7)
To be completed ONLY if (a) certificates for shares of Series A TCI Group
Common Stock not accepted for exchange or not tendered, and/or (b) any
certificates for shares of Series A TCI Ventures Group Common Stock to be
issued in the name of the undersigned, are to be sent to someone other than
the undersigned or to the undersigned at an address other than that shown
above in the table "Identification of Shares of Series A TCI Group Common
Stock Tendered Pursuant to the Series A Exchange Offer."
Mail Certificates To:
NAME:
- --------------------------------------------------------------------------------
(Please Print)
ADDRESS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
================================================================================
4
<PAGE> 5
NOTE: SIGNATURES MUST BE PROVIDED BELOW. THE UNDERSIGNED REPRESENTS THAT HE OR
SHE HAS READ AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE SERIES A
EXCHANGE OFFER.
================================================================================
STOCKHOLDER(S) MUST SIGN HERE
(See Instructions 1 and 5)
Must be signed by registered holder(s) EXACTLY as name(s) appear(s) on
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificate(s) and documents transmitted
herewith. If signature(s) is by attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary or
representative capacity, please set forth the full title. See Instruction 5.
SIGN HERE
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
(Signature(s) of Owner(s))
DATED: ,1997
---------------------------------------------------------------------
NAME(S):
------------------------------------------------------------------------
(Please Print)
CAPACITY (Full Title):
----------------------------------------------------------
ADDRESS:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Zip Code)
- ------------------------------------ ----------------------------------
AREA CODE & TELEPHONE NUMBER:( )
--- ----------------------------------------------
- --------------------------------------------------------------------------------
Tax I.D. or Social Security No.(s)
================================================================================
================================================================================
SUBSTITUTE FORM W-9 BELOW MUST BE COMPLETED
================================================================================
================================================================================
GUARANTEE OF SIGNATURE(S) (IF REQUIRED)
(See Instructions 1 and 5)
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
NAME(S):
------------------------------------------------------------------------
TITLE:
--------------------------------------------------------------------------
NAME OF FIRM:
-------------------------------------------------------------------
ADDRESS (Including Zip Code):
---------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
AREA CODE & TELEPHONE NUMBER:( )
--- ----------------------------------------------
DATED: ,1997
---------------------------------------------------------------------
================================================================================
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE SERIES A EXCHANGE OFFER
1. Guarantee of Signatures. No signature guarantee is required (i) if
this Letter of Transmittal is signed by the registered holder (which term for
purposes of this document shall include any participant in a Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of the
shares of Series A TCI Group Common Stock tendered pursuant to the Series A
Exchange Offer) of the shares of Series A TCI Group Common Stock tendered
hereby, and such holder has not completed either the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" or (ii) if the shares
of Series A TCI Group Common Stock are tendered for exchange for the account of
a member firm of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States or by any other
"eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (each being hereinafter referred to as an
"Eligible Institution"). IN ALL OTHER CASES, ALL SIGNATURES ON THIS LETTER OF
TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. Delivery of Letter of Transmittal and Certificates; Guaranteed Delivery
Procedures. This Letter of Transmittal is to be used if (i) certificates are
forwarded herewith, or (ii) tenders are made pursuant to the procedures for
tender by book-entry transfer set forth in the Offering Circular under "THE
EXCHANGE OFFERS -- Procedure for Tendering -- Book-Entry Delivery." Certificates
for all physically tendered shares of Series A TCI Group Common Stock, or
confirmation of a book-entry transfer into the Exchange Agent's account at one
of the Book-Entry Transfer Facilities of shares of Series A TCI Group Common
Stock ("Book-Entry Confirmation"), as the case may be, together in each case
with (i) a properly completed and duly executed Letter of Transmittal (or a
manually signed facsimile thereof), together with any required signature
guarantees or, in the case of book-entry transfer of the tendered shares, an
Agent's Message (as defined below) and (ii) any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at one of its
addresses set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. The term "Agent's Message" means a message, transmitted by a
Book-Entry Transfer Facility to, and received by, the Exchange Agent forming a
part of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Series A TCI Group Common Stock, that
such participant has received and agrees to be bound by the terms of this Letter
of Transmittal and that the Company may enforce such agreement against such
participant.
Stockholders whose certificates representing shares of Series A TCI Group
Common Stock are not immediately available or who cannot deliver such
certificates and all other required documents to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date, or cannot complete the
procedure for book-entry transfer on a timely basis, may tender their shares of
Series A TCI Group Common Stock by properly completing and duly executing and
delivering a Notice of Guaranteed Delivery pursuant to the guaranteed delivery
procedures described in the Offering Circular under "THE EXCHANGE OFFERS --
Procedure for Tendering -- Guaranteed Delivery." Pursuant to such procedures (i)
such tender must be made by or through an Eligible Institution, (ii) a properly
completed and duly executed Notice of Guaranteed Delivery, substantially in the
form provided by the Company, must be received by the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date, and (iii) the
certificates for all physically tendered shares of Series A TCI Group Common
Stock in proper form for transfer, or a Book-Entry Confirmation, as the case may
be, together with a properly completed and duly executed Letter of Transmittal
(or a manually signed facsimile thereof) with any required signature guarantees
(or, in the case of book-entry transfers, an Agent's Message) and all other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three Nasdaq trading days after the date of execution of
such Notice of Guaranteed Delivery, all as provided in the Offering Circular. If
certificates for shares of Series A TCI Group Common Stock are forwarded
separately to the Exchange Agent, a properly completed and duly executed Letter
of Transmittal must accompany each such delivery.
6
<PAGE> 7
The method of delivery of all documents, including certificates for shares
of Series A TCI Group Common Stock tendered hereby, is at the election and risk
of the tendering stockholder and, except as otherwise provided in this Letter of
Transmittal, the delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended and sufficient time to ensure timely
receipt should be allowed.
3. Inadequate Space. If the space provided herein is inadequate, the
certificate numbers and the number of shares of Series A TCI Group Common Stock
being exchanged should be listed on a separate SIGNED schedule attached to this
Letter of Transmittal.
4. Partial Exercise; Partial Tender and Unexchanged Shares of Series A TCI
Group Common Stock (Not applicable to stockholders who tender by book-entry
transfer). If fewer than all the shares of Series A TCI Group Common Stock
represented by any certificate are to be exchanged, fill in the number of shares
of Series A TCI Group Common Stock which are to be exchanged in column (3)
entitled "No. of Shares Tendered for Exchange." In such case, a new certificate
for the remainder of the shares of Series A TCI Group Common Stock evidenced by
your old certificate(s) will be sent to the registered holder, unless otherwise
specified in the "Special Issuance Instructions" or "Special Delivery
Instructions" box in this Letter of Transmittal, as soon as practicable after
the Expiration Date. All shares of Series A TCI Group Common Stock represented
by certificates listed in the box entitled "Identification of Shares of Series A
TCI Group Common Stock Tendered Pursuant to the Series A Exchange Offer" will be
deemed to have been tendered for exchange, unless otherwise indicated.
5. Signatures on Letter of Transmittal, Stock Powers and Endorsements.
(a) If this Letter of Transmittal is signed by the registered holder
of the shares of Series A TCI Group Common Stock tendered hereby, the
signature must correspond EXACTLY with the name as written on such
certificates without any change whatsoever.
(b) If the certificate representing shares of Series A TCI Group
Common Stock to be tendered is held of record by two or more joint holders,
all such holders must sign this Letter of Transmittal.
(c) If any shares of Series A TCI Group Common Stock being tendered
are registered in different names on several certificates, it will be
necessary to complete, sign and submit as many separate Letters of
Transmittal as there are different registrations of certificates.
(d) When this Letter of Transmittal is signed by the registered holder
of the shares of Series A TCI Group Common Stock transmitted hereby, no
endorsement of certificates or separate stock powers is required. If,
however, the certificates for shares of Series A TCI Group Common Stock not
tendered or accepted for exchange or the certificates for shares of Series
A TCI Ventures Group Common Stock are to be issued to a person other than
the registered holder of the Series A TCI Group Common Stock then the
Series A TCI Group Common Stock certificate must be endorsed or accompanied
by appropriate stock powers signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates. Signatures on such certificates or
stock powers must be guaranteed by an Eligible Institution. See Instruction
1.
(e) If the certificates representing shares of Series A TCI Group
Common Stock tendered for exchange are registered in the name of a person
other than the person executing this Letter of Transmittal, then the Series
A TCI Group Common Stock certificate must be endorsed or accompanied by
appropriate stock powers signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates. Signatures on such certificates or
stock powers must be guaranteed by an Eligible Institution. See Instruction
1.
(f) If this Letter of Transmittal or any other certificates, stock
powers or proxies, are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity, such persons should so indicate
when signing and must submit proper evidence satisfactory to the Company of
their authority to so act.
7
<PAGE> 8
(g) No signature guarantee is required (i) if this Letter of
Transmittal is signed by the registered holder (which term for purposes of
this document shall include any participant in a Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of
the shares of Series A TCI Group Common Stock tendered pursuant to the
Series A Exchange Offer) of the shares of Series A TCI Group Common Stock
tendered hereby, and such holder has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" or (ii)
if the shares of Series A TCI Group Common Stock are tendered for exchange
for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES ON THIS LETTER OF TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE
INSTITUTION. STOCKHOLDERS MUST FOLLOW ALL OF THE SIGNATURE REQUIREMENTS
CONTAINED IN THIS INSTRUCTION 5 IN ORDER TO MAKE A VALID TENDER OF SHARES
OF SERIES A TCI GROUP COMMON STOCK.
6. Stock Transfer Taxes. Except as set forth in this Instruction 6, no
stock transfer tax stamps or funds to cover any such stamps need accompany this
Letter of Transmittal. The Company will pay all stock transfer taxes, if any,
payable on the transfer to it of shares of Series A TCI Group Common Stock
acquired pursuant to the Series A Exchange Offer. If, however, the shares of
Series A TCI Ventures Group Common Stock, or (in the circumstances permitted
hereby) if certificates for shares of Series A TCI Group Common Stock not
tendered or not accepted for exchange, are to be delivered to or issued or
registered in the name of, any person other than the registered holder of the
Series A TCI Group Common Stock certificate tendered, or if tendered
certificates for shares of Series A TCI Group Common Stock are registered in the
name of any person other than the person(s) signing this Letter of Transmittal,
the amount of all stock transfer taxes, if any (whether imposed on the
registered holder or such other person), payable on account of the transfer to
such person must accompany this Letter of Transmittal unless satisfactory
evidence of the payment of such taxes, or exemption therefrom, is submitted.
7. Special Issuance and Delivery Instructions. If (i) certificates for
shares of Series A TCI Group Common Stock not tendered or not accepted for
exchange and/or certificates for shares of Series A TCI Ventures Group Common
Stock are to be issued in the name of a person other than the person executing
this Letter of Transmittal, or (ii) such certificates are to be sent to someone
other than the person executing this Letter of Transmittal or to such person at
a different address, the appropriate boxes on this Letter of Transmittal should
be completed. In such case, signatures on the Letter of Transmittal must be
guaranteed by an Eligible Institution. See Instruction 1.
8. Irregularities. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance for exchange of shares of Series A
TCI Group Common Stock and all questions as to the interpretation of the terms
and conditions of the Series A Exchange Offer will be determined by the Company
in its sole discretion, whose determination shall be final and binding on all
parties. The Company reserves the absolute right to reject any or all tenders
determined by it not to be in proper form or the acceptance of or exchange for
which may, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive, in whole or in part, any of the
conditions of the Series A Exchange Offer or any defect or irregularity in any
tender with respect to any particular shares of Series A TCI Group Common Stock
or any particular stockholder. Unless waived, any defects or irregularities in
connection with the tender of any shares must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent, Georgeson &
Company Inc., as the Information Agent, nor any other person will be under any
duty to give exchanging stockholders notification of any defects or
irregularities in the tender of any shares, nor shall any of them incur any
liability for failure to give any such notification. No tender of shares will be
deemed to have been validly made until all defects and irregularities have been
cured or waived.
9. Questions and Requests for Assistance and Additional Copies. Questions
and requests for assistance and additional copies of the Offering Circular and
this Letter of Transmittal may be directed to the Information Agent at the
address and telephone numbers set forth on the back cover of this Letter of
Transmittal or from your broker, dealer, commercial bank, trust company or other
nominee.
10. Taxpayer Identification Number. Federal income tax law requires that
to avoid backup withholding on any distributions on the Series A TCI Ventures
Group Common Stock, a holder of such stock must provide his or her correct
taxpayer identification number ("TIN") to the Company, which in the case of a
8
<PAGE> 9
stockholder who is an individual is his or her social security number. If the
stockholder does not provide the correct TIN, the stockholder may be subject to
a penalty imposed by the Internal Revenue Service ("IRS") and dividends paid to
such stockholder may be subject to 31% backup withholding. If backup withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
Exempt stockholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding requirements.
In order for a foreign individual to qualify as an exempt person, that
individual must submit a statement, signed under penalty of perjury, attesting
to that individual's exempt status. A Form W-8 for such a statement can be
obtained from the Exchange Agent.
To prevent future backup withholding, each tendering stockholder that is
not an exempt stockholder must provide his or her correct TIN by completing
"Substitute Form W-9" set forth below, certifying that the TIN provided is
correct (or that the stockholder is awaiting a TIN) and that (a) the stockholder
has not been notified by the IRS that he or she is subject to backup withholding
as a result of failure to report all interest or dividends, or (b) the IRS has
notified the stockholder that he or she is no longer subject to backup
withholding. To prevent possible erroneous backup withholding, exempt
stockholders (other than certain foreign individuals) should certify in
accordance with the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 that such stockholder is exempt
from backup withholding. If a stockholder has been notified by the IRS that he
or she is subject to backup withholding because of underreporting interest or
dividends on his or her tax return, he or she should nevertheless complete and
sign Substitute Form W-9, but should (unless he or she received a notification
from the IRS that he or she is no longer subject to backup withholding) cross
out item (2) of the certification on the form. In such case, backup withholding
may apply to dividends paid on the shares of Series A TCI Ventures Group Common
Stock issued to such stockholder. If the shares of Series A TCI Ventures Group
Common Stock are to be issued in more than one name or in a name other than the
name of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for information on which
TIN to report.
See enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute From W-9" for additional instructions.
9
<PAGE> 10
TO BE COMPLETED BY ALL EXCHANGING HOLDERS OF SHARES OF
SERIES A TCI GROUP COMMON STOCK
(SEE INSTRUCTION 10)
PAYER'S NAME: THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION
NUMBER AND CERTIFICATION
------------------------------------------------------------------------------------------
SUBSTITUTE PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION ------------------------------------
FORM W-9 NUMBER ("TIN") IN THE BOX AT RIGHT AND (SOCIAL SECURITY NO. OR
CERTIFY BY SIGNING AND DATING BELOW EMPLOYER IDENTIFICATION NO.)
------------------------------------------------------------------------------------------
Department of the Treasury Please check this box if you have applied for and are awaiting receipt of your TIN [ ]
Internal Revenue Service
------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING: If you are exempt from Backup Withholding for
IDENTIFICATION NUMBER AND any of the reasons provided on the instructions accompanying this Substitute Form W-9,
CERTIFICATION FOR PAYEES EXEMPT write "EXEMPT" in the space provided: ____________. If you are exempt from backup
FROM BACKUP WITHHOLDING (SEE withholding, you should still complete this form to avoid possible erroneous backup
GUIDELINES FOR CERTIFICATION OF withholding. Enter your correct TIN in the box provided, write "EXEMPT" in the space
TAXPAYER IDENTIFICATION NUMBER ON provided and sign and date the form. If you are a nonresident alien or foreign entity
SUBSTITUTE FORM W-9) not subject to backup withholding, give the requester a completed FORM W-8, Certificate
of Foreign Status.
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TIN (OR I AM WAITING FOR A TIN TO BE
ISSUED TO ME), AND
(2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER BECAUSE: (A) I AM EXEMPT FROM BACKUP
WITHHOLDING, OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT
ALL INTEREST OR DIVIDENDS, OR (C) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER
SUBJECT TO BACKUP WITHHOLDING.
You must cross out item (2) above if you have been notified by the IRS that you are
currently subject to backup withholding because you have failed to report all interest
and dividends on your tax return. For real estate transactions, item (2) does not apply.
For mortgage interest paid, acquisition or abandonment of secured property, cancellation
of debt, contributions to an individual retirement arrangement and generally, payments
other than interest and dividends, you are not required to sign the Certification, but
you must provide your correct TIN in the box provided.
The Internal Revenue Service does not require your consent to any provision of this
document other than the certificates required to avoid backup withholding.
PRINT YOUR NAME: -------------------------------------------------------------
ADDRESS:-----------------------------------------------------------------------
SIGNATURE:-------------------------------------- DATE:-----------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% ON ANY PAYMENTS MADE TO YOU IN RESPECT OF YOUR SERIES A TCI
VENTURES GROUP COMMON STOCK. FOR ADDITIONAL DETAILS, PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9.
IF YOU CHECKED THE ABOVE BOX OF THIS SUBSTITUTE FORM W-9 INDICATING THAT
YOU ARE AWAITING RECEIPT OF YOUR TAXPAYER IDENTIFICATION NUMBER,
YOU MUST SIGN AND DATE THE FOLLOWING CERTIFICATION.
CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification Number has
not been issued to me, and that I mailed or delivered an application to receive
a Taxpayer Identification Number to the appropriate IRS Center or Social
Security Administration Office (or I intend to mail or deliver an application in
the near future). I understand that if I do not provide a Taxpayer
Identification Number within 60 days, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number.
--------------------------------------
SIGNATURE
---------------------------------------
DATE
<PAGE> 11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e., 00-0000000. The table below will help determine which
number to give the payer.
<TABLE>
<S> <S> <C>
- ------------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- ------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor (2)
(Uniform Gift to Minors Act)
4. a. The usual revocable savings The grantor-
trust (grantor is also trustee) trustee(1)
b. So-called trust account that is The actual owner
not a legal or valid trust (1)
under state law
5. Sole proprietorship The owner (3)
- ------------------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------
6. A valid trust, estate or pension The legal entity(4)
trust
7. Corporate The corporation
8. Association, club, religious, The organization
charitable and educational or
other tax-exempt organization
9. Partnership The partnership
10. A broker or registered nominee The broker or
nominee
11. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state or
local government, school district
or prison) that receives
agricultural program payments
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a Social Security number, that
person's number must be furnished.
(2) Circle the minor's name, and furnish the minor's Social Security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your Social Security number or
employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate or pension trust.
(Do not furnish the TIN of the personal representative or trustee unless the
legal entity itself is not designated in the account title.)
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 12
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
The Tax Identification Number ("TIN") provided in the Substitute Form W-9 should
be that of the tendering stockholder even when such stockholder has indicated in
"Special Issuance Instructions" in the Letter of Transmittal that a certificate
representing TCI Ventures Group Common Stock is to be issued in a name other
than that in which the certificate surrendered in exchange therefor is
registered.
For a joint account, only the person whose TIN is furnished should sign the
Substitute Form W-9.
TAXPAYER IDENTIFICATION NUMBER
You must enter your TIN in the appropriate box. If you are a resident alien and
do not have and are not eligible to get a Social Security number ("SSN"), your
TIN is your IRS individual taxpayer identification number ("ITIN"). Enter it in
the box provided. If you are a sole proprietor and you have an employer
identification number ("EIN"), you may enter either your SSN or EIN. However,
using your EIN may result in unnecessary notices to the requester.
HOW TO GET A TIN:
If you do not have a TIN, apply for one immediately. To apply for an SSN, get
FORM SS-5 from your local Social Security Administration office. Get FORM W-7 to
apply for an ITIN or FORM SS-4 to apply for an EIN. You can get Forms W-7 and
SS-4 from the IRS by calling 1-800-TAX-FORM (1-800-829-3676).
If you do not have a TIN, write "Applied For" in the space for the TIN, sign and
date form and give it to the requester. For interest and dividend payments, you
will generally have 60 days to get a TIN and give it to the requester. Other
payments are subject to backup withholding.
NOTE: Writing "Applied For" means that you have already applied for a TIN OR
that you intend to apply for one soon.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
The following is a list of payees exempt from backup withholding and for which
no information reporting is required with respect to dividend income.
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7), if the
account satisfies the requirements of section 401(f)(2).
(3) The United States or any of its agencies or instrumentalities.
(4) A State, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S., the
District of Columbia or a possession of the U.S.
(9) A real estate investment trust.
(10) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(11) A common trust fund operated by a bank under section 584(a).
(12) A financial institution.
(13) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(14) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends generally not subject to backup withholding also include
the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
that have at least one nonresident partner.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045,
6049, 6050A and 6050N, and the regulations under such sections.
If you are a nonresident alien or a foreign entity not subject to backup
withholding, give the payer a completed Form W-8 Certificate of Foreign Status.
PRIVACY ACT NOTICE
Section 6109 requires certain recipients of dividend, interest or other payments
to give taxpayer identification numbers to payers who must report the payments
to the IRS. The IRS uses the numbers for identification purposes and to help
verify the accuracy of your tax return. The IRS may also provide this
information to the Department of Justice for civil and criminal litigation and
to cities, states and the District of Columbia to carry out their tax laws.
Payers must be given the numbers whether or not recipients are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividends
and certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a requester, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no backup
withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Wilfully falsifying
certifications or affirmations may subject you to criminal penalties, including
fines and/or imprisonment.
(4) MISUSE OF TINS -- If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE> 13
Questions or requests for assistance and additional copies of this Letter
of Transmittal and the Offering Circular may be obtained from:
THE INFORMATION AGENT
(GEORGESON & COMPANY INC. LOGO)
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
Call Toll-Free: (800) 223-2064
<PAGE> 1
LETTER OF TRANSMITTAL
TO EXCHANGE SHARES OF SERIES B TCI VENTURES GROUP COMMON STOCK
OF
TELE-COMMUNICATIONS, INC.
FOR
SHARES OF SERIES B TCI GROUP COMMON STOCK
OF
TELE-COMMUNICATIONS, INC.
<TABLE>
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
IDENTIFICATION OF SHARES OF SERIES B TCI GROUP COMMON STOCK
TENDERED PURSUANT TO THE SERIES B EXCHANGE OFFER
------------------------------------------------------------------------------------------------------------------------------
(SEE INSTRUCTIONS 3 AND 4)
------------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SERIES B TCI GROUP COMMON STOCK CERTIFICATE(S)
(PLEASE FILL IN, IF BLANK) (ATTACH SIGNED LIST, IF NECESSARY)
------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
SERIES B TCI GROUP NUMBER NUMBER
COMMON STOCK OF SHARES OF SHARES
CERTIFICATE REPRESENTED BY TENDERED FOR
NUMBER(S)* CERTIFICATE* EXCHANGE**
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
==================================================================
Total Shares of Series B TCI Group Common Stock
------------------------------------------------------------------------------------------------------------------------------
* Columns (1) and (2) need not be completed by stockholders who deliver shares of Series B TCI Group Common Stock by book-entry
transfer.
** If you desire to tender fewer than all shares of Series B TCI Group Common Stock evidenced by any certificate listed above,
please indicate in column (3) the number of shares you wish to tender. Otherwise, all shares of Series B TCI Group Common Stock
evidenced by such certificate will be deemed to have been tendered for exchange.
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EACH HOLDER OF TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK MAY
TENDER ANY OR ALL SHARES OF TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON
STOCK HELD BY SUCH HOLDER IN EXCHANGE FOR SHARES OF TELE-COMMUNICATIONS, INC.
SERIES B TCI VENTURES GROUP COMMON STOCK, ON A ONE FOR ONE BASIS. THE COMPANY IS
NOT OBLIGATED TO ACCEPT FOR EXCHANGE MORE THAN AN AGGREGATE OF 16,266,400 SHARES
OF TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK IN THE SERIES B
EXCHANGE OFFER.
THE SERIES B EXCHANGE OFFER EXPIRES AT 5:00 P.M.,
NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS EXTENDED.
(PLEASE CAREFULLY READ THE ACCOMPANYING INSTRUCTIONS ON PAGES 6 TO 9)
THE EXCHANGE AGENT FOR THE SERIES B EXCHANGE OFFER IS:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
Tender & Exchange Department (for Eligible Institutions Only) Tender & Exchange Department
P.O. Box 11248 (212) 815-6213 101 Barclay Street
Church Street Station Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
FOR CONFIRMATION TELEPHONE:
(800) 507-9357
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile to a number other than as set forth
above does not constitute a valid delivery to the Exchange Agent.
