<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14 A INFORMATION
(AMENDMENT NO. 2)
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by a Party other than Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TELE-COMMUNICATIONS, INC.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) and 0-11.
(1) Tile of each class of securities to which transaction applied:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.: Schedule 14A
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(3) Filing Party: Tele-Communications, Inc.
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(4) Date Filed: February 5, 1997
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<PAGE> 2
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
Dear Stockholder: February 5, 1997
You are cordially invited to attend a special meeting of stockholders of
Tele-Communications, Inc. (the "Company" or "TCI"), which will be held at the
Company's corporate headquarters located at 5619 DTC Parkway, Englewood,
Colorado, on March 12, 1997 starting at 10:00 a.m., local time. A notice of the
special meeting, a proxy card and a Proxy Statement containing important
information about the matters to be acted upon at the special meeting are
enclosed.
At the special meeting, you will be asked to consider and vote upon a
proposal (the "Telephony Group Stock Proposal"), which would authorize two new
series of the Company's Common Stock, par value $1.00 per share (the "Common
Stock"), and a corresponding increase in the total number of authorized shares
of Common Stock. The two new series would be designated Tele-Communications,
Inc. Series A Telephony Group Common Stock ("Series A Telephony Group Common
Stock") and Tele-Communications, Inc. Series B Telephony Group Common Stock
("Series B Telephony Group Common Stock" and, together with the Series A
Telephony Group Common Stock, the "Telephony Group Common Stock"). A total of
750 million shares of Series A Telephony Group Common Stock and 75 million
shares of Series B Telephony Group Common Stock would be authorized.
The Telephony Group Common Stock if issued, will be intended to reflect the
separate performance of the Telephony Group, which will initially consist of
TCI's principal investments in the domestic wireless and wireline telephony
businesses (the "Telephony Business"). These investments consist 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 using the "Sprint" brand (the "PCS Ventures"), and
the Company's investment in Teleport Communications Group Inc., a Delaware
corporation ("TCG"). The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), 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 TCI. The Company has a 30%
interest as a partner in each of the Sprint PCS Partnerships and a 35.3%
interest as a partner in PhillieCo. TCG is a competitive local exchange carrier
that offers a wide range of local telecommunications services in major
metropolitan markets nationwide, primarily to businesses, long distance carriers
and resellers, and wireless communications companies. The Company has a 31.1%
equity interest (which represents a 36.4% voting interest) in the outstanding
common stock of TCG. (The TCG Class A common stock is quoted on the Nasdaq
National Market under the symbol "TCGI.") The Telephony Group also includes a
50% partnership interest in Kansas City Fiber Network, L.P. and a 40%
partnership interest in NHT Partnership, which are competitive access providers
serving the Kansas City and Buffalo metropolitan areas, respectively. Each of
the foregoing investments is owned directly or indirectly by TCI Telephony
Services, Inc., a Delaware corporation and an indirectly wholly owned subsidiary
of the Company ("TTS-Delaware"). All assets and liabilities of TTS-Delaware and
its subsidiaries (collectively, "TCI Telephony") will be attributed to the
Telephony Group.
Beyond its current investments, TCI Telephony has the right, but not the
obligation, to acquire TCI's developmental stage cable telephony business, which
provides wireline residential telephony services (i.e., conventional telephone
service or "POTS" and related services) via TCI's cable plant to residential and
small business customers in certain of the geographic areas served by TCI's
cable television systems (the "ResTel Business"). The right to acquire the
ResTel Business may be exercised by TCI Telephony in whole or in part (by
geographic area) and at any time or from time to time, as applicable, provided
that TCI Telephony is at
<PAGE> 3
the time of exercise a subsidiary of TCI and TCI is then conducting such
business. The method of determining the purchase price for the ResTel Business,
and the arrangements between the Telephony Group and the TCI Group for the use
by TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined by the Board of Directors and, when
determined, may not be the price or arrangements that either TCI Telephony or
the TCI Group could have obtained in an arm's-length transaction. TCI Telephony
is currently in the process of studying the customer acceptance and economic
attractiveness of the ResTel Business.
TCI Telephony also has the right to acquire TCI's interests in the
business, currently being conducted by TCI's indirect subsidiary, Western
Tele-Communications, Inc., of providing long-distance transport of video, voice
and data traffic and other telecommunications services primarily to
inter-exchange carriers on a wholesale basis using a digital broadband microwave
network located throughout a 14-state region in the western United States. Such
right may be exercised at any time, provided that TCI Telephony is then a
subsidiary of TCI and TCI is then conducting such business, at a price based on
the fair market value of such business (as determined by the Board of Directors
of the Company).
Currently the Company has four series of Common Stock authorized: (i)
Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A TCI
Group Common Stock"), (ii) Tele-Communications, Inc. Series B TCI Group Common
Stock (the "Series B TCI Group Common Stock" and, together with the Series A TCI
Group Common Stock, the "TCI Group Common Stock"), (iii) Tele-Communications,
Inc. Series A Liberty Media Group Common Stock (the "Series A Liberty Media
Group Common Stock"); and (iv) Tele-Communications, Inc. Series B Liberty Media
Group Common Stock (the "Series B Liberty Media Group Common Stock" and,
together with the Series A Liberty Media Group Common Stock, the "Liberty Media
Group Common Stock"). The TCI Group Common Stock presently is intended to
reflect the separate performance of the TCI Group, which is comprised of the
Company's domestic cable and telephony distribution and communications
businesses, international cable, telephony and programming businesses,
technology/venture capital businesses, and any other businesses and assets not
included in the Liberty Media Group. The investments attributed to the Telephony
Group are currently included in the TCI Group. The Liberty Media Group Common
Stock is intended to reflect the separate performance of the Liberty Media
Group, which is 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 Telephony Group Stock Proposal, the investments
attributed to the Telephony Group will no longer be included in the TCI Group;
however, until shares of Telephony Group Common Stock are issued, the TCI Group
Common Stock will continue to be intended to reflect all of the common
stockholders' equity value of the Company attributable to the Telephony Group,
in addition to the separate performance of the Company's domestic cable and
telephony distribution and communications businesses (other than the investments
attributed to the Telephony Group), international cable, telephony and
programming businesses, technology/venture capital businesses, and any other
businesses and assets of the Company not attributed to either the Liberty Media
Group or the Telephony Group. As shares of Telephony Group Common Stock are
issued and sold or distributed, the percentage of the common stockholders'
equity value of the Company attributable to the Telephony Group that is or is
intended to be reflected in the TCI Group Common Stock will be reduced
accordingly. The composition of the Liberty Media Group will not be affected by
the Telephony Group Stock Proposal.
The Telephony Group Stock Proposal is intended to provide the Company
greater flexibility with regard to raising capital and making acquisitions and
investments, including strategic partnering transactions, with equity securities
specifically related to the Telephony Group. The Board of Directors believes
that the Telephony Group Stock Proposal and the issuance of Telephony Group
Common Stock will result in greater market recognition of the value of the
Telephony Group, thereby enhancing stockholder value over the long term, while
at the same time enabling the Company's businesses to preserve the benefits of
being part of a
-2-
<PAGE> 4
consolidated enterprise. The Telephony Group Stock Proposal would also provide
security holders with the opportunity to invest in separate securities intended
specifically to reflect the Telephony Group and would enable the Company to more
effectively tailor employee benefits plans to provide incentives to the
employees in the Telephony Group.
Following approval by stockholders of the Telephony Group Stock Proposal,
but subject to prevailing market and other conditions, the Company currently
proposes to offer shares of Series A Telephony Group Common Stock for cash in an
initial public offering, in which event the proceeds of such offering would be
allocated to the Telephony Group to be used to fund a portion of its anticipated
capital requirements and for general corporate purposes. The timing and size of
any such public offering and the price at which such shares would be sold will
be determined by the Board of Directors, without further approval of
stockholders, prior to such offering based upon then prevailing market and other
conditions.
Following such public offering, additional authorized shares of Telephony
Group Common Stock may be issued at the discretion of the Board of Directors in
one or more public offerings, as consideration for acquisitions or investments,
to employees of the Company pursuant to employee benefit plans or otherwise as
compensation, as a distribution to holders of TCI Group Common Stock, or for any
other proper corporate purpose. Such additional authorized shares of Telephony
Group Common Stock may be issued in the form of shares of Series A Telephony
Group Common Stock and/or Series B Telephony Group Common Stock (subject to
there being a sufficient number of authorized and unissued shares of the
applicable series of Telephony Group Common Stock). The proceeds of any future
issuance of shares of Telephony Group Common Stock may be allocated either to
the TCI Group (in which case the percentage of the common stockholders' equity
value of the Company attributable to the Telephony Group that is, or is intended
to be, reflected in the TCI Group Common Stock will be reduced accordingly) or
to the Telephony Group (in which case the percentage of the common stockholders
equity value of the Company attributable to the Telephony Group that is
represented by the outstanding shares of Telephony Group Common Stock will
increase accordingly). The Company does not currently intend to distribute
shares of Telephony Group Common Stock to holders of TCI Group Common Stock.
Annex IV to the accompanying Proxy Statement contains illustrations of certain
effects of the issuance of Telephony Group Common Stock.
IT IS IMPORTANT TO NOTE THAT HOLDERS OF TCI GROUP COMMON STOCK, LIBERTY
MEDIA GROUP COMMON STOCK AND TELEPHONY GROUP COMMON STOCK WHEN ISSUED WILL BE
COMMON STOCKHOLDERS OF THE COMPANY AND WILL BE SUBJECT TO RISKS ASSOCIATED WITH
AN INVESTMENT IN THE COMPANY AND ALL OF ITS BUSINESSES, ASSETS AND LIABILITIES.
THE COMPANY CAN PROVIDE NO ASSURANCE AS TO THE DEGREE TO WHICH THE MARKET PRICE
OF THE TELEPHONY GROUP COMMON STOCK WILL REFLECT THE SEPARATE PERFORMANCE OF THE
TELEPHONY GROUP OR AS TO THE IMPACT OF THE PROPOSAL ON THE MARKET PRICE OF THE
TCI GROUP COMMON STOCK OR THE LIBERTY MEDIA GROUP COMMON STOCK. IN ADDITION,
IMPLEMENTATION OF THE TELEPHONY GROUP STOCK PROPOSAL WILL MAKE THE CAPITAL
STRUCTURE OF THE COMPANY MORE COMPLEX AND MAY GIVE RISE TO OCCASIONS WHEN THE
INTERESTS OF THE HOLDERS OF THE SEPARATE SERIES OF COMMON STOCK MAY DIVERGE OR
APPEAR TO DIVERGE.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TELEPHONY GROUP STOCK
PROPOSAL, BELIEVES THE ADOPTION OF THE PROPOSAL IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR
OF THE PROPOSAL.
Whether or not you are personally able to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to vote in person if you wish to attend the special meeting and vote
personally.
Sincerely yours,
John C. Malone
Chairman of the Board
-3-
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS................... i
PROXY STATEMENT............................................. 1
THE SPECIAL MEETING......................................... 1
Time and Place; Purposes.................................. 1
Voting Rights; Votes Required for Approval................ 2
Proxies................................................... 2
No Appraisal Rights....................................... 3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 3
Security Ownership of Certain Beneficial Owners........... 3
Security Ownership of Management.......................... 9
THE TELEPHONY GROUP STOCK PROPOSAL.......................... 17
General................................................... 17
The Telephony Group....................................... 17
Issuance of Telephony Group Common Stock.................. 20
Background and Reasons for the Telephony Group Stock
Proposal............................................... 21
Recommendation of the Board of Directors.................. 24
Summary Description of Telephony Group Stock Proposal..... 24
Factors to be Considered.................................. 32
Management and Allocation Policies........................ 40
Description of Telephony Group Common Stock and Effects on
Existing Common Stock.................................. 45
Inter-Group Interest in the Telephony Group............... 62
Dividend Policy........................................... 66
Stock Transfer Agent and Registrar........................ 66
Inclusion in Nasdaq National Market....................... 66
Certain Federal Income Tax Considerations................. 67
Existing Capital Stock.................................... 70
Anti-Takeover Considerations.............................. 71
INDEPENDENT AUDITORS........................................ 74
INCORPORATION BY REFERENCE.................................. 74
ADDITIONAL INFORMATION...................................... 75
OTHER MATTERS............................................... 75
ANNEX I -- Index of Certain Defined Terms................... I-1
ANNEX II -- Proposed Amendments to the Restated Certificate
of Incorporation.......................................... II-1
ANNEX III -- Description of Telephony Group................. III-1
ANNEX IV -- Illustration of Certain Terms................... IV-1
ANNEX V -- Financial Information............................ V-1
Index..................................................... V-1
Selected Historical and Pro Forma Financial Data.......... V-2
Condensed Pro Forma Combined Financial Statements......... V-5
Tele-Communications, Inc.................................. V-16
Telephony Group........................................... V-97
</TABLE>
<PAGE> 6
TELE-COMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 12, 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (including
any adjournment or postponement thereof, the "Special Meeting") of
Tele-Communications, Inc., a Delaware corporation (the "Company"), will be held
at the Company's corporate headquarters located at 5619 DTC Parkway, Englewood,
Colorado, starting at 10:00 a.m., local time, on Wednesday, March 12, 1997, for
the following purposes:
1. To consider and vote upon a proposal (the "Telephony Group Stock
Proposal") to adopt amendments to the Company's Restated Certificate of
Incorporation which would (a) authorize two new series of the Company's
Common Stock, par value $1.00 per share, to consist of 750 million newly
authorized shares designated Tele-Communications, Inc. Series A Telephony
Group Common Stock and 75 million newly authorized shares designated
Tele-Communications, Inc. Series B Telephony Group Common Stock
(collectively, the "Telephony Group Common Stock"), and a corresponding
increase in the total number of authorized shares of Common Stock, (b)
provide for the voting powers and relative, participating, optional and
other special rights and qualifications, limitations and restrictions of
the Telephony Group Common Stock, and (c) change certain of the rights and
powers of the Tele-Communications, Inc. Series A TCI Group Common Stock
(the "Series A TCI Group Common Stock") and the 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"), the Tele-Communications, Inc. Series A Liberty Media Group Common
Stock (the "Series A Liberty Media Group Common Stock") and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock (the
"Series B Liberty Media Group Common Stock" and, together with the Series A
Liberty Media Group Common Stock, the "Liberty Media Group Common Stock"),
and the qualifications, limitations or restrictions thereof, in order to
implement the Telephony Group Stock Proposal and to reflect the
authorization of the Telephony Group Common Stock.
2. To transact such other business as may properly come before the
Special Meeting.
Holders of record of the Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock and Convertible Preferred Stock, Series C, par value
$.01 per share (the "Series C Preferred Stock"), at the close of business on
February 4, 1997, the record date for the Special Meeting, will be entitled to
notice of and to vote at the Special Meeting.
Holders of record of the Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock and Series C Preferred Stock at the close of business
on the record date will be entitled to vote together as a single class on the
Telephony Group Stock Proposal. In addition, holders of record of the Series A
TCI Group Common Stock and Series B TCI Group Common Stock, and holders of
record of the Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock, will each be entitled to vote as a separate class on
the Telephony Group Stock Proposal. Accordingly, the vote of a holder of record
on the record date of shares of, for example, TCI Group Common Stock will count
for both the single class vote of the TCI Group Common Stock, Liberty Media
Group Common Stock and Series C Preferred Stock, and for the separate class vote
of the TCI Group Common Stock. The vote of a holder of record on the record date
of shares of Series C Preferred Stock will only count for the single class vote
of the TCI Group Common Stock, Liberty Media Group Common Stock and Series C
Preferred Stock.