YOU MUST TENDER ONE SHARE OF SERIES B TCI GROUP COMMON STOCK FOR EACH SHARE
OF SERIES B TCI VENTURES GROUP COMMON STOCK YOU WISH TO RECEIVE.
<PAGE> 2
This Letter of Transmittal is to be used by all holders of shares of
Tele-Communications, Inc. Series B TCI Group Common Stock, par value $1.00 per
share (the "Series B TCI Group Common Stock"), desiring to exchange any or all
of the shares of Series B TCI Group Common Stock held by such holders for shares
of Tele-Communications, Inc. Series B TCI Ventures Group Common Stock, par value
$1.00 per share (the "Series B TCI Ventures Group Common Stock"), pursuant to
the Series B Exchange Offer described in the Offering Circular of
Tele-Communications, Inc., a Delaware corporation (the "Company"), dated August
7, 1997 (the "Offering Circular"). This Letter of Transmittal is to be completed
by stockholders if (i) certificates representing shares of Series B TCI Group
Common Stock tendered are to be forwarded herewith, or (ii) the delivery of
shares of Series B TCI Group Common Stock is to be made by book-entry transfer
to the account(s) maintained by the Exchange Agent at The Depository Trust
Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC" and,
collectively with DTC, the "Book-Entry Transfer Facilities"), pursuant to the
procedures set forth in the Offering Circular. Stockholders whose certificates
for shares of Series B TCI Group Common Stock are not immediately available or
who cannot deliver such certificates and all other documents required hereby to
the Exchange Agent prior to 5:00 p.m., New York City time, on September 10,
1997, unless the Series B Exchange Offer is extended (such date as extended from
time to time, the "Expiration Date"), or who cannot comply with the procedure
for book-entry transfer on a timely basis, must tender their shares of Series B
TCI Group Common Stock according to the guaranteed delivery procedures described
in the Offering Circular. See Instruction 2. DELIVERY OF DOCUMENTS TO A
BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
2
<PAGE> 3
TO TELE-COMMUNICATIONS, INC.:
The undersigned hereby tenders to Tele-Communications, Inc., a Delaware
corporation (the "Company"), the above described shares of Series B TCI Group
Common Stock, subject to the terms and conditions set forth in this Letter of
Transmittal and the Offering Circular, dated August 7, 1997 (collectively, the
"Series B Exchange Offer"), the receipt of which is hereby acknowledged.
Subject to, and effective upon, acceptance for exchange of the shares of
Series B TCI Group Common Stock tendered herewith in accordance with the terms
and subject to the conditions of the Series B Exchange Offer, the undersigned
hereby assigns and transfers to, or upon the order of, the Company all of the
shares of Series B TCI Group Common Stock tendered hereby which are accepted for
exchange and hereby irrevocably constitutes and appoints The Bank of New York,
as exchange agent (the "Exchange Agent") and as attorney-in-fact of the
undersigned, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), to (a) deliver
certificates evidencing the shares of Series B TCI Group Common Stock tendered
hereby, or transfer ownership of such shares of Series B TCI Group Common Stock
on the account books maintained by a Book-Entry Transfer Facility, together, in
either such case, with all accompanying evidences of transfer and authenticity,
to, or upon the order of, the Company, (b) present such certificates for shares
of Series B TCI Group Common Stock for transfer on the books of the Company, and
(c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such shares of Series B TCI Group Common Stock, all in accordance
with the terms of the Series B Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to validly tender, assign and transfer the shares of
Series B TCI Group Common Stock tendered hereby and that when the same are
accepted for exchange by the Company, the Company will acquire good title
thereto, free and clear of all security interests, liens, charges, encumbrances,
conditional sales agreements or other conditions relating to the sale or
transfer thereof, and not subject to any adverse claims. Upon request, the
undersigned will execute and deliver any additional documents necessary to
complete the transfer of the shares of Series B TCI Group Common Stock tendered
hereby. The undersigned represents that the undersigned has read and agrees to
all of the terms and conditions of the Series B Exchange Offer as set forth in
the Offering Circular and this Letter of Transmittal. All representations and
warranties set forth herein will survive consummation of the transactions
contemplated hereby.
The undersigned understands that the valid tender of shares of Series B TCI
Group Common Stock pursuant to any one of the procedures described in the
Offering Circular and in the instructions hereto will constitute a binding
agreement between the undersigned and the Company upon the terms and subject to
the conditions of the Series B Exchange Offer.
Each person executing this Letter of Transmittal (or facsimile hereof)
waives any right to receive notice of the acceptance for exchange of shares of
Series B TCI Group Common Stock tendered hereby.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and any obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
Unless otherwise indicated herein under "Special Issuance Instructions,"
the shares of Series B TCI Ventures Group Common Stock and any certificates for
any shares of Series B TCI Group Common Stock not tendered or not accepted for
exchange shall be issued in the name(s) of the registered holder(s) appearing
under "Identification of Shares of Series B TCI Group Common Stock Tendered
Pursuant to the Series B Exchange Offer." Similarly, unless otherwise indicated
under "Special Delivery Instructions," the shares of Series B TCI Ventures Group
Common Stock and any certificates for any shares of Series B TCI Group Common
Stock not tendered or not accepted for exchange will be returned to the
undersigned at the address indicated under "Identification of Shares of Series B
TCI Group Common Stock Tendered Pursuant to the Series B Exchange Offer." The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Issuance Instructions" to transfer any shares of Series B TCI Group
Common Stock from the name(s) of the registered holder(s) thereof, if the
Company does not accept for exchange the shares of Series B TCI Group Common
Stock so tendered.
3
<PAGE> 4
================================================================================
[ ] CHECK HERE IF SHARES OF SERIES B TCI GROUP COMMON STOCK TENDERED FOR
EXCHANGE ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT(S)
MAINTAINED BY THE EXCHANGE AGENT WITH ONE OF THE BOOK-ENTRY TRANSFER FACILITIES
AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER FACILITY
MAY DELIVER SHARES OF SERIES B TCI GROUP COMMON STOCK BY BOOK-ENTRY TRANSFER):
Name of Tendering Institution:
-------------------------------------------------
- --------------------------------------------------------------------------------
Check Box of Applicable Book-Entry Transfer Facility:
[ ] DTC [ ] PDTC (check one box)
Account Number:
----------------------------------------------------------------
Transaction Code Number:
-------------------------------------------------------
================================================================================
================================================================================
[ ] CHECK HERE IF CERTIFICATES FOR SHARES OF SERIES B TCI GROUP COMMON STOCK
ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT
TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):
------------------------------------------------
Date of Execution of Notice of Guaranteed
Delivery:
----------------------------------------------------------------------
Window Ticket Number (if available):
-------------------------------------------
Name of Institution Which Guaranteed Delivery:
- --------------------------------------------------------------------------------
If Delivered by Book-Entry Transfer, Check Box of Applicable Book-Entry
Transfer Facility:
[ ] DTC [ ] PDTC (check one box)
Account Number:
----------------------------------------------------------------
Transaction Code Number:
-------------------------------------------------------
================================================================================
================================================================================
[ ] SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 4, 5 and 7)
To be completed ONLY if (a) certificates for shares of Series B TCI Group
Common Stock not accepted for exchange or not tendered, and/or (b) any
certificates for shares of Series B TCI Ventures Group Common Stock to be
issued upon exchange, are to be issued in the name of someone other than the
undersigned.
Issue Certificates To:
NAME:
- --------------------------------------------------------------------------------
(Please Print)
ADDRESS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
- --------------------------------------------------------------------------------
(Tax Identification or Social Security No.(s))
================================================================================
================================================================================
[ ] SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 1, 4, 5 and 7)
To be completed ONLY if (a) certificates for shares of Series B TCI Group
Common Stock not accepted for exchange or not tendered, and/or (b) any
certificates for shares of Series B TCI Ventures Group Common Stock to be
issued in the name of the undersigned, are to be sent to someone other than
the undersigned or to the undersigned at an address other than that shown
above in the table "Identification of Shares of Series B TCI Group Common
Stock Tendered Pursuant to the Series B Exchange Offer."
Mail Certificates To:
NAME:
- --------------------------------------------------------------------------------
(Please Print)
ADDRESS:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
================================================================================
4
<PAGE> 5
NOTE: SIGNATURES MUST BE PROVIDED BELOW. THE UNDERSIGNED REPRESENTS THAT HE OR
SHE HAS READ AND AGREES TO ALL OF THE TERMS AND CONDITIONS OF THE SERIES B
EXCHANGE OFFER.
================================================================================
STOCKHOLDER(S) MUST SIGN HERE
(See Instructions 1 and 5)
Must be signed by registered holder(s) EXACTLY as name(s) appear(s) on
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificate(s) and documents transmitted
herewith. If signature(s) is by attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary or
representative capacity, please set forth the full title. See Instruction 5.
SIGN HERE
X
- --------------------------------------------------------------------------------
X
- --------------------------------------------------------------------------------
(Signature(s) of Owner(s))
DATED: ,1997
---------------------------------------------------------------------
NAME(S):
------------------------------------------------------------------------
(Please Print)
CAPACITY (Full Title):
----------------------------------------------------------
ADDRESS:
------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Zip Code)
- ------------------------------------ ----------------------------------
AREA CODE & TELEPHONE NUMBER:( )
--- ----------------------------------------------
- --------------------------------------------------------------------------------
Tax I.D. or Social Security No.(s)
================================================================================
================================================================================
SUBSTITUTE FORM W-9 BELOW MUST BE COMPLETED
================================================================================
================================================================================
GUARANTEE OF SIGNATURE(S) (IF REQUIRED)
(See Instructions 1 and 5)
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
NAME(S):
------------------------------------------------------------------------
TITLE:
--------------------------------------------------------------------------
NAME OF FIRM:
-------------------------------------------------------------------
ADDRESS (Including Zip Code):
---------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
AREA CODE & TELEPHONE NUMBER:( )
--- ----------------------------------------------
DATED: ,1997
---------------------------------------------------------------------
================================================================================
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE SERIES B EXCHANGE OFFER
1. Guarantee of Signatures. No signature guarantee is required (i) if
this Letter of Transmittal is signed by the registered holder (which term for
purposes of this document shall include any participant in a Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of the
shares of Series B TCI Group Common Stock tendered pursuant to the Series B
Exchange Offer) of the shares of Series B TCI Group Common Stock tendered
hereby, and such holder has not completed either the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" or (ii) if the shares
of Series B TCI Group Common Stock are tendered for exchange for the account of
a member firm of a registered national securities exchange, a member of the
National Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States or by any other
"eligible guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (each being hereinafter referred to as an
"Eligible Institution"). IN ALL OTHER CASES, ALL SIGNATURES ON THIS LETTER OF
TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. Delivery of Letter of Transmittal and Certificates; Guaranteed Delivery
Procedures. This Letter of Transmittal is to be used if (i) certificates are
forwarded herewith, or (ii) tenders are made pursuant to the procedures for
tender by book-entry transfer set forth in the Offering Circular under "THE
EXCHANGE OFFERS -- Procedure for Tendering -- Book-Entry Delivery." Certificates
for all physically tendered shares of Series B TCI Group Common Stock, or
confirmation of a book-entry transfer into the Exchange Agent's account at one
of the Book-Entry Transfer Facilities of shares of Series B TCI Group Common
Stock ("Book-Entry Confirmation"), as the case may be, together in each case
with (i) a properly completed and duly executed Letter of Transmittal (or a
manually signed facsimile thereof), together with any required signature
guarantees or, in the case of book-entry transfer of the tendered shares, an
Agent's Message (as defined below) and (ii) any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at one of its
addresses set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. The term "Agent's Message" means a message, transmitted by a
Book-Entry Transfer Facility to, and received by, the Exchange Agent forming a
part of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Series B TCI Group Common Stock, that
such participant has received and agrees to be bound by the terms of this Letter
of Transmittal and that the Company may enforce such agreement against such
participant.
Stockholders whose certificates representing shares of Series B TCI Group
Common Stock are not immediately available or who cannot deliver such
certificates and all other required documents to the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date, or cannot complete the
procedure for book-entry transfer on a timely basis, may tender their shares of
Series B TCI Group Common Stock by properly completing and duly executing and
delivering a Notice of Guaranteed Delivery pursuant to the guaranteed delivery
procedures described in the Offering Circular under "THE EXCHANGE OFFERS --
Procedure for Tendering -- Guaranteed Delivery." Pursuant to such procedures (i)
such tender must be made by or through an Eligible Institution, (ii) a properly
completed and duly executed Notice of Guaranteed Delivery, substantially in the
form provided by the Company, must be received by the Exchange Agent prior to
5:00 p.m., New York City time, on the Expiration Date, and (iii) the
certificates for all physically tendered shares of Series B TCI Group Common
Stock in proper form for transfer, or a Book-Entry Confirmation, as the case may
be, together with a properly completed and duly executed Letter of Transmittal
(or a manually signed facsimile thereof) with any required signature guarantees
(or, in the case of book-entry transfers, an Agent's Message) and all other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three Nasdaq trading days after the date of execution of
such Notice of Guaranteed Delivery, all as provided in the Offering Circular. If
certificates for shares of Series B TCI Group Common Stock are forwarded
separately to the Exchange Agent, a properly completed and duly executed Letter
of Transmittal must accompany each such delivery.
6
<PAGE> 7
The method of delivery of all documents, including certificates for shares
of Series B TCI Group Common Stock tendered hereby, is at the election and risk
of the tendering stockholder and, except as otherwise provided in this Letter of
Transmittal, the delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended and sufficient time to ensure timely
receipt should be allowed.
3. Inadequate Space. If the space provided herein is inadequate, the
certificate numbers and the number of shares of Series B TCI Group Common Stock
being exchanged should be listed on a separate SIGNED schedule attached to this
Letter of Transmittal.
4. Partial Exercise; Partial Tender and Unexchanged Shares of Series B TCI
Group Common Stock (Not applicable to stockholders who tender by book-entry
transfer). If fewer than all the shares of Series B TCI Group Common Stock
represented by any certificate are to be exchanged, fill in the number of shares
of Series B TCI Group Common Stock which are to be exchanged in column (3)
entitled "No. of Shares Tendered for Exchange." In such case, a new certificate
for the remainder of the shares of Series B TCI Group Common Stock evidenced by
your old certificate(s) will be sent to the registered holder, unless otherwise
specified in the "Special Issuance Instructions" or "Special Delivery
Instructions" box in this Letter of Transmittal, as soon as practicable after
the Expiration Date. All shares of Series B TCI Group Common Stock represented
by certificates listed in the box entitled "Identification of Shares of Series B
TCI Group Common Stock Tendered Pursuant to the Series B Exchange Offer" will be
deemed to have been tendered for exchange, unless otherwise indicated.
5. Signatures on Letter of Transmittal, Stock Powers and Endorsements.
(a) If this Letter of Transmittal is signed by the registered holder
of the shares of Series B TCI Group Common Stock tendered hereby, the
signature must correspond EXACTLY with the name as written on such
certificates without any change whatsoever.
(b) If the certificate representing shares of Series B TCI Group
Common Stock to be tendered is held of record by two or more joint holders,
all such holders must sign this Letter of Transmittal.
(c) If any shares of Series B TCI Group Common Stock being tendered
are registered in different names on several certificates, it will be
necessary to complete, sign and submit as many separate Letters of
Transmittal as there are different registrations of certificates.
(d) When this Letter of Transmittal is signed by the registered holder
of the shares of Series B TCI Group Common Stock transmitted hereby, no
endorsement of certificates or separate stock powers is required. If,
however, the certificates for shares of Series B TCI Group Common Stock not
tendered or accepted for exchange or the certificates for shares of Series
B TCI Ventures Group Common Stock are to be issued to a person other than
the registered holder of the Series B TCI Group Common Stock then the
Series B TCI Group Common Stock certificate must be endorsed or accompanied
by appropriate stock powers signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates. Signatures on such certificates or
stock powers must be guaranteed by an Eligible Institution. See Instruction
1.
(e) If the certificates representing shares of Series B TCI Group
Common Stock tendered for exchange are registered in the name of a person
other than the person executing this Letter of Transmittal, then the Series
B TCI Group Common Stock certificate must be endorsed or accompanied by
appropriate stock powers signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates. Signatures on such certificates or
stock powers must be guaranteed by an Eligible Institution. See Instruction
1.
(f) If this Letter of Transmittal or any other certificates, stock
powers or proxies, are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity, such persons should so indicate
when signing and must submit proper evidence satisfactory to the Company of
their authority to so act.
7
<PAGE> 8
(g) No signature guarantee is required (i) if this Letter of
Transmittal is signed by the registered holder (which term for purposes of
this document shall include any participant in a Book-Entry Transfer
Facility whose name appears on a security position listing as the owner of
the shares of Series B TCI Group Common Stock tendered pursuant to the
Series B Exchange Offer) of the shares of Series B TCI Group Common Stock
tendered hereby, and such holder has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" or (ii)
if the shares of Series B TCI Group Common Stock are tendered for exchange
for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES ON THIS LETTER OF TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE
INSTITUTION. STOCKHOLDERS MUST FOLLOW ALL OF THE SIGNATURE REQUIREMENTS
CONTAINED IN THIS INSTRUCTION 5 IN ORDER TO MAKE A VALID TENDER OF SHARES
OF SERIES B TCI GROUP COMMON STOCK.
6. Stock Transfer Taxes. Except as set forth in this Instruction 6, no
stock transfer tax stamps or funds to cover any such stamps need accompany this
Letter of Transmittal. The Company will pay all stock transfer taxes, if any,
payable on the transfer to it of shares of Series B TCI Group Common Stock
acquired pursuant to the Series B Exchange Offer. If, however, the shares of
Series B TCI Ventures Group Common Stock, or (in the circumstances permitted
hereby) if certificates for shares of Series B TCI Group Common Stock not
tendered or not accepted for exchange, are to be delivered to or issued or
registered in the name of, any person other than the registered holder of the
Series B TCI Group Common Stock certificate tendered, or if tendered
certificates for shares of Series B TCI Group Common Stock are registered in the
name of any person other than the person(s) signing this Letter of Transmittal,
the amount of all stock transfer taxes, if any (whether imposed on the
registered holder or such other person), payable on account of the transfer to
such person must accompany this Letter of Transmittal unless satisfactory
evidence of the payment of such taxes, or exemption therefrom, is submitted.
7. Special Issuance and Delivery Instructions. If (i) certificates for
shares of Series B TCI Group Common Stock not tendered or not accepted for
exchange and/or certificates for shares of Series B TCI Ventures Group Common
Stock are to be issued in the name of a person other than the person executing
this Letter of Transmittal, or (ii) such certificates are to be sent to someone
other than the person executing this Letter of Transmittal or to such person at
a different address, the appropriate boxes on this Letter of Transmittal should
be completed. In such case, signatures on the Letter of Transmittal must be
guaranteed by an Eligible Institution. See Instruction 1.
8. Irregularities. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance for exchange of shares of Series B
TCI Group Common Stock and all questions as to the interpretation of the terms
and conditions of the Series B Exchange Offer will be determined by the Company
in its sole discretion, whose determination shall be final and binding on all
parties. The Company reserves the absolute right to reject any or all tenders
determined by it not to be in proper form or the acceptance of or exchange for
which may, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the absolute right to waive, in whole or in part, any of the
conditions of the Series B Exchange Offer or any defect or irregularity in any
tender with respect to any particular shares of Series B TCI Group Common Stock
or any particular stockholder. Unless waived, any defects or irregularities in
connection with the tender of any shares must be cured within such time as the
Company shall determine. Neither the Company, the Exchange Agent, Georgeson &
Company Inc., as the Information Agent, nor any other person will be under any
duty to give exchanging stockholders notification of any defects or
irregularities in the tender of any shares, nor shall any of them incur any
liability for failure to give any such notification. No tender of shares will be
deemed to have been validly made until all defects and irregularities have been
cured or waived.
9. Questions and Requests for Assistance and Additional Copies. Questions
and requests for assistance and additional copies of the Offering Circular and
this Letter of Transmittal may be directed to the Information Agent at the
address and telephone numbers set forth on the back cover of this Letter of
Transmittal or from your broker, dealer, commercial bank, trust company or other
nominee.
10. Taxpayer Identification Number. Federal income tax law requires that
to avoid backup withholding on any distributions on the Series B TCI Ventures
Group Common Stock, a holder of such stock must provide his or her correct
taxpayer identification number ("TIN") to the Company, which in the case of a
8
<PAGE> 9
stockholder who is an individual is his or her social security number. If the
stockholder does not provide the correct TIN, the stockholder may be subject to
a penalty imposed by the Internal Revenue Service ("IRS") and dividends paid to
such stockholder may be subject to 31% backup withholding. If backup withholding
results in an overpayment of taxes, a refund may be obtained from the IRS.
Exempt stockholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding requirements.
In order for a foreign individual to qualify as an exempt person, that
individual must submit a statement, signed under penalty of perjury, attesting
to that individual's exempt status. A Form W-8 for such a statement can be
obtained from the Exchange Agent.
To prevent future backup withholding, each tendering stockholder that is
not an exempt stockholder must provide his or her correct TIN by completing
"Substitute Form W-9" set forth below, certifying that the TIN provided is
correct (or that the stockholder is awaiting a TIN) and that (a) the stockholder
has not been notified by the IRS that he or she is subject to backup withholding
as a result of failure to report all interest or dividends, or (b) the IRS has
notified the stockholder that he or she is no longer subject to backup
withholding. To prevent possible erroneous backup withholding, exempt
stockholders (other than certain foreign individuals) should certify in
accordance with the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 that such stockholder is exempt
from backup withholding. If a stockholder has been notified by the IRS that he
or she is subject to backup withholding because of underreporting interest or
dividends on his or her tax return, he or she should nevertheless complete and
sign Substitute Form W-9, but should (unless he or she received a notification
from the IRS that he or she is no longer subject to backup withholding) cross
out item (2) of the certification on the form. In such case, backup withholding
may apply to dividends paid on the shares of Series B TCI Ventures Group Common
Stock issued to such stockholder. If the shares of Series B TCI Ventures Group
Common Stock are to be issued in more than one name or in a name other than the
name of the actual owner, consult the enclosed "Guidelines for Certification of
Taxpayer Identification Number on Substitute Form W-9" for information on which
TIN to report.
See enclosed "Guidelines for Certification of Taxpayer Identification
Number on Substitute From W-9" for additional instructions.
9
<PAGE> 10
TO BE COMPLETED BY ALL EXCHANGING HOLDERS OF SHARES OF
SERIES B TCI GROUP COMMON STOCK
(SEE INSTRUCTION 10)
PAYER'S NAME: THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION
NUMBER AND CERTIFICATION
------------------------------------------------------------------------------------------
SUBSTITUTE PLEASE PROVIDE YOUR TAXPAYER IDENTIFICATION ------------------------------------
FORM W-9 NUMBER ("TIN") IN THE BOX AT RIGHT AND (SOCIAL SECURITY NO. OR
CERTIFY BY SIGNING AND DATING BELOW EMPLOYER IDENTIFICATION NO.)
------------------------------------------------------------------------------------------
Department of the Treasury Please check this box if you have applied for and are awaiting receipt of your TIN [ ]
Internal Revenue Service
------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING: If you are exempt from Backup Withholding for
IDENTIFICATION NUMBER AND any of the reasons provided on the instructions accompanying this Substitute Form W-9,
CERTIFICATION FOR PAYEES EXEMPT write "EXEMPT" in the space provided: ____________. If you are exempt from backup
FROM BACKUP WITHHOLDING (SEE withholding, you should still complete this form to avoid possible erroneous backup
GUIDELINES FOR CERTIFICATION OF withholding. Enter your correct TIN in the box provided, write "EXEMPT" in the space
TAXPAYER IDENTIFICATION NUMBER ON provided and sign and date the form. If you are a nonresident alien or foreign entity
SUBSTITUTE FORM W-9) not subject to backup withholding, give the requester a completed FORM W-8, Certificate
of Foreign Status.
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TIN (OR I AM WAITING FOR A TIN TO BE
ISSUED TO ME), AND
(2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER BECAUSE: (A) I AM EXEMPT FROM BACKUP
WITHHOLDING, OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT
ALL INTEREST OR DIVIDENDS, OR (C) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER
SUBJECT TO BACKUP WITHHOLDING.