Each holder of record as of the record date of (i) shares of Series A TCI
Group Common Stock and Series A Liberty Media Group Common Stock is entitled to
cast one vote per share of such series held, (ii) the Series B TCI Group Common
Stock and the Series B Liberty Media Group Common Stock is entitled to cast ten
votes per share of such series held, and (iii) the Series C Preferred Stock is
entitled to cast
i
<PAGE> 7
153 votes per share of such series held, on each matter on which holders of
shares of such class or series are entitled to vote at the Special Meeting. In
the single class vote, the affirmative vote (in person or by proxy) of at least
66 2/3% of the combined voting power of the shares of TCI Group Common Stock,
Liberty Media Group Common Stock and Series C Preferred Stock outstanding on the
record date is required to approve the Telephony Group Stock Proposal. In the
separate class votes, the affirmative vote (in person or by proxy) of a majority
of the combined voting power of the shares of TCI Group Common Stock or Liberty
Media Group Common Stock, as applicable, outstanding on the record date is
required to approve the Telephony Group Stock Proposal.
To assure that your interests will be represented at the Special Meeting,
regardless of whether you plan to attend in person, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed return
envelope, which requires no postage if mailed in the United States. This action
will not limit your right to vote in person if you wish to attend the Special
Meeting and vote personally.
By Order of the Board of Directors
Stephen M. Brett
Secretary
Englewood, Colorado
February 5, 1997
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU INTEND
TO BE PRESENT AT THE SPECIAL MEETING.
ii
<PAGE> 8
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
------------------------------------
PROXY STATEMENT
------------------------------------
FOR SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished in connection with the solicitation
by the Board of Directors of TeleCommunications, Inc., a Delaware corporation
(the "Company" or "TCI") of proxies for use at a special meeting of the
stockholders of the Company, or at any adjournment or postponement thereof (the
"Special Meeting"), for the purposes set forth in the accompanying Notice of
Meeting. Proxies are being solicited from the holders of the following
securities of the Company: (i) Tele-Communications, Inc. Series A TCI Group
Common Stock (the "Series A TCI Group Common Stock"), (ii) Tele-Communications,
Inc. Series B TCI Group Common Stock (the "Series B TCI Group Common Stock" and,
together with the Series A TCI Group Common Stock, the "TCI Group Common
Stock"), (iii) Tele-Communications, Inc. Series A Liberty Media Group Common
Stock (the "Series A Liberty Media Group Common Stock"), (iv) Tele-
Communications, Inc. Series B Liberty Media Group Common Stock (the "Series B
Liberty Media Group Common Stock" and, together with the Series A Liberty Media
Group Common Stock, the "Liberty Media Group Common Stock"), and (v) Convertible
Preferred Stock, Series C, par value $.01 per share (the "Series C Preferred
Stock").
THE SPECIAL MEETING
TIME AND PLACE; PURPOSES
The Special Meeting will be held at the Company's corporate headquarters
located at 5619 DTC Parkway, Englewood, Colorado, on Wednesday, March 12, 1997,
starting at 10:00 a.m. local time. At the Special Meeting, the stockholders of
the Company will be asked to consider and vote upon (a) a proposal (the
"Telephony Group Stock Proposal") which would (i) authorize two new series of
the Company's Common Stock, par value $1.00 per share (the "Common Stock"), to
consist of 750 million newly authorized shares designated Tele-Communications,
Inc. Series A Telephony Group Common Stock (the "Series A Telephony Group Common
Stock") and 75 million newly authorized shares designated Tele-Communications,
Inc. Series B Telephony Group Common Stock (the "Series B Telephony Group Common
Stock" and, together with the Series A Telephony Group Common Stock, the
"Telephony Group Common Stock"), and a corresponding increase in the total
number of authorized shares of Common Stock, (ii) provide for the voting powers
and relative, participating, optional and other special rights and
qualifications, limitations and restrictions of the Telephony Group Common
Stock, and (iii) change certain of the rights and powers of the TCI Group Common
Stock and the Liberty Media Group Common Stock, and the qualifications,
limitations or restrictions thereof, in order to implement the Telephony Group
Stock Proposal and to reflect the authorization of the Telephony Group Common
Stock, and (b) such other business as may properly come before the Special
Meeting.
The Telephony Group Common Stock, if issued, would be intended to reflect
the separate performance of the Telephony Group, which would initially consist
of the Company's investments in certain entities engaged in the domestic
wireline and wireless telephony businesses. See "THE TELEPHONY GROUP STOCK
PROPOSAL -- The Telephony Group" and Annex III -- Description of Telephony
Group.
This Proxy Statement and the accompanying form of proxy are first being
mailed to the stockholders of the Company on or about February 11, 1997.
<PAGE> 9
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on February 4, 1997
(the "Record Date") as the date for the determination of holders of shares of
the TCI Group Common Stock, Liberty Media Group Common Stock and Series C
Preferred Stock entitled to notice of and to vote at the Special Meeting. Only
holders of record of such shares at the close of business on the Record Date are
entitled to notice of and to vote at the Special Meeting.
Holders of record of Common Stock and holders of record of Series C
Preferred Stock at the close of business on the Record Date will be entitled to
vote together as a single class on the Telephony Group Stock Proposal. In
addition, holders of record of the TCI Group Common Stock and holders of record
of the Liberty Media Group Common Stock will each be entitled to vote as a
separate class on the Telephony Group Stock Proposal. Accordingly, if, for
example, you were a record holder of shares of TCI Group Common Stock on the
Record Date, your vote of such shares will count for both the single class vote
of the Common Stock and Series C Preferred Stock, and for the separate class
vote of the TCI Group Common Stock. If you were a record holder of Series C
Preferred Stock on the Record Date, your vote of such shares will only count for
the single class vote of the Common Stock and Series C Preferred Stock.
At the close of business on the Record Date, there were: (i) 597,497,130
shares of Series A TCI Group Common Stock outstanding and entitled to vote at
the Special Meeting, (ii) 84,647,065 shares of Series B TCI Group Common Stock
outstanding and entitled to vote at the Special Meeting, (iii) 228,562,676
shares of Series A Liberty Media Group Common Stock outstanding and entitled to
vote at the Special Meeting, (iv) 21,187,969 shares of Series B Liberty Media
Group Common Stock outstanding and entitled to vote at the Special Meeting, and
(v) 70,575 shares of Series C Preferred Stock outstanding and entitled to vote
at the Special Meeting. Each holder of record as of the Record Date of: (i) the
Series A TCI Group Common Stock and the Series A Liberty Media Group Common
Stock is entitled to cast one vote per share of such series held, (ii) the
Series B TCI Group Common Stock and the Series B Liberty Media Group Common
Stock is entitled to cast ten votes per share of such series held, and (iii) the
Series C Preferred Stock is entitled to cast 153 votes per share of such series
held, on each matter on which holders of shares of such class or series are
entitled to vote at the Special Meeting.
The presence, in person or by proxy, of the holders of a majority of the
combined voting power of the outstanding shares of TCI Group Common Stock,
Liberty Media Group Common Stock and Series C Preferred Stock entitled to vote
is necessary to constitute a quorum at the Special Meeting. The affirmative
vote, in person or by proxy, of (i) holders of record of at least 66 2/3% of the
combined voting power of the shares of TCI Group Common Stock, Liberty Media
Group Common Stock and Series C Preferred Stock outstanding on the Record Date,
voting together as a single class, (ii) holders of record of a majority of the
combined voting power of the shares of TCI Group Common Stock outstanding on the
Record Date, voting as a separate class and (iii) holders of record of a
majority of the combined voting power of the shares of Liberty Media Group
Common Stock outstanding on the Record Date, voting as a separate class, is
required to approve the Telephony Group Stock Proposal. The shares of TCI Group
Common Stock outstanding on the Record Date represented an aggregate of
1,443,967,780 votes; the shares of Liberty Media Group Common Stock outstanding
on the Record Date represented an aggregate of 440,442,366 votes; and the shares
of Series C Preferred Stock outstanding on the Record Date represented an
aggregate of 10,797,975 votes. For a quorum, shares representing 947,604,061
votes in the aggregate will be required to be present at the meeting in person
or by proxy. For the Telephony Group Stock Proposal to be approved, the Company
needs (i) 1,263,472,080 affirmative votes in the aggregate by holders of shares
of Common Stock and Series C Preferred Stock entitled to vote (voting together),
(ii) 721,983,891 affirmative votes by the holders of shares of TCI Group Common
Stock entitled to vote and (iii) 220,221,184 affirmative votes by the holders of
shares of Liberty Media Group Common Stock entitled to vote.
PROXIES
All shares of the TCI Group Common Stock, Liberty Media Group Common Stock
and Series C Preferred Stock represented by properly executed proxies received
prior to or at the Special Meeting, and not
2
<PAGE> 10
revoked, will be voted in accordance with the instructions indicated in such
proxies. If no instructions are indicated, such proxies will be voted FOR the
Telephony Group Stock Proposal. So far as the Company's Board of Directors is
aware, the Telephony Group Stock Proposal is the only matter to be acted upon at
the Special Meeting. As to any other matter which may properly come before the
Special Meeting, the persons named in the accompanying proxy card will vote
thereon in accordance with their best judgment. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum and for purposes of determining the aggregate voting power and number of
shares represented and entitled to vote at the Special Meeting, will not be
voted and, therefore, will have the same effect as a vote cast against the
matter to which such instruction is indicated. Shares represented by "broker
non-votes" (i.e., shares held by brokers or nominees which are represented at a
meeting but with respect to which the broker or nominee is not empowered to vote
on a particular proposal) will also be counted for purposes of determining
whether there is a quorum at the Special Meeting and will be deemed shares not
entitled to vote and will not be included for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote on
such matter.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, officers and regular employees of the Company
may solicit proxies by telephone, telegram, in person or by other means. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares held of record by them
and will be reimbursed for their reasonable out-of-pocket expenses in connection
therewith.
NO APPRAISAL RIGHTS
Under applicable Delaware law, holders of the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Series C Preferred Stock do not have
appraisal rights in connection with the Telephony Group Stock Proposal.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of October 31, 1996, information with
respect to the ownership of Series A TCI Group Common Stock, Series B TCI Group
Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty Media
Group Common Stock, Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, par value $.01 per share, of the Company ( "Class B Preferred
Stock"), Series C Preferred Stock, Redeemable Convertible TCI Group Preferred
Stock, Series G, par value $.01 per share, of the Company ("Series G Preferred
Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series
H, par value $.01 per share, of the Company ("Series H Preferred Stock"), by
each person known to the Company to own beneficially more than 5% of any such
class or series outstanding on that date. Subsequent to October 31, 1996 and
prior to the Record Date, the Company paid a dividend of one share of Series A
Liberty Media Group Common Stock for each two shares of Series A Liberty Media
Group Common Stock held and one share of Series A Liberty Media Group Common
Stock for each two shares of Series B Liberty Media Group Common Stock held (the
"Liberty Stock Distribution"). The numbers of shares (and corresponding
percentages of series) of the Series A Liberty Media Group Common Stock in the
following table and in the footnotes to the table have not been adjusted for the
Liberty Stock Distribution. Shares issuable upon exercise of options or
conversion of convertible securities are deemed to be outstanding for the
purpose of computing the percentage of ownership and overall voting power of
persons beneficially owning such options or convertible securities, but have not
been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power of any other person. Voting power in the table
is
3
<PAGE> 11
computed with respect to a general election of directors and, therefore, the
Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred
Stock are included in the calculation notwithstanding the fact that the Class B
Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock
do not generally vote with respect to matters submitted to a vote of
stockholders. The number of shares indicated as owned by Dr. Malone include
interests in shares held by the trustee of TCI's Employee Stock Purchase Plan
("ESPP"). So far as is known to TCI, the persons indicated below have sole
voting and investment power with respect to the shares indicated as owned by
them except as otherwise stated in the notes to the table and except for the
shares held by the trustee of the ESPP for the benefit of Dr. Malone, which
shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- -------- --------
<S> <C> <C> <C> <C>
TCI Group John C. Malone, Chairman of the
Common Stock Board, President and a Director
Series A 5619 DTC Parkway 2,172,366(2) *
Series B Englewood, Colorado 25,332,083(3)(4) 29.9% 17.7%
Liberty Media Group
Common Stock
Series A 542,983(2) *
Series B 6,360,520(3)(4) 30.0%
Preferred Stock
Class B 306,000(3) 18.9%
Series C -- --
Series G -- --
Series H -- --
TCI Group Kearns-Tribune Corporation
Common Stock 400 Tribune Building
Series A Salt Lake City, Utah 8,792,514 1.5% 6.9%
Series B 9,112,500(4) 10.8%
Liberty Media Group
Common Stock
Series A 2,198,128 1.5%
Series B 2,278,125(4) 10.8%
Preferred Stock
Class B 67,536 4.2%
Series C -- --
Series G -- --
Series H -- --
TCI Group The Associated Group, Inc.
Common Stock 200 Gateway Towers
Series A Pittsburgh, Pennsylvania 12,479,976 2.2% 5.8%
Series B 7,071,852(5) 8.4%
Liberty Media Group
Common Stock
Series A 3,119,993 2.2%
Series B 1,767,963(5) 8.3%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
</TABLE>
4
<PAGE> 12
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- -------- --------
<S> <C> <C> <C> <C>
TCI Group Kim Magness (individually and as
Common Stock Personal Representative to the
Series A Estate of Betsy Magness) 2,155,332(6) * 4.9%
Series B Director 6,864,212(6) 8.1%
5619 DTC Parkway
Englewood, Colorado
Liberty Media Group
Common Stock
Series A 538,833(6) *
Series B 1,716,053(6) 8.1%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group The Equitable Companies Incorporated
Common Stock 787 Seventh Avenue
Series A New York, New York; and 41,193,448(7) 7.1% 3.1%
Series B The Mutuelles AXA and AXA -- --
Liberty Media Group 101-100 Terrasse Boieldieu
Common Stock 92042 Paris La Defense
Series A France 14,685,004(8) 10.1%
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group The Capital Group
Common Stock Companies Inc.
Series A 333 South Hope Street 39,546,870(9) 6.8% 2.9%
Series B Los Angeles, California -- --
Liberty Media Group
Common Stock
Series A 13,037,740(10) 9.0%
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Bill Daniels
Common Stock c/o Daniels & Associates
Series A 3200 Cherry Creek Drive South 259 * *
Series B Denver, Colorado -- --
Liberty Media Group
Common Stock
Series A 64 *
Series B -- --
Preferred Stock
Class B -- --
Series C 70,575 100%
Series G --
Series H --
</TABLE>
5
<PAGE> 13
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- -------- --------
<S> <C> <C> <C> <C>
TCI Group Lawrence Flinn, Jr.
Common Stock 209 Taconic Road 1,102,344 * *
Series A Greenwich, Connecticut 24,000 *
Series B
Liberty Media Group
Common Stock
Series A 275,611 *
Series B 6,000 *
Preferred Stock
Class B -- --
Series C -- --
Series G 6,186,647 92.4%
Series H 6,186,647 92.4%
TCI Group Donne F. Fisher
Common Stock (individually and as
Series A Co-Personal Representative 4,111,817(11)(12) * 21.7%
Series B to the Estate of Bob Magness) 31,034,936(4)(11) 36.7%
Director
5619 DTC Parkway
Liberty Media Group
Common Stock
Series A 1,029,838(11)(12) *
Series B 7,758,734(4)(11) 36.6%
Preferred Stock
Class B 129,299(11) 8.0%
Series C -- --
Series G -- --
Series H -- --
TCI Group Daniel L. Ritchie
Common Stock (as Co-Personal Representative
Series A to the Estate of Bob Magness) 3,524,315(11) * 21.6%
Series B 2199 South University 30,785,864(11) 36.4%
Denver, Colorado
Liberty Media Group
Common Stock
Series A 880,714(11) *
Series B 7,696,466(11) 36.3%
Preferred Stock
Class B 125,000(11) 7.7%
Series C -- --
Series G -- --
Series H -- --
TCI Group J.P. Morgan & Co., Inc.
Common Stock 60 Wall Street
Series A New York, New York 31,322,458(13) 5.4% 1.8%
Series B -- --
Liberty Media Group
Common Stock
Series A 714,220(13) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
</TABLE>
6
<PAGE> 14
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENT
NAME AND ADDRESS BENEFICIAL OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- -------- --------
<S> <C> <C> <C> <C>
TCI Group Salomon Inc
Common Stock Seven World Trade Center
Series A New York, New York -- -- *
Series B -- --
Liberty Media Group
Common Stock
Series A -- --
Series B -- --
Preferred Stock
Class B 150,142(14) 9.3%
Series C -- --
Series G -- --
Series H -- --
</TABLE>
- ---------------
* Less than one percent.
(1) Based on 579,395,742 shares of Series A TCI Group Common Stock (after
elimination of shares held by subsidiaries of the Company), 84,663,501
shares of Series B TCI Group Common Stock, 144,815,842 shares of Series A
Liberty Media Group Common Stock, 21,191,669 shares of Series B Liberty
Media Group Common Stock, 1,620,026 shares of Class B Preferred Stock,
70,575 shares of Series C Preferred Stock, 6,695,527 shares of Series G
Preferred Stock and 6,695,527 shares of Series H Preferred Stock
outstanding on October 31, 1996.
(2) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 1,000,000 shares of
Series A TCI Group Common Stock and 250,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 600,000 and 150,000 shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common
Stock, respectively, are exercisable as of October 31, 1996. Additionally
assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in December of 1995 to acquire 1,000,000 shares of
Series A TCI Group Common Stock and 250,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 200,000 shares of Series A TCI
Group Common Stock and 50,000 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996.
(3) Includes 1,173,000 shares of Series B TCI Group Common Stock, 293,250
shares of Series B Liberty Media Group Common Stock and 6,900 shares of
Class B Preferred Stock held by Dr. Malone's wife, Mrs. Leslie Malone, but
Dr. Malone has disclaimed any beneficial ownership of such shares.
(4) Mr. Bob Magness, prior to his death, and Kearns-Tribune Corporation
("Kearns"), pursuant to a letter agreement, dated June 17, 1988, each
agreed with Dr. Malone that prior to making a disposition of a significant
portion of their respective holdings of Series B TCI Group Common Stock or
Series B Liberty Media Group Common Stock, he or it would first offer Dr.
Malone the opportunity to purchase such shares.
(5) The number of shares in the table is based upon a Schedule 13D, dated May
24, 1996, filed by The Associated Group, Inc. which reflects that said
corporation has shared voting and dispositive power over 7,071,852 shares
of Series B TCI Group Common Stock and 1,767,963 shares of Series B Liberty
Media Group Common Stock.
(6) Includes 2,105,332 shares of Series A TCI Group Common Stock, 6,346,212
shares of Series B TCI Group Common Stock, 526,333 shares of Series A
Liberty Media Group Common Stock and 1,586,553 Series B Liberty Media Group
held by the Estate of Betsy Magness. Mr. Magness is deemed to have
beneficial ownership over such shares as Personal Representative to the
Estate of Betsy Magness. Also, assumes the exercise in full of stock
options granted in November of 1994 to Kim Magness to acquire 50,000 shares
of Series A TCI Group Common Stock and 12,500 shares of Series A Liberty
Media
7
<PAGE> 15
Group Common Stock. Options to acquire 10,000 shares of Series A TCI Group
Common Stock and 2,500 shares of Series A Liberty Media Group Common Stock
are exercisable as of October 31, 1996.
(7) The number of shares in the table is based upon a Schedule 13G, dated
February 9, 1996, filed by The Equitable Companies Incorporated which
Schedule 13G indicates that such corporation has sole voting power over
30,729,443 shares and shared voting power over 1,002,725 shares of Series A
TCI Group Common Stock. No information is given with respect to voting
power over the remaining shares.
(8) The number of shares in the table is based upon a Schedule 13G, dated
January 9, 1996, filed by The Equitable Companies Incorporated which
Schedule 13G indicates that said corporation has sole voting power over
11,219,798 shares and shared voting power over 273,681 shares of Series A
Liberty Media Group Common Stock. No information is given with respect to
voting power over the remaining shares.
(9) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held as of December 29, 1995, 39,546,870 shares of Series A TCI Group
Common Stock. Capital Guardian Trust Company, a bank, and one of such
operating companies, exercised investment discretion over 3,636,820 of said
shares. Capital Research and Management Company, a registered investment
advisor, and Capital International Limited and Capital International, S.A.,
other operating subsidiaries, had investment discretion with respect to
35,565,750, 137,770 and 206,510 shares, respectively, of the above shares.
The information set forth above is based upon a Schedule 13G, dated
February 9, 1996, filed by The Capital Group Companies, Inc.
(10) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held as of December 29, 1995, 13,037,740 shares of Series A Liberty Media
Group Common Stock. Capital Guardian Trust Company, a bank, and one of such
operating companies, exercised investment discretion over 3,123,430 of said
shares. Capital Research and Management Company, a registered investment
advisor, and Capital International Limited and Capital International, S.A.,
other operating subsidiaries, had investment discretion with respect to
9,825,430, 34,440 and 54,420 shares, respectively, of the above shares. The
information set forth above is based upon a Schedule 13G, dated February 9,
1996, filed by The Capital Group Companies, Inc.
(11) Includes 3,524,315 shares of Series A TCI Group Common Stock, 30,785,864
shares of Series B TCI Group Common Stock, 880,714 shares of Series A
Liberty Media Group Common Stock, 7,696,466 shares of Series B Liberty
Media Group Common Stock and 125,000 shares of Class B Preferred Stock held
by the Estate of Bob Magness. Messrs. Fisher and Ritchie are each deemed to
have beneficial ownership over such shares as Co-Personal Representatives
to the Estate of Bob Magness. Included in such beneficial ownership is the
assumed exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to Bob Magness to acquire 1,000,000
shares of Series A TCI Group Common Stock and 250,000 shares of Series A
Liberty Media Group Common Stock. Additionally assumes the exercise in full
of stock options granted in tandem with stock appreciation rights in
December of 1995 to Bob Magness to acquire 1,000,000 shares of Series A TCI
Group Common Stock and 250,000 shares of Series A Liberty Media Group
Common Stock. All options became fully vested upon the death of Bob Magness
and, pursuant to the stock incentive plan, must be exercised within one
year.
(12) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 200,000 shares of Series
A TCI Group Common Stock and 50,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 40,000 shares of Series A TCI Group Common
Stock and 10,000 shares of Series A Liberty Media Group Common Stock are
exercisable as of October 31, 1996. Additionally assumes the exercise of
stock options granted in January of 1996 to acquire 50,000 shares of Series
A TCI Group Common Stock and 12,500 shares of Series A Liberty Media Group
Common Stock. None of these stock options are exercisable as of October 31,
1996.
(13) The number of shares in the table is based upon Form 13F for the quarter
ended September 30, 1996, filed by J.P. Morgan & Co. Incorporated, which
reflects that said corporation has sole voting power over 19,594,984 shares
and shared voting power over 403,438 shares of Series A TCI Group Common
Stock.
8
<PAGE> 16
(14) The number of shares in the table is based upon a Schedule 13G, dated July
31, 1996, filed by Salomon Inc. which reflects that said corporation has
shared voting power over 150,142 shares of the Class B Preferred Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of October 31, 1996, information with
respect to the ownership of: (i) Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock, Class B Preferred Stock, Series C Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock and (ii) the voting
securities of Tele-Communications International, Inc., a majority owned
subsidiary of the Company ("International"), which consist of
Tele-Communications International, Inc. Series A Common Stock ("TINTA Series A
Stock") and Tele-Communications International, Inc. Series B Common Stock
("TINTA Series B Stock"), by all directors and each of the named executive
officers of TCI and by all executive officers and directors of TCI as a group.
The numbers of shares (and corresponding percentages of series) of the Series A
Liberty Media Group Common Stock in the following table and in the footnotes in
the table have not been adjusted for the Liberty Stock Distribution. Shares
issuable upon exercise of options or conversion of convertible securities and
upon vesting of restricted shares are deemed to be outstanding for the purpose
of computing the percentage ownership and overall voting power of persons
beneficially owning such securities, but have not been deemed to be outstanding
for the purpose of computing the percentage ownership or overall voting power of
any other person. Voting power in the table is computed with respect to a
general election of directors. The number of shares of Series A TCI Group Common
Stock, Series B TCI Group Common Stock, Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock in the table include
interests of the named directors or executive officers or of members of the
group of directors and executive officers in shares held by the trustee of TCI's
ESPP and shares held by the trustee of United Artists Entertainment Company's
Employee Stock Ownership Plan for their respective accounts. So far as is known
to TCI, the persons indicated below have sole voting and investment power with
respect to the shares indicated as owned by them except as otherwise stated in
the notes to the table and except for the shares held by the trustee of TCI's
ESPP for the benefit of such person, which shares are voted at the discretion of
the trustee.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)(2) POWER(1)(2)
-------------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
TCI Group John C. Malone
Common Stock
Series A 2,172,366(3) * 17.7%
Series B 25,332,083(3) 29.9%
Liberty Media Group
Common Stock
Series A 542,983(3) *
Series B 6,360,520(3) 30.0%
Preferred Stock
Class B 306,000(3) 18.9%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000(16) * *
TINTA Series B Stock -- --
</TABLE>
9
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)(2) POWER(1)(2)
-------------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
TCI Group Donne F. Fisher
Common Stock
Series A 4,111,817(4) * 21.7%
Series B 31,034,936(4) 36.7%
Liberty Media Group
Common Stock
Series A 1,029,838(4) *
Series B 7,758,734(4) 36.6%
Preferred Stock
Class B 129,299(4) 8.0%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 450,000 * *
TINTA Series B Stock -- --
TCI Group John W. Gallivan
Common Stock
Series A 52,124(5)(15) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 13,031(5)(15) *
Series B -- --
Preferred Stock
Class B 14(15) *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Kim Magness
Common Stock
Series A 2,155,332(6) * 4.9%
Series B 6,864,212(6) 8.1%
Liberty Media Group
Common Stock
Series A 538,833(6) *
Series B 1,716,053(6) 8.1%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 2,000 * *
TINTA Series B Stock -- --
</TABLE>
10
<PAGE> 18
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)(2) POWER(1)(2)
- ------------------------ ----------------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
TCI Group Jerome H. Kern
Common Stock
Series A 2,050,000(7) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 512,500(7) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000(17) * *
TINTA Series B Stock -- --
TCI Group Tony Coelho
Common Stock
Series A 152,800(8) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 12,700(8) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,000 * *
TINTA Series B Stock -- --
TCI Group Robert A. Naify
Common Stock
Series A 23,688,860(9) 3.9% 1.6%
Series B -- --
Liberty Media Group
Common Stock
Series A 5,922,192(9) 3.9%
Series B -- --
Preferred Stock
Class B 1,000 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
</TABLE>
11
<PAGE> 19
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)(2) POWER(1)(2)
- ------------------------ ----------------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
TCI Group J.C. Sparkman
Common Stock
Series A 235,472(10) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 62,168(10) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Paul Gould
Common Stock
Series A 77,330 * *
Series B 127,324 *
Liberty Media Group
Common Stock
Series A 47,832 *
Series B 24,081 *
Preferred Stock
Class B 19,558 1.2%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 400,000(11) * *
TINTA Series B Stock --
TCI Group Fred A. Vierra
Common Stock
Series A 581,473(12) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 141,260(12) * *
Series B -- --
Preferred Stock
Class B 200 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 442,000(13) * *
TINTA Series B Stock -- --
</TABLE>
12
<PAGE> 20
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME OF BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1)(2) POWER(1)(2)
-------------- ---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
TCI Group Brendan R. Clouston
Common Stock
Series A 1,986,496(14) * *
Series B 230 *
Liberty Media Group
Common Stock
Series A 221,623(14) *
Series B 57 *
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
All directors and
TCI Group executive
Common Stock officers as a group
Series A (16 persons) 41,153,690(1)(3)(4) 6.7% 45.6%
(5)(6)(7)
(8)(9)(10)
(12)(14)
(15)
Series B 63,364,131(1)(3)(4) 74.8%
(6)
Liberty Media Group
Common Stock
Series A 10,896,391(1)(3)(4) 7.1%
(5)(6)(7)
(8)(9)(10)
(12)(14)
(15)
Series B 15,860,781(1)(3)(4) 74.8%
(6)
Preferred Stock
Class B 459,277(1)(4) 28.4%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,503,200(2)(11) 1.4% *
(13)(16)
(18)(19)
TINTA Series B Stock -- --
</TABLE>
- ---------------
* Less than one percent.
(1) See note (1) to the table in "-- Security Ownership of Certain Beneficial
Owners."
(2) Based on 106,960,873 shares of TINTA Series A Stock and 11,700,000 shares
of TINTA Series B Stock outstanding on October 31, 1996.
(3) See notes (2), (3) and (4) to the table in "-- Security Ownership of
Certain Beneficial Owners."
(4) See notes (4), (11) and (12) to the table in "-- Security Ownership of
Certain Beneficial Owners."
(5) Includes 1,524 shares of Series A TCI Group Common Stock and 381 shares of
Series A Liberty Media Group Common Stock held by Mr. Gallivan's wife.
Also, assumes the exercise in full of options granted to acquire 50,000
shares of Series A TCI Group Common Stock and 12,500 shares of Series A
Liberty Media Group Common Stock. Options to acquire 10,000 shares of
Series A TCI Group Common Stock
13
<PAGE> 21
and 2,500 shares of Series A Liberty Media Group Common Stock are
exercisable as of October 31, 1996.
(6) See note (6) to the table in "-- Security Ownership of Certain Beneficial
Owners."
(7) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights to acquire 1,500,000 shares of Series A TCI Group
Common Stock and 375,000 shares of Series A Liberty Media Group Common
Stock. Options to acquire 700,000 shares and 175,000 shares of Series A TCI
Group Common Stock and Series A Liberty Media Group Common Stock,
respectively, are exercisable as of October 31, 1996. Additionally, assumes
the exercise in full of stock options granted in tandem with stock
appreciation rights to acquire 500,000 shares of Series A TCI Group Common
Stock and 125,000 shares of Series A Liberty Media Group Common Stock.
Options to acquire 100,000 shares of Series A TCI Group Common Stock and
25,000 shares of Series A Liberty Media Group Common Stock are exercisable
as of October 31, 1996. Also assumes the exercise in full of stock options
granted to acquire 50,000 shares of Series A TCI Group Common Stock and
12,500 shares of Series A Liberty Media Group Common Stock. Options to
acquire 10,000 shares of Series A TCI Group Common Stock and 2,500 shares
of Series A Liberty Media Group Common Stock are exercisable as of October
31, 1996.
(8) Assumes the exercise in full of stock options granted to acquire 50,000
shares of Series A TCI Group Common Stock and 12,500 shares of Series A
Liberty Media Group Common Stock. Options to acquire 10,000 shares of
Series A TCI Group Common Stock and 2,500 shares of Series A Liberty Media
Group Common Stock are exercisable as of October 31, 1996. Additionally
assumes the exercise in full of stock options granted in tandem with stock
appreciation rights granted to acquire 100,000 shares of Series A TCI Group
Common Stock. Options to acquire 20,000 shares of Series A TCI Group Common
Stock are exercisable as of October 31, 1996.