You must cross out item (2) above if you have been notified by the IRS that you are
currently subject to backup withholding because you have failed to report all interest
and dividends on your tax return. For real estate transactions, item (2) does not apply.
For mortgage interest paid, acquisition or abandonment of secured property, cancellation
of debt, contributions to an individual retirement arrangement and generally, payments
other than interest and dividends, you are not required to sign the Certification, but
you must provide your correct TIN in the box provided.
The Internal Revenue Service does not require your consent to any provision of this
document other than the certificates required to avoid backup withholding.
PRINT YOUR NAME: -------------------------------------------------------------
ADDRESS:-----------------------------------------------------------------------
SIGNATURE:-------------------------------------- DATE:-----------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% ON ANY PAYMENTS MADE TO YOU IN RESPECT OF YOUR SERIES B TCI
VENTURES GROUP COMMON STOCK. FOR ADDITIONAL DETAILS, PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9.
IF YOU CHECKED THE ABOVE BOX OF THIS SUBSTITUTE FORM W-9 INDICATING THAT
YOU ARE AWAITING RECEIPT OF YOUR TAXPAYER IDENTIFICATION NUMBER,
YOU MUST SIGN AND DATE THE FOLLOWING CERTIFICATION.
CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification Number has
not been issued to me, and that I mailed or delivered an application to receive
a Taxpayer Identification Number to the appropriate IRS Center or Social
Security Administration Office (or I intend to mail or deliver an application in
the near future). I understand that if I do not provide a Taxpayer
Identification Number within 60 days, 31% of all reportable payments made to me
thereafter will be withheld until I provide a number.
--------------------------------------
SIGNATURE
---------------------------------------
DATE
<PAGE> 11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e., 00-0000000. The table below will help determine which
number to give the payer.
<TABLE>
<S> <S> <C>
- ------------------------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- ------------------------------------------------------------
1. An individual's account The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor (2)
(Uniform Gift to Minors Act)
4. a. The usual revocable savings The grantor-
trust (grantor is also trustee) trustee(1)
b. So-called trust account that is The actual owner
not a legal or valid trust (1)
under state law
5. Sole proprietorship The owner (3)
============================================================
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------
6. A valid trust, estate or pension The legal entity(4)
trust
7. Corporate The corporation
8. Association, club, religious, The organization
charitable and educational or
other tax-exempt organization
9. Partnership The partnership
10. A broker or registered nominee The broker or
nominee
11. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state or
local government, school district
or prison) that receives
agricultural program payments
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a Social Security number, that
person's number must be furnished.
(2) Circle the minor's name, and furnish the minor's Social Security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your Social Security number or
employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate or pension trust.
(Do not furnish the TIN of the personal representative or trustee unless the
legal entity itself is not designated in the account title.)
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 12
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
The Tax Identification Number ("TIN") provided in the Substitute Form W-9 should
be that of the tendering stockholder even when such stockholder has indicated in
"Special Issuance Instructions" in the Letter of Transmittal that a certificate
representing TCI Ventures Group Common Stock is to be issued in a name other
than that in which the certificate surrendered in exchange therefor is
registered.
For a joint account, only the person whose TIN is furnished should sign the
Substitute Form W-9.
TAXPAYER IDENTIFICATION NUMBER
You must enter your TIN in the appropriate box. If you are a resident alien and
do not have and are not eligible to get a Social Security number ("SSN"), your
TIN is your IRS individual taxpayer identification number ("ITIN"). Enter it in
the box provided. If you are a sole proprietor and you have an employer
identification number ("EIN"), you may enter either your SSN or EIN. However,
using your EIN may result in unnecessary notices to the requester.
HOW TO GET A TIN:
If you do not have a TIN, apply for one immediately. To apply for an SSN, get
FORM SS-5 from your local Social Security Administration office. Get FORM W-7 to
apply for an ITIN or FORM SS-4 to apply for an EIN. You can get Forms W-7 and
SS-4 from the IRS by calling 1-800-TAX-FORM (1-800-829-3676).
If you do not have a TIN, write "Applied For" in the space for the TIN, sign and
date form and give it to the requester. For interest and dividend payments, you
will generally have 60 days to get a TIN and give it to the requester. Other
payments are subject to backup withholding.
NOTE: Writing "Applied For" means that you have already applied for a TIN OR
that you intend to apply for one soon.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
The following is a list of payees exempt from backup withholding and for which
no information reporting is required with respect to dividend income.
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under section 403(b)(7), if the
account satisfies the requirements of section 401(f)(2).
(3) The United States or any of its agencies or instrumentalities.
(4) A State, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S., the
District of Columbia or a possession of the U.S.
(9) A real estate investment trust.
(10) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(11) A common trust fund operated by a bank under section 584(a).
(12) A financial institution.
(13) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(14) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends generally not subject to backup withholding also include
the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
that have at least one nonresident partner.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see sections 6041, 6041A(a), 6042, 6044, 6045,
6049, 6050A and 6050N, and the regulations under such sections.
If you are a nonresident alien or a foreign entity not subject to backup
withholding, give the payer a completed Form W-8 Certificate of Foreign Status.
PRIVACY ACT NOTICE
Section 6109 requires certain recipients of dividend, interest or other payments
to give taxpayer identification numbers to payers who must report the payments
to the IRS. The IRS uses the numbers for identification purposes and to help
verify the accuracy of your tax return. The IRS may also provide this
information to the Department of Justice for civil and criminal litigation and
to cities, states and the District of Columbia to carry out their tax laws.
Payers must be given the numbers whether or not recipients are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividends
and certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a requester, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no backup
withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Wilfully falsifying
certifications or affirmations may subject you to criminal penalties, including
fines and/or imprisonment.
(4) MISUSE OF TINS -- If the requester discloses or uses TINs in violation of
Federal law, the requester may be subject to civil and criminal penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE> 13
Questions or requests for assistance and additional copies of this Letter
of Transmittal and the Offering Circular may be obtained from:
THE INFORMATION AGENT
(GEORGESON & COMPANY INC. LOGO)
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
Call Toll-Free: (800) 223-2064
<PAGE> 1
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
August 7, 1997
Dear TCI Group Stockholder:
Tele-Communications, Inc., a Delaware corporation (the "Company"), is
offering, upon the terms and subject to the conditions set forth in the enclosed
Offering Circular, dated August 7, 1997, and the related Letter of Transmittal
(collectively, the "Series A Exchange Offer"), to issue one share of
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("Series A
TCI Ventures Group Common Stock") in exchange for each share of
Tele-Communications, Inc. Series A TCI Group Common Stock ("Series A TCI Group
Common Stock") validly tendered and not properly withdrawn on or prior to the
Expiration Date (as defined below), up to a maximum of 188,661,300 shares of
Series A TCI Group Common Stock. Please note that you may only participate in
the Series A Exchange Offer by validly tendering shares of Series A TCI Group
Common Stock.
The Company is also offering, upon the terms and subject to the conditions
set forth in the Offering Circular and the related Letter of Transmittal
(collectively, the "Series B Exchange Offer" and together with the Series A
Exchange Offer, the "Exchange Offers"), to issue one share of
Tele-Communications, Inc. Series B TCI Ventures Group Common Stock ("Series B
TCI Ventures Group Common Stock" and together with the Series A TCI Ventures
Group Common Stock, the "TCI Ventures Group Common Stock") in exchange for each
share of Tele-Communications, Inc. Series B TCI Group Common Stock ("Series B
TCI Group Common Stock" and together with the Series A TCI Group Common Stock,
the "TCI Group Common Stock"), validly tendered and not properly withdrawn on or
prior to the Expiration Date, up to a maximum of 16,266,400 shares of Series B
TCI Group Common Stock. Please note that you may only participate in the Series
B Exchange Offer by validly tendering shares of Series B TCI Group Common Stock.
The TCI Ventures Group Common Stock is intended to reflect the performance
of the assets and businesses attributed to the TCI Ventures Group, which include
the Company's principal international assets and substantially all of the
Company's non-cable and non-programming domestic assets, but the TCI Ventures
Group Common Stock will be common stock of the Company and as such, holders of
TCI Ventures Group Common Stock will be subject to the risks associated with an
investment in the Company and all of its businesses, assets and liabilities. In
addition, there can be no assurance as to the degree to which the market value
of the TCI Ventures Group Common Stock will reflect the separate performance of
the TCI Ventures Group. See the Offering Circular for a more detailed
description of the assets and businesses attributed to the TCI Ventures Group.
SINCE THE EXCHANGE OFFERS WILL EXPIRE AT 5:00 P.M. ON SEPTEMBER 10, 1997,
UNLESS OTHERWISE EXTENDED PURSUANT TO THE OFFERING CIRCULAR (THE "EXPIRATION
DATE"), PLEASE BE SURE TO GIVE THIS MATTER YOUR PROMPT ATTENTION.
Please be aware that participation in the Exchange Offers is not subject to
a minimum number of shares being tendered; however, the Company is not obligated
to accept for exchange more than a specified maximum number of shares of each
series of TCI Group Common Stock. In the event of an oversubscription for shares
of either series, shares will be exchanged on a pro rata basis up to the
applicable maximum number of shares for such series. Please also be aware that
the Exchange Offers are subject to the satisfaction of certain conditions,
including, but not limited to, stockholder approval of certain amendments to the
Company's charter at the 1997 annual meeting of stockholders of the Company, to
be held on August 28, 1997.
The Letter of Transmittal enclosed herein is applicable only for use with
one series of TCI Group Common Stock. If your Letter of Transmittal is yellow,
it may be used to tender shares of Series A TCI Group Common Stock; if your
Letter of Transmittal is blue, it may be used to tender shares of Series B TCI
Group Common Stock. In the event you own both shares of Series A TCI Group
Common Stock and Series B TCI Group Common Stock, you should receive a separate
mailing for each series of TCI Group Common Stock, each containing a copy of the
Offering Circular and one with a yellow Letter of Transmittal (for your Series A
TCI Group Common Stock) and one with a blue Letter of Transmittal (for your
Series B TCI Group Common Stock). IN THE EVENT YOU OWN SHARES OF TCI GROUP
COMMON STOCK THROUGH A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER
NOMINEE, THE LETTERS OF TRANSMITTAL ARE FOR YOUR INFORMATION ONLY. You should
fill out the form on the enclosed letter from such institution or other nominee
which requests your instructions with respect to whether and to what extent you
wish to participate in the Exchange Offers. Such institution or other nominee
will then fill out the appropriate Letter of Transmittal on your behalf.
Neither the Company, nor its Board of Directors, is making any
recommendation as to whether you should participate in the Exchange Offers. You
should decide whether to participate, and, if so, how many shares of TCI Group
Common Stock you wish to exchange.
The enclosed Offering Circular contains detailed information about the
Exchange Offers, and you should give it your careful consideration. If you have
any questions or require assistance, please call Georgeson & Company Inc., the
Information Agent, at (800) 223-2064.
The Exchange Offers are made only by, and are subject to, the terms and
conditions contained in the Offering Circular and the related Letters of
Transmittal. For this reason, I urge you to read them carefully and to consult
with your investment advisor before you make a decision.
Very truly yours,
/s/ JOHN C. MALONE
------------------
John C. Malone
Chairman of the Board and
Chief Executive Officer
<PAGE> 1
TELE-COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI VENTURES
GROUP
COMMON STOCK FOR SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON
STOCK
THE SERIES A EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS THE SERIES A
EXCHANGE OFFER IS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). SERIES A TCI GROUP COMMON STOCK TENDERED PURSUANT TO THE
SERIES A EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
August 7, 1997
TO BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
We are enclosing herewith the material listed below relating to the offer
by Tele-Communications, Inc. (the "Company") to issue shares of
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value
$1.00 per share (the "Series A TCI Ventures Group Common Stock"), in exchange
for shares of Tele-Communications, Inc. Series A TCI Group Common Stock, par
value $1.00 per share (the "Series A TCI Group Common Stock"), validly tendered
to the Company and not properly withdrawn, upon the terms and subject to the
conditions set forth in the Offering Circular of the Company, dated August 7,
1997 (the "Offering Circular"), and the related Letter of Transmittal
(collectively, the "Series A Exchange Offer"). Consummation of the Series A
Exchange Offer is subject to, among other things, satisfaction of the conditions
set forth in the Offering Circular under "THE EXCHANGE OFFERS -- Certain
Conditions to the Exchange Offers."
We are asking you to contact your clients for whom you hold Series A TCI
Group Common Stock registered in your name or in the name of your nominee. In
addition, we are asking you to contact your clients who, to your knowledge, hold
Series A TCI Group Common Stock registered in their name.
Enclosed for your information and use are copies of the following
documents:
1. Letter to TCI Group Stockholders from John C. Malone;
2. The Offering Circular;
3. A Letter of Transmittal ("Letter of Transmittal") for your use in
connection with the tender of Series A TCI Group Common Stock and for the
information of your clients;
4. A form of letter that may be sent to your clients for whose accounts
you hold Series A TCI Group Common Stock registered in your name or the name of
your nominee, with space provided for obtaining the clients' instructions with
regard to the Series A Exchange Offer;
5. A form of Notice of Guaranteed Delivery;
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 (included in the Letter of Transmittal); and
7. A return envelope addressed to The Bank of New York, the Exchange Agent
(the "Exchange Agent").
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE SERIES A EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 10, 1997, UNLESS EXTENDED. SERIES A TCI GROUP COMMON STOCK TENDERED
PURSUANT TO THE SERIES A EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE
PROCEDURES DESCRIBED IN THE OFFERING CIRCULAR, AT ANY TIME ON OR PRIOR TO THE
EXPIRATION DATE.
<PAGE> 2
In all cases, shares of Series A TCI Ventures Group Common Stock will be
issued in exchange for shares of Series A TCI Group Common Stock, up to the
Series A Maximum (as defined in the Offering Circular), tendered and accepted
for exchange pursuant to the Series A Exchange Offer only after timely receipt
by the Exchange Agent of (i) certificates representing such shares of Series A
TCI Group Common Stock (or a Book-Entry Confirmation of the book-entry transfer
of such shares into the Exchange Agent's account at a Book-Entry Transfer
Facility), (ii) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or in the case of book-entry transfer, an
Agent's Message and (iii) any documents required by the Letter of Transmittal.
Capitalized terms used but not defined herein shall have the meanings set forth
in the Offering Circular.
If holders of Series A TCI Group Common Stock desire to tender shares of
Series A TCI Group Common Stock for exchange pursuant to the Series A Exchange
Offer and the holders' certificates for such shares are not immediately
available or time will not permit the Letter of Transmittal and other required
documents to reach the Exchange Agent on or prior to the Expiration Date, or the
procedure for book-entry transfer cannot be completed on a timely basis, tender
may nevertheless be effected by following the guaranteed delivery procedures
described in the Offering Circular under the heading "THE EXCHANGE
OFFERS -- Procedure for Tendering -- Guaranteed Delivery."
The procedure for tendering shares of Series A TCI Group Common Stock is
set forth in the Offering Circular under the caption "THE EXCHANGE
OFFERS -- Procedure for Tendering." Holders of Series A TCI Group Common Stock
who wish to exchange any shares of Series A TCI Group Common Stock must either
use the Letter of Transmittal distributed with the Offering Circular (or a
facsimile thereof) or comply with the requirements of a Book-Entry Transfer
Facility for such Facility to transmit an Agent's Message. In addition, holders
of Series A TCI Group Common Stock who are following the procedures for
guaranteed delivery set forth in the Offering Circular must use the Notice of
Guaranteed Delivery distributed with the Offering Circular (or a facsimile
thereof).
The Company will not pay any fees or commissions to any broker, dealer or
other person in connection with the solicitation of tenders of securities
pursuant to the Offering Circular. However, the Company will reimburse you for
customary mailing and handling expenses incurred by you in forwarding any of the
enclosed materials to your clients. The Company will pay or cause to be paid any
transfer taxes payable with respect to the transfer of Series A TCI Group Common
Stock to it, except as otherwise provided in Instruction 6 to the Letter of
Transmittal.
Any inquiries you may have with respect to the Series A Exchange Offer
should be addressed to, and additional copies of the enclosed materials may be
obtained from, Georgeson & Company Inc., the Information Agent, at the address
and telephone numbers set forth on the back cover page of the Offering Circular.
Very truly yours,
Tele-Communications, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, THE EXCHANGE AGENT, THE
INFORMATION AGENT OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER
PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN
CONNECTION WITH THE SERIES A EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS
AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 1
TELE-COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF TELE-COMMUNICATIONS, INC. SERIES B TCI VENTURES
GROUP COMMON
STOCK FOR SHARES OF TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK
THE SERIES B EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS THE SERIES B
EXCHANGE OFFER IS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). SERIES B TCI GROUP COMMON STOCK TENDERED PURSUANT TO THE
SERIES B EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
August 7, 1997
TO BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES AND OTHER NOMINEES:
We are enclosing herewith the material listed below relating to the offer
by Tele-Communications, Inc. (the "Company") to issue shares of
Tele-Communications, Inc. Series B TCI Ventures Group Common Stock, par value
$1.00 per share (the "Series B TCI Ventures Group Common Stock"), in exchange
for shares of Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share (the "Series B TCI Group Common Stock"), validly tendered
to the Company and not properly withdrawn, upon the terms and subject to the
conditions set forth in the Offering Circular of the Company, dated August 7,
1997 (the "Offering Circular"), and the related Letter of Transmittal
(collectively, the "Series B Exchange Offer"). Consummation of the Series B
Exchange Offer is subject to, among other things, satisfaction of the conditions
set forth in the Offering Circular under "THE EXCHANGE OFFERS -- Certain
Conditions to the Exchange Offers."
We are asking you to contact your clients for whom you hold Series B TCI
Group Common Stock registered in your name or in the name of your nominee. In
addition, we are asking you to contact your clients who, to your knowledge, hold
Series B TCI Group Common Stock registered in their name.
Enclosed for your information and use are copies of the following
documents:
1. Letter to TCI Group Stockholders from John C. Malone;
2. The Offering Circular;
3. A Letter of Transmittal ("Letter of Transmittal") for your use in
connection with the tender of Series B TCI Group Common Stock and for the
information of your clients;
4. A form of letter that may be sent to your clients for whose
accounts you hold Series B TCI Group Common Stock registered in your name
or the name of your nominee, with space provided for obtaining the clients'
instructions with regard to the Series B Exchange Offer;
5. A form of Notice of Guaranteed Delivery;
6. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 (included in the Letter of Transmittal); and
7. A return envelope addressed to The Bank of New York, the Exchange
Agent (the "Exchange Agent").
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE
THAT THE SERIES B EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 10, 1997, UNLESS EXTENDED. SERIES B TCI GROUP COMMON STOCK TENDERED
PURSUANT TO THE SERIES B EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE
PROCEDURES DESCRIBED IN THE OFFERING CIRCULAR, AT ANY TIME ON OR PRIOR TO THE
EXPIRATION DATE.
<PAGE> 2
In all cases, shares of Series B TCI Ventures Group Common Stock will be
issued in exchange for shares of Series B TCI Group Common Stock, up to the
Series B Maximum (as defined in the Offering Circular), tendered and accepted
for exchange pursuant to the Series B Exchange Offer only after timely receipt
by the Exchange Agent of (i) certificates representing such shares of Series B
TCI Group Common Stock (or a Book-Entry Confirmation of the book-entry transfer
of such shares into the Exchange Agent's account at a Book-Entry Transfer
Facility), (ii) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) or in the case of book-entry transfer, an
Agent's Message and (iii) any documents required by the Letter of Transmittal.
Capitalized terms used but not defined herein shall have the meanings set forth
in the Offering Circular.
If holders of Series B TCI Group Common Stock desire to tender shares of
Series B TCI Group Common Stock for exchange pursuant to the Series B Exchange
Offer and the holders' certificates for such shares are not immediately
available or time will not permit the Letter of Transmittal and other required
documents to reach the Exchange Agent on or prior to the Expiration Date, or the
procedure for book-entry transfer cannot be completed on a timely basis, tender
may nevertheless be effected by following the guaranteed delivery procedures
described in the Offering Circular under the heading "THE EXCHANGE
OFFERS -- Procedure for Tendering -- Guaranteed Delivery."
The procedure for tendering shares of Series B TCI Group Common Stock is
set forth in the Offering Circular under the caption "THE EXCHANGE
OFFERS -- Procedure for Tendering." Holders of Series B TCI Group Common Stock
who wish to exchange any shares of Series B TCI Group Common Stock must either
use the Letter of Transmittal distributed with the Offering Circular (or a
facsimile thereof) or comply with the requirements of a Book-Entry Transfer
Facility for such Facility to transmit an Agent's Message. In addition, holders
of Series B TCI Group Common Stock who are following the procedures for
guaranteed delivery set forth in the Offering Circular must use the Notice of
Guaranteed Delivery distributed with the Offering Circular (or a facsimile
thereof).
The Company will not pay any fees or commissions to any broker, dealer or
other person in connection with the solicitation of tenders of securities
pursuant to the Offering Circular. However, the Company will reimburse you for
customary mailing and handling expenses incurred by you in forwarding any of the
enclosed materials to your clients. The Company will pay or cause to be paid any
transfer taxes payable with respect to the transfer of Series B TCI Group Common
Stock to it, except as otherwise provided in Instruction 6 to the Letter of
Transmittal.
Any inquiries you may have with respect to the Series B Exchange Offer
should be addressed to, and additional copies of the enclosed materials may be
obtained from, Georgeson & Company Inc., the Information Agent, at the address
and telephone numbers set forth on the back cover page of the Offering Circular.
Very truly yours,
Tele-Communications, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY, THE EXCHANGE AGENT, THE
INFORMATION AGENT OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER
PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN
CONNECTION WITH THE SERIES B EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS
AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 1
TELE-COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI VENTURES
GROUP
COMMON STOCK FOR SHARES OF TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON
STOCK
THE SERIES A EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS THE SERIES A
EXCHANGE OFFER IS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). SERIES A TCI GROUP COMMON STOCK TENDERED PURSUANT TO THE
SERIES A EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
August 7, 1997
TO OUR CLIENTS:
Enclosed for your consideration is the Offering Circular of
Tele-Communications, Inc. (the "Company") dated August 7, 1997 (the "Offering
Circular"), and the related Letter of Transmittal including instructions thereto
(the "Letter of Transmittal") relating to the offer by the Company to issue
shares of Tele-Communications, Inc. Series A TCI Ventures Group Common Stock,
par value $1.00 per share (the "Series A TCI Ventures Group Common Stock"), in
exchange for shares of Tele-Communications, Inc. Series A TCI Group Common
Stock, par value $1.00 per share (the "Series A TCI Group Common Stock"),
validly tendered to the Company and not properly withdrawn, upon the terms and
subject to the conditions set forth in the Offering Circular and the related
Letter of Transmittal (collectively, the "Series A Exchange Offer").
Consummation of the Series A Exchange Offer is subject to, among other things,
satisfaction of the conditions set forth in the Offering Circular under the
heading "THE EXCHANGE OFFERS -- Certain Conditions to the Exchange Offers."
WE ARE THE REGISTERED HOLDER OF SERIES A TCI GROUP COMMON STOCK HELD BY US
FOR YOUR ACCOUNT. A TENDER OF ANY SUCH SERIES A TCI GROUP COMMON STOCK CAN BE
MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE
LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT
BE USED BY YOU TO TENDER SERIES A TCI GROUP COMMON STOCK HELD BY US FOR YOUR
ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender
any or all of the Series A TCI Group Common Stock held by us for your account
pursuant to the terms and subject to the conditions set forth in the Offering
Circular and the Letter of Transmittal. We urge you to read the Offering
Circular and the Letter of Transmittal carefully before instructing us to tender
your Series A TCI Group Common Stock.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Series A TCI Group Common Stock on your behalf in
accordance with the provisions of the Series A Exchange Offer. The Series A
Exchange Offer will expire at 5:00 p.m., New York City time on September 10,
1997, unless extended. Series A TCI Group Common Stock tendered pursuant to the
Series A Exchange Offer may be withdrawn, subject to the procedures described in
the Offering Circular, at any time on or prior to the Expiration Date.