(9) Mr. Robert Naify received notes, which are currently convertible into
22,446,926 shares of Series A TCI Group Common Stock and 5,611,731 shares
of Series A Liberty Media Group Common Stock, as partial consideration for
the sale to TCI of the stock owned by him in United Artists Communications,
Inc. ("UACI"). Mr. Naify is also a co-trustee, along with Mr. Naify's
brother, Marshall, and their sister, of a trust for the benefit of Marshall
which holds additional notes convertible into 341,606 shares of Series A
TCI Group Common Stock and 85,401 shares of Series A Liberty Media Group
Common Stock. The number of shares indicated as held by Mr. Naify assumes
the conversion of these notes. Also, assumes the exercise in full of
options granted to acquire 50,000 shares of Series A TCI Group Common Stock
and 12,500 shares of Series A Liberty Media Group Common Stock. Options to
acquire 10,000 shares of Series A TCI Group Common Stock and 2,500 shares
of Series A Liberty Media Group Common Stock are exercisable as of October
31, 1996.
(10) Assumes the exercise in full of options granted in May of 1995 to acquire
100,000 shares of Series A TCI Group Common Stock and 25,000 shares of
Series A Liberty Media Group Common Stock. All options are fully vested and
are exercisable as of October 31, 1996.
(11) Assumes the exercise in full of options granted in April of 1996 to acquire
50,000 shares of TINTA Series A Stock. None of these options is exercisable
until April of 1997.
(12) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 100,000 shares of Series
A TCI Group Common Stock and 25,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 60,000 shares of Series A TCI Group Common
Stock and 15,000 shares of Series A Liberty Media Group Common Stock are
exercisable as of October 31, 1996. Also assumes the exercise in full of
stock options granted in tandem with stock appreciation rights in November
of 1993 to acquire 100,000 shares of Series A TCI Group Common Stock and
25,000 shares of Series A Liberty Media Group Common Stock. Options to
acquire 50,000 shares of Series A TCI Group Common Stock and 12,500 shares
of Series A Liberty Media Group Common Stock are exercisable as of October
31, 1996. Additionally assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 200,000 shares of Series A TCI Group Common Stock and 50,000 shares
of Series A Liberty Media Group Common Stock. Options to acquire 40,000
shares of Series A TCI Group Common Stock and 10,000 shares of Series A
Liberty Media Group Common Stock are exercisable as of October 31, 1996.
14
<PAGE> 22
(13) Assumes the exercise in full of options granted in tandem with stock
appreciation rights in December of 1995 to acquire 400,000 shares of TINTA
Series A Stock. Options to acquire 80,000 shares of TINTA Series A Stock
are exercisable as of October 31, 1996. Additionally assumes the vesting in
full of 15,000 shares of TINTA Series A Stock which is restricted. None of
such stock is currently vested.
(14) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 300,000 shares of Series
A TCI Group Common Stock and 75,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 100,000 shares of Series A TCI Group
Common Stock and 25,000 shares of Series A Liberty Media Group Common Stock
are exercisable as of October 31, 1996. Additionally assumes the exercise
in full of stock options granted in tandem with stock appreciation rights
in November 1993 to acquire 375,000 shares of Series A TCI Group Common
Stock and 93,750 shares of Series A Liberty Media Group Common Stock.
Options to acquire 125,000 shares of Series A TCI Group Common Stock and
31,250 shares of Series A Liberty Media Group Common Stock are exercisable
as of October 31, 1996. Also assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 200,000 shares of Series A TCI Group Common Stock and 50,000 shares
of Series A Liberty Media Group Common Stock. Options to acquire 40,000
shares of Series A TCI Group Common Stock and 10,000 shares of Series A
Liberty Media Group Common Stock are exercisable as of October 31, 1996.
Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 1,000,000 shares of
Series A TCI Group Common Stock. Options to acquire 200,000 shares of
Series A TCI Group Common Stock are exercisable as of October 31, 1996.
Additionally assumes the vesting in full of 100,000 shares of Series A TCI
Group Common Stock which is restricted. None of the stock is currently
vested.
(15) Certain executive officers and directors of TCI (10 persons, including
Messrs. Malone, Vierra and Clouston) hold options which were granted in
tandem with stock appreciation rights in November of 1992, to acquire an
aggregate of 3,025,000 shares of Series A TCI Group Common Stock and an
aggregate of 756,250 shares of Series A Liberty Media Group Common Stock at
purchase prices of $12.50 per share and $16.75 per share, respectively.
Options to acquire 1,735,000 shares of Series A TCI Group Common Stock and
433,750 shares of Series A Liberty Media Group Common Stock are exercisable
as of October 31, 1996. Additionally certain executive officers (8 persons
including Messrs. Vierra and Clouston) hold stock options granted in tandem
with stock appreciation rights in October and November of 1993 to acquire
an aggregate of 1,100,000 shares of Series A TCI Group Common Stock and an
aggregate of 275,000 shares of Series A Liberty Media Group Common Stock at
purchase prices of $12.50 per share and $16.75 per share, respectively.
Options to acquire 487,500 shares of Series A TCI Group Common Stock and
121,875 shares of Series A Liberty Media Group Common Stock are exercisable
as of October 31, 1996. Also, certain executive officers and directors (10
persons including Messrs. Fisher, Vierra and Clouston) hold stock options
which were granted in tandem with stock appreciation rights in November of
1994 to acquire an aggregate of 1,450,000 shares of Series A TCI Group
Common Stock and an aggregate of 362,500 shares of Series A Liberty Media
Group Common Stock at purchase prices of $16.50 per share and $22.50 per
share, respectively. Options to acquire 290,000 shares of Series A TCI
Group Common Stock and 72,500 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996. Additionally, certain
executive officers and directors (11 persons, including Messrs. Malone,
Kern and Clouston) hold stock options which were granted, in tandem with
stock appreciation rights in December of 1995 to acquire an aggregate of
4,650,000 shares of Series A TCI Group Common Stock at $17.00 per share.
Options to acquire 930,000 shares of Series A TCI Group Common Stock are
exercisable as of October 31, 1996. Additionally, certain executive
officers and directors (6 persons, including Messrs. Malone and Kern) hold
stock options which were granted, in tandem with stock appreciation rights
in December of 1995 to acquire an aggregate of 1,775,000 shares of Series A
Liberty Media Group Common Stock at a purchase price of $24.00 per share.
Options to acquire 355,000 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996. Also, certain executive
officers (7 persons, including Mr. Clouston) hold an aggregate of 240,000
shares of Series A TCI Group Common Stock which is restricted. None of the
shares is vested as of October 31, 1996. Certain executive officers
15
<PAGE> 23
(2 persons) hold an aggregate of 20,000 shares of Series A Liberty Media
Group Common Stock which is restricted. None of the shares is vested as of
October 31, 1996. Mr. Kern holds an option to acquire 1,500,000 shares of
Series A TCI Group Common Stock and 375,000 shares of Series A Liberty
Media Group Common Stock. Also, Messrs. Gallivan, Kim Magness, Kern, Coelho
and Naify hold options to purchase an aggregate of 250,000 shares of Series
A TCI Group Common Stock and an aggregate of 62,500 shares of Series A
Liberty Media Group Common Stock at purchase prices of $16.50 per share and
$22.50 per share, respectively. Options to purchase 50,000 shares of Series
A TCI Group Common Stock and 12,500 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Also, Mr. Fisher holds
options to purchase an aggregate of 50,000 shares of Series A TCI Group
Common Stock and an aggregate of 12,500 shares of Series A Liberty Media
Group Common Stock at purchase prices of $19.25 per share and $25.25 per
share, respectively. None of such options is exercisable as of October 31,
1996. All of the aforementioned options with tandem stock appreciation
rights, options and restricted stock are reflected in this table assuming
the exercise or vesting in full of such securities. Neither the numbers of
shares issued upon exercise of such options nor the purchase prices for
such shares set forth herein have been adjusted to reflect the Liberty
Stock Distribution or the distribution subsequent to October 31, 1996 of
the common stock of TCI Satellite Entertainment, Inc. to holders of the TCI
Group Common Stock.
(16) Two executive officers, including Mr. Vierra, hold options which were
granted in tandem with stock appreciation rights in December of 1995 to
acquire an aggregate of 450,000 shares of TINTA Series A Stock. Options to
acquire 90,000 shares of TINTA Series A Stock are exercisable as of October
31, 1996. Additionally Mr. Vierra holds 15,000 shares of TINTA Series A
Stock which is restricted. None of the shares is currently vested.
Additionally, one executive officer holds options granted in tandem with
stock appreciation rights in December of 1995 by TCI to acquire 50,000
shares of its TINTA Series A Stock. Options to acquire 10,000 shares of
TINTA Series A Stock are exercisable as of October 31, 1996.
(17) The number of shares in the table does not include any shares held by
Kearns, of which Mr. Gallivan is an officer.
(18) Assumes the exercise in full of stock options granted in April of 1996 to
acquire 50,000 shares of TINTA Series A Stock. None of these options is
exercisable until April of 1997.
(19) Assumes the exercise in full of stock options granted in April of 1996 to
acquire 50,000 shares of TINTA Series A Stock. None of these options is
exercisable until April of 1997.
No equity securities in any subsidiary of the Company, other than
directors' qualifying shares, are owned by any of the Company's executive
officers or directors, except for those shares of TINTA Series A Stock reflected
in the table above and except that Mr. Kim Magness, a director of the Company,
owns 31 shares of 12% Series C Cumulative Compounding Preferred Stock ("WestMarc
Preferred Stock") of WestMarc Communications, Inc. ("WestMarc"), a wholly-owned
subsidiary of TCI. In addition, 948 shares of WestMarc Preferred Stock are held
in the Estate of Bob Magness, of which Donne Fisher, a director of the Company,
is a Co-Personal Representative. Dr. Malone, a director and an executive officer
of the Company, owns, as trustee for his children, 68 shares of WestMarc
Preferred Stock; Mr. Larry Romrell, an officer of the Company, owns 103 shares
of WestMarc Preferred Stock and Mr. Jerome Kern, a director of the Company, is
deemed to have beneficial ownership over 116 shares of WestMarc Preferred Stock
owned by his wife, Diane D. Kern. In July 1996, Brendan Clouston, an executive
officer of the Company, was granted a restricted stock award of 62 shares of
WestMarc Preferred Stock. Mr. Clouston and another executive officer of TCI
Communications, Inc., a subsidiary of the Company, each hold an option to
purchase 1.0% of the Company's common equity in the Telephony Group and an
option to purchase 1.0% of the Company's common equity in the Company's
developmental stage cable telephony business. See "THE TELEPHONY GROUP STOCK
PROPOSAL -- Management and Allocation Policies."
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<PAGE> 24
THE TELEPHONY GROUP STOCK PROPOSAL
GENERAL
The holders of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Series C Preferred Stock are being asked to consider and approve
the Telephony Group Stock Proposal, including adoption of the proposed
amendments to the Company's Restated Certificate of Incorporation (the "Company
Charter") set forth in Annex II hereto. The amendments would (i) authorize two
new series of Common Stock to consist of 750 million newly authorized shares
designated Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Series B Telephony Group Common Stock, and a corresponding
increase in the total number of authorized shares of Common Stock from
2,725,000,000 to 3,550,000,000, (ii) establish the voting powers and relative,
participating, optional and other special rights and qualifications, limitations
and restrictions of the Telephony Group Common Stock, and (iii) change certain
rights and powers of the TCI Group Common Stock and the Liberty Media Group
Common Stock, and the qualifications, limitations or restrictions thereof, in
order to implement the Telephony Group Stock Proposal and to reflect the
authorization of the Telephony Group Common Stock. Capitalized terms used in the
following description of the Telephony Group Stock Proposal and not otherwise
defined have the meanings ascribed to them elsewhere in this Proxy Statement.
See Annex I -- Index of Certain Defined Terms.
If the Telephony Group Stock Proposal is approved by stockholders, the
Company anticipates filing with the Secretary of State of the State of Delaware
a Certificate of Amendment to the Company Charter including the amendments in
the form set forth in Annex II hereto (the "Certificate of Amendment"). It is
currently anticipated that such filing will be made as promptly as practicable
after the Special Meeting. The Company Charter as proposed to be amended to
reflect the Telephony Group Stock Proposal is herein referred to as the "Amended
Charter." The Board of Directors may abandon the Telephony Group Stock Proposal
in whole, but not in part, without further action by the stockholders, at any
time prior to such filing. In addition, even if the Certificate of Amendment is
so filed, the Board of Directors may determine not to authorize the issuance of
any shares of the Telephony Group Common Stock, in which case, in accordance
with the provisions of the Certificate of Amendment, the performance of the
entire interest in the businesses comprising the Telephony Group would continue
to be reflected in the TCI Group Common Stock. If the Telephony Group Stock
Proposal is not approved, the Certificate of Amendment will not be filed and no
shares of Telephony Group Common Stock will be authorized or issued.
THE TELEPHONY GROUP
The Telephony Group Common Stock, if issued, would be intended to reflect
the separate performance of the Telephony Group. The Telephony Group would
initially consist of all of the Company's equity interest in TCI Telephony
Services, Inc., a Delaware corporation and an indirect wholly owned subsidiary
of the Company ("TTS-Delaware"), its subsidiaries, their respective assets, and
all assets and liabilities of the Company and its subsidiaries to the extent
attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TTS-Delaware or any of its
subsidiaries (TTS-Delaware, together with its consolidated subsidiaries (unless
the context indicates otherwise), is referred to in this Proxy Statement as "TCI
Telephony"). The principal assets of TCI Telephony are its investments in a
series of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband personal
communications services ("PCS"), to residential and business customers
nationwide under the "Sprint" brand (the "PCS Ventures"), and its investment in
Teleport Communications Group Inc., a Delaware corporation ("TCG" or
"Teleport"), which is a competitive local exchange carrier. 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
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<PAGE> 25
Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. The
Company has a 31.1% equity interest (which represents a 36.4% voting interest)
in TCG.
Sprint PCS is the largest broadband wireless personal communications
services company in the United States in terms of total licensed "Pops," with
licenses (including those owned by licensees that are affiliated or have agreed
to affiliate with Sprint PCS (including PhillieCo)) to provide service in MTAs
(or metropolitan trading areas) covering over 190 million Pops. The term "Pops"
refers to the population covered by a license or group of licenses and, as used
in this Proxy Statement, is based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of a geographic area. Sprint PCS is in the
process of initiating wireless communications services nationwide under the
Sprint brand name and, as of January 10, 1997, had seven markets operational.
Teleport, the largest 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, primarily to businesses
long-distance carriers and resellers, and wireless communications companies. TCI
Telephony also holds a 50% partnership interest in Kansas City Fiber Network,
L.P. and a 40% partnership interest in NHT Partnership, which are competitive
access providers serving the Kansas City and Buffalo metropolitan areas,
respectively. Beyond the ownership of these assets, TCI Telephony also has the
right to acquire TCI's interests in the ResTel Business and the WTCI Business
(each as defined below). Reference is made to Annex III for a further
description of the Telephony Group and to Annex V for the combined financial
statements of the Telephony Group.
The Telephony Group would also include such other assets and liabilities of
the TCI Group as the Board of Directors may in the future determine to attribute
to the Telephony Group and such other businesses, assets and liabilities as the
Company or any of its subsidiaries may in the future acquire for the Telephony
Group, as determined by the Board of Directors. It is currently the intention of
the Company that any businesses, assets and liabilities so attributed to the
Telephony Group in the future would be businesses, assets and liabilities of, or
related to, the interests of the Company and its subsidiaries in the domestic
wireless and wireline telephony businesses (the "Telephony Business").
As of the date of this Proxy Statement, the only interests of the Company
and its subsidiaries in the Telephony Business that are not attributed to the
Telephony Group are the Company's developmental stage cable telephony business,
which provides wireline residential telephony services (i.e., conventional
telephone service or "POTS" and related services) via TCI's cable plant to
residential and small business customers in certain of the geographic areas
served by TCI's cable television systems (the "ResTel Business") and the
business currently being conducted by the Company's indirect subsidiary, Western
Tele-Communications, Inc. ("WTCI"), of providing long-distance transport of
video, voice and data traffic and other telecommunications services primarily to
inter-exchange carriers on a wholesale basis using a digital broadband microwave
network located throughout a 14-state region in the western United States (the
"WTCI Business"). The Company is currently in the process of evaluating the
customer acceptance and economic attractiveness of the residential telephony
opportunity utilizing upgraded cable plant. As part of this evaluation, the
Company began offering residential telephone service commercially in Hartford,
Connecticut in October 1996 and in Arlington Heights, Illinois in January 1997.
TCI is currently testing the provision of residential telephony service over its
cable plant in Freemont, California, and anticipates commercially launching the
service there in the first half of 1997. TCI currently expects that its
residential telephony service will be available to 260,000 homes in these three
markets in the aggregate by the end of the first half of 1997. With respect to
the WTCI Business, WTCI's gross revenues for the year ended December 31, 1995 of
approximately $32 million included approximately $24 million attributable to
wholesale carrier revenues. For the nine months ended September 30, 1996, WTCI's
gross revenues of approximately $24 million included approximately $19 million
attributable to wholesale carrier revenues.
TCI Telephony has the right, but not the obligation, to acquire the ResTel
Business from the Company, which right may be exercised by TCI Telephony in
whole or in part (by geographic area) and at any time or from time to time, as
applicable, provided that TCI Telephony is at the time a subsidiary of the
Company and the Company is then conducting such business. The method of
determining the purchase price for the ResTel Business, and the arrangements
between the Telephony Group and the TCI Group for the use by TCI Telephony of
the TCI Group's underlying cable plant to conduct the ResTel Business, have not
yet been
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<PAGE> 26
determined. In making such determinations, the Board of Directors will consider,
among other things, the TCI Group's aggregate investment (historically and
through any upgrade for two-way service) in the cable plant that TCI Telephony
would use to conduct the ResTel Business, the use of such plant by TCI's various
Groups (as defined below) or subsidiaries (e.g., for cable television, telephony
and Internet services), including the use by the Telephony Group of the
underlying plant for the ResTel Business and the use by the TCI Group of the
upgraded plant for other two-way services (such as Internet services and, if
developed in the future, interactive television services), and the ongoing costs
to maintain the plant. The purchase price and other arrangements between the
Groups determined by the Board of Directors may or may not reflect the terms and
conditions that either Group might have obtained in an arm's-length negotiation
with a third party. It is currently anticipated that if TCI Telephony exercises
its right to acquire the ResTel Business, it will enter into a long-term
agreement with TCI for the use of the cable plant via which it would conduct the
ResTel Business and for the payment by TCI Telephony of an allocated share of
the costs to maintain such plant. The portion of TCI's investment in the plant
that the Board determines to allocate to the Telephony Group may be included in
the purchase price for the ResTel Business or as a usage fee pursuant to such
long-term agreement.
TCI Telephony also has the right to acquire TCI's interests in the WTCI
Business. Such right may be exercised at any time, provided that TCI Telephony
is then a subsidiary of TCI and TCI is then conducting such business, at a price
based on the fair market value of such business (as determined by the Board of
Directors).
If TCI Telephony exercises its right to acquire the ResTel Business (in
whole or in part) or its right to acquire the WTCI Business, payment of the
applicable purchase price may be in funds generated by the Telephony Group
(whether through external financings, future operations or sales of assets), in
funds borrowed from TCI or otherwise through the issuance of debt or preferred
equity securities by TCI Telephony to TCI or other potential financing
opportunities; provided, however that the Board of Directors has determined
that, in the case of the Telephony Group's acquisition of the ResTel Business,
the payment of such purchase price will not be made through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony Group.
Whether or not TCI Telephony will exercise its right to acquire the ResTel
Business (in whole or in part) will depend upon a number of factors, including
the penetration rates for the service in the geographic area or areas in which
the service has been commercially launched (with the penetration rate being the
percentage that the number of subscribers to the service in such geographic area
represents of the homes technically capable of subscribing to the service), the
cost of providing the service at the penetration rate achieved in that area, and
the ability of TCI Telephony to fund the continued development and ongoing
operation of the ResTel Business in that area. With regard to the WTCI Business,
the factors that may affect whether TCI Telephony will exercise its acquisition
right include the costs to acquire and operate the business and TCI Telephony's
ability to fund such costs.
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The investments attributed to the Telephony Group are currently included in
the TCI Group, which also includes the Company's domestic cable and telephony
distribution and communications businesses, international cable, telephony and
programming businesses, technology/venture capital business and any other
business of the Company not attributed to the Liberty Media Group. The following
table presents selected financial data as of September 30, 1996 and for the nine
months then ended of the TCI Group (inclusive of the businesses constituting the
Telephony Group) and of the Telephony Group, and the percentage of the TCI Group
amounts represented by those of the Telephony Group. The table should be read
together with the more detailed information and financial statements included in
Annexes III and V.
<TABLE>
<CAPTION>
UNAUDITED
--------- TELEPHONY
TELE- GROUP AS A
COMMUNICATIONS, TELEPHONY PERCENTAGE OF
INC. TCI GROUP GROUP TCI GROUP
--------------- --------- --------- -------------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1996:
Share of Losses of Affiliates....... $ (308) $ (319) $ (111) 34.8%
Net Loss............................ (438) (474) (64) 13.5%
SEPTEMBER 30, 1996:
Total Assets........................ 30,575 28,160 1,120 4.0%
Debt................................ 15,118 15,014 -- 0%
</TABLE>
Upon effectiveness of the Telephony Group Stock Proposal, if approved, the
investments attributed to the Telephony Group will no longer be included in the
TCI Group; however, until shares of Telephony Group Common Stock are issued, the
TCI Group Common Stock will continue to be intended to reflect all of the common
stockholders' equity value of the Company attributable to the Telephony Group,
in addition to the separate performance of the Company's domestic cable and
telephony distribution and communications businesses (other than the investments
attributed to the Telephony Group), international cable, telephony and
programming businesses, technology/venture capital business and any other
businesses and assets of the Company not attributed to either the Liberty Media
Group or the Telephony Group. The common stockholders' equity value of the
Company attributable to the Telephony Group that, at any relevant time, is
attributed to the TCI Group and, accordingly, not represented by outstanding
Telephony Group Common Stock is referred to as the "Inter-Group Interest" of the
TCI Group in the Telephony Group. Prior to the issuance of any shares of
Telephony Group Common Stock, the Inter-Group Interest of the TCI Group in the
Telephony Group will be 100%. As shares of Telephony Group Common Stock are
issued and distributed or sold, the TCI Group's Inter-Group Interest in the
Telephony Group will be reduced accordingly.
ISSUANCE OF TELEPHONY GROUP COMMON STOCK
If the Telephony Group Stock Proposal is approved, the Company does not
currently intend to distribute shares of Telephony Group Common Stock to holders
of TCI Group Common Stock or any other series of Common Stock. Instead, the
Company presently proposes, subject to prevailing market and other conditions,
to effect an underwritten public offering of shares of Series A Telephony Group
Common Stock for cash. The Company has filed a registration statement with the
Securities and Exchange Commission ("SEC") in order to register shares of Series
A Telephony Group Common Stock to be offered and sold (the "Registration
Statement"). Any such offering of shares of Series A Telephony Group Common
Stock will be made only by a prospectus included in such Registration Statement.
Prior to the issuance of any shares of Telephony Group Common Stock, the Board
of Directors will determine the number of shares of the aggregate 825 million
authorized shares of Telephony Group Common Stock that are deemed to represent
the then Inter-Group Interest (i.e., 100% of the common stockholders' equity
value of the Company attributable to the Telephony Group) and such number will
represent the initial Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest. The authorized but unissued shares of Telephony
Group Common Stock in excess of the sum of (i) the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest and (ii) any
outstanding shares of Telephony Group Common Stock as of any relevant time are
referred to herein as "Available Shares." As described in the Registration
Statement, it is currently contemplated that the shares of Series A Telephony
Group Common Stock to be initially offered in such
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<PAGE> 28
public offering would be made from Available Shares and the net proceeds of such
offering would be allocated to the Telephony Group to be used to fund a portion
of its anticipated capital requirements, principally to fund TCI Telephony's
share of the capital contributions it anticipates will be required by the PCS
Ventures through 1998, and for general corporate purposes. The timing and size
of any such public offering and the price at which such shares would be sold
will be determined by the Board of Directors prior to such offering, without
further approval of stockholders, based upon then prevailing market and other
conditions.
Additional authorized shares of Telephony Group Common Stock could be
offered in the future, at the discretion of the Board of Directors, for cash in
one or more public offerings, with the proceeds credited either to the TCI
Group, to the extent of the Inter-Group Interest, in which case the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest would
be reduced accordingly and the Available Shares would be unaffected, or to the
Telephony Group, in which case the number of Available Shares would be reduced
accordingly and the Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be unaffected, or in part to the TCI Group (to
the extent of the Inter-Group Interest) and in part to the Telephony Group. In
the discretion of the Board of Directors, shares of Telephony Group Common Stock
issued in respect of the TCI Group's Inter-Group Interest in the Telephony Group
may be issued in the form of shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock (subject to there being a sufficient
number of authorized and unissued shares of the applicable series of Telephony
Group Common Stock). See "Inter-Group Interest in Telephony Group." For an
illustration of certain effects of the issuance of shares of Telephony Group
Common Stock, see Annex IV. The TCI Group's Inter-Group Interest in the
Telephony Group would be increased if a subsequent transfer of cash or other
property from the TCI Group to the Telephony Group is specifically designated by
the Board of Directors as being made to increase the Inter-Group Interest in the
Telephony Group (in contrast to transfers made for other consideration such as
transfers as loans or in purchase and sale transactions) or if outstanding
shares of Telephony Group Common Stock are retired or otherwise cease to be
outstanding following their purchase with funds attributed to the TCI Group. In
addition to the Inter-Group Interest, the Company holds $500 million of 6%
cumulative compounding redeemable preferred stock of TCI Telephony, which
preferred stock (the "Telephony Preferred Stock") is attributed to the TCI
Group, and may continue to advance funds to TCI Telephony in the form of loans.
The Company may from time to time, by action of its Board of Directors, (i)
offer shares of Telephony Group Common Stock for cash in one or more public
offerings, (ii) issue shares of Telephony Group Common Stock as consideration
for acquisitions or investments, (iii) issue shares of Telephony Group Common
Stock to employees of the Company pursuant to employee benefit plans or
otherwise as compensation, (iv) issue shares as a distribution to holders of TCI
Group Common Stock (to the extent of the Inter-Group Interest of the TCI Group
in the Telephony Group) or (v) issue shares of Telephony Group Common Stock for
any other proper corporate purpose. So long as sufficient authorized shares are
available, the timing, sequence, size and terms of such transactions would be
determined by the Board of Directors, without further approval of the
stockholders, unless deemed advisable by the Board of Directors or required by
applicable law, regulation or Nasdaq National Market requirements.
BACKGROUND AND REASONS FOR THE TELEPHONY GROUP STOCK PROPOSAL
In late 1994, the Board of Directors of the Company determined to
restructure the Company's businesses into four separate business lines: Domestic
Cable and Communications; Programming; International Cable and Programming; and
Technology/Venture Capital (the "Business Line Restructuring"). The Board of
Directors believed that the division of the Company's business into four
distinct units would enable the Company to benefit from the focused and
entrepreneurial behavior which is more typical of a small company, while also
maintaining the benefits of scale which a large corporation such as the Company
is ordinarily able to achieve; would facilitate increased investor understanding
of the different lines of business; would enhance opportunities to finance the
operations of each division separately, where appropriate, through financing
tailored specifically to the capital needs of the division in question; and
could encourage strategic partnering with other companies in the same line of
business.
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<PAGE> 29
The Board of Directors also directed management to study various methods of
enhancing stockholder value. This directive resulted from the Board of
Directors' belief that the Company was undervalued by the capital markets, in
part because the market focused primarily upon the Company's dominant cable
television system business and did not give full value to the other diverse
assets held by the Company. The Board of Directors believed that overall
stockholder value would be enhanced if there were increased recognition in the
investment community of the Company's individual lines of business and the value
of the assets used in such businesses.
Management proceeded to review with its financial advisors potential
actions which the Company could undertake in order to increase market
recognition of the value of the Company's assets used in each of its lines of
business. Among the actions considered by management were a spin-off to the
Company's stockholders of all or part of one or more of its divisions, public
offerings of minority interests in one or more of the divisions and the issuance
of separate securities of the Company the economic attributes of which would be
defined by reference to the performance of one or more of its divisions
(commonly known as "tracking stock" or "targeted stock").
With respect to the Programming line of business, the Board of Directors
determined that the issuance of tracking stock came closest to meeting the
objectives of the Board of Directors. Accordingly, on February 8, 1995, the
Board of Directors determined that the creation of the Liberty Media Group
Common Stock and the redesignation of the Company's then-existing common stock
into TCI Group Common Stock was in the best interests of the Company and its
stockholders and made a proposal to such effect to the Company's stockholders
(the "Liberty Media Group Proposal"). At the Company's annual meeting held on
August 3, 1995, the Company's stockholders approved the Liberty Media Group
Proposal, and shares of Liberty Media Group Common Stock were distributed to
holders of TCI Group Common Stock on August 10, 1995.
With respect to the Company's International Cable and Programming line of
business, which is included in the TCI Group, the Board of Directors determined
that a public offering of a minority interest in this division was the
appropriate course to take to achieve the Company's objectives. In July 1995,
Tele-Communications International, Inc., the subsidiary of the Company that
holds the assets comprising the International Cable and Programming line of
business, completed an initial public offering of shares representing
approximately 18% of its common stock.
Consistent with the Board of Director's directive, management of the
Company has also been considering the applicability of certain of the strategies
proposed by its financial advisors to the Company's Domestic Cable and
Communications line of business. As an initial step, the operations of the
Domestic Cable and Communications line of business were further subdivided into
four strategic business units (each, an "SBU"): cable, telephony, internet
services and satellite. In November 1996, the Board of Directors declared a
distribution to the holders of TCI Group Common Stock of all of the outstanding
shares of common stock of TCI Satellite Entertainment, Inc., which then held the
assets of the satellite SBU. The distribution was effected on December 4, 1996,
resulting in the spin off to stockholders of all of the Company's interests in
the business of distributing multichannel programming services directly to
consumers in the United States via digital medium power or high power
satellites, including the rental and sale of related customer premises equipment
(the "Digital Satellite Business"). Because the Digital Satellite Business and
the cable distribution business use distinct distribution networks to provide
the same or similar programming potentially to the same customer, the separation
of the two businesses through a spin off was both possible and desirable.
In management's opinion, the businesses and investments included in the
telephony SBU do not pose the same competitive issues as those in the satellite
SBU; instead, they provide opportunities for packaging product offerings that
may attract new customers and assist in retaining existing customers. In certain
cases, such as the ResTel Business, the businesses included in the telephony SBU
are intricately linked to the cable distribution network and, with the exception
of the WTCI Business and the investment in TCG, such businesses and investments
currently have large capital requirements and a minimal amount of revenue.