Your attention is directed to the following:
1. Pursuant to the Series A Exchange Offer, holders of Series A TCI Group
Common Stock may receive one share of Series A TCI Ventures Group Common Stock
for each share of Series A TCI Group Common Stock validly tendered and not
properly withdrawn on or prior to the Expiration Date. The Series A Exchange
Offer is not subject to a condition that a minimum number of shares be tendered;
however, the Company is not obligated to accept for exchange more than the
Series A Maximum (as defined in the Offering Circular). In the event of an
oversubscription for shares of Series A TCI Ventures Group Common Stock, shares
will be exchanged on a pro rata basis up to the Series A Maximum.
<PAGE> 2
2. Consummation of the Series A Exchange Offer is subject to, among other
things, satisfaction of certain conditions set forth in the Offering Circular
under the heading "THE EXCHANGE OFFERS -- Certain Conditions to the Exchange
Offers," including approval by the stockholders of the Company of certain
amendments to the Company's charter at the 1997 annual meeting of stockholders
of the Company, to be held on August 28, 1997.
3. Any transfer taxes incident to the transfer of Series A TCI Group
Common Stock from the tendering holder to the Company will be paid by the
Company, except as provided in the Offering Circular and Instruction 6 to the
Letter of Transmittal.
4. The Series A TCI Group Common Stock are "margin securities" under the
rules of the Federal Reserve Board. The Series A TCI Ventures Group Common Stock
will be "margin securities" under the rules of the Federal Reserve Board when
issued only if, upon consummation of the Series A Exchange Offer, the Series A
TCI Ventures Group Common Stock satisfies the requirements for inclusion on the
National Market tier of The Nasdaq Stock Market. The Series A TCI Ventures Group
Common Stock will satisfy such requirements if at least 500,000 shares of Series
A TCI Ventures Group Common Stock are publicly held following the Series A
Exchange Offer (excluding for this purpose shares held directly or indirectly by
any officer or director of the Company and by any person who is the beneficial
owner of more than 10% of the total shares outstanding) and there are at least
400 beneficial holders of Series A TCI Ventures Group Common Stock following the
Series A Exchange Offer. If the Series A TCI Ventures Group Common Stock does
not qualify as margin securities, however, a stockholder tendering shares of
Series A TCI Group Common Stock held as collateral in a brokerage margin account
will not be permitted to use the shares of Series A TCI Ventures Group Common
Stock issued for the account of such stockholder as substitute collateral and
may be required to deposit additional collateral in such account.
If you wish to have us tender any or all of the Series A TCI Group Common
Stock held by us for your account, please so instruct us by completing,
executing and returning to us the instruction form that follows.
<PAGE> 3
INSTRUCTIONS REGARDING THE OFFERING CIRCULAR WITH RESPECT TO
TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offering Circular, dated August 7, 1997 (the "Offering Circular"), of
Tele-Communications, Inc. (the "Company") and the related Letter of Transmittal,
pursuant to which the Company is offering, upon the terms and subject to the
conditions set forth in the Offering Circular and related Letter of Transmittal,
to exchange one share of Series A TCI Ventures Group Common Stock, par value
$1.00 per share, of the Company for each share of Series A TCI Group Common
Stock, par value $1.00 per share, of the Company validly tendered to the Company
prior to 5:00 p.m., New York City time, on September 10, 1997 (or such date to
which the Series A Exchange Offer may be extended) and not properly withdrawn.
Please tender _______________ shares of Series A TCI Group Common Stock
held by you for the account of the undersigned pursuant to the terms of and
conditions set forth in the Offering Circular and the related Letter of
Transmittal.
Date: ____________________, 1997
------------------------------------
------------------------------------
Signature(s)
------------------------------------
Please print name(s) here:
------------------------------------
------------------------------------
Please type or print address, area
code and telephone number:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
Taxpayer Identification or Social
Security Number:
------------------------------------
My Account Number with You:
------------------------------------
<PAGE> 1
TELE-COMMUNICATIONS, INC.
OFFER TO EXCHANGE SHARES OF TELE-COMMUNICATIONS, INC. SERIES B TCI VENTURES
GROUP
COMMON STOCK FOR SHARES OF TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON
STOCK
THE SERIES B EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE
AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER 10, 1997, UNLESS THE SERIES B
EXCHANGE OFFER IS EXTENDED (SUCH DATE AS EXTENDED FROM TIME TO TIME, THE
"EXPIRATION DATE"). SERIES B TCI GROUP COMMON STOCK TENDERED PURSUANT TO THE
SERIES B EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
August 7, 1997
TO OUR CLIENTS:
Enclosed for your consideration is the Offering Circular of
Tele-Communications, Inc. (the "Company"), dated August 7, 1997 (the "Offering
Circular"), and the related Letter of Transmittal including instructions thereto
(the "Letter of Transmittal") relating to the offer by the Company to issue
shares of Tele-Communications, Inc. Series B TCI Ventures Group Common Stock,
par value $1.00 per share (the "Series B TCI Ventures Group Common Stock"), in
exchange for shares of Tele-Communications, Inc. Series B TCI Group Common
Stock, par value $1.00 per share (the "Series B TCI Group Common Stock"),
validly tendered to the Company and not properly withdrawn, upon the terms and
subject to the conditions set forth in the Offering Circular and the related
Letter of Transmittal (collectively, the "Series B Exchange Offer").
Consummation of the Series B Exchange Offer is subject to, among other things,
satisfaction of the conditions set forth in the Offering Circular under the
heading "THE EXCHANGE OFFERS -- Certain Conditions to the Exchange Offers."
WE ARE THE REGISTERED HOLDER OF SERIES B TCI GROUP COMMON STOCK HELD BY US
FOR YOUR ACCOUNT. A TENDER OF ANY SUCH SERIES B TCI GROUP COMMON STOCK CAN BE
MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE
LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT
BE USED BY YOU TO TENDER SERIES B TCI GROUP COMMON STOCK HELD BY US FOR YOUR
ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender
any or all of the Series B TCI Group Common Stock held by us for your account
pursuant to the terms and subject to the conditions set forth in the Offering
Circular and the Letter of Transmittal. We urge you to read the Offering
Circular and the Letter of Transmittal carefully before instructing us to tender
your Series B TCI Group Common Stock.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Series B TCI Group Common Stock on your behalf in
accordance with the provisions of the Series B Exchange Offer. The Series B
Exchange Offer will expire at 5:00 p.m., New York City time on September 10,
1997, unless extended. Series B TCI Group Common Stock tendered pursuant to the
Series B Exchange Offer may be withdrawn, subject to the procedures described in
the Offering Circular, at any time on or prior to the Expiration Date.
Your attention is directed to the following:
1. Pursuant to the Series B Exchange Offer, holders of Series B TCI Group
Common Stock may receive one share of Series B TCI Ventures Group Common Stock
for each share of Series B TCI Group Common Stock validly tendered and not
properly withdrawn on or prior to the Expiration Date. The Series B Exchange
Offer is not subject to a condition that a minimum number of shares be tendered;
however, the Company is not obligated to accept for exchange more than the
Series B Maximum (as defined in the Offering Circular). In the event of an
oversubscription for shares of Series B TCI Ventures Group Common Stock, shares
will be exchanged on a pro rata basis up to the Series B Maximum.
<PAGE> 2
2. Consummation of the Series B Exchange Offer is subject to, among other
things, satisfaction of certain conditions set forth in the Offering Circular
under the heading "THE EXCHANGE OFFERS -- Certain Conditions to the Exchange
Offers," including approval by the stockholders of the Company of certain
amendments to the Company's charter at the 1997 annual meeting of stockholders
of the Company, to be held on August 28, 1997.
3. Any transfer taxes incident to the transfer of Series B TCI Group
Common Stock from the tendering holder to the Company will be paid by the
Company, except as provided in the Offering Circular and Instruction 6 to the
Letter of Transmittal.
4. The Series B TCI Group Common Stock are "margin securities" under the
rules of the Federal Reserve Board. The Series B TCI Ventures Group Common Stock
will be "margin securities" under the rules of the Federal Reserve Board when
issued only if, upon consummation of the Series B Exchange Offer, the Series B
TCI Ventures Group Common Stock satisfies the requirements for inclusion on the
National Market tier of The Nasdaq Stock Market. The Series B TCI Ventures Group
Common Stock will satisfy such requirements if at least 500,000 shares of Series
B TCI Ventures Group Common Stock are publicly held following the Series B
Exchange Offer (excluding for this purpose shares held directly or indirectly by
any officer or director of the Company and by any person who is the beneficial
owner of more than 10% of the total shares outstanding) and there are at least
400 beneficial holders of Series B TCI Ventures Group Common Stock following the
Series B Exchange Offer (approximately 30% of the number of beneficial holders
of Series B TCI Group Common Stock as of July 25, 1997). If the Series B TCI
Ventures Group Common Stock does not qualify as margin securities, however, a
stockholder tendering shares of Series B TCI Group Common Stock held as
collateral in a brokerage margin account will not be permitted to use the shares
of Series B TCI Ventures Group Common Stock issued for the account of such
stockholder as substitute collateral and may be required to deposit additional
collateral in such account.
If you wish to have us tender any or all of the Series B TCI Group Common
Stock held by us for your account, please so instruct us by completing,
executing and returning to us the instruction form that follows.
<PAGE> 3
INSTRUCTIONS REGARDING THE OFFERING CIRCULAR WITH RESPECT TO
TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK
The undersigned acknowledge(s) receipt of your letter and the enclosed
Offering Circular, dated August 7, 1997 (the "Offering Circular"), of
Tele-Communications, Inc. (the "Company") and the related Letter of Transmittal,
pursuant to which the Company is offering, upon the terms and subject to the
conditions set forth in the Offering Circular and the related Letter of
Transmittal, to exchange one share of Series B TCI Ventures Group Common Stock,
par value $1.00 per share, of the Company for each share of Series B TCI Group
Common Stock, par value $1.00 per share, of the Company validly tendered to the
Company prior to 5:00 p.m., New York City time, on September 10, 1997 (or such
date to which the Series B Exchange Offer may be extended) and not properly
withdrawn.
Please tender ________ shares of Series B TCI Group Common Stock held by
you for the account of the undersigned pursuant to the terms of and conditions
set forth in the Offering Circular and the related Letter of Transmittal.
Date: _______________________, 1997
------------------------------------
------------------------------------
Signature(s)
------------------------------------
Please print name(s) here:
------------------------------------
------------------------------------
Please type or print address, area
code and
telephone number:
------------------------------------
------------------------------------
------------------------------------
------------------------------------
Taxpayer Identification or Social
Security Number:
------------------------------------
My Account Number with You:
------------------------------------
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY OF SHARES OF
TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK
This form or one substantially equivalent hereto must be used to tender the
shares of Tele-Communications, Inc. Series A TCI Group Common Stock, par value
$1.00 per share ("Series A TCI Group Common Stock"), pursuant to the Series A
Exchange Offer described in the Offering Circular of Tele-Communications, Inc.,
a Delaware corporation, dated August 7, 1997 (the "Offering Circular"), if
certificates for such shares of Series A TCI Group Common Stock are not
immediately available or time will not permit the Letter of Transmittal and
other required documents to reach the Exchange Agent on or prior to 5:00 p.m.,
New York City time, on September 10, 1997, unless the Series A Exchange Offer is
extended (such date as may be extended from time to time, the "Expiration
Date"). This form may be delivered by hand, mail, telegram, telex or facsimile
transmission to the Exchange Agent. See the information under "THE EXCHANGE
OFFERS -- Procedure for Tendering -- Guaranteed Delivery" in the Offering
Circular.
TO: THE BANK OF NEW YORK
<TABLE>
<C> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
Tender & Exchange Department (for Eligible Institutions Tender & Exchange Department
P.O. Box 11248 Only) 101 Barclay Street
Church Street Station (212) 815-6213 Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
FOR CONFIRMATION TELEPHONE:
(800) 507-9357
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY TO THE EXCHANGE AGENT.
<PAGE> 2
Ladies and Gentlemen:
The undersigned, upon the terms and subject to the conditions set forth in
the Offering Circular of Tele-Communications, Inc. (the "Company"), dated August
7, 1997 (the "Offering Circular"), and the related Letter of Transmittal
(collectively, the "Series A Exchange Offer"), receipt of which are hereby
acknowledged, hereby tenders to the Company the shares of Series A TCI Group
Common Stock listed below pursuant to the guaranteed delivery procedures set
forth under "THE EXCHANGE OFFERS -- Procedure for Tendering -- Guaranteed
Delivery" in the Offering Circular.
Number of Shares of Series A TCI Group Common Stock Tendered:________________
THE BOXES BELOW MUST BE COMPLETED
Signature(s):
- ------------------------------------------------------
- ------------------------------------------------------
Name(s) of Record Holder(s):
- ------------------------------------------------------
Please Print
Address:
- ------------------------------------------------------
- ------------------------------------------------------
Zip Code
Area Code and
Tel. No.
- ------------------------------------------------------
IDENTIFICATION OF SHARES OF
SERIES A TCI GROUP COMMON STOCK TO BE TENDERED
<TABLE>
<C> <C> <S>
Series A No. of Shares of If shares of Series A TCI Group
TCI Group Series A Common Stock will be tendered by
Common Stock Certificate TCI Group Common Stock book-entry transfer, check the
No. (if available) to be Tendered appropriate box below:
- ------------------------ ---------------------- [ ] The Depository Trust Company
- ------------------------ ---------------------- [ ] Philadelphia Depositary Trust
- ------------------------ ---------------------- Account Number
- ------------------------ ---------------------- ----------------------------
</TABLE>
<PAGE> 3
GUARANTEED DELIVERY
(Not to be used for signature guarantees)
The undersigned, a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office, branch or agency in the
United States, hereby guarantees that the Exchange Agent will receive (i)
certificates for such number of shares of Series A TCI Group Common Stock as
indicated above, in proper form for transfer, or a Book-Entry Confirmation of
the book-entry transfer of such shares of Series A TCI Group Common Stock into
the Exchange Agent's account at one of the Book-Entry Transfer Facilities, (ii)
a properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof), with any required signature guarantees (or, in the case of
book-entry transfers, an Agent's Message), and (iii) any other documents
required by the Letter of Transmittal, all within three Nasdaq trading days
after the date of execution of this Notice of Guaranteed Delivery set forth
below (each of such capitalized terms, as defined in the Offering Circular).
- ------------------------------------------------------
Name of Firm
- ------------------------------------------------------
Authorized Signature
- ------------------------------------------------------
Name (Please Print)
- ------------------------------------------------------
Title
- ------------------------------------------------------
Address
- ------------------------------------------------------
Zip Code
- ------------------------------------------------------
Area Code and Telephone No.
Date: _____________, 1997
NOTE: DO NOT SEND CERTIFICATES FOR SHARES OF SERIES A TCI GROUP COMMON STOCK
WITH THIS FORM. SUCH CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF
TRANSMITTAL.
<PAGE> 1
NOTICE OF GUARANTEED DELIVERY OF SHARES OF
TELE-COMMUNICATIONS, INC. SERIES B TCI GROUP COMMON STOCK
This form or one substantially equivalent hereto must be used to tender
shares of Tele-Communications, Inc. Series B TCI Group Common Stock, par value
$1.00 per share ("Series B TCI Group Common Stock"), pursuant to the Series B
Exchange Offer described in the Offering Circular of Tele-Communications, Inc.,
a Delaware corporation, dated August 7, 1997 (the "Offering Circular"), if
certificates for such shares of Series B TCI Group Common Stock are not
immediately available or time will not permit the Letter of Transmittal and
other required documents to reach the Exchange Agent on or prior to 5:00 p.m.,
New York City time, on September 10, 1997, unless the Series B Exchange Offer is
extended (such date as may be extended from time to time, the "Expiration
Date"). This form may be delivered by hand, mail, telegram, telex or facsimile
transmission to the Exchange Agent. See the information under "THE EXCHANGE
OFFERS -- Procedure for Tendering -- Guaranteed Delivery" in the Offering
Circular.
TO: THE BANK OF NEW YORK
<TABLE>
<C> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
Tender & Exchange Department (for Eligible Institutions Tender & Exchange Department
P.O. Box 11248 Only) 101 Barclay Street
Church Street Station (212) 815-6213 Receive and Deliver Window
New York, New York 10286-1248 New York, New York 10286
</TABLE>
FOR CONFIRMATION TELEPHONE:
(800) 507-9357
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY TO THE EXCHANGE AGENT.
<PAGE> 2
Ladies and Gentlemen:
The undersigned, upon the terms and subject to the conditions set forth in
the Offering Circular of Tele-Communications, Inc. (the "Company"), dated August
7, 1997 (the "Offering Circular"), and the related Letter of Transmittal
(collectively, the "Series B Exchange Offer"), receipt of which are hereby
acknowledged, hereby tenders to the Company the shares of Series B TCI Group
Common Stock listed below pursuant to the guaranteed delivery procedures set
forth under "THE EXCHANGE OFFERS -- Procedure for Tendering -- Guaranteed
Delivery" in the Offering Circular.
Number of Shares of Series B TCI Group Common Stock Tendered: ________________
THE BOXES BELOW MUST BE COMPLETED
Signature(s):
- ------------------------------------------------------
- ------------------------------------------------------
Name(s) of Record Holder(s):
- ------------------------------------------------------
Please Print
Address:
- ------------------------------------------------------
- ------------------------------------------------------
Zip Code
Area Code and
Tel. No.
- ------------------------------------------------------
IDENTIFICATION OF SHARES OF
SERIES B TCI GROUP COMMON STOCK TO BE TENDERED
<TABLE>
<C> <C> <S>
Series B No. of Shares of If shares of Series B TCI Group
TCI Group Series B Common Stock will be tendered by
Common Stock Certificate TCI Group Common Stock book-entry transfer, check the
No. (if available) to be Tendered appropriate box below:
- ------------------------ ---------------------- [ ] The Depository Trust Company
- ------------------------ ---------------------- [ ] Philadelphia Depositary Trust
- ------------------------ ---------------------- Account Number
- ------------------------ ---------------------- ----------------------------
</TABLE>
<PAGE> 3
GUARANTEED DELIVERY
(Not to be used for signature guarantees)
The undersigned, a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office, branch or agency in the
United States, hereby guarantees that the Exchange Agent will receive (i)
certificates for such number of shares of Series B TCI Group Common Stock as
indicated above, in proper form for transfer, or a Book-Entry Confirmation of
the book-entry transfer of such shares of Series B TCI Group Common Stock into
the Exchange Agent's account at one of the Book-Entry Transfer Facilities, (ii)
a properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof), with any required signature guarantees (or, in the case of
book-entry transfers, an Agent's Message), and (iii) any other documents
required by the Letter of Transmittal, all within three Nasdaq trading days
after the date of execution of this Notice of Guaranteed Delivery set forth
below (each of such capitalized terms, as defined in the Offering Circular).
- ------------------------------------------------------
Name of Firm
- ------------------------------------------------------
Authorized Signature
- ------------------------------------------------------
Name (Please Print)
- ------------------------------------------------------
Title
- ------------------------------------------------------
Address
- ------------------------------------------------------
Zip Code
- ------------------------------------------------------
Area Code and Telephone No.
Date: _____________, 1997
NOTE: DO NOT SEND CERTIFICATES FOR SHARES OF SERIES B TCI GROUP COMMON STOCK
WITH THIS FORM. SUCH CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF
TRANSMITTAL.
<PAGE> 1
To All Unexchanged Holders of
United Artists Entertainment Company Securities:
As you may recall, on December 2, 1991, pursuant to the merger of UAE
into a subsidiary of Tele-Communications, Inc. ("TCI"), each share of UAE
Class A Common Stock and UAE Class B Common Stock became exchangeable for 1.02
shares of TCI Class A Common Stock (now Tele-Communications, Inc. Series A TCI
Group Common Stock), respectively. Additionally, pursuant to several other
transactions involving TCI securities, you are also entitled to the TCI
securities referenced on the attached summary entitled "UAE EXCHANGE".
ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon"), is the
current Exchange Agent for UAE securities. CHASEMELLON'S RECORDS INDICATE THAT
YOU HAVE NOT YET EXCHANGED YOUR UAE SHARES FOR TCI SHARES.
Enclosed is a packet of materials informing you of a new offering (the
"Series A Exchange Offer") of one share of TCI Series A TCI Ventures Group
Common Stock in exchange for each share of Tele-Communications, Inc. Series A
TCI Group Common Stock validly tendered prior to the Expiration Date of the
offering (as defined within the enclosed materials). PLEASE NOTE THAT YOU MAY
ONLY PARTICIPATE IN THE SERIES A EXCHANGE OFFER BY TENDERING SHARES OF
TELE-COMMUNICATIONS, INC. SERIES A TCI GROUP COMMON STOCK.
If you wish to participate in the Series A Exchange Offer, you must
IMMEDIATELY forward your shares of UAE, together with a fully completed Series
A Exchange Offer Letter of Transmittal, to The Bank of New York ("The Bank") in
the enclosed envelope. You must indicate on the Series A Exchange Offer Letter
of Transmittal how many shares of your Tele-Communications, Inc. Series A TCI
Group Common Stock you wish to tender in the Series A Exchange Offer (bearing
in mind that the initial UAE/TCI exchange rate is 1.02 shares of
Tele-Communications, Inc. Series A TCI Group Common Stock for each share of UAE
stock, as adjusted by the several transactions listed in the attached summary
entitled "UAE Exchange"). Upon receipt, The Bank will first process your
UAE/TCI exchange and then process your Series A Exchange Offer Letter of
Transmittal.
If you DO NOT wish to participate in the Series A Exchange Offer,
please call Georgeson & Company, Inc. ("Georgeson"), TCI's Information Agent
for the Series A Exchange Offer, at 1-(800) 223-2064, for information relating
only to the exchange of your UAE securities. Please also call Georgeson if you
have any questions about any of the other instructions contained in this
letter.
Very truly yours,
Stephen M. Brett
Executive Vice President, Secretary
and General Counsel
<PAGE> 2
UAE EXCHANGE
On December 2, 1991, pursuant to the merger of UAE into a subsidiary
of Tele-Communications, Inc. ("TCI"), each share of UAE Class A Common Stock
became exchangeable for 1.02 shares of TCI Class A Common Stock (now
Tele-Communications, Inc. Series A TCI Group Common Stock), and each share of
UAE Class B Common Stock became exchangeable for 1.02 shares of TCI Class A
Common Stock (now Tele-Communications, Inc. Series A TCI Group Common Stock).
Subsequent to the merger, TCI effected the transactions listed below, all of
which changed the original exchange rate:
a) On August 3, 1995, TCI Class A Common Stock and TCI Class B Common
Stock were redesignated as Tele-Communications, Inc. Series A TCI Group Common
Stock ("Series A TCI Group Common Stock") and Tele-Communications, Inc. Series
B TCI Group Common Stock ("Series B TCI Group Common Stock"), respectively. On
August 4, 1995, TCI issued a 25% stock dividend to holders of record of its
Series A TCI Group Common Stock and Series B TCI Group Common Stock securities.
All holders of Series A TCI Group Common Stock received one-fourth of a share
of Tele-Communications, Inc. Series A Liberty Media Group Common Stock ("Series
A Liberty Media Group Common Stock") for each share of Series A TCI Group
Common Stock held, and one-fourth of a share of Tele-Communications, Inc.
Series B Liberty Media Group Common Stock ("Series B Liberty Media Group Common
Stock") for each share of Series B TCI Group Common Stock held. As you know,
The Bank of New York is the current transfer agent for these TCI securities.
b) On December 4, 1996, TCI spun off its satellite company operations
by distributing shares of TCI Satellite Entertainment, Inc. ("SATCO"). Holders
of record of Series A TCI Group Common Stock as of the November 12, 1996 record
date received one share of SATCO Series A Common Stock (SATCO-A) for each ten
shares of Series A TCI Group Common Stock held as of the record date, and one
share of SATCO Series B Common Stock (SATCO-B) for each ten shares of Series B
TCI Group Common Stock held. The Bank of New York is also the current transfer
agent for these SATCO securities.
c) On January 13, 1997, TCI declared a 50% stock dividend payable to
holders of record of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock as of the December 27, 1996 record date. Each
such shareholder received one share of Series A Liberty Media Group Common
Stock for every two shares of Series A Liberty Media Group Common Stock held,
and one share of Series A Liberty Media Group Common Stock for every two shares
of Series B Liberty Media Group Common Stock held on the record date.