Management therefore proposed to the Board of Directors that the Company issue a
"tracking stock" or "targeted stock," the economic attributes of which would be
defined by reference to the performance of the
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<PAGE> 30
Telephony Group, which would initially be comprised of certain investments of
the telephony SBU, including the Company's interests in the PCS Ventures and in
TCG.
On December 4, 1996, the Board of Directors determined that the Telephony
Group Stock Proposal was in the best interests of the Company and its
stockholders and unanimously declared it advisable and recommended that the
Company's stockholders vote in favor of the Telephony Group Stock Proposal. The
Board of Directors believes that adoption of the Telephony Group Stock Proposal
is in the best interests of the Company and all of its stockholders for the
following reasons:
- It would provide the Company greater flexibility with regard to raising
capital for the Telephony Group's businesses and with regard to making
acquisitions and investments for the Telephony Group, including strategic
partnering transactions, independent of the TCI Group, by using equity
securities specifically related to the Telephony Group.
- It would also provide the Company with additional means of realizing
value for the TCI Group from the businesses that constitute the Telephony
Group, through the sale of shares of Telephony Group Common Stock
attributed to the Inter-Group Interest.
- The issuance and sale of Telephony Group Common Stock would result in
greater market recognition of the value of the Telephony Group, thereby
enhancing stockholder value over the long term.
- The issuance and sale of Telephony Group Common Stock would also provide
investors with the opportunity to invest in separate securities intended
specifically to reflect the Telephony Group and would enable the Company
to more effectively tailor employee benefit plans to provide incentives
to the employees in the Telephony Group. Although a substantial portion
of the value of the assets of the Telephony Group is represented by the
Company's investment in TCG and shares of the Class A common stock of TCG
are traded on the Nasdaq National Market, the issuance and sale of shares
of the Telephony Group Common Stock would offer investors the opportunity
to participate in the Company's substantial equity investment in TCG
(primarily represented by shares of TCG's Class B common stock which have
ten votes per share (as compared to the Class A common stock's one vote
per share) and are not publicly traded) and its investments in the PCS
Ventures (none of which has publicly traded equity securities).
- The sale of Telephony Group Common Stock by the Company would strengthen
its consolidated balance sheet by increasing the Company's shareholders'
equity and reducing its ratio of debt to total capitalization. This
result would be accomplished without diluting the interest of the holders
of TCI Group Common Stock in the TCI Group Common Stock (although the
percentage of the common stockholders' equity value of the Company
attributable to the Telephony Group that is intended to be reflected in
the TCI Group Common Stock would decrease) and without diluting the
interest of the holders of the Liberty Media Group Common Stock in the
Liberty Media Group Common Stock.
- It would permit the Company to obtain the foregoing benefits while
preserving the advantages of continued ownership of the businesses of the
Telephony Group by the Company and the benefits of being part of a
consolidated enterprise, including the absence of certain costs
associated with operation of separate, publicly held corporations, and
preserving certain restructuring options for the Company in the future.
Unlike the case with separate, publicly held corporations, however,
holders of Telephony Group Common Stock will continue to be subject to
all the risks associated with an investment in the Company and all of its
businesses, assets and liabilities. See "Factors to be
Considered -- Stockholders of One Company; Financial Effects on One
Business Could Affect Other Businesses."
The issuance of the Telephony Group Common Stock would change certain of
the rights, powers and privileges of the TCI Group Common Stock and the Liberty
Media Group Common Stock. See "Description of Telephony Group Common Stock and
Effects on Existing Common Stock."
In connection with its approval of the Telephony Group Stock Proposal, the
Board of Directors also evaluated the potentially adverse aspects of the
proposal, including the lack of assurance as to the degree to which the market
price of the Telephony Group Common Stock will reflect the separate performance
of the
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<PAGE> 31
Telephony Group and the uncertainty as to the impact of the proposal on the
market price of the TCI Group Common Stock and the Liberty Media Group Common
Stock, as well as the fact that implementation of the Telephony Group Stock
Proposal will, to an extent, make the capital structure of the Company more
complex and may give rise to occasions when the interests of the holders of TCI
Group Common Stock, the holders of Liberty Media Group Common Stock and the
holders of Telephony Group Common Stock may diverge or appear to diverge. See
"Factors to be Considered -- No Assurance as to Market Price" and "Factors to be
Considered -- Potential Divergence of Interests; No Specific Procedures for
Resolution." The Board of Directors determined, however, that the positive
aspects of the Telephony Group Stock Proposal outweighed any potentially adverse
aspect.
The Board of Directors will continue to review options that may be
available to the Company to realize additional value from the investments
attributed to the Telephony Group as well as the remaining businesses and assets
of the telephony SBU. In determining whether to pursue a particular option, the
Board of Directors, in exercising its business judgment, will consider various
factors, including market conditions, the financial and other effects of any
such option on the Company, the TCI Group, the Liberty Media Group and the
Telephony Group (each, a "Group" and, collectively, the "Groups") and on the
holders of the TCI Group Common Stock and the Liberty Media Group Common Stock,
and the preservation of its ability to engage in other restructuring options at
such time as such options become desirable.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TELEPHONY GROUP STOCK
PROPOSAL AND BELIEVES THAT ITS ADOPTION IS IN THE BEST INTERESTS OF THE COMPANY
AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE IN FAVOR OF THE TELEPHONY GROUP STOCK PROPOSAL.
SUMMARY DESCRIPTION OF TELEPHONY GROUP STOCK PROPOSAL
The following summarizes certain selected terms of the Telephony Group
Common Stock under the Amended Charter, the changes to the terms of the TCI
Group Common Stock and Liberty Media Group Common Stock under the Amended
Charter and the Inter-Group Interest. These summaries should be read together
with (and are qualified by reference to) the more complete discussion set forth
under "Description of Telephony Group Common Stock and Effects on Existing
Common Stock," "Inter-Group Interest in the Telephony Group" and the text of the
Certificate of Amendment set forth in Annex II.
TELEPHONY GROUP COMMON STOCK
Businesses.................... The Telephony Group consists of the Company's
investments, through TCI Telephony, in certain
entities engaged in the domestic wireline and
wireless telephony businesses, principally its
investments in the PCS Ventures and in TCG. See
Annex III -- Description of Telephony Group.
The Company could determine to pursue future
business opportunities through one Group
instead of the other Groups, or jointly through
more than one of the Groups. See "Management
and Allocation Policies."
The Telephony Group Common Stock is intended to
reflect the separate performance of the
Telephony Group. However, holders of Telephony
Group Common Stock will be subject to all of
the risks associated with an investment in the
Company and all of its businesses, assets and
liabilities. There is no assurance as to the
degree to which the market value of the
Telephony Group Common Stock will reflect the
separate performance of the Telephony Group.
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<PAGE> 32
Dividends and Share
Distributions................. The Company has never paid cash dividends on
its Common Stock and does not currently intend
to pay cash dividends on any series of its
Common Stock, including the Telephony Group
Common Stock, if authorized.
Dividends on the Telephony Group Common Stock
would be payable out of the lesser of assets of
the Company legally available therefor and the
Telephony Group Available Dividend Amount. If
dividends on the Telephony Group Common Stock
are paid, equivalent per share dividends will
be concurrently paid on both the Series A
Telephony Group Common Stock and the Series B
Telephony Group Common Stock. For this purpose,
equivalent per share dividends include, in the
case of distributions of securities, either
distributions of identical securities or
distributions of securities having differences
in voting rights and in certain related rights
(which differences are, in the case of
distributions of securities of the Company or
its subsidiaries (including stock dividends
consisting of Telephony Group Common Stock),
not greater than the corresponding differences
between the Series A Telephony Group Common
Stock and the Series B Telephony Group Common
Stock).
Subject to the foregoing provisions, dividends
may be declared and paid on the TCI Group
Common Stock, the Liberty Media Group Common
Stock and/or the Telephony Group Common Stock
in equal or unequal amounts, notwithstanding
the relationship between the TCI Group
Available Dividend Amount, the Liberty Media
Group Available Dividend Amount and the
Telephony Group Available Dividend Amount, the
respective amounts of prior dividends paid on,
or liquidation rights of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or
the Telephony Group Common Stock or any other
factor.
Any decision to pay dividends in the future
will depend on the financial condition, results
of operations and business requirements of the
Company as a whole. In making a determination
as to the allocation of any future dividends
between the TCI Group Common Stock, the Liberty
Media Group Common Stock and the Telephony
Group Common Stock, the Board of Directors
expects to follow a policy under which it will
consider, among other factors, the relative
financial condition, results of operations and
business requirements of the respective Groups.
Dividend, Redemption and
Conversion Rights Applicable
on Disposition of Telephony
Group Assets.................. If the Company disposes of all or substantially
all of the assets of the Telephony Group
(defined as 80% or more on a current market
value basis), other than in a transaction
referred to in the following sentence, the
Company is required, at its option, either to
(i) distribute to holders of the Telephony
Group Common Stock an amount in cash and/or
securities or other property equal to their
proportionate interest in the Telephony Group
Net Proceeds of such disposition, either by
special dividend or by redemption of all or
part of the outstanding shares of Telephony
Group Common Stock, or (ii) convert each
outstanding share of Series A Teleph-
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<PAGE> 33
ony Group Common Stock and Series B Telephony
Group Common Stock into a number (or fraction)
of shares of Series A TCI Group Common Stock or
Series B TCI Group Common Stock, respectively,
equal in each case to 110% of the average daily
ratio over the ten-Trading Day period beginning
on the 16th Trading Day after consummation of
the transaction of the Market Value of one
share of Series A Telephony Group Common Stock
to the Market Value of one share of Series A
TCI Group Common Stock. The Company will not be
required to take any of the foregoing actions
if the disposition of all or substantially all
of the assets of the Telephony 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 and other
than in connection with the disposition of all
or substantially all of the properties and
assets of the Company. The proportionate
interest in the Telephony Group Net Proceeds of
a disposition that would be distributed to
holders of Telephony Group Common Stock would
be based on the Telephony Group Outstanding
Interest Fraction (a measure of the percentage
interest in the Telephony Group represented by
outstanding shares of Telephony Group Common
Stock). Such a partial redemption could be
effected pro rata among the holders of such
shares or by such other method as may be
determined by the Board of Directors to be
equitable.
Conversion at Option of
Holder........................ Shares of Series B Telephony Group Common Stock
will be convertible at any time, at the option
of the holder only, into the same number of
shares of Series A Telephony Group Common
Stock. Shares of Series A Telephony Group
Common Stock will not be convertible into
shares of Series B Telephony Group Common
Stock.
Conversion at Option of
Company....................... The Company may, in the sole discretion of the
Board of Directors, elect at any time to
convert each outstanding share of Telephony
Group Common Stock into a number (or fraction)
of shares of TCI Group Common Stock equal to
the ratio of the value (as determined on the
basis of appraisals performed by investment
banking firms) of one share of Telephony Group
Common Stock to the average Market Value over a
20-Trading Day period prior to the date such
appraisal process is initiated of one share of
Series A TCI Group Common Stock. In such a
case, shares of Series A Telephony Group Common
Stock would be converted into Series A TCI
Group Common Stock and shares of Series B
Telephony Group Common Stock would be converted
into Series B TCI Group Common Stock.
Redemption in Exchange for
Stock
of Subsidiary................. The Company could at any time, in the sole
discretion of the Board of Directors, redeem
(without premium) all outstanding shares of
Telephony Group Common Stock in exchange for a
proportionate interest in the outstanding
shares of any one or more Qualifying
Subsidiaries that hold all of the assets and
liabilities attributed to the Telephony Group.
The percentage of the stock of the Qualifying
Subsidiary or Qualifying Subsidiaries owned by
the Company
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<PAGE> 34
that is distributable in the redemption would
be based on the Telephony Group Outstanding
Interest Fraction. In such a case, the Board of
Directors could elect to distribute, with
respect to each such subsidiary, either a
single class of subsidiary stock or two classes
of subsidiary stock having relative voting
rights and differences in certain related
rights not greater than the corresponding
differences between the Series A Telephony
Group Common Stock and the Series B Telephony
Group Common Stock. A "Qualifying Subsidiary"
for this purpose is a subsidiary of the Company
that is either wholly owned, directly or
indirectly, by the Company or in which the
Company's direct or indirect ownership and
voting interest is sufficient to satisfy the
requirements of the Internal Revenue Service
(the "Service") for a distribution of the
Company's interest in such subsidiary to
holders of Telephony Group Common Stock, which
distribution is tax free to such holders.
A Qualifying Subsidiary may include an existing
subsidiary of the Company such as TTS-Delaware
(which, through its subsidiaries, currently
holds substantially all of the assets and
liabilities of the Company attributed to the
Telephony Group) or another subsidiary of the
Company 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 Telephony
Group, it is expected that in connection with
any such redemption such additional assets or
liabilities would either be attributed to the
Telephony Group or transferred by such
Qualifying Subsidiary to the Company or to
another subsidiary of the Company attributed to
a Group other than the Telephony Group. In each
case, either the Inter-Group Interest of the
TCI Group in the Telephony Group would be
appropriately adjusted or other consideration
that the Board of Directors may determine in
its discretion to be appropriate would be paid
by one Group to the other Group. See
"Management and Allocation Policies."
Generally, the charter of a corporation that
has a tracking stock contains a provision
equivalent to the foregoing for the redemption
of such tracking stock in exchange for the
stock of a subsidiary and the Company Charter
includes such a provision with respect to the
Liberty Media Group Common Stock. Although the
Board of Directors determined that it was
appropriate for the Company to have the same
flexibility to redeem the Telephony Group
Common Stock, the Company does not currently
have any plans or proposals to effect any such
redemption if the Telephony Group Common Stock
is authorized and issued. 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 Telephony Group Common Stock in
exchange for a proportionate interest in shares
of one or more Qualifying Subsidiaries may be
limited 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.
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<PAGE> 35
The Company believes that under current law a
holder of Telephony 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 of Directors to redeem the
outstanding shares of Telephony Group Common
Stock in accordance 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 Telephony Group Common Stock will
be entitled to one vote per share and the
Series B Telephony Group Common Stock will be
entitled to ten votes per share, voting as one
class with the TCI Group Common Stock, the
Liberty Media Group Common Stock and any
Preferred Stock entitled to vote, except to the
extent separate class or series votes are
required by law or the Amended Charter. The
Amended Charter does not provide for any rights
for the Telephony Group Common Stock to vote
separately from the TCI Group Common Stock and
the Liberty Media Group Common Stock.
Liquidation................... Holders of shares of Series A Telephony Group
Common Stock and Series B Telephony Group
Common Stock will be entitled to share (on an
equal per share basis) a portion of the funds
of the Company remaining for distribution to
its common stockholders based on the average
daily ratio over a period of 20 Trading Days
prior to the announcement of the liquidation
event of the aggregate Market Capitalization of
the Telephony Group Common Stock to the
aggregate Market Capitalization of the TCI
Group Common Stock, the Liberty Media Group
Common Stock and the Telephony Group Common
Stock.
EFFECTS ON TCI GROUP COMMON STOCK
AND LIBERTY MEDIA GROUP COMMON STOCK
Businesses.................... Under the Telephony Group Stock Proposal, the
TCI Group will consist of the Company's
businesses and assets not included in either
the Liberty Media Group or the Telephony Group,
including, without limitation, domestic cable
distribution, the ResTel Business and the WTCI
Business, international cable, telephony and
programming and technology/venture capital. The
TCI Group will also include the Inter-Group
Interest in the Telephony Group and any
Inter-Group Interest that may hereafter be
created in the Liberty Media Group. Any
issuance of shares of Telephony Group Common
Stock would reduce the percentage of the common
stockholders' equity value of the Company
attributable to the Telephony Group that is
represented by the Inter-Group Interest of the
TCI Group in the Telephony Group (whether
through a reduction in the Number of Shares
Issuable with Respect to the Telephony Group
Inter-Group Interest or through an increase of
the percentage in the common stockholders'
equity value of the Company attributable to the
Telephony Group that is represented by the
outstanding shares of Telephony Group Common
Stock).