<PAGE> 1
FOR IMMEDIATE RELEASE
August 12, 1997
Contacts: Investor Relations, Linda J. Dill, (303) 267-5048
Media Relations, Lela Cocoros or Joann Dobbs, (303) 267-5273
TELE-COMMUNICATIONS, INC. COMMENCES
TCI VENTURES GROUP EXCHANGE OFFERS
ENGLEWOOD, COLORADO -- Tele-Communications, Inc. (TCI) announced today that it
has commenced offers to exchange shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock for up to an aggregate of
188,661,300 shares of Series A TCI Group Common Stock and 16,266,400 shares of
Series B TCI Group Common Stock, respectively. The Exchange Offers are being
made pursuant to an Offering Circular dated August 7, 1997 and the related
Letter of Transmittal (which together constitute the "Exchange Offers"). The
Offering Circular and the related Letter of Transmittal were filed with the
Securities and Exchange Commission today as part of TCI's Schedule 13 E-4.
The shares offered for exchange represent approximately 30 percent of the
shares of each series of TCI Group Common stock outstanding as of June 30,
1997. The Exchange Offers will be subject to, among other conditions, the
approval by TCI stockholders of the TCI Ventures Group Stock proposal at TCI's
Annual Meeting, scheduled for August 28, 1997. If such approval is obtained and
other conditions are satisfied, TCI will accept for exchange up to 188,661,300
shares of Series A TCI Group Common Stock and up to 16,266,400 shares of Series
B TCI Group Common Stock validly tendered and not properly withdrawn prior to 5
p.m. (EST), on September 10, 1997, unless extended by TCI (such date, if and as
extended, the "Expiration Date"). In the event more shares are tendered than
such maximums, shares will be accepted for exchange on a pro rata basis. In the
event less shares are tendered than such interest in TCI Ventures Group. All
persons who hold Series A TCI Group Common Stock or Series B TCI Group Common
Stock from the commencement of the Exchange Offers through the Expiration Date
are entitled to participate in the Exchange Offers.
<PAGE> 2
Dr. John Malone, chairman and chief executive officer of TCI, and Leo J.
Hindery, Jr. president and chief operating officer of TCI, have each advised
the Company of his desire to own substantially the same percentage equity and
voting interests in the TCI Ventures Group as he would own in the TCI Group
after giving effect to the Exchange Offers. Accordingly, Malone and Hindery
have each stated his intention to tender approximately 30 percent of his shares
of Series A TCI Group Common Stock and approximatley 30 percent of his shares
of Series B TCI Group Common Stock pursuant to the Exchange Offers.
The TCI Ventures Group will consist of TCI's principal international assets and
substantially all of TCI's non-cable, non-programming domestic assets.
Accordingly, TCI Ventures Group Common Stock will track such assets as TCI's
interests in Teleport, Sprint PCS, At Home Corporation, Tele-Communications
International, Inc., United Video Satellite Group and others. The businesses
that would be attributed to the TCI Group after giving effect to the creation
of the TCI Ventures Group would largely be confined to the Company's domestic
cable, Internet and telephony distribution businesses.
Tele-Communications, Inc. is traded through the TCI Group and the Liberty
Media Group common stocks. TCI Group is traded on the National Market tier of
the Nasdaq Stock Market ("Nasdaq") with Series A and Series B TCI Group Common
Stock, under the symbols TCOMA and TCOMB, respectively. Also, the Company's
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock is traded
on Nasdaq under the symbol TCOMP. Liberty Media Group is traded on Nasdaq with
Series A and Series B Common Stock, under the symbols LBTYA and LBTYB,
respectively. Tele-Communications International, Inc., which is traded on
Nasdaq under the symbol TINTA, is currently attributed to the TCI Group. TCI
Communications, Inc., the Company's domestic communications subsidiary, trades
its Cumulative Exchangeable Preferred Stock, Series A on Nasdaq under the symbol
TCICP, its 8.72% Trust Originated Preferred Securities on the New York Stock
Exchange under the symbol TFI/pr and its 10% and 9.72% Trust Preferred
Securities on the New York Stock Exchange under the symbols TFII and TFIV,
respectively.
<PAGE> 1
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of ___________, 1997 and is
between TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI"), and TCI
VENTURES GROUP, LLC, a Delaware limited liability company (the "Company").
RECITALS:
A. The Company was formed on June 26, 1997 for the
purpose of holding the assets that will comprise the Ventures Group businesses
of TCI. The Company is a wholly owned indirect subsidiary of TCI.
B. TCI has offered to issue shares of
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, $1.00 par
value per share (the "Series A Ventures Stock") in exchange for up to
188,661,300 shares of Tele-Communications, Inc. Series A TCI Group Common
Stock, $1.00 par value per share, and shares of Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, $1.00 par value per share (the
"Series B Ventures Stock") in exchange for up to 16,266,400 shares of Tele-
Communications, Inc. Series B TCI Group Common Stock, $1.00 par value per share
(collectively, the "Exchange Offers"). As a result of the Exchange Offers, the
Series A Ventures Stock and the Series B Ventures Stock will be intended to
reflect the separate performance of the TCI Ventures Group, which includes
TCI's principal international assets and substantially all of TCI's non-cable
and non-programming domestic assets.
C. To provide the Company with a source of financing
after the Exchange Offers, the Company has requested TCI to establish a
revolving credit facility pursuant to which the Company may obtain loans in an
aggregate principal amount outstanding at any one time not exceeding
$500,000,000 (the "Revolving Loans").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
<PAGE> 2
ARTICLE I.
CERTAIN DEFINITIONS
"Business Day" shall mean any day (other than a Saturday,
Sunday or legal holiday in the State of Colorado or in the State of New York)
on which banks are open for business in Denver, Colorado and New York, New
York.
"Commitment Fee" shall have the meaning set forth in section
2.05.
"Company" shall have the meaning set forth in the recitals.
"Default" shall mean an event that with the giving of notice
or the passage of time (or both) would constitute an Event of Default.
"Event of Default or Events of Default" shall have the
meanings set forth in Article V.
"Exchange Offers" shall have the meaning set forth in the
recitals.
"Expiration Date" shall mean the date on which the Exchange
Offers expire.
"Indebtedness" shall mean, with respect to any Person, without
duplication: (i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or similar
instruments, (iii) all obligations of such Person upon which interest charges
are customarily paid, (iv) all obligations of such Person issued or assumed as
the deferred purchase price of property or services (other than accounts
payable to suppliers incurred in the ordinary course of business), and (v) all
obligations of such Person in respect of letters of credit and bankers
acceptances. The term "Indebtedness" shall not include the obligation of any
Person guaranteeing the Indebtedness of any other Person.
"Interest Payment Date" shall have the meaning set forth in
section 2.02(b).
"Maturity Date" shall mean _________, 2002.
"Maximum Rate" shall have the meaning set forth in section
2.02(d).
"Note or Notes" shall mean the promissory note or notes
executed pursuant to the Revolving Loans by the Company as maker in favor of
TCI and in substantially the form of Exhibit A.
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<PAGE> 3
"Person" shall mean any natural person, corporation, limited
liability company, partnership, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority or any other
entity, whether acting in an individual, fiduciary or other capacity.
"Prepayment Notice" shall have the meaning set forth in
Section 2.03(b).
"Revolving Loan Commitment" shall mean $500,000,000 principal
amount, as such amount may be reduced from time to time pursuant to Section
2.04.
"Revolving Loan Commitment Termination Date" shall mean the
date on which the commitment of TCI to make Revolving Loans under this Credit
Agreement shall terminate in accordance with Section 2.04.
"Revolving Loans" shall have the meaning set forth in the
recitals.
"Series A Ventures Stock" shall have the meaning set forth in
the recitals.
"Series B Ventures Stock" shall have the meaning set forth in
the recitals.
"Subsidiary" shall mean (with respect to any Person) any
corporation, limited liability company, partnership or joint venture, whether
now existing or hereafter organized or acquired in which: (i) (in the case of
a corporation) securities having a majority of the voting power in the election
of directors (excluding for these purposes securities that entitle the holder
to vote only upon the occurrence of a contingency) are at the time owned,
directly or indirectly, by such Person and/or one or more of its Subsidiaries,
or (ii) (in the case of a limited liability company, partnership or joint
venture): (y) the managing general partner is such Person or one or more of its
Subsidiaries, or (z) a majority of the ownership interests are owned, directly
or indirectly, by such Person or one or more of its Subsidiaries.
"TCI" shall have the meaning set forth in the recitals.
"Unused Portion of the Revolving Loan Commitment" shall mean,
as of any date, the Revolving Loan Commitment as of such date less the
aggregate unpaid principal amount of all Revolving Loans outstanding as of such
date.
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<PAGE> 4
ARTICLE II.
THE REVOLVING LOANS
SECTION 2.01 Revolving Loans.
(a) Upon the terms and subject to the conditions set
forth in this Credit Agreement, TCI agrees to originate the Revolving Loans on
a revolving credit basis to the Company, from time to time, from the Expiration
Date until the Revolving Loan Commitment Termination Date, at such time and in
such amounts as the Company shall request, in an aggregate principal amount at
any time outstanding not in excess of the Revolving Loan Commitment. Upon the
terms and subject to the conditions set forth in this Credit Agreement, the
Company may borrow, repay and reborrow funds from TCI.
(b) To effect a borrowing under the Revolving Loan
Commitment, the Company shall give TCI irrevocable written notice not less than
three (3) Business Days before a requested borrowing. Such notice shall in
each case be signed by an authorized officer and shall refer to this Credit
Agreement and specify: (i) the amount of the requested borrowing under this
Credit Agreement, (ii) the date (which shall be a Business Day) on which the
Company is to receive the proceeds of such borrowing, and (iii) that all
conditions to such borrowing set forth in Article IV of this Credit Agreement
have been satisfied. The Company shall be deemed to be making, as of the date
of the delivery of the borrowing notice, the representations and warranties
contained in Article III of this Credit Agreement by the act of delivering such
borrowing notice to TCI.
(c) The Revolving Loans made by TCI shall be evidenced by
the Notes (which shall be in the form of Exhibit A) duly executed on behalf of
the Company. TCI shall endorse on the schedule attached to the Notes, or
otherwise record in its internal records, an appropriate notation evidencing
the date and amount of each Revolving Loan, each payment and prepayment of the
principal amount of any Revolving Loan and other information provided for on
such schedule; provided, however, that the failure of TCI to make such a
notation or any error in such notation shall not affect the obligation of the
Company to repay the Revolving Loans in accordance with the terms of this
Credit Agreement and the Notes.
SECTION 2.02 Interest on Revolving Loans.
(a) Subject to Section 2.02(d) below, the principal
amount of each Revolving Loan shall bear interest at a rate per annum (computed
on the basis of the actual number of days elapsed over a year of 360 days)
equal to The Bank of New York's prime rate (as in effect from time to time),
plus 1% per annum.
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<PAGE> 5
(b) Interest on each Revolving Loan shall be due and
payable on a quarterly basis, commencing December 31, 1997, and each March 31,
June 30, September 30 and December 31 thereafter (each an "Interest Payment
Date").
(c) If the Company shall default in the payment of the
principal of, or interest on any Revolving Loan, or on any other amount
becoming due hereunder, by reason of an Interest Payment Date, the Maturity
Date or acceleration, the Company shall, on demand from time to time from TCI,
pay interest, to the extent permitted by law, on such defaulted amount up to
the date of actual payment (after as well as before judgment) at a rate per
annum (computed on the basis of the actual number of days elapsed over a year
of 360 days) equal to the interest rate then in effect pursuant to Section
2.02(a) above, plus 2%.
(d) All agreements between the Company and TCI are
expressly limited so that in no contingency or event whatsoever shall the
interest paid or agreed to be paid to TCI for the use, forbearance, or
detention of the indebtedness evidenced by the Notes exceed the maximum rate
permissible under applicable law (the "Maximum Rate"). If from any
circumstance TCI should ever receive an amount which would represent interest
in excess of the Maximum Rate, such amount as would be excessive interest shall
be applied to the reduction of the principal amount owing under the Notes and
not to the payment of interest. In determining whether the interest paid or
payable, under any contingency, exceeds such Maximum Rate, the Company and TCI
shall to the maximum extent permitted by applicable law: (i) characterize any
non-principal payment as an expense, fee, or premium rather than as interest;
(ii) exclude voluntary prepayments and the effects thereof; (iii) amortize,
prorate, allocate, and spread the total amount of interest throughout the full
term of the Notes so that the actual rate of such interest does not exceed such
Maximum Rate; or (iv) allocate interest between portions of the debt evidenced
hereby so that no portion of such debt shall bear interest at a rate greater
than such Maximum Rate. For purposes of the Notes, the term "applicable law"
shall mean that law in effect from time to time and applicable to the credit
transaction between the Company and TCI which lawfully permits the charging and
collection of the highest permissible, lawful, non-usurious rate of interest on
such transaction and the Notes, including laws of the State of Colorado and, to
the extent controlling, laws of the United States of America.
SECTION 2.03 Payment; Maturity; Prepayment; Indemnity.
(a) Unless accelerated hereunder, the principal amount of
each Revolving Loan, together with all interest accrued and unpaid thereon,
shall be due and payable on the Maturity Date.
(b) The Company shall have the right, at any time and
from time to time, to prepay any Revolving Loan, in whole or in part, without
premium or penalty, upon giving written notice (a "Prepayment Notice") to TCI
at least three (3) Business Days prior to such prepayment. Each Prepayment
Notice shall specify the principal amount of each Revolving Loan (or portion
thereof) to be prepaid and the date of prepayment and shall commit the Company
to prepay such
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<PAGE> 6
borrowing on the date specified therein. All prepayments shall be accompanied
by accrued and unpaid interest on the principal amount being prepaid to the
date of prepayment.
SECTION 2.04 Reduction and Termination of Revolving Loan Commitment.
(a) The Revolving Loan Commitment shall be immediately
and irrevocably reduced on a dollar-for-dollar basis by up to $300,000,000 if
and to the extent the aggregate amount of any additional capital that TCI
Telephony Services, Inc., a Delaware corporation and an indirect wholly owned
subsidiary of TCI, contributes or is required to contribute to two limited
partnerships, Sprint Spectrum Holding Company, L.P. and MinorCo, L.P., does not
exceed $300,000,000.
(b) Upon at least three (3) Business Days prior
irrevocable written notice to TCI, the Company may at any time in whole or,
from time to time, in part permanently reduce the amount of the Revolving Loan
Commitment.
(c) The Revolving Loan Commitment shall terminate on the
earlier to occur of: (i) the Maturity Date, or (ii) an Event of Default
(collectively, the "Revolving Loan Commitment Termination Date").
SECTION 2.05 Facility Fees. As additional compensation to
TCI in connection with this Credit Agreement and the Revolving Loans, the
Company shall pay to TCI a commitment fee (the "Commitment Fee") equal to .375%
per annum on the average daily Unused Portion of the Revolving Loan Commitment,
for the period commencing on the Expiration Date through and including the
Revolving Loan Commitment Termination Date. The Commitment Fee shall be
computed on the basis of a 360-day year for actual days elapsed and shall be
payable quarterly, in arrears, commencing December 31, 1997, each March 31,
June 30, September 30, and December 31 thereafter, and on the Revolving Loan
Commitment Termination Date.
SECTION 2.06 No Security. The Loans made by TCI under this
Credit Agreement shall be unsecured.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Mutual Representations and Warranties. As an
inducement to enter into this Credit Agreement, each party represents to and
agrees with the other that:
(a) with respect to TCI, it is a corporation, and with
respect to the Company, it is a limited liability company, each duly organized,
validly existing and in good standing under the laws of the State of Delaware
and each has all requisite corporate power to own, lease and
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<PAGE> 7
operate its properties, to carry on its business as presently conducted and to
carry out the transactions contemplated by this Credit Agreement.
(b) it has duly and validly taken all corporate action
necessary to authorize the execution, delivery and performance of this Credit
Agreement (and, with respect to the Company, the Notes).
(c) this Credit Agreement (and, with respect to the
Company, the Notes) has been duly executed and delivered by it and constitutes
its legal, valid and binding obligation enforceable in accordance with its
terms.
(d) none of the execution and delivery of this Credit
Agreement (and, with respect to the Company, the Notes) or the compliance with
any of the provisions of this Credit Agreement (and, with respect to the
Company, the Notes) will (i) conflict with or result in a breach of any
provision of (y) with respect to TCI, its corporate charter or by-laws, or (z)
with respect to the Company, its certificate of formation or limited liability
agreement, (ii) breach, violate or result in a default under any of the terms
of any agreement or other instrument or obligation (including, without
limitation, those in respect of Indebtedness) to which it or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries' properties
or assets may be bound, or (iii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to it or any of its Subsidiaries or
affecting any of its or any of its Subsidiaries' properties or assets.
ARTICLE IV.
CONDITIONS OF LENDING
SECTION 4.01 Conditions Precedent. The obligation of TCI to
make a Revolving Loan hereunder on any date shall be subject to the
satisfaction of TCI with the fulfillment of the following conditions precedent:
(a) TCI shall have received a notice of such borrowing as
required by Section 2.01(b).
(b) The representations and warranties of the Company set
forth in Article III shall be true and correct with the same effect as though
made on and as of such date.
(c) The Company shall be in compliance with all of the
terms and conditions of this Credit Agreement (including the Notes), and at the
time of, and immediately after such borrowing no Default or Event of Default
shall have occurred and be continuing.
(d) TCI shall have received from the Company such
additional information and materials as TCI shall have reasonably requested,
and all proceedings and documents in
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<PAGE> 8
connection with any Revolving Loan shall be satisfactory to counsel (which may
be in-house counsel) for TCI.
ARTICLE V.
DEFAULTS
If any one or more of the following events ("Events of
Default") shall occur and be continuing, TCI may by notice to the Company
terminate the Revolving Loan Commitment and/or declare the entire unpaid
balance of the principal of, and interest on, any outstanding Revolving Loans to
be forthwith due and payable, and thereupon the same and any unpaid Commitment
Fees and all other liabilities of the Company accrued hereunder shall
immediately become due and payable without further act, except that in the case
of the occurrence of an Event of Default described in Section 5.05, the
Revolving Loan Commitment shall automatically terminate and the unpaid balance
of the principal of, and interest on, all of the outstanding Revolving Loans and
any unpaid Commitment Fees and all other liabilities of the Company accrued
hereunder shall automatically become due and payable without any requirement of
notice. Except for the notice provided for in the immediately preceding
sentence, the Company hereby expressly waives any presentment, demand, protest,
notice of protest or other notice of any kind.
SECTION 5.01 Failure to Pay.
(a) Failure by the Company to make any payment of
principal or interest on the Revolving Loans when due, whether on an Interest
Payment Date, the Maturity Date or a date fixed for prepayment or otherwise;
provided, however, that no event of default shall be deemed to occur upon a
failure by the Company to pay an optional prepayment under section 2.03(b); or
(b) Failure by the Company to pay the Commitment Fee in
full within five (5) days of the date such payment is due.
SECTION 5.02 Breach of Agreement. Failure by the Company to
perform or observe any other term, covenant, or condition of this Credit
Agreement which shall remain unremedied for a period of thirty (30) days after
TCI shall have notified the Company of such failure.
SECTION 5.03 Breach of Debt Instrument. A default by the
Company or any of its Subsidiaries in the payment of, principal of, or interest
on any Indebtedness in excess of $5,000,000, or the failure to observe or
perform any other agreement or condition relating to any such Indebtedness, or
the occurrence or failure to occur of any other event or condition, so that, as
a result of such default, failure to observe or perform, occurrence or failure
to occur, such Indebtedness is accelerated or may be declared due and payable
prior to the date on which such Indebtedness would otherwise become due and
payable, unless prior to the exercise by TCI of any
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<PAGE> 9
of its remedies hereunder (including acceleration of the maturity of the
Revolving Loans): (i) such default, failure to observe or perform, occurrence
or failure to occur has been cured in full or unconditionally waived with the
result that the payment of such Indebtedness may not thereafter be accelerated
on the basis thereof, or (ii) such declaration of acceleration has been
rescinded or annulled on terms satisfactory to TCI, or (iii) the Company or
such Subsidiary, as the case may be, shall have contested such declaration of
acceleration in good faith and by appropriate proceedings and have obtained and
thereafter maintained the stay of such acceleration and all consequences
thereof that would have a material adverse effect on the Company and its
Subsidiaries (considered as a whole) or the rights of TCI hereunder.
SECTION 5.04 Breach of Representation. Any representation or
warranty made by the Company to TCI in this Credit Agreement, or in connection
with the making of any Revolving Loan, or in any certificate or other document
furnished by the Company at any time under or in connection with this Credit
Agreement, shall prove to have been false in any material respect when made.
SECTION 5.05 Bankruptcy, Etc. The Company shall make an
assignment for the benefit of creditors, file a petition in bankruptcy, be
adjudicated insolvent or bankrupt, suffer an order for relief under any federal
bankruptcy law, petition or apply to any tribunal for the appointment of a
custodian, receiver or any trustee for it or a substantial part of its assets,
or shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or if there shall have
been filed any such petition or application, or any such proceeding shall have
been commenced against it, which remains undismissed for a period of thirty
(30) days or more; or the Company, by any act or omission, shall indicate its
consent to, approval of, or acquiescence in any such petition, application or
proceeding or the appointment of a custodian, receiver or any trustee for it or
any substantial part of any of its properties, or shall suffer any
custodianship, receivership or trusteeship to continue undischarged for a
period of thirty (30) days or more.
SECTION 5.06 Judgments, Etc. Any judgment against the
Company or any of its Subsidiaries for any amount in excess of $5,000,000 shall
remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a
period of thirty (30) days or more.
SECTION 5.07 Material Adverse Changes. A material adverse
change in the business, assets, operations, prospects or condition (financial
or otherwise) of the Company and any of its Subsidiaries, taken as a whole
shall have occurred.
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ARTICLE VI.
MISCELLANEOUS
SECTION 6.01 Severability. If any term, provision, covenant
or restriction of this Credit Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. It
is hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such which may be hereafter declared invalid, void or
unenforceable. In the event that any such term, provision, covenant or
restriction is so held to be invalid, void or unenforceable, the parties hereto
shall use their best efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision or restriction.
SECTION 6.02 Assignment. This Credit Agreement shall not be
assignable, in whole or in part, directly or indirectly, by operation of law or
otherwise, by the Company without the prior written consent of TCI, and any
attempt by the Company to assign any rights or obligations arising under this
Credit Agreement without such consent shall be void. TCI may assign the Notes
in whole or in part. TCI may assign this Credit Agreement with the prior
written consent of the Company, which consent shall not be unreasonably
withheld. The provisions of this Credit Agreement shall be binding upon, inure
to the benefit of, and be enforceable by TCI and the Company and their
respective successors (subject, as to the Company, to the first sentence above)
and permitted assigns.
SECTION 6.03 Further Assurances. Subject to the provisions
hereof, each of TCI and the Company shall make, execute, acknowledge and
deliver such other instruments and documents, and take all such other actions
as may be reasonably required in order to effectuate the purposes of this
Credit Agreement and to consummate the transactions contemplated hereby.
Subject to the provisions hereof, each of TCI and the Company shall, in
connection with entering into this Credit Agreement, performing its obligations
hereunder and taking any and all actions relating thereto, comply with all
applicable laws, regulations, orders and decrees, obtain all required consents
and approvals and make all required filings with any governmental agency, other
regulatory or administrative agency, commission or similar authority and
promptly provide the other with all such information as the other may
reasonably request in order to be able to comply with the provisions of this
sentence.
SECTION 6.04 Parties in Interest. Nothing in this Credit
Agreement expressed or implied is intended or shall be construed to confer any
right or benefit upon any person, firm or corporation other than TCI and the
Company and their respective successors (subject, as to the Company, to the
first sentence of Section 6.02) and permitted assigns.
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SECTION 6.05 Waivers, Etc. No failure or delay on the part
of TCI in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Credit
Agreement nor consent to any departure by TCI therefrom shall in any event be
effective unless the same shall be in writing, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given.
SECTION 6.06 Setoff. All payments to be made by the Company
under this Credit Agreement shall be made without setoff, counterclaim or
withholding, all of which are expressly waived.
SECTION 6.07 Confidentiality. Subject to any contrary
requirement of law and the right of each party to enforce its rights hereunder
in any legal action, each party shall keep strictly confidential and shall
cause its employees and agents to keep strictly confidential, any information
which it or any of its agents or employees may acquire pursuant to, or in the
course of performing its obligations under, any provision of this Credit
Agreement; provided, however, that such obligation to maintain confidentiality
shall not apply to information which (x) at the time of disclosure was in the
public domain not as a result of acts by the receiving party or (y) was in the
possession of the receiving party at the time of disclosure.
SECTION 6.08 Entire Credit Agreement. This Credit Agreement
(including the Exhibit hereto) and the Notes contain the entire understanding
of the parties with respect to the transactions contemplated hereby.
SECTION 6.09 Headings. Descriptive headings are for
convenience only and shall not control or affect the meaning or construction of
any provision of this Credit Agreement.
SECTION 6.10 Counterparts. For the convenience of the
parties, any number of counterparts of this Credit Agreement may be executed by
the parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original instrument.
SECTION 6.11 Notices. All notices and other communications
provided for herein or made hereunder shall be in writing and shall be hand
delivered, telecopied or mailed to the intended recipient at the telephone
number or address specified below:
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<PAGE> 12
The Company: TCI Ventures Group, LLC
5619 DTC Parkway
Englewood, Colorado 80111
Attn: President
Facsimile: (303) 488-3200
With a copy similarly addressed: Attention: Legal Department
TCI:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Treasurer
Facsimile: (303) 488-3200
With a copy similarly addressed: Attention: Legal Department
or to such other telephone number or address as shall be designated by such
party in a notice to the other party. All notices and other communications
hereunder shall be deemed delivered and received: (i) in the case of a
telecopy, when transmitted by telecopier, answer back received, (ii) in the
case of personal delivery, when delivered, and (iii) in the case of a mailing,
three (3) Business Days after deposited in the mails (registered or certified
mail, return receipt requested, postage prepaid), in each case given or
addressed as aforesaid. Telephonic notice may be given, provided it is
promptly confirmed by the sender by telecopy as aforesaid.
SECTION 6.13 Governing Law. This Credit Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Colorado applicable to contracts made and to be performed therein.
IN WITNESS WHEREOF, TCI and the Company have caused this
Credit Agreement to be duly executed by their respective officers, each of whom
is duly authorized, all as of the day and year first above written.
TELE-COMMUNICATIONS, INC.
-------------------------------------
By:
Title:
TCI VENTURES GROUP, LLC
-------------------------------------
By:
Title:
12
<PAGE> 13
EXHIBIT A
FORM OF REVOLVING LOAN NOTE
$500,000,000 Englewood, Colorado
, 1997
-------------
FOR VALUE RECEIVED, effective as of the date first above
written, the undersigned, TCI VENTURES GROUP, LLC, a Delaware limited liability
(the "Borrower"), hereby promises to pay to the order of TELE-COMMUNICATIONS,
INC., a Delaware corporation, or assigns (the "Lender"), the lesser of the
principal sum of FIVE HUNDRED MILLION DOLLARS ($500,000,000) and the aggregate
unpaid principal amount of the outstanding Revolving Loans to the Borrower from
the Lender pursuant to the Credit Agreement, dated as of ____________, 1997, by
and between the Borrower and the Lender (as the same may be amended or
otherwise modified from time to time, the "Credit Agreement"), in lawful money
of the United States of America, in immediately available funds, and to pay
interest from the date first above specified on the principal amount hereof
from time to time outstanding, in like funds, at said office, at a rate or
rates per annum and payable on the dates determined pursuant to the Credit
Agreement.
The Borrower promises to pay interest, on demand, on any
overdue principal and, to the extent permitted by law, overdue interest from
the due date at a rate or rates determined as set forth in the Credit
Agreement.
The Borrower hereby waives diligence, presentment, demand,
protest and notice (except for the notice required by section 5.01 of the
Credit Agreement) of any kind whatsoever. The nonexercise by the holder of any
of its rights hereunder in any particular instance shall not constitute a
waiver thereof in that or any subsequent instance.
All borrowings evidenced by this Note and all payments and
prepayments of the principal hereof and interest hereon and the respective
dates thereof shall be endorsed by the holder hereof on the schedule attached
hereto and made a part hereof, or otherwise recorded by such holder in its
internal records; provided, however, that the failure of the holder hereof to
make such a notation or any error in such a notation shall not affect the
obligations of the Borrower under this Note.
In the event of any action at law or suit in equity with
respect to this Note, the Borrower, in addition to all other sums which it may
be required to pay hereunder, will pay a reasonable sum for attorneys' fees
incurred by the holder hereof in connection with such action or suit and all
other costs of collection.
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<PAGE> 14
This Note is one of the Notes referred to in the Credit
Agreement and is entitled to the benefits, and is subject to the terms, set
forth therein, which, among other things, contains provisions for the
acceleration of the maturity hereof upon the happening of certain events, for
optional and mandatory prepayment of the principal hereof prior to the maturity
hereof and for the amendment or waiver of certain provisions of the Credit
Agreement, all upon the terms and conditions therein specified. This Note
shall be construed in accordance with and governed by the laws of the State of
Colorado and any applicable laws of the United States of America.
TCI VENTURES GROUP, LLC
By:
-------------------------------------
Title:
----------------------------------
14
<PAGE> 15
SCHEDULE
LOANS AND PAYMENTS
<TABLE>
<CAPTION>
Unpaid Name of
Payments Principal Person
Amount -------- Balance Making
Date of Loan Principal Interest of Note Notation
---- ------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 1
TAX SHARING AGREEMENT
THIS TAX SHARING AGREEMENT (the "Agreement") dated as of the Effective
Date (as hereinafter defined), is entered into by and among
Tele-Communications, Inc., a Delaware corporation ("TCI" or the "Company"), TCI
Communications, Inc., a Delaware corporation ("TCIC"), on behalf of itself and
each member of the Cable Subgroup (as hereinafter defined), Liberty Media
Corporation, a Delaware corporation ("Liberty"), on behalf of itself and each
member of the Programming Subgroup (as hereinafter defined), and TCI Ventures
Group L.L.C., a Delaware limited liability company ("Ventures"), on behalf of
itself and each member of the Ventures Subgroup (as hereinafter defined).
RECITALS:
As of July 1, 1995, each of Liberty, Tele-Communications International,
Inc. ("International"), TCI Technology Ventures, Inc. ("Technology"), TCIC, and
TCI Cable Investments, Inc. ("TCICI") and their Subsidiaries (as hereinafter
defined) were members of an affiliated group of corporations of which TCI was
the parent and which filed consolidated federal income tax returns pursuant to
Section 1501 of the Code (as hereinafter defined). In order to set forth their
agreement regarding allocation and sharing of federal, state, local and foreign
taxes of such affiliated group, each of Liberty, International, Technology,
TCIC and TCICI (collectively, the "Original Subgroup Parents") entered into a
Tax Sharing Agreement with TCI, effective as of July 1, 1995 (the "Original
Agreement"), which was intended to bind TCI, each of the Original Subgroup
Parents, each of the respective Subsidiaries of the Original Subgroup Parents,
and any other members of such affiliated group. The Original Agreement was
amended by a First Amendment to Tax Sharing Agreement dated as of October 1,
1995 among TCI, each of the Original Subgroup Parents, TCI Starz, Inc.
("Starz") and TCI CT Holdings, Inc. ("CT") (the "First Amendment"), a Second
Amendment to Tax Sharing Agreement dated as of December 3, 1996 among TCI, each
of the Original Subgroup Parents, Starz, and CT (the "Second Amendment"), and a
Third Amendment to Tax Sharing Agreement dated as of December 1, 1996 among
TCI, each of the Original Subgroup Parents, Starz, CT, TCI Telephony Holdings,
Inc. ("Telephony") and TCI Wireline Holdings, Inc. ("Wireline") (the "Third
Amendment"; the Original Agreement, as amended by the First Amendment, the
Second Amendment and the Third Amendment, is hereinafter referred to as the
"Amended Agreement").
Each of TCIC, Liberty and Ventures and each other member of their
respective Subgroups are members of an affiliated group of corporations of
which TCI is the parent and which files consolidated federal income tax returns
pursuant to Section 1501 of the Code (the "TCI Affiliated Group"). The parties
to this Agreement desire to enter into arrangements regarding tax allocation
and sharing by TCIC, Liberty, Ventures, and each other member of their
respective Subgroups and TCI which would be effective from and after the
Effective Date and which differ in certain respects from the arrangements set
forth in the Amended Agreement. At the same time, the
1
<PAGE> 2
parties intend that the Amended Agreement shall continue in full force and
effect and shall continue to govern the allocation and sharing arrangement with
respect to federal, state, local and foreign taxes for taxable periods prior to
the Effective Date and all claims and liabilities of the parties to this
Agreement with respect to such taxable periods and shall also continue to
govern with respect to the rights, powers, obligations, claims and liabilities
of each party to this Agreement relative to those of parties to or entities
bound by the Amended Agreement which are not also parties to or bound by this
Agreement.
Therefore, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
A. Definitions. As used in this Agreement, the following terms shall have
the following meanings:
"Affiliated Group" has the meaning ascribed thereto in Section
1504(a) of the Code.
"Alternative Minimum Tax" means the Tax imposed by Section 55 of the
Code.
"Alternative Minimum Tax Benefit," as to any Subgroup, shall mean
the amount determined with respect to such Subgroup under Section C.2.b.
hereof.
"Alternative Minimum Tax Liability," as to any Subgroup, shall mean
the amount determined with respect to such Subgroup under Section C.1.b.
hereof.
"AMT Benefit Adjustment," as to any AMT Loss Subgroup, shall mean
the amount determined with respect to such AMT Loss Subgroup under Section
C.2.b.ii. hereof.
"AMT Benefit Payment," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.5.a.iv. hereof.
"AMT Carried Losses" mean the total amount of taxable losses of each
AMT Gain Subgroup that can be carried to the current taxable year or part
thereof to offset such AMT Gain Subgroup's Pre-Adjustment Alternative Minimum
Tax Liability (when multiplied by the AMT Tax Rate), which are not utilized by
the TCI Affiliated Group to offset its consolidated federal tax liability for
such taxable year or portion thereof.
"AMT Credit" means a credit against regular federal income tax under
Section 53 of the Code.
"AMT Credit Ratio" means the ratio that the amount of AMT Credit
attributable to a prior taxable period which is utilized by TCI to reduce its
consolidated federal
2
<PAGE> 3
income tax liability for the current taxable year or part thereof bears to the
total amount of AMT Credit available for such prior taxable period.
"AMT Current Losses" mean the total amount of taxable losses of each
AMT Loss Subgroup that are attributable to the current taxable year or part
thereof, which are utilized by the TCI Affiliated Group to offset its
consolidated federal tax liability for such taxable year or portion thereof.
"AMT Gain Subgroup" means any Subgroup that has a Pre-Adjustment
Alternative Minimum Tax Liability for the taxable year or part thereof.
"AMT Gain Subgroup Sharing Ratio" means the ratio that the amount of
AMT Carried Losses that are attributable to such Subgroup bears to the total
amount of AMT Carried Losses that are attributable to each Subgroup of the TCI
Affiliated Group.
"AMT Liability Adjustment," as to any AMT Gain Subgroup, shall mean
the amount determined with respect to such AMT Gain Subgroup under Section
C.1.b.ii. hereof.
"AMT Loss Subgroup" means any Subgroup that has a Pre-Adjustment
Alternative Minimum Tax Benefit for the taxable year or part thereof.
"AMT Loss Subgroup Sharing Ratio" means the ratio that the amount of
AMT Current Losses that are attributable to such Subgroup bears to the total
amount of AMT Current Losses that are attributable to each Subgroup of the TCI
Affiliated Group.
"AMT Tax Rate" means the statutory rate set forth in Section
55(b)(1)(B)(i) of the Code.
"Applicable Federal Tax Rate" means (i) the Regular Federal Tax
Rate, if the TCI Affiliated Group is not liable for Alternative Minimum Tax
during such taxable year or portion thereof, and (ii) the AMT Tax Rate, if the
TCI Affiliated Group is liable for the Alternative Minimum Tax during such
taxable year or portion thereof.
"Cable Subgroup" means TCI and each First Tier LLC and Subsidiary of
TCI that is part of the TCI Group.
"Carried Losses" mean (i) Regular Tax Carried Losses and (ii) if the
TCI Affiliated Group is liable for the Alternative Minimum Tax for such taxable
period, AMT Carried Losses.
"Code" means the Internal Revenue Code of 1986, as amended.
3
<PAGE> 4
"Corresponding Paid Loss" shall mean (i) each item of Regular Tax
Carried Loss for which a Regular Tax Gain Subgroup receives a Regular Tax
Liability Adjustment and (ii) if the TCI Affiliated Group is liable for the
Alternative Minimum Tax during such taxable year or part thereof, each item of
AMT Carried Loss for which an AMT Gain Subgroup receives an AMT Liability
Adjustment.
"Current Losses" mean (i) Regular Tax Current Losses and (ii) AMT
Current Losses.
"Deconsolidation Date" means, as to any Subgroup or Subgroup Member,
the date that such Subgroup or Subgroup Member ceases to be part of the TCI
Affiliated Group.
"Effective Date" means October 1, 1997.
"Federal Tax Benefit," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.2. hereof.
"Federal Tax Liability," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.1. hereof.
"Final Determination" means the final resolution of liability for
any Tax for a taxable period, including any related interest and penalties, (i)
pursuant to IRS Form 870-AD (or any successor form thereto), on the date of
acceptance by or on behalf of the IRS, or by a comparable agreement form under
the laws of any state, local or foreign government or the rules or regulations
of any state, local or foreign taxing authority, except that a Form 870-AD or
comparable form that reserves the right of the taxpayer to file a claim for
refund and/or the right of the taxing authority to assert a further deficiency
shall not constitute a Final Determination with respect to the items so
reserved; (ii) by a decision, judgment, decree or other order by a court of
competent jurisdiction, which has become final and nonappealable; (iii) by a
closing agreement or offer in compromise under Section 7121 or 7122 of the
Code, or comparable agreements under the laws of any state, local or foreign
government or the rules or regulations of any state, local or foreign taxing
authority; (iv) by any allowance of a refund or credit in respect of an
overpayment of Tax, including any related interest or penalties, but only after
the expiration of all periods during which such refund may be recovered
(including by way of offset) by the jurisdiction imposing the Tax (including a
refund or credit allowed as a result of the filing of an amended return); (v)
by any other final disposition by reason of the expiration of the applicable
statute of limitations; or (vi) by the occurrence of any event which the
parties agree in writing is a Final Determination.
"First Tier LLC" means any limited liability company that is wholly
owned directly by TCI.
"include" and derivatives thereof are used in an illustrative and
not a limitative sense.
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<PAGE> 5
"IRS" means the Internal Revenue Service.
"Liberty Media Group" means the Company's assets that are tracked by
the Tele-Communications, Inc. Series A Liberty Media Group Common Stock and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock.
"Post-Deconsolidation Correlative Amounts" mean all payments made
pursuant to this Agreement which are not in settlement of a tax liability but
are correlative thereto (e.g., interest, penalties, additions to tax, or costs
of contesting a proposed adjustment under Section F.3. hereof) and which are
neither paid nor accrued on or before the Deconsolidation Date (as defined
below).
"Pre-Adjustment Alternative Minimum Tax Benefit," as to any
Subgroup, means the amount determined with respect to such Subgroup under
Section C.2.b.i. hereof.
"Pre-Adjustment Alternative Minimum Tax Liability," as to any
Subgroup, means the amount determined with respect to such Subgroup under
Section C.1.b.i. hereof.
"Pre-Adjustment Regular Tax Benefit," as to any Subgroup, means the
amount determined with respect to such Subgroup under Section C.2.a.i. hereof.
"Pre-Adjustment Regular Tax Liability," as to any Subgroup, means
the amount determined with respect to such Subgroup under Section C.1.a.i.
hereof.
"Programming Subgroup" means each First Tier LLC and Subsidiary of
TCI that is part of the Liberty Media Group.
"Regular Federal Tax Rate" means the maximum corporate federal
income tax rate in effect for such taxable year or part thereof.
"Regular Tax Benefit," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.2.a. hereof.
"Regular Tax Benefit Adjustment," as to any Regular Tax Loss
Subgroup, shall mean the amount determined with respect to such Regular Tax
Loss Subgroup under Section C.2.a.ii. hereof.
"Regular Tax Carried Losses" mean the total amount of taxable losses
of each Regular Tax Gain Subgroup that can be carried to the current taxable
year or part thereof to offset such Regular Tax Gain Subgroup's Pre-Adjustment
Regular Tax Liability (when multiplied by the Regular Federal Tax Rate), which
are not utilized by the TCI Affiliated Group to offset its consolidated federal
tax liability for such taxable year or portion thereof.
5
<PAGE> 6
"Regular Tax Current Losses" mean the total amount of taxable losses
of each Regular Tax Loss Subgroup that are attributable to the current taxable
year or part thereof, which are utilized by the TCI Affiliated Group to offset
its consolidated federal tax liability for such taxable year or portion
thereof.
"Regular Tax Gain Subgroup" means any Subgroup that has a
Pre-Adjustment Regular Tax Liability for the taxable year or part thereof.
"Regular Tax Gain Subgroup Sharing Ratio" means the ratio that the
amount of Regular Tax Carried Losses that are attributable to such Subgroup
bears to the total amount of Regular Tax Carried Losses that are attributable
to each Subgroup of the TCI Affiliated Group.
"Regular Tax Liability," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.1.a. hereof.
"Regular Tax Liability Adjustment," as to any Regular Tax Gain
Subgroup, shall mean the amount determined with respect to such Regular Tax
Gain Subgroup under Section C.1.a.ii. hereof.
"Regular Tax Loss Subgroup" means any Subgroup that has a
Pre-Adjustment Regular Tax Benefit for the taxable year or part thereof.
"Regular Tax Loss Subgroup Sharing Ratio" means the ratio that the
amount of Regular Tax Current Losses that are attributable to such Subgroup
bears to the total amount of Regular Tax Current Losses that are attributable
to each Subgroup of the TCI Affiliated Group.
"Sharing Ratios" mean the Regular Tax Gain Subgroup Sharing Ratio,
the AMT Gain Subgroup Sharing Ratio, the Regular Tax Loss Subgroup Sharing
Ratio, and the AMT Loss Subgroup Sharing Ratio.
"State or Local Tax Liability," as to any Subgroup, shall mean the
amount determined with respect to such Subgroup under Section D.1. hereof, as
adjusted pursuant to any other provision hereof.
"Subgroup" means each of the Cable Subgroup, the Programming
Subgroup, and the Ventures Subgroup.
"Subgroup Member" means each First Tier LLC or Subsidiary of TCI
that is a member of a Subgroup.
"Subsidiary" means, as to any corporation, a corporate subsidiary
that would be included in the Affiliated Group of which such corporation would
be the common parent if such corporation were not a member of any other
Affiliated Group.
6
<PAGE> 7
"Tax Benefit" means, as to any Subgroup, a Federal Tax Benefit of
such Subgroup.
"Tax Item" means any item of income, gain, loss, deduction or tax
credit.
"Tax Liability" means as to any Subgroup, a Federal Tax Liability or
State or Local Tax Liability of such Subgroup.
"Tax Return" means any return, filing, questionnaire or other
document required to be filed for a period with any taxing authority (whether
domestic or foreign) in connection with any Taxes (whether or not a payment is
required with respect to such filing).
"Taxes" mean all forms of taxation, whenever created or imposed, and
whether by the United States or a foreign governmental entity, or by a local,
municipal, governmental, tribal, state, federation or other body, and shall
include income, sales, use, ad valorem, gross receipts, value added, franchise,
transfer, recording, withholding, payroll, employment, excise, occupation,
premium or property taxes, together with related interest, penalties and
additions to tax, or additional amounts imposed by any taxing authority
(domestic or foreign) upon the TCI Affiliated Group or any Subgroup or any of
their respective members or branches. Notwithstanding the foregoing, however,
the term "Taxes" shall not include unclaimed property or escheat taxes.
"TCI Affiliated Group" means the Affiliated Group of which TCI or
any successor of TCI is the common parent.
"TCI Group" means the Company's assets that are tracked by the
Tele-Communications, Inc. Series A TCI Group Common Stock and the
Tele-Communications, Inc. Series B TCI Group Common Stock.
"TCI Unitary Group," means, as to any state or local taxing
jurisdiction, the unitary or consolidated group of which TCI or any successor
of TCI is the common parent and which is subject to state or local income Taxes
in such jurisdiction.
"TCI Ventures Group" means the Company's assets that are tracked by
the Tele-Communications, Inc. Series A TCI Ventures Group Common Stock and the
Tele-Communications, Inc. Series B TCI Ventures Group Common Stock.
"TCI Ventures Group Preferred Interest" shall have the meaning
ascribed to such term in the TCI Charter, as amended.
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<PAGE> 8
"Unpaid Loss" shall mean (i) each item of Regular Tax Current Loss
for which a Regular Tax Loss Subgroup receives a Regular Tax Benefit Adjustment
and (ii) each item of AMT Current Loss for which a AMT Loss Subgroup receives
an AMT Benefit Adjustment.
"Ventures Subgroup" means each First Tier LLC and Subsidiary of TCI
that is part of the TCI Ventures Group.
B. Intercompany Accounts.
1. Maintenance. Beginning on the Effective Date, TCI shall establish
and maintain separate accounts (the "Intercompany Accounts") between it and
each Subgroup. The Intercompany Accounts for the Cable Subgroup and the
Programming Subgroup, the balance of which shall initially be zero, shall be
adjusted on the Effective Date on a retroactive basis from July 1, 1995 to
reflect all amounts credited or debited to intercompany accounts existing under
the Amended Agreement (the "Old Intercompany Accounts") that are attributable
to each Subgroup Member of such Subgroup. The Intercompany Account for the
Ventures Subgroup, the balance of which shall initially be zero, shall be
adjusted on the Effective Date on a retroactive basis from the date of the
consummation of the Exchange Offers (as defined in TCI's Proxy Statement, dated
July 25, 1997, with respect to its 1997 Annual Stockholders Meeting) to reflect
all amounts credited or debited to the Old Intercompany Accounts that are
attributable to each Subgroup Member of such Subgroup. Amounts credited or
debited to the Old Intercompany Accounts that are attributable to each Subgroup
Member of the Ventures Subgroup for the period beginning July 1, 1995 and
ending prior to the date of the consummation of the Exchange Offers will be
reflected as a component of the TCI Ventures Group's combined equity, and the
Ventures Subgroup shall assume all of TCI's rights and obligations under the
Amended Agreement with respect to the settlement of such amounts with each
Subgroup Member of the Ventures Subgroup. The Old Intercompany Accounts shall
be canceled on the Effective Date; however, in the event that any amounts
credited or debited to the Old Intercompany Accounts (but, with respect to the
Ventures Subgroup, only those amounts credited or debited to the Old
Intercompany Accounts from and after the date of the consummation of the
Exchange Offers) must be redetermined as the result of any Final Determination
or other settlement of any claim or liability under the Amended Agreement, the
Intercompany Accounts shall be adjusted on a retroactive basis to reflect such
recomputation. As provided herein, the Intercompany Account for each Subgroup
shall be credited with any Tax Benefit attributable to such Subgroup or any
Subgroup Member thereof and shall be charged with any Tax Liability
attributable to such Subgroup or any Subgroup Member thereof.