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<PAGE> 36
The businesses included in the Liberty Media
Group will not change under the Telephony Group
Stock Proposal.
Dividends and Share
Distributions................. Because the businesses included in the
Telephony Group are currently included in the
TCI Group, the Telephony Group Stock Proposal
will affect the determination of, and could
reduce the amount available for dividends
under, the TCI Group Available Dividend Amount.
Under the Telephony Group Stock Proposal, share
distributions on the TCI Group Common Stock
consisting of Telephony Group Common Stock are
permitted to the extent of the Number of Shares
Issuable with Respect to the Telephony Group
Inter-Group Interest, while share distributions
on the Liberty Media Group Common Stock
consisting of Telephony Group Common Stock are
not permitted.
Liquidation................... Holders of shares of Series A TCI Group Common
Stock and Series B TCI Group Common Stock are
currently entitled to share (on an equal per
share basis) a portion of the funds of the
Company remaining for distribution to its
common stockholders based on the average daily
ratio over a period of 20 Trading Days prior to
the announcement of the liquidation event of
the aggregate Market Capitalization of the TCI
Group Common Stock to the aggregate Market
Capitalization of the TCI Group Common Stock
and the Liberty Media Group Common Stock. If
the Telephony Group Stock Proposal is approved
and shares of Telephony Group Common Stock are
issued, the formula basis on which holders of
shares of TCI Group Common Stock share in the
funds remaining for distribution to common
stockholders will take into account the Market
Capitalization of the Telephony Group Common
Stock. Similarly, holders of shares of Series A
Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock will be
entitled to share (on an equal per share basis)
a portion of the funds of the Company remaining
for distribution to its common stockholders
based on the average daily ratio over a period
of 20 Trading Days prior to the announcement of
the liquidation event of the aggregate Market
Capitalization of the Liberty Media Group
Common Stock to the aggregate Market
Capitalization of the TCI Group Common Stock,
the Liberty Media Group Common Stock and the
Telephony Group Common Stock. If the sum of the
Market Capitalization of the TCI Group Common
Stock and the Market Capitalization of the
Telephony Group Common Stock for the relevant
measurement period is greater than what the
Market Capitalization of the TCI Group for such
period would have been if the Telephony Group
Common Stock had not been authorized, then the
portion of the funds of the Company remaining
for distribution to common stockholders in
which the holders of Liberty Media Group Common
Stock would share would be smaller than it
otherwise would have been.
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<PAGE> 37
INTER-GROUP INTEREST IN THE TELEPHONY GROUP
Currently, all of the investments attributed to the Telephony Group are
part of the TCI Group and the Company's equity in and share of losses of the
entities in which it holds such investments are attributed entirely to the TCI
Group. Upon effectiveness of the Telephony Group Stock Proposal, these
investments will cease to be included in the TCI Group; however, until shares of
Telephony Group Common Stock are issued, the TCI Group Common Stock will
continue to be intended to reflect all of the common stockholders' equity value
of the Company attributed to the Telephony Group -- i.e., the Inter-Group
Interest of the TCI Group in the Telephony Group will initially be 100% -- in
addition to the separate performance of all businesses of the Company not
included in the Liberty Media Group or the Telephony Group. At such time as
shares of Telephony Group Common Stock are first issued, the share of losses of
and the equity in the entities in which the investments attributed to the
Telephony Group are held will be reflected in the separate combined financial
statements of the Telephony Group and will cease to be reflected in the combined
financial statements of the TCI Group, except to the extent of the then
Inter-Group Interest, as adjusted to reflect such issuance. Except for the
financial statements included in this Proxy Statement and in the Registration
Statement, the Company does not intend to provide separate combined financial
statements for the Telephony Group until shares of Telephony Group Common Stock
are first offered or sold.
The amount of the Inter-Group Interest in the Telephony Group at any point
in time would be expressed in terms of the "Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest," which is intended to
provide a measure of the Inter-Group Interest of the TCI Group in the Telephony
Group on a basis comparable to an investment in shares of Telephony Group Common
Stock. Prior to the issuance of any shares of Telephony Group Common Stock, the
Board of Directors will designate the number of shares of the aggregate 825
million authorized shares of Telephony Group Common Stock that are deemed to
represent the then Inter-Group Interest (i.e., 100% of the common stockholders'
equity value of the Company attributable to the Telephony Group), and such
number will represent the initial Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest. Authorized shares of Telephony Group
Common Stock in excess of the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest and the outstanding shares of Telephony
Group Common Stock will be available for issuance as additional equity for the
Telephony Group. If shares of Telephony Group Common Stock are sold in an
initial public offering, it is currently the intention of the Company that the
shares offered would not include shares attributed to the Inter-Group Interest.
As shares of Telephony Group Common Stock are offered and sold from time to time
by the Company, the Company will identify (i) the number of shares of Telephony
Group Common Stock offered and sold that represent the Inter-Group Interest of
the TCI Group in the Telephony Group, if any, the sale of which shares will
reduce the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest on a share-for-share basis and the net proceeds of which
sale will be attributed entirely to the TCI Group, and (ii) the number of such
shares that represent an additional equity interest in the Telephony Group, the
sale of which shares will reduce the Available Shares and the net proceeds of
which sale will be attributed entirely to and reflected entirely in the combined
financial statements of the Telephony Group. See "Inter-Group Interest in the
Telephony Group." At the discretion of the Board of Directors, shares of
Telephony Group Common Stock issued in respect of the TCI Group's Inter-Group
Interest in the Telephony Group may be issued in the form of shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock (subject
to there being a sufficient number of authorized and unissued shares of the
applicable series of Telephony Group Common Stock). In addition to the net
proceeds from the sale of the number of shares of Telephony Group Common Stock
deemed to constitute all or part of the Inter-Group Interest, the TCI Group will
be credited, and the Telephony Group will be charged, with an amount equal to
the product of (i) the aggregate amount of any dividend or other distribution
paid (other than in shares of Telephony Group Common Stock as contemplated
below) or distributed in respect of outstanding Telephony Group Common Stock,
times (ii) a fraction, the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. For illustrations of the effects of the issuance
of shares of Telephony Group Common Stock, see Annex IV. The "Telephony Group
Outstanding Interest Fraction" represents the percentage interest in the common
stockholders' equity value of the Company attributable to the Telephony Group
that is represented at any time by the outstanding shares of Telephony Group
Common Stock and the
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"Telephony Group Inter-Group Interest Fraction" represents the percentage
interest in the common stockholders' equity value of the Company attributable to
the Telephony Group that is attributed to the TCI Group.
The TCI Group's Inter-Group Interest in the Telephony Group would be
increased if a subsequent transfer of cash or other property from the TCI Group
to the Telephony Group is specifically designated by the Board of Directors as
being made to increase the Inter-Group Interest in the Telephony Group (in
contrast to transfers made for other consideration such as transfers as loans or
in purchase and sale transactions) or if outstanding shares of Telephony Group
Common Stock are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the TCI Group. In structuring the terms of the
Telephony Group Stock Proposal, the Board of Directors determined that the
Telephony Group should not be permitted to create an interest in either the TCI
Group or the Liberty Media Group corresponding to the Inter-Group Interest, and
the Company Charter does not permit the Liberty Media Group to create an
interest in the Telephony Group corresponding to the Inter-Group Interest. In
making these determinations, the Board of Directors concluded that an interest
corresponding to the Inter-Group Interest held by the Telephony Group in either
the TCI Group or the Liberty Media Group could influence adversely the ability
of the Telephony Group Common Stock to reflect the separate performance of the
Telephony Group, and that an interest corresponding to the Inter-Group Interest
held by the Liberty Media Group in the Telephony Group could influence adversely
the ability of the Liberty Media Group Common Stock to reflect the separate
performance of the Liberty Media Group.
In general, if the TCI Group's Inter-Group Interest in the Telephony Group
is increased by a transfer of funds or other assets from the TCI Group to the
Telephony Group, the Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be increased by an amount determined by
dividing the amount of funds or value of the assets transferred by the Market
Value of a share of Series A Telephony Group Common Stock as of the date of such
transfer. Any decrease in the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest resulting from a transfer of funds or other
assets from the Telephony Group to the TCI Group determined by the Board of
Directors to be made in respect of such a decrease would be similarly
calculated. To the extent outstanding shares of Telephony Group Common Stock are
retired or otherwise cease to be outstanding following their purchase with funds
attributed to the TCI Group, the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would increase on a share-for-share basis.
Shares of Telephony Group Common Stock purchased with funds attributed to the
TCI Group which remain outstanding (as a result of being held by a subsidiary
included in the TCI Group) would not increase its Inter-Group Interest in the
Telephony Group but would represent an outstanding interest in the common
stockholders' equity value of the Company attributable to the Telephony Group.
Similarly, shares of Telephony Group Common Stock purchased with funds
attributed to the Liberty Media Group which remain outstanding would not create
an interest in the Telephony Group corresponding to the Inter-Group Interest,
but would represent an outstanding interest in the common stockholders' equity
value of the Company attributable to the Telephony Group. The Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest will also (a)
be adjusted from time to time as appropriate to reflect (i) subdivisions (by
stock split or otherwise) and combinations (by reverse stock split or otherwise)
of the Telephony Group Common Stock, (ii) dividends or distributions payable in
shares of Telephony Group Common Stock to holders of Telephony Group Common
Stock and (iii) reclassifications of Telephony Group Common Stock and (b) be
decreased by the number of shares of Telephony Group Common Stock (i) issued
upon conversion or exercise of Convertible Securities that are not attributed to
the Telephony Group or (ii) issued by the Company as a dividend or distribution
or by reclassification or exchange to holders of TCI Group Common Stock. The
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest would not be represented by outstanding shares of Telephony Group
Common Stock and would have no voting rights. In addition to the Inter-Group
Interest, the Company holds $500 million of Telephony Preferred Stock, which is
attributed to the TCI Group, and may continue to advance funds in the form of
loans to TCI Telephony.
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FACTORS TO BE CONSIDERED
Stockholders should consider the following factors, in addition to the
other information contained elsewhere in this Proxy Statement and the Annexes
hereto, in connection with the Telephony Group Stock Proposal.
STOCKHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE BUSINESS COULD AFFECT
OTHER BUSINESSES
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the Groups for the purpose of preparing the combined
financial statements of the Liberty Media Group and the Telephony Group, the
change in the capital structure of the Company contemplated by the Telephony
Group Stock Proposal will not affect legal title to such assets or
responsibility for such liabilities of the Company or any of its subsidiaries.
Holders of TCI Group Common Stock, Liberty Media Group Common Stock and
Telephony Group Common Stock will be common stockholders of the Company and will
be subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities.
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 Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. In addition, any net losses of any Group,
dividends or distributions on, or repurchases of, the TCI Group Common Stock,
the Liberty Media Group Common Stock or the Telephony Group Common Stock, and
dividends on, or certain repurchases of, Preferred Stock, will reduce funds of
the Company legally available for the payment of dividends on the TCI Group
Common Stock, the Liberty Media Group Common Stock and the Telephony Group
Common Stock. The combined financial statements of the Liberty Media Group and
the Telephony Group should be read in conjunction with the consolidated
financial statements of the Company. The combined financial statements of the
Liberty Media Group and the Telephony Group will principally reflect the
combined financial position, results of operations and cash flows of the
businesses and investments included therein. However, each of such Group's
financial information could also include allocated portions of the individual
assets and liabilities that are not separately identified with the operations of
a specific Group.
LIMITED SEPARATE STOCKHOLDER RIGHTS; EFFECTS ON VOTING POWER
Under the Telephony Group Stock Proposal, holders of Telephony Group Common
Stock would not have any legal rights specifically related to the assets
attributed to the Telephony 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 Telephony Group Common Stock upon the disposition of
all or substantially all of the properties and assets of the Telephony Group as
described under "Description of Telephony Group Common Stock and Effects on
Existing Common Stock -- Conversion and Redemption" and (ii) separate voting
rights in limited circumstances as required by the General Corporation Law of
the State of Delaware (the "DGCL"). Separate meetings for the holders of
Telephony Group Common Stock would not be held.
Under the Telephony Group Stock Proposal, holders of TCI Group Common
Stock, Liberty Media Group Common Stock, Telephony Group Common Stock and any
Preferred Stock having general voting rights would vote as one class on all
matters coming before any meeting of stockholders and would not have any
separate class voting rights except in limited circumstances as required by the
DGCL. Under the DGCL, the holders of the outstanding shares of a class are
entitled to vote as a class upon a proposed amendment to a corporation's
certificate of incorporation, whether or not entitled to vote on such amendment
by the certificate of incorporation, if the amendment would alter or change the
powers, preferences or special rights of such class so as to affect them
adversely. For this purpose, if a proposed amendment would alter or change the
powers, preferences or special rights of one or more series of any class so as
to affect them adversely, but would not so affect the entire class, then only
the shares of the series so affected by the amendment would be entitled to vote
as a separate class on the amendment. Accordingly, a proposed amendment the
adverse effect of which on the powers, preferences or rights of any series of
Common Stock does not differ from its adverse effect on
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the powers, preferences or rights of any other series of Common Stock would not
entitle such series to vote as a class separately from the other series of
Common Stock.
Certain matters on which holders of TCI Group Common Stock, Liberty Media
Group Common Stock and Telephony Group Common Stock would vote together as a
single class could involve a divergence or the appearance of a divergence of
interests between the holders of such series of Common Stock. For example, the
Amended Charter does not require that a merger or consolidation of the Company
requiring the approval of the Company's stockholders be approved by a separate
vote of holders of any series of Common Stock, and Delaware law requires such
approval only in certain circumstances. As a result, if holders of any one or
more series of Common Stock that possess the requisite voting power vote to
approve the merger or consolidation, then the merger or consolidation could be
consummated even if the holders of a majority of some other series of Common
Stock vote against the merger or consolidation. See "-- Potential Divergence of
Interests; No Specific Procedures for Resolution." Immediately following the
initial issuance of any shares of Telephony Group Common Stock, the combined
voting power of the Series A TCI Group Common Stock and Series B TCI Group
Common Stock would represent a majority of the voting power of all classes and
series entitled to vote in the election of directors.
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Common Stock will have one vote per share and the
Series B Telephony Group Common Stock will have ten votes per share. The Series
A TCI Group Common Stock and Series A Liberty Media Group Common Stock will
continue to have one vote per share and the Series B TCI Group Common Stock and
Series B Liberty Media Group Common Stock will continue to have ten votes per
share. See "Description of Telephony Group Common Stock and Effects on Existing
Common Stock -- Voting Rights."