2. Payments. The following payments shall be made hereunder by TCI
and each Subgroup:
a. Within 90 days after the close of each taxable year and
after TCI has calculated the estimated Tax Benefit and Tax Liability of each
Subgroup for the taxable year or part thereof and credited or charged the
Intercompany Accounts for such estimated Tax Benefit and Tax Liability as
described in Section C.3. and D.3. hereof,
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<PAGE> 9
i. TCI shall pay to each Subgroup, in immediately
available funds, the amount credited to such Subgroup's Intercompany Account
for the estimated Tax Benefit of the Subgroup, and the credit balance in such
Intercompany Account shall be reduced by the amount paid by TCI, and
ii. each Subgroup shall pay to TCI, in immediately
available funds, the amount charged to such Subgroup's Intercompany Account for
the estimated Tax Liability of the Subgroup, and the debit balance in such
Intercompany Account shall be reduced by the amount paid by the Subgroup.
b. Within 45 days after the date that the Tax Return with respect
to any estimated Tax Benefit or Tax Liability has been filed,
i. TCI shall pay to each Subgroup, in immediately available
funds, the amount credited to such Subgroup's Intercompany Account pursuant to
Sections C.3.a. and D.3.a. hereof for the final Tax Benefit or Tax Liability of
the Subgroup, and the credit balance in such Intercompany Account shall be
reduced by the amount paid by TCI, and
ii. each Subgroup shall pay to TCI, in immediately
available funds, the amount charged to such Subgroup's Intercompany Account
pursuant to Sections C.3.b. and D.3.b. hereof for the final Tax Benefit or Tax
Liability of the Subgroup, and the debit balance in such Intercompany Account
shall be reduced by the amount paid by the Subgroup.
c. Any amount required to be paid by either TCI or a Subgroup
pursuant to this Section B.2. which is not timely paid shall thereafter bear
interest (compounded daily) at the Federal short-term rate established pursuant
to Section 6621 of the Code and shall increase the credit balance or debit
balance, as applicable, in the Intercompany Account of such Subgroup.
3. Treatment at Deconsolidation.
a. On the Deconsolidation Date of any Subgroup, TCI shall pay to
such Subgroup an amount equal to any credit balance in the Intercompany Account
attributable to such Subgroup, and such Subgroup shall pay to TCI an amount
equal to any debit balance in such Intercompany Account, after which payment
such Intercompany Account shall be closed. Upon the Deconsolidation Date of a
Subgroup Member, (i) TCI shall pay to the Subgroup Member's Subgroup an amount
equal to any credit balance in the Intercompany Account attributable to such
Subgroup Member, and such Subgroup shall pay such amount to the deconsolidated
Subgroup Member, and (ii) the Subgroup Member's Subgroup shall pay to TCI an
amount equal to any debit balance in such Intercompany Account attributable to
such Subgroup Member, and the deconsolidated Subgroup Member shall pay such
amount to its former Subgroup.
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<PAGE> 10
b. Within 45 days after the date that TCI has prepared all the
Tax Returns for all taxable periods and portions thereof ending on or before
the Deconsolidation Date as to any Subgroup or Subgroup Member, (i) TCI shall
pay such Subgroup or Subgroup Member, as applicable, any net amount that would
have been credited hereunder to the Intercompany Account of such Subgroup after
the Deconsolidation Date had such Subgroup or Subgroup Member continued to be
part of the TCI Affiliated Group and (ii) such Subgroup or Subgroup Member
shall pay TCI any net amount that would have been debited hereunder to the
Intercompany Account of such Subgroup after the Deconsolidation Date had such
Subgroup or Subgroup Member continued to be part of the TCI Affiliated Group.
Any such amounts becoming due or owing hereunder after the Deconsolidation Date
of a Subgroup or Subgroup Member shall be settled in immediately available
funds as between such Subgroup or Subgroup Member and TCI.
C. Federal Income Taxes.
1. Federal Tax Liability. For each taxable year or part thereof
ending after the Effective Date that a Subgroup is included in the TCI
Affiliated Group, TCI shall compute (i) the Regular Tax Liability of the
Subgroup for such taxable year or part thereof and (ii) if the TCI Affiliated
Group is liable for Alternative Minimum Tax, the Alternative Minimum Tax
Liability of the Subgroup for such taxable year or part thereof. The Federal
Tax Liability of such Subgroup for each taxable year or part thereof shall be
equal to (i) the Regular Tax Liability of the Subgroup, if the TCI Affiliated
Group is not liable for Alternative Minimum Tax during such taxable year or
portion thereof and (ii) the Alternative Minimum Tax Liability of the Subgroup,
if the TCI Affiliated Group is liable for Alternative Minimum Tax during such
taxable year or portion thereof.
a. Regular Tax Liability. The Regular Tax Liability of
such Subgroup (for purposes of this calculation, each First Tier LLC shall be
treated as if it were a corporation) for the taxable year or portion thereof
shall be equal to:
i. such Subgroup's Pre-Adjustment Regular Tax Liability,
which shall be equal to the amount by which (x) the product of (a) the amount
of taxable income attributable to such Subgroup for such period calculated, in
accordance with Treasury Regulations Section 1.1552-1(a)(1)(ii), as though such
Subgroup were required to file a consolidated corporate federal income tax
return pursuant to the Code (with the timing of the recognition of income,
gain, deduction and loss and other items determined by reference to the timing
of such items for purposes of the preparation of the consolidated return of the
TCI Affiliated Group except that (1) current year items of loss and deduction
shall be considered regardless of whether or not such items are utilized by the
TCI Affiliated Group and (2) no item of loss or deduction shall be considered
if such item of loss or deduction has been used to reduce such Subgroup's
Federal Tax Liability or Regular Tax Liability or to increase such Subgroup's
Federal Tax Benefit or Regular Tax Benefit for any other taxable period
pursuant to this Agreement or the Amended Agreement) for such period and (b)
the Regular Federal Tax Rate exceeds (y) the amount of tax credits attributable
to such Subgroup (whether attributable to such taxable year or part thereof or
carried to such taxable year or part
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thereof from another taxable year) that are actually utilized by the TCI
Affiliated Group to reduce its consolidated federal income tax liability for
such period; reduced by
ii. the Regular Tax Liability Adjustment, if such
Subgroup is a Regular Tax Gain Subgroup, which shall be equal to the lesser of:
(1) the product of (x) the amount of Regular Tax Carried
Losses that are attributable to such Regular Tax Gain
Subgroup, and (y) the Regular Federal Tax Rate; and
(2) the product of (x) Regular Tax Current Losses
multiplied by the Regular Tax Gain Subgroup Sharing
Ratio, and (y) the Regular Federal Tax Rate.
b. Alternative Minimum Tax Liability. The Alternative Minimum
Tax Liability of such Subgroup (for purposes of this calculation, each First
Tier LLC shall be treated as if it were a corporation) for the taxable year or
portion thereof shall be equal to:
i. such Subgroup's Pre-Adjustment Alternative Minimum Tax
Liability, which shall be equal to the amount by which (x) the product of (a)
the amount of alternative minimum taxable income attributable to such Subgroup
for such period calculated, in accordance with Proposed Treasury Regulations
Section 1.1502-55(b), as though such Subgroup were required to file a
consolidated corporate federal income tax return pursuant to the Code (with the
timing of the recognition of income, gain, deduction and loss and other items
determined by reference to the timing of such items for purposes of the
preparation of the consolidated return of the TCI Affiliated Group, except that
no item of loss or deduction shall be considered if such item of loss or
deduction has been used to reduce such Subgroup's Federal Tax Liability or
Regular Tax Liability or to increase such Subgroup's Federal Tax Benefit or
Regular Tax Benefit for any other taxable period pursuant to this Agreement or
the Amended Agreement) for such period and (b) the AMT Tax Rate exceeds (y) the
amount of tax credits attributable to such Subgroup (whether attributable to
such taxable year or part thereof or carried to such taxable year or part
thereof from another taxable year) that are actually utilized by the TCI
Affiliated Group to reduce its consolidated federal income tax liability for
such period; reduced by
ii. the AMT Liability Adjustment, if such Subgroup is an
AMT Gain Subgroup, which shall be equal to the lesser of:
(1) the product of (x) the amount of AMT Carried Losses
that are attributable to such AMT Gain Subgroup, and
(y) the AMT Tax Rate; and
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(2) the product of (x) AMT Current Losses multiplied by
the AMT Gain Subgroup Sharing Ratio, and (y) the AMT
Tax Rate.
2. Federal Tax Benefit. For each taxable year or part thereof ending
after the Effective Date that a Subgroup is included in the TCI Affiliated
Group, TCI shall compute (i) the Regular Tax Benefit of the Subgroup for such
taxable year or part thereof and (ii) if the TCI Affiliated Group is liable for
Alternative Minimum Tax, the Alternative Minimum Tax Benefit of the Subgroup
for such taxable year or part thereof. The Federal Tax Benefit of such Subgroup
for each taxable year or part thereof shall be equal to (i) the Regular Tax
Benefit of the Subgroup, if the TCI Affiliated Group is not liable for
Alternative Minimum Tax during such taxable year or portion thereof and (ii)
the Alternative Minimum Tax Benefit of the Subgroup, if the TCI Affiliated
Group is liable for Alternative Minimum Tax during such taxable year or portion
thereof.
a. Regular Tax Benefit. The Regular Tax Benefit of such
Subgroup (for purposes of this calculation, each First Tier LLC shall be
treated as if it were a corporation) for the taxable year or portion thereof
shall be equal to:
i. such Subgroup's Pre-Adjustment Regular Tax Benefit,
which shall be equal to the sum of (x) the product of (a) the amount of taxable
loss attributable to such Subgroup (whether attributable to such taxable year
or part thereof or carried to such taxable year or part thereof from another
taxable year, but excluding any part thereof which has been used to reduce such
Subgroup's Federal Tax Liability or Regular Tax Liability for such taxable
period or any other taxable period or to increase such Subgroup's Federal Tax
Benefit or Regular Tax Benefit for any other taxable period pursuant to this
Agreement or the Amended Agreement), and actually used by the TCI Affiliated
Group during such taxable year or part thereof to reduce its consolidated
federal income tax liability, calculated in accordance with Treasury
Regulations Section 1.1552-1(a)(1)(ii) (without regard to the last sentence
thereof), as though such Subgroup were required to file a consolidated
corporate federal income tax return pursuant to the Code (with the timing of
the recognition of income, gain, deduction and loss and other items determined
by reference to the timing of such items for purposes of the preparation of the
consolidated return of the TCI Affiliated Group) for such period, and (b) the
Regular Federal Tax Rate; and (y) the amount of tax credits attributable to
such Subgroup (whether attributable to such taxable year or part thereof or
carried to such taxable year or part thereof from another taxable year, but
excluding any part thereof which has been used to reduce such Subgroup's
Federal Tax Liability or Regular Tax Liability for such taxable period or any
other taxable period or to increase such Subgroup's Federal Tax Benefit or
Regular Tax Benefit for any other taxable period pursuant to this Agreement or
the Amended Agreement) that are actually utilized by the TCI Affiliated Group
to reduce its consolidated federal income tax liability for such tax period;
reduced by
ii. the Regular Tax Benefit Adjustment, if such Subgroup
is a Regular Tax Loss Subgroup, which shall be equal to the lesser of:
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<PAGE> 13
(1) the product of (x) the amount of Regular Tax Current
Losses that are attributable to such Regular Tax Loss
Subgroup, and (y) the Regular Federal Tax Rate; and
(2) the product of (x) Regular Tax Carried Losses
multiplied by the Regular Tax Loss Subgroup Sharing
Ratio, and (y) the Regular Federal Tax Rate.
b. Alternative Minimum Tax Benefit. The Alternative Minimum Tax
Benefit of such Subgroup (for purposes of this calculation, each First Tier LLC
shall be treated as if it were a corporation) for the taxable year or portion
thereof shall be equal to:
i. such Subgroup's Pre-Adjustment Alternative Minimum Tax
Benefit, which shall be equal to the sum of (x) the product of (a) the amount
of the alternative tax net operating loss deduction, calculated in accordance
with Proposed Treasury Regulations Section 1.1502-55(b)(4) (but determined
without regard to the 90% limitation), attributable to such Subgroup (whether
attributable to such taxable year or part thereof or carried to such taxable
year or part thereof from another taxable year, but excluding any part thereof
which has been used to reduce such Subgroup's Federal Tax Liability or Regular
Tax Liability for such taxable period or any other taxable period or to
increase such Subgroup's Federal Tax Benefit or Regular Tax Benefit for any
other taxable period pursuant to this Agreement or the Amended Agreement) and
actually used by the TCI Affiliated Group during such taxable year or part
thereof to reduce its consolidated federal income tax liability, calculated as
though such Subgroup were required to file a consolidated corporate federal
income tax return pursuant to the Code (with the timing of the recognition of
income, gain, deduction and loss and other items determined by reference to the
timing of such items for purposes of the preparation of the consolidated return
of the TCI Affiliated Group) for such period, and (b) the AMT Tax Rate; and (y)
the amount of tax credits attributable to such Subgroup (whether attributable
to such taxable year or part thereof or carried to such taxable year or part
thereof from another taxable year, but excluding any part thereof which has
been used to reduce such Subgroup's Federal Tax Liability or Regular Tax
Liability for such taxable period or any other taxable period or to increase
such Subgroup's Federal Tax Benefit or Regular Tax Benefit for any other
taxable period pursuant to this Agreement or the Amended Agreement) that are
actually utilized by the TCI Affiliated Group to reduce its consolidated
federal income tax liability for such tax period; reduced by
ii. the AMT Benefit Adjustment, if such Subgroup is an AMT
Loss Subgroup, which shall be equal to the lesser of:
(1) the product of (x) the amount of AMT Current Losses
that are attributable to such AMT Loss Subgroup, and
(y) the AMT Tax Rate; and
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<PAGE> 14
(2) the product of (x) AMT Carried Losses multiplied by
the AMT Loss Subgroup Sharing Ratio, and (y) the AMT
Tax Rate.
3. Time of Determination; Credits and Charges to the Intercompany
Accounts. The estimated Federal Tax Benefit and Federal Tax Liability of each
Subgroup shall be calculated by TCI as promptly as practicable after the close
of each calendar quarter in each taxable year, and the appropriate credits or
charges made to the Intercompany Accounts. As soon as practicable after the
close of each taxable year, TCI shall determine the final Federal Tax Benefit
or final Federal Tax Liability of such Subgroup for such taxable year and
shall:
a. credit the Intercompany Account of the Subgroup with the
amount by which:
i. such final Federal Tax Benefit for such taxable year
exceeds the aggregate credits for estimated Federal Tax Benefits made to such
Intercompany Account with respect to such Subgroup for such taxable year, or
ii. the aggregate charges for estimated Federal Tax
Liability made to such Intercompany Account with respect to such Subgroup for
such taxable year exceed such final Federal Tax Liability for such taxable
year; and
b. charge the Intercompany Account of the Subgroup with the
amount by which:
i. the aggregate credits for estimated Federal Tax
Benefits made to such Intercompany Account with respect to such Subgroup for
such taxable
ii. such final Federal Tax Liability for such taxable year
exceeds the aggregate charges for estimated Federal Tax Liability made to such
Intercompany Account with respect to such Subgroup for such taxable year.
For purposes of this Section C.3., the final Federal Tax Liability for the 1997
taxable year shall equal only that portion of the final Federal Tax Liability
which is attributable to the fourth quarter of the 1997 taxable year.
4. AMT Credit.
a. Procedural Matters. For each taxable year or portion thereof
that a Subgroup is included in the TCI Affiliated Group, the Federal Tax
Liability and Federal Tax Benefit of such Subgroup shall be computed without
regard to the AMT Credit attributable to any taxable period.
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<PAGE> 15
b. AMT Adjustment Payments. If the TCI Affiliated Group
actually utilizes any AMT Credit that is attributable in whole or in part to
any taxable period beginning on or after the Effective Date in computing its
consolidated federal income tax liability,
i. within 45 days after the date that the Tax Return
utilizing such AMT Credit has been filed, TCI shall pay to such Subgroup, in
immediately available funds, the amount equal to the product of (x) the AMT
Credit Ratio and (y) the sum of (a) the amount by which the Alternative Minimum
Tax Liability of the Subgroup for such prior taxable period exceeds the Regular
Tax Liability of such Subgroup for such prior taxable period and (b) the amount
by which the Regular Tax Benefit of such Subgroup for such prior taxable period
exceeds the Alternative Minimum Tax Benefit of such Subgroup for such prior
taxable period; and
ii. within 45 days after the date that the Tax Return
utilizing such AMT Credit has been filed, such Subgroup shall pay to TCI, in
immediately available funds, the amount equal to the product of (x) the AMT
Credit Ratio and (y) the sum of (a) the amount by which the Regular Tax
Liability of such Subgroup for such prior taxable period exceeds the
Alternative Minimum Tax Liability of such Subgroup for such prior taxable
period and (b) the amount by which the Alternative Minimum Tax Benefit of such
Subgroup for such prior taxable period exceeds the Regular Tax Benefit of such
Subgroup for such prior taxable period.
c. Treatment at Deconsolidation.
i. In the event that after the Deconsolidation Date as to
any Subgroup, the TCI Affiliated Group actually utilizes an AMT Credit
attributable to any taxable period beginning on or after the Effective Date and
ending on or before such Deconsolidation Date in computing its consolidated
federal income tax liability, the payment obligations of TCI and such
deconsolidated Subgroup set forth in Section C.4.b. hereof shall continue to
apply in full force and effect until such time that no additional AMT Credits
may be utilized by the TCI Affiliated Group for any taxable period beginning on
or after the Effective Date and ending on or before the Deconsolidation Date.
ii. In the event that after the Deconsolidation Date as
to any Subgroup Member, the TCI Affiliated Group actually utilizes an AMT
Credit attributable to any taxable period beginning on or after the Effective
Date and ending on or before such Deconsolidation Date of such Subgroup Member
in computing its consolidated federal income tax liability, which triggers the
payment obligations of TCI and such deconsolidated Subgroup Member's former
Subgroup set forth in Section C.4.b. hereof:
(1) within 45 days after the date that the Tax Return
utilizing such AMT Credit has been filed, TCI shall
pay, in immediately available funds, the allocable
portion of the amount owed to such deconsolidated
Subgroup Member's former Subgroup that is attributable
to such deconsolidated
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<PAGE> 16
Subgroup Member, and the payment obligations of TCI
pursuant to Section C.4.b.i. to such deconsolidated
Subgroup Member's former Subgroup shall be reduced
accordingly; and
(2) within 45 days after the date that the Tax Return
utilizing such AMT Credit has been filed, such
deconsolidated Subgroup Member shall pay, in
immediately available funds, the allocable portion of
the amount owed by its former Subgroup that is
attributable to such deconsolidated Subgroup Member to
TCI, and the payment obligations of such
deconsolidated Subgroup Member's former Subgroup
pursuant to Section C.4.b.ii. to TCI shall be reduced
accordingly.
The payment obligations of TCI and the deconsolidated Subgroup Member shall
continue to apply in full force and effect until such time that no additional
AMT Credits may be utilized by the TCI Affiliated Group for any taxable period
beginning on or after the Effective Date and ending on or before the
Deconsolidation Date of such Subgroup Member.
iii. In the event that, after the Deconsolidation Date as
to any Subgroup Member, such Subgroup Member receives any benefit from an AMT
Credit attributable to any taxable period ending on or before such
Deconsolidation Date (by way of reduction in federal income tax liability or
otherwise), such Subgroup Member shall promptly pay to TCI the amount of such
benefit plus any associated interest thereon. For purposes of applying Section
C.4. of this Agreement, the TCI Affiliated Group shall be treated as if it had
utilized such AMT Credit.
d. Notwithstanding anything to the contrary herein, the
provisions of paragraphs b. and c. of this Section C.4. shall survive the
termination of this Agreement.
5. Benefit Tracking Accounts. Beginning on the Effective Date, TCI
shall establish and maintain separate tracking accounts ("Benefit Tracking
Accounts") for each Subgroup, the balance of which shall initially be zero. For
each taxable year or part thereof ending after the Effective Date that a
Subgroup is included in the TCI Affiliated Group, each Unpaid Loss that is a
Regular Tax Current Loss shall be paired, in accordance with the applicable
regular tax Sharing Ratios, with a Corresponding Paid Loss that is a Regular
Tax Carried Loss, and each Unpaid Loss that is an AMT Current Loss shall be
paired, in accordance with the applicable alternative minimum tax Sharing
Ratios, with a Corresponding Paid Loss that is an AMT Carried Loss. The Benefit
Tracking Account of each Subgroup shall track each Unpaid Loss, as matched with
its Corresponding Paid Loss, that is attributable to such Subgroup.
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<PAGE> 17
a. Maintenance and Payment of Benefit Tracking Accounts. The
Benefit Tracking Accounts shall be adjusted, and paid, as follows:
i. Expiration of Corresponding Paid Loss. At such time
that a Corresponding Paid Loss expires and cannot be used by the TCI Affiliated
Group in any taxable year or part thereof to reduce its consolidated federal
income tax liability, the Subgroup that has an Unpaid Loss in its Benefit
Tracking Account that is paired with such Corresponding Paid Loss shall remove
such Unpaid Loss from its Benefit Tracking Account.
ii. Payment of Dividends on the TCI Ventures Group
Preferred Interest. In the event that the TCI Ventures Group pays dividends on
the TCI Ventures Group Preferred Interest through the cancellation of Unpaid
Losses of the Ventures Subgroup pursuant to Section C.6. hereof, the Ventures
Subgroup shall remove such Unpaid Losses from its Benefit Tracking Account.
iii. Payment of Unpaid Losses. If a Corresponding Paid
Loss is actually utilized by the TCI Affiliated Group in any taxable year or
part thereof to reduce its consolidated federal income tax liability, TCI shall
pay, in immediately available funds, to the Subgroup with the Unpaid Loss
paired with such Corresponding Paid Loss, within 45 days after the date that
the Tax Return utilizing such Corresponding Paid Loss has been filed, an amount
equal to the product of (x) the Unpaid Loss and (y) the Applicable Federal Tax
Rate for the taxable year or part thereof in which such Subgroup received a
Regular Tax Benefit Adjustment or an AMT Benefit Adjustment for such Unpaid
Loss. Thereafter, the Subgroup shall remove such Unpaid Loss from its Benefit
Tracking Account.
iv. AMT Benefit Payment. If any Subgroup is paid, or has
previously been paid, for an Unpaid Loss pursuant to the provisions of
paragraphs a.iii. of this Section C.5. at a tax rate that is less than the
Regular Federal Tax Rate that was in effect for the taxable period or part
thereof in which such Subgroup received a Regular Tax Benefit Adjustment or an
AMT Benefit Adjustment for such Unpaid Loss, and if the TCI Affiliated Group
utilizes, or has previously utilized, any AMT Credit that is attributable to
that same taxable period, then TCI shall pay to such Subgroup in the current
taxable year or part thereof, and in each future taxable year or part thereof,
an additional amount, which amount shall be proportional to the amount that
such AMT Credit that has previously been utilized or is utilized in such
taxable period (as applicable) bears to the total AMT Credit available for such
prior taxable period, until such Subgroup has been paid for an Unpaid Loss at
the Regular Federal Tax Rate that was in effect for the taxable period or part
thereof in which such Subgroup received a Regular Tax Benefit Adjustment or an
AMT Benefit Adjustment for such Unpaid Loss.
b. Treatment at Deconsolidation.
i. Upon deconsolidation of a Subgroup, the maintenance
and payment obligations set forth in Section C.5.a. hereof with respect to such
Subgroup's Benefit
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Tracking Account shall continue to apply in full force and effect until such
time that no Unpaid Losses continue to be reflected in such deconsolidated
Subgroup's Benefit Tracking Account and no AMT Benefit Payments continue to be
owed to such deconsolidated Subgroup pursuant to Section C.5.a.iv. hereof.
ii. Upon the deconsolidation of any Subgroup Member of a
Subgroup, a new Benefit Tracking Account shall be created for such Subgroup
Member, and all Unpaid Losses that are reflected in the Subgroup's Benefit
Tracking Account that are attributable to such deconsolidated Subgroup Member
shall be removed from the Benefit Tracking Account of the Subgroup and added to
the new Benefit Tracking Account of the Subgroup Member. The maintenance and
payment obligations set forth in Section C.5.a. hereof shall apply in full
force and effect (as if such deconsolidated Subgroup Member were a Subgroup
under Section C.5.a.) until such time that no Unpaid Losses continue to be
reflected in such deconsolidated Subgroup Member's Benefit Tracking Account and
no AMT Benefit Payments continue to be owed to such deconsolidated Subgroup
Member pursuant to Section C.5.a.iv. hereof.
iii. In the event that any deconsolidated Subgroup Member
is entitled to claim in any taxable period any Corresponding Paid Loss, then
such deconsolidated Subgroup Member shall (x) take such steps as may reasonably
be necessary to claim such Corresponding Paid Loss and (y) promptly upon
receipt by such Subgroup Member (or another member of the Affiliated Group of
which Subgroup Member is a member) of a refund of or reduction in tax
liability, such Subgroup Member shall remit such amount to TCI. For purposes of
applying this Section C.5.a.iii. of this Agreement, the TCI Affiliated Group
shall be treated as if it had utilized such Corresponding Paid Loss.
c. Termination. Notwithstanding anything to the contrary
herein, the provisions of this Section C.5. shall survive the termination of
this Agreement.
6. Payment of Dividends on the TCI Ventures Group Preferred
Interest. As permitted by the terms of the TCI Charter, as amended, the TCI
Ventures Group may pay dividends on the TCI Ventures Group Preferred Interest
through (i) the deemed transfer of taxable losses or deductions of the Ventures
Subgroup to the Cable Subgroup, (ii) the cancellation of any item of Unpaid
Loss of the Ventures Subgroup, or (iii) the deemed transfer of any contingent
AMT Benefit Payments that are required to be paid to the Ventures Subgroup
pursuant to Section C.5.a.iv. hereof to the Cable Subgroup. For purposes of
determining the dividend amount, such taxable losses or Unpaid Losses shall be
deemed to be transferred or canceled (as applicable) in an amount equal to the
product of (i) the amount of such taxable losses or Unpaid Losses and (ii) the
Regular Federal Tax Rate in effect at the time of the dividend. From and after
the dividend date, (i) except for purposes of calculating the State and Local
Tax Liability of each Subgroup, taxable losses or deductions transferred from
the Ventures Subgroup to the Cable Subgroup and (ii) any AMT Benefit Payments
transferred from the Ventures Subgroup to the Cable Subgroup, shall be deemed
to be attributable to the Cable Subgroup for purposes of this Agreement.
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7. Filings and Procedural Matters.
a. TCI shall continue to prepare and file all federal income
Tax Returns (the "TCI Consolidated Returns") which are required to be filed by
the TCI Affiliated Group for all periods and will pay all Taxes shown as due
thereon. The costs of such preparation and filing shall be allocated among and
paid by each Subgroup in accordance with TCI's policy of allocating corporate
general and administrative costs among the Subgroups. Such returns shall
include all Tax Items of the Subgroup Members for all tax periods or portions
thereof ending on or before the Deconsolidation Date with respect to such
Subgroup Members. TCI will make all decisions relating to the preparation and
filing of such returns. Each Subgroup Member whose Tax Items are includable in
any such return shall, upon the request of TCI, consent to be included in the
TCI Consolidated Return on any form as may be prescribed for such consent.
b. So as to enable TCI to prepare accurately and completely
the TCI Consolidated Returns and in order to provide for accurate financial
reporting, for tax periods or portions thereof ending on or before the
Deconsolidation Date as to any Subgroup or Subgroup Member, such Subgroup shall
provide such information with respect to Taxes (including forecasts,
projections and tax accruals) as TCI may reasonably request. Each Subgroup
shall bear all costs and expenses of preparation and submission of such
information, including accountants' and attorneys' fees.
c. TCI may claim the benefit for federal income tax purposes
of any net operating loss or other tax benefit carryback resulting from a loss
or tax benefit incurred by any Subgroup or Subgroup Member for any taxable
period after the Deconsolidation Date of such Subgroup or Subgroup Member,
provided that TCI pays, in immediately available funds, to such Subgroup or
Subgroup Member the amount of any refund of Taxes resulting from such net
operating loss or other tax benefit carryback, together with the interest
received in respect of such refund, promptly after receipt thereof from the
IRS, unless either such Tax Item (i) is a Corresponding Paid Loss, (ii) is
deemed to be attributable to another Subgroup pursuant to Section C.6. hereof,
or (iii) has otherwise been used by such Subgroup or such Subgroup Member's
former Subgroup to increase its Federal Tax Benefit or to decrease its Federal
Tax Liability for any taxable period pursuant to the terms of this Agreement or
the Amended Agreement. However, with respect to any such net operating loss or
other tax benefit that is attributable to a taxable period of a Subgroup or
Subgroup Member after the Deconsolidation Date with respect to such Subgroup or
Subgroup Member and as to which such Subgroup or Subgroup Member has the option
to waive its right to carry such net operating loss or other tax benefit back,
such Subgroup or Subgroup Member shall exercise such option and elect to carry
such net operating loss or other tax benefit forward unless either (i) TCI
requests such Subgroup or Subgroup Member not to exercise such option and
instead to carry such net operating loss back to a period prior to the
Deconsolidation Date with respect to such Subgroup or Subgroup Member or (ii)
TCI consents in writing to the failure of such Subgroup or Subgroup Member to
exercise any such option to waive such carryback period. If such Subgroup or
Subgroup Member fails to exercise any such option to waive the right to carry
back any such net operating loss or other tax benefit without such a request or
consent from TCI, TCI shall not be
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obligated to compensate such Subgroup or Subgroup Member for any benefit that
TCI may receive from such net operating loss or other tax benefit.
D. State or Local Taxes.
1. State or Local Tax Liability. For each taxable year or
portion thereof ending after the Effective Date that a Subgroup is part of the
TCI Affiliated Group, the State or Local Tax Liability of the Subgroup shall be
equal to the product of:
a. the sum of the state and local income and franchise
taxes attributable to those jurisdictions in which the TCI Unitary Group is
liable for state or local income or franchise taxes with respect to the
operations of any Member of such Subgroup on a unitary, consolidated or nexus
combination basis, multiplied by
b. a fraction, (i) the numerator of which is the
aggregate amount of such tax that is attributable to such Subgroup in such
jurisdictions, determined without regard to any other Subgroup, as though such
Subgroup were required to file either a unitary, consolidated or nexus
combination corporate income or franchise tax return (for this purpose, each
First Tier LLC shall be treated as if it was a corporation) in such
jurisdictions for such taxable year or portion thereof, and (ii) the
denominator of which is the sum of all such amounts determined with respect to
all the Subgroups.
2. State or Local Tax Attributes. In calculating the amounts
referred to in Section D.1. above, each Subgroup will calculate state and local
net operating losses and other state and local tax attributes to which its
Subgroup Members are entitled as of the Effective Date. For each taxable year
or portion thereof ending after the Effective Date that a Subgroup is part of
the TCI Affiliated Group, the amounts referred to in Section D.1. shall be
calculated by taking into account the utilization of such tax attributes as
though the Subgroup actually filed returns as described in such Section without
regard to the actual filings of the TCI Affiliated Group. If any Subgroup or
Subgroup Member ceases to be a member of the TCI Affiliated Group, no
adjustments shall be made to account for differences between the tax attributes
utilized in the calculations made pursuant to Section D.1. and the Tax Returns
actually filed by the TCI Affiliated Group.
3. Time of Determination; Credits and Charges to the Intercompany
Accounts. To the extent required for financial statement purposes, the
estimated State or Local Tax Liability of each Subgroup shall be calculated by
TCI after the close of each calendar quarter in each taxable year, and the
appropriate credits or charges made to the Intercompany Accounts. As soon as
practicable after the close of each taxable year, TCI and each Subgroup shall
cooperate together to determine the final State or Local Tax Liability of such
Subgroup and shall:
a. credit the Intercompany Account of such Subgroup with the
amount by which the aggregate charges for estimated State or Local Tax
Liability made to such
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<PAGE> 21
Intercompany Account with respect to such Subgroup for such taxable year exceed
such final State or Local Tax Liability for such taxable year; and
b. charge the Intercompany Account of such Subgroup with the
amount by which such final State or Local Tax Liability for such taxable year
exceeds the aggregate charges for estimated State or Local Tax Liability made
to such Intercompany Account with respect to such Subgroup for such taxable
year.
For purposes of this Section D.3., the final State or Local Tax Liability for
the 1997 taxable year shall equal only that portion of the final State or Local
Tax Liability which is attributable to the fourth quarter of the 1997 taxable
year.
4. Filings and Procedural Matters.
a. For all tax periods or portions thereof ending on or before
the Deconsolidation Date as to any Subgroup Member, TCI shall prepare and file
all unitary, consolidated, nexus combination or separate state or local income
or franchise Tax Returns which are required by law to be filed which include
both any Tax Item of such Subgroup Member and any Tax Item of any member of a
different Subgroup. TCI shall pay all Taxes shown as due on such returns
(including those for which any Subgroup Member may be liable). Each Subgroup
Member whose Tax Items are included in any such unitary, consolidated, nexus
combination or separate state or local income Tax Return shall agree to be
included on such return on any form as may be prescribed for such consent if
such consent is requested, and the costs of preparing and filing such Tax
Returns shall be allocated among the Subgroup Members whose Tax Items are
included therein in accordance with TCI's policy for allocating corporate
general and administrative costs. TCI shall prepare and file on behalf of and
at the cost and expense of each Subgroup Member all other state and local
income and franchise Tax Returns required to be filed with respect to such
Subgroup Member. Such Subgroup Member shall pay all taxes reportable on such
returns.
b. So as to enable TCI accurately and completely to prepare all
state and local income and franchise Tax Returns which it will file and in
order to provide for accurate financial reporting, each Subgroup Member shall
prepare and submit to TCI such information with respect to Taxes (including
forecasts, projections and tax accruals) as TCI may reasonably request.
E. Foreign Income Taxes. TCI shall prepare and file or shall cause
to be filed all foreign income or franchise Tax Returns which are required to
be filed for all members of the TCI Affiliated Group and each member of the TCI
Affiliated Group will pay all Taxes shown as due on any such Tax Return that is
thus prepared and filed on its behalf. Each Subgroup Member shall bear the
costs of preparing and filing such Tax Returns on its behalf in accordance with
TCI's policy for allocating corporate general and administrative costs.
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F. Subsequent Adjustment of Tax Liability.
1. Federal, State, Local and Foreign Taxes - In General. As
provided in this Section F, each Subgroup or Subgroup Member, as the case may
be, shall indemnify the TCI Affiliated Group from any and all federal, state,
local or foreign tax liability resulting from any Final Determination which
adjusts any Tax Item of such Subgroup or Subgroup Member for any tax period or
portion thereof that ends after the Effective Date and on or before the
Deconsolidation Date as to such Subgroup or Subgroup Member, including any
interest, penalties or additions to tax attributable thereto (and all
reasonable out-of-pocket costs incurred by the TCI Affiliated Group in
connection with the assessment or collection thereof). As provided herein, for
any tax period or portion thereof ending after the Effective Date and on or
before the Deconsolidation Date as to any Subgroup or Subgroup Member, such
Subgroup or Subgroup Member shall be entitled to the benefit of all refunds of
federal, state, local or foreign taxes, and all interest attributable thereto,
resulting from any Final Determination which (i) adjusts any Tax Item of such
Subgroup or Subgroup Member, or (ii) causes a tax benefit that is attributable
to such Subgroup or Subgroup Member to be utilized by another Subgroup or
Subgroup Member. TCI shall indemnify each Subgroup Member from any increase in
federal, state, local or foreign tax liability, including interest, penalties
or additions to tax attributable thereto (and all reasonable out-of-pocket
costs incurred by such Subgroup Member in connection with the assessment or
collection thereof), other than any such amount for which such Subgroup Member
is responsible as provided above in this Section F.1., and TCI shall be
entitled to all refunds and interest attributable thereto other than any such
refunds or interest to which such Subgroup Member is entitled as provided in
this Section F.1.
2. Determination of Indemnification Amounts. If any Final
Determination results in an adjustment to any Tax Item of any Subgroup or
Subgroup Member, as the case may be, for any tax period or portion thereof
ending on or before the Deconsolidation Date and after the Effective Date as to
such Subgroup or Subgroup Member, and such adjustment would affect the tax
benefit or tax liability of such Subgroup or Subgroup Member, such tax benefit
or tax liability shall be redetermined, in accordance with any applicable
provision hereof, to give effect to such adjustment, as if it had been made as
part of or reflected in the Tax Return (or other tax calculation) to which such
tax benefit or tax liability relates. Such Subgroup or Subgroup Member shall
pay to TCI within 45 days of such Final Determination, in immediately available
funds, (a) any excess of such tax benefit as originally computed over such tax
benefit as determined pursuant to such recomputation, (b) any excess of such
tax liability as determined pursuant to such recomputation over such tax
liability as originally computed, and (c) the amount of any interest,
penalties, additions to tax or expenses (as described in Section F.1.) which
are paid by any member of the TCI Affiliated Group other than such Subgroup
Member (or a member of the same Subgroup as such Subgroup Member) with respect
to such adjustment. Any amount payable by a Subgroup or a Subgroup Member to
TCI pursuant to this Section F.2. shall be reduced to reflect any amount paid
directly by such Subgroup or Subgroup Member to any government or taxing
authority to satisfy the increased tax liability taken into account in
computing such payment. TCI shall pay to each Subgroup or Subgroup Member, as
the case may be within 45 days of such Final Determination, in immediately
available funds, (a) any excess of such tax benefit as determined pursuant to
such recomputation over
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such tax benefit as originally determined, (b) any excess of such tax liability
as originally computed over such tax liability as determined pursuant to such
recomputation, and (c) the amount of any interest received by any member of the
TCI Affiliated Group (other than such Subgroup Member or a member of the same
Subgroup as such Subgroup Member) from any government or taxing authority with
respect to such amount, provided that such payment shall be reduced by the
amount of any refund of tax received directly from any government or taxing
authority by such Subgroup or Subgroup Member with respect to such adjustment.
3. Contests. The defense of proceedings for the assessment as to any
taxable period or portion thereof ending on or before the Deconsolidation Date
as to any Subgroup or Subgroup Member of any Tax deficiencies and the
prosecution of any proceedings for the assertion of any refund claims which
arise with respect to or which relate to any member of the TCI Affiliated
Group, whether or not attributable to such Subgroup or Subgroup Member, and
regardless of whether such tax period or portion thereof occurs before or after
the Effective Date, shall be conducted by TCI in such manner, including through
deferral, compromise or settlement, as TCI in its sole discretion shall
determine, provided that TCI will consult with and keep any affected Subgroup
or Subgroup Member informed of the status of such matters and TCI will not
compromise or settle any assessment for which such Subgroup or Subgroup Member
would have an indemnification obligation hereunder or any tax refund claim
attributable to such Subgroup or Subgroup Member without the consent of such
Subgroup or Subgroup Member, as the case may be, which shall not be
unreasonably withheld. If any Subgroup or Subgroup Member shall consent to any
proposed compromise or settlement, then such Subgroup or Subgroup Member as a
consequence waives any and all present and future claims against TCI relating
to such compromise or settlement between TCI and the IRS or other taxing
authority, regardless of whether such compromise or settlement allegedly
improperly causes an overstatement of the liability of such Subgroup or
Subgroup Member to TCI or another member of the TCI Affiliated Group, or
whether such Subgroup or Subgroup Member could have reached a more favorable
agreement with the IRS or other taxing authority on a separate company basis.
If any affected Subgroup or Subgroup Member shall not consent to such
compromise or settlement, TCI shall renegotiate such agreement, in cooperation
with such Subgroup or Subgroup Member, and at the expense of such Subgroup or
Subgroup Member. Any compromise or settlement which results from such
renegotiation will not be entered into without the consent of both TCI and such
Subgroup or Subgroup Member. TCI will bear all costs and expenses associated
with the defense of such deficiency proceedings or the prosecution of such
refund claims, except that the affected Subgroup or Subgroup Member shall bear
the portion, if any, of such costs and expenses provided for in Section F.1.
hereof. TCI and such Subgroup or Subgroup Member will execute and deliver such
waivers, consents, petitions, refund claims, complaints, powers of attorney and
other documents which may be necessary or appropriate in connection with the
defense, prosecution or resolution of any such proceedings for assessment of
income tax deficiencies or refund claims.
G. Taxes Other Than Income Taxes. Except as provided in Section E
above or the next succeeding sentence, each Subgroup Member shall file all tax
returns and reports related to, shall defend all audits and investigations
related to, shall pay, and shall indemnify the other members of
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the TCI Affiliated Group from, all Taxes, other than income taxes, attributable
to such Subgroup Member for all periods before the Deconsolidation Date as to
such Subgroup Member, regardless of whether such period occurs before or after
the Effective Date, including any expenses incurred by any member of the TCI
Affiliated Group (including reasonable accountants' and attorneys' fees) in
connection therewith. Notwithstanding the foregoing, so long as any Subgroup
Member is a member of the TCI Affiliated Group, TCI shall (i) prepare and file
all real property, ad valorem and similar Tax Returns for such Subgroup Member
and (ii) provide such assistance as such Subgroup Member may reasonably request
with respect to audits of sales and use taxes. TCI shall pay or cause to be
paid, and shall indemnify each Subgroup Member from, all Taxes, other than
income taxes, attributable to the members of the TCI Affiliated Group (other
than any member of the same Subgroup as such Subgroup Member) for all periods
before the Deconsolidation Date as to such Subgroup Member, regardless of
whether such periods occur before or after the Effective Date, including any
expenses incurred by such Subgroup Member (including reasonable accountants'
and attorneys' fees) in connection therewith. Unclaimed property and escheat
taxes shall be borne by the Subgroup Member whose operations give rise to the
liability therefor.
H. Administrative Provisions.
1. Cooperation and Exchange of Information. TCI and each
Subgroup Member will provide each other with such cooperation and information
as either of them may reasonably request of the other in filing any Tax Return,
amended return or claim for refund, determining a liability for Taxes or a
right to refund of Taxes, in conducting any audit or other proceeding in
respect of Taxes or in preparing any financial statement information concerning
or relating to Taxes, including any accrual of Taxes required for financial
statement purposes. Such cooperation shall include providing copies of all
relevant Tax Returns, together with all accompanying schedules and related
workpapers, computerized tax database, documents relating to rulings or other
determinations by taxing authorities, and records concerning the ownership and
tax basis of property, which any party hereto may possess. Each party shall
make its employees available to any other party hereto on a mutually convenient
basis to provide explanations of any documents or information requested
hereunder. Except as otherwise provided in the Agreement, any party requesting
assistance hereunder shall reimburse any party providing such assistance for
any reasonable out-of-pocket costs incurred in providing any Tax Return,
document or other written information, upon receipt of reasonable documentation
of such costs. Each party hereto will retain all returns, schedules and
workpapers, and all material records or other documents relating thereto, until
the expiration of the statute of limitations (including extensions) for the
taxable years to which such returns and other documents relate and, unless such
Tax Returns and other documents are offered to the other parties hereto, until
the final determination of any payments which may be required in respect of
such years under this Agreement. Any information obtained under this Section
shall be kept confidential, except as may be otherwise necessary in connection
with the filing of returns or claims for refund or in conducting any audit or
other proceeding.
2. Meaning of Receipt or Reduction. Any reference in this Agreement
to the receipt by a party of an amount, or a reduction in a tax liability of a
party or interest with respect
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thereto shall (except where the context indicates to the contrary) include any
offset or credit against any other tax liability of such party, and shall be
deemed to have been received or refunded at the time such other tax liability
(or interest thereon) would otherwise have been due.
3. Character and Effect of Payments. All amounts paid pursuant to
this Agreement by one party to another, including all payments in discharge of
an outstanding balance in an Intercompany Account, shall be treated by the
parties for all Tax purposes as non-taxable recoveries of capital in the nature
of intercompany settlements of liabilities existing on or before the
Deconsolidation Date, other than Post-Deconsolidation Correlative Amounts. With
respect to Post-Deconsolidation Correlative Amounts or if, notwithstanding such
treatment by the parties, as a result of a Final Determination the federal,
state, local or foreign income tax liability of any party hereto shall be
increased as a result of its receipt of a payment pursuant to this Agreement,
such payment shall be appropriately adjusted so that the amount of such
payment, as adjusted, reduced by the amount of all income taxes payable with
respect to the receipt thereof (but taking into account all correlative tax
benefits resulting from the payment of such income taxes), shall equal the
amount of the payment which the party receiving such payment would otherwise be
entitled to received pursuant to this Agreement.
4. Entire Agreement; Termination of Prior Agreements.
a. Subject to paragraph b. of this Section, this Agreement
constitutes the entire agreement among the parties concerning the subject
matter hereof and supersedes all other agreements, if any, whether or not
written, in respect of any Tax between or among any of the Subgroup Members and
TCI, and all such agreements are hereby canceled and any rights or obligations
existing thereunder are hereby fully and finally settled without any payment by
any party thereto. This Agreement may not be amended except by an agreement in
writing, signed by the parties hereto.
b. The Amended Agreement shall continue in full force and
effect, and shall continue to govern the allocation to and sharing by the
parties thereto, their former or current Subsidiaries, and any other former or
current member of the TCI Affiliated Group intended to be bound thereby of
federal, state, local and foreign taxes for taxable periods prior to the
Effective Date and any contest, claim, controversy or dispute which may arise
(whether before, on or after the Effective Date) with respect to the subject
matter of the Amended Agreement relating to any such period. The execution and
delivery of this Agreement is not intended to constitute a waiver, release,
discharge or modification of or to otherwise affect any of the respective
rights, powers, obligations and liabilities (whether accrued, contingent,
known, unknown, now existing or hereafter arising) of any of the parties to the
Amended Agreement, any of their former or current Subsidiaries, or any other
former or current member of the TCI Affiliated Group intended to be bound
thereby with respect to any such period.
5. Effective Date. This Agreement is effective as of the Effective
Date. This Agreement shall continue in effect until otherwise agreed in writing
by TCI and each Subgroup.
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6. Notices. All notices, requests, demands and other communications
to any party hereunder shall be in writing and shall be duly given if delivered
and mailed (registered or certified mail, postage prepaid, return receipt
requested) to the address set forth below or such other address as any party
shall give written notice to the other:
If to TCI, to:
Tele-Communications, Inc.
Attn: Colin Stoner
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
If to a member of the Cable Subgroup, to:
TCI Communications, Inc.
Attn: Bernard Schotters
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
or to such other member of the Cable Subgroup, that the Cable Subgroup may
designate as its representative hereunder, at its address as shown in the books
and records of TCI.
If to a member of the Programming Subgroup, to:
Liberty Media Corporation
Attn: Robert Bennett
8101 E. Prentice Avenue, Suite 500
Englewood, CO 80111
or to such other member of the Programming Subgroup, that the Programming
Subgroup may designate as its representative hereunder, at its address as shown
in the books and records of TCI.
If to a member of the Ventures Subgroup, to:
TCI Ventures Group L.L.C.
Attn: Brendan Clouston
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
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or to such other member of the Ventures Subgroup, that the Ventures Subgroup
may designate as its representative hereunder, at its address as shown in the
books and records of TCI.
7. Resolution of Disputes. Any disputes between any parties hereto
concerning the calculation of amounts, allocation or attribution of costs or of
any Tax or Tax Item or similar accounting matters shall be resolved by a
nationally recognized public accounting firm selected by the parties involved
in such dispute, whose fees and expenses shall be shared by such parties.
8. Application to Present and Future Subsidiaries and First Tier
LLCs. This Agreement is being entered into by TCI, and each of TCIC, Liberty
and Ventures, on behalf of themselves and their respective Subgroups. This
Agreement shall constitute a direct obligation of each First Tier LLC and each
corporation that is a member of the TCI Affiliated Group, and shall be deemed
to have been adopted and affirmed on behalf of any limited liability company or
corporation that becomes a First Tier LLC or a member of the TCI Affiliated
Group. This Agreement shall be binding upon, and shall inure to the benefit of,
the successors, assigns and persons controlling any of the limited liability
companies or corporations bound hereby.
9. Comprehensive Settlement. Following the expiration of the statute
of limitations for all taxable years ending before the Deconsolidation Date,
and for the taxable year which includes the Deconsolidation Date, of a Subgroup
or Subgroup Member that ceases to be part of the TCI Affiliated Group, under
every federal, state, local, or foreign Tax law under which such First Tier LLC
or corporation may have a material liability for such years, the parties hereto
shall each, if requested by one of the others, agree to negotiate in good faith
in an effort to reach an appropriate settlement of all of the then remaining
obligations of such Subgroup and its Subgroup Members under this Agreement.
10. Governing Law. This Agreement shall be governed by the laws of
the State of Delaware without regard to the principles of conflicts of laws
thereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the Effective Date.
TELE-COMMUNICATIONS, INC.
By /s/ Leo J. Hindery, Jr.
------------------------------------
TCI COMMUNICATIONS, INC.
By /s/ Leo J. Hindery, Jr.
------------------------------------
LIBERTY MEDIA CORPORATION
By /s/ Robert R. Bennett
------------------------------------
TCI VENTURES GROUP L.L.C.
By /s/ Bernard W. Schotters
------------------------------------
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