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
The existence of the Telephony Group Common Stock may give rise to
occasions when the interests of the holders of Telephony Group Common Stock and
the holders of either TCI Group Common Stock or Liberty Media Group Common
Stock, or both, may diverge or appear to diverge. As further discussed below,
examples include, among others, determinations by the Board of Directors to (i)
convert each outstanding share of Telephony Group Common Stock into a fraction
of a share of TCI Group Common Stock, (ii) approve the disposition of all or
substantially all of the properties and assets of the Telephony Group, (iii)
allocate consideration to be received by holders of Common Stock in connection
with a merger or consolidation involving the Company among holders of different
series of Common Stock, (iv) allocate resources and financial support to or
pursue business opportunities or operational strategies through one Group
instead of one or more of the other Groups, (v) allocate the proceeds of
issuances of Telephony Group Common Stock either to the TCI Group in respect of
a reduction in its Inter-Group Interest in the Telephony Group or to the equity
of the Telephony Group, (vi) pay or omit dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common Stock
or (vii) approve transactions involving the transfer of funds or assets from one
Group to one or more of the other Groups or make other operational or financial
decisions with respect to one Group that could be considered to be detrimental
to one or more of the other Groups. Other than as described under "Management
and Allocation Policies," no specific procedures have been adopted for
consideration of matters involving a divergence of interests among the holders
of TCI Group Common Stock, Liberty Media Group Common Stock and Telephony Group
Common Stock. Rather than develop additional specific procedures in advance, the
Board of Directors intends to exercise its judgment from time to time, depending
on the circumstances, as to how best to obtain information regarding the
divergence (or potential divergence) of interests, under what circumstances to
seek the assistance of outside advisers, whether a committee of the Board of
Directors should be appointed to address the matter and how to assess which
available alternative is in the best interests of the Company and all of its
stockholders. The Board of Directors believes the advantages of retaining
flexibility in determining how best to fulfill its responsibilities in such
circumstances as they may arise outweigh any perceived advantages from adopting
additional specific procedures in advance.
Optional Conversion of Telephony Group Common Stock into TCI Group Common
Stock. The Board of Directors may determine to convert each outstanding share of
Series A Telephony Group Common Stock into
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a fraction of a share of Series A TCI Group Common Stock and each outstanding
share of Series B Telephony Group Common Stock into a fraction of a share of
Series B TCI Group Common Stock, in each case determined based upon the ratio of
the value (as determined on the basis of appraisals performed by investment
banking firms) of one share of Telephony Group Common Stock to the average
Market Value over a 20-Trading Day period prior to the date such appraisal
process is initiated of one share of Series A TCI Group Common Stock. Such a
conversion could be effected at any time, including at a time when the value of
one share of Telephony Group Common Stock determined by appraisal differs
significantly from the market value of the Telephony Group Common Stock
reflected in the trading markets, or at a time when the Market Value of the TCI
Group Common Stock used in the determination of the conversion ratio reflects
what might be considered an overvaluation or undervaluation. Basing the
conversion ratio on an appraised value determination for the Telephony Group
Common Stock and a trading market valuation for the TCI Group Common Stock could
result in the conversion ratio being significantly different from that which
would have resulted if the same measure were used for the valuation of both the
TCI Group Common Stock and the Telephony Group Common Stock. For example, a
conversion could be considered dilutive of the interests of the holders of the
TCI Group Common Stock if the Market Value of the TCI Group Common Stock is less
than the valuation of the TCI Group Common Stock that would have resulted if a
similar appraisal procedure to that used in the determination of the value of
the Telephony Group Common Stock were used. Such a conversion would also have
the effect of precluding holders of Telephony Group Common Stock from retaining
their investment in a security intended to reflect separately the business of
the Telephony Group.
Disposition of Group Assets. As long as the assets of a Group continue to
represent less than substantially all of the properties and assets of the
Company, the Board of Directors may approve sales and other dispositions of any
amount of the properties and assets of such Group without stockholder approval,
because under the DGCL and the Amended Charter stockholder approval is required
only for a sale or other disposition of all or substantially all of the
properties and assets of the 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 of the Telephony Group in one transaction or a
series of related transactions, other than in a transaction in which the Company
receives primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business, and other than in connection
with the disposition of all or substantially all of the assets of the entire
Company, require the Company, at its option, either to (i) distribute by
dividend or redemption to the holders of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock an amount in cash and/or securities or
other property equal to their proportionate interest in the Net Proceeds of such
disposition or (ii) convert outstanding shares of Series A Telephony Group
Common Stock into a number (or fraction) of shares of Series A TCI Group Common
Stock and outstanding shares of Series B Telephony Group Common Stock into a
number (or fraction) of shares of Series B TCI Group Common Stock, equal in each
case to 110% of the average daily ratio of the Market Value of a share of Series
A Telephony Group Common Stock to the Market Value of a share of Series A TCI
Group Common Stock over a specified period following such Disposition. The
provisions of the Amended Charter do not require the Board of Directors to
select the option which would result in the distribution with the highest value
to the holders of the Telephony Group Common Stock or with the smallest effect
on the TCI Group Common Stock. The Amended Charter does not require the Company
to take such actions upon sales or other dispositions of less than substantially
all of the properties and assets of the Telephony Group or upon two or more
unrelated sales or other dispositions which together constitute the sale of
substantially all of the properties and assets of the Telephony Group. In
addition, although the Company Charter currently contains, and the Amended
Charter will continue to contain, comparable provisions relating to a
disposition of all or substantially all of the properties and assets of the
Liberty Media Group, the Company Charter currently does not contain, and the
Amended Charter will continue not to contain, comparable provisions relating to
a disposition of all or substantially all of the properties and assets of the
TCI Group. See "Description of Telephony Group Common Stock and Effects on
Existing Common Stock -- Conversion and Redemption." The appropriate disposition
of proceeds in the latter case would be subject to determination by the Board of
Directors in accordance with the Amended Charter, approved allocation policies
and in the exercise of its fiduciary duties. See "-- Fiduciary Duties of the
Board of Directors Are to All Stockholders Regardless of Class or Series."
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Allocation of Proceeds of Mergers or Consolidations. The Amended Charter
does not contain any provisions governing how consideration to be received by
the Company's stockholders in connection with a merger or consolidation
involving the Company (in which the Common Stock is to be converted into other
securities, cash or other property) is to be allocated among holders of TCI
Group Common Stock, Liberty Media Group Common Stock and Telephony Group Common
Stock. In any such merger or consolidation, the allocation of consideration
would be determined by the Board of Directors. See "-- Limited Separate
Stockholder Rights; Effects on Voting Power."
Allocation of Resources and Financial Support; Pursuit of Business
Opportunities or Operational Strategies. The Board of Directors could from time
to time allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group instead of the other
Groups. The decision to allocate resources and financial support to one Group
may adversely affect the ability of the other Groups to obtain funds sufficient
to implement their business strategies. If the ResTel Business is transferred to
the Telephony Group, both the Telephony Group and the TCI Group would be using
the same hybrid fiber-coaxial plant ("HFC Plant") to provide services to
potentially the same customers. In such circumstances, it would be likely that
the Board of Directors of the Company will be presented with opportunities that
are not clearly either "telephony" services or "cable television" services
within the traditional meaning of such terms and which could be pursued through
either the TCI Group or the Telephony Group, or jointly through both Groups. In
addition, the Board of Directors will have to decide what amounts will be
charged to the Telephony Group and paid to the TCI Group for the use of such HFC
Plant, whether as the price for the Telephony Group's exercise of its right to
acquire the ResTel Business or as an ongoing usage charge following such
acquisition or as a combination thereof. See "Management and Allocation
Policies."
Allocation of Proceeds Upon Issuance of Telephony Group Common Stock. To
the extent of the TCI Group's Inter-Group Interest in the Telephony Group at the
time of any sale of shares of Telephony Group Common Stock, the Board of
Directors would determine the allocation of the proceeds of such sale between
the TCI Group and the Telephony Group. In such case, the Board of Directors
could allocate up to 100% of the net proceeds of the sale of Telephony Group
Common Stock to the TCI Group or to the Telephony Group, and such net proceeds
would be attributed entirely to and, in the case of the Telephony Group,
reflected entirely on the combined financial statements of the Group to which
such proceeds were allocated. Any such allocation of net proceeds to the TCI
Group would reduce its Inter-Group Interest in the Telephony Group.
No Assurance of Payment of Dividends. The Company has never paid cash
dividends on its Common Stock. The Board of Directors does not currently intend
to pay cash dividends on the TCI Group Common Stock, the Liberty Media Group
Common Stock or, if the Telephony Group Stock Proposal is approved and shares of
Telephony Group Common Stock are issued, the Telephony Group Common Stock. Any
dividends on the Telephony Group Common Stock which may be declared by the Board
of Directors will be payable out of the lesser of (i) the funds of the Company
legally available for such purpose, which are determined on the basis of the
entire Company, and (ii) the Telephony Group Available Dividend Amount. Such
dividends are further subject to the prior payment of dividends on outstanding
shares of any class or series of capital stock of the Company with preferential
dividend provisions. Any net losses of the Company (without regard to whether
such losses arose from any specific Group), and any dividends or distributions
on, or repurchases of, the TCI Group Common Stock, the Liberty Media Group
Common Stock or the Telephony Group Common Stock, and dividends on, and certain
repurchases of, Preferred Stock, will reduce the funds of the Company legally
available for payment of dividends on the TCI Group Common Stock, the Liberty
Media Group Common Stock and the Telephony Group Common Stock. Subject to
limitations of the DGCL and the Amended Charter, the Board of Directors may
declare and pay dividends on the TCI Group Common Stock, the Liberty Media Group
Common Stock and the Telephony Group Common Stock in equal or unequal amounts,
or may decide not to declare and pay such dividends, notwithstanding the
relationship between the TCI Group Available Dividend Amount, the Liberty Media
Group Available Dividend Amount and the Telephony Group Available Dividend
Amount, the respective amounts of prior dividends paid on, or liquidation rights
of, the TCI Group Common Stock, the Liberty Media Group Common Stock or the
Telephony Group Common
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Stock or any other factor. See "Description of Telephony Group Common Stock and
Effects on Existing Common Stock -- Dividends" and "Dividend Policy."
Operational and Financial Decisions. The Board of Directors could from time
to time make operational and financial decisions that affect the Groups
disproportionately, such as transfers of funds or assets among the Groups, the
allocation of funds for capital expenditures, the determination to expand into
new areas and the allocation of resources and personnel that may be suitable for
more than one Group. See "Management and Allocation Policies." The decision to
provide funds to one Group may adversely affect the ability of the other Groups
to obtain funds sufficient to implement their business strategies. For further
discussion of potential divergence of interests arising from financial
decisions, see "-- Transfer of Funds among Groups; Equity Contributions from the
TCI Group."
FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS ARE TO ALL STOCKHOLDERS REGARDLESS
OF CLASS OR SERIES
Under Delaware law, the Board of Directors has a duty to act with due care
and in the best interests of all the Company's stockholders, including the
holders of TCI Group Common Stock, Liberty Media Group Common Stock and
Telephony Group Common Stock. The existence of the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Telephony Group Common Stock may give
rise to occasions when the interests of the holders of one or more series of
Common Stock and the holders of the other series of Common Stock may diverge or
appear to diverge. See "-- Potential Divergence of Interests; No Specific
Procedures for Resolution." The Board of Directors will address and resolve any
issues involving material divergence of interests between the holders of the
separate series of Common Stock.
Although the Company is not aware of any precedent concerning the manner in
which principles of Delaware law would be applied in the context of a capital
structure involving multiple classes or series of capital stock the rights of
which include terms designed to reflect the separate performance of specified
businesses, principles of Delaware law provide that a board of directors must
act in accordance with its good faith business judgment of the corporation's
best interests, taking into consideration the interests of all stockholders
regardless of class or series. Under these principles of Delaware law and the
"business judgment rule," a good faith determination made by a disinterested and
adequately informed Board of Directors with respect to any matter having a
disparate impact upon the holders of TCI Group Common Stock, the holders of
Liberty Media Group Common Stock and the holders of Telephony Group Common Stock
would be a defense to any challenge to such determination made by or on behalf
of any of such groups of holders. Nevertheless, a Delaware court hearing a case
involving such a challenge may decide to apply principles of Delaware law other
than those discussed above, or may fashion new principles of Delaware law, in
order to decide such a case, which would be a case of first impression. There
may arise circumstances involving a divergence of interests in which the Board
of Directors is held to have properly discharged its responsibilities to act
with due care and in the best interests of the Company and all of its
stockholders, but in which holders of the TCI Group Common Stock, the Liberty
Media Group Common Stock or the Telephony Group Common Stock consider themselves
to be disadvantaged relative to the other series. In such a case, such holders
would not have any other remedy under Delaware law with respect to the
circumstances giving rise to the divergence of interests.
Disproportionate ownership interests of members of the Board of Directors
in the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock or disparate values of the TCI Group Common Stock,
the Liberty Media Group Common Stock and the Telephony Group Common Stock could
create or appear to create potential conflicts of interest when directors are
faced with decisions that could have different implications for different
series. See "-- Potential Divergence of Interests; No Specific Procedures for
Resolution." Nevertheless, the Company believes that a director would be able to
discharge his or her fiduciary responsibilities even if his or her interests in
shares of TCI Group Common Stock, Liberty Media Group Common Stock and Telephony
Group Common Stock were disproportionate or had disparate values.
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TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS FROM THE TCI GROUP
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale by the Company of TCI Telephony Group Common Stock would
be (unless the Board of Directors otherwise provides) specifically attributed to
and, in the case of the Liberty Media Group and the Telephony Group, reflected
on the combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity incurring
the debt or issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board of Directors could, however, determine from time to time that
debt incurred or preferred stock issued by entities included in a Group should
be specifically attributed to and reflected on the combined financial statements
of one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the Telephony Group, reflected as the creation of, or
increase in, the TCI Group's Inter-Group Interest in such Group or, in the case
of a transfer from either the Liberty Media Group or the Telephony Group to the
TCI Group, reflected as a reduction in the TCI Group's Inter-Group Interest in
such Group. There are no specific criteria for determining when a transfer will
be reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the financing needs and objectives
of the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
Generally, it is expected that entities included in the Liberty Media Group
will seek their own long-term debt financing, whereas the Telephony Group is
expected to require additional advances from the TCI Group for some period of
time. To satisfy this need, the Company has agreed to provide a revolving loan
facility (the "Revolving Credit Facility") to TCI Telephony for a period
commencing December 1, 1996 and ending December 31, 2001. 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 Telephony 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 (i) by
the amount of the first $300 million of net proceeds of any external debt or
equity financings attributed to the Telephony Group (assuming the approval of
the Telephony Group Stock Proposal) resulting in the reduction of the maximum
amount of such borrowings under the Revolving Credit Facility to an amount not
less than $200 million and (ii) below $200 million, if (but only to the extent
that) the net proceeds of any such external financings attributed to the
Telephony Group which are completed on or prior to December 1, 1998 exceed $600
million (including the first $300 million of such proceeds referred to above).
The maximum amount of the borrowings permitted under the Revolving Credit
Facility will be increased on a dollar-for-dollar basis by the dollar amount of
any borrowings thereunder the proceeds of which are used by the Telephony Group
(assuming the approval of the Telephony Group Stock Proposal) to pay a portion
of the exercise price for the purchase of all or part of the ResTel Business
from the TCI Group.
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
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from time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources. In connection with its
determination to recommend the Telephony Group Stock Proposal to the Company's
stockholders, the Board of Directors determined to convert a portion of the
amount invested by the Company in the investments attributed to the Telephony
Group into a $500 million investment by the Company in Telephony Preferred
Stock, which will be attributed to the TCI Group, and a contractual right to use
up to $500 million of tax benefits generated by TCI Telephony (principally
arising from its partnership interest in the PCS Ventures) without charge to the
TCI Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock as
of the date of such transfer, such an increase could occur at a time when such
shares could be considered undervalued and such a decrease could occur at a time
when such shares could be considered overvalued.
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE
The Board of Directors has adopted certain management and allocation
policies described herein with respect to cash management, corporate expenses
and inter-Group transactions, any and all of which could be modified or
rescinded by the Board of Directors, in its sole discretion, without the
approval of stockholders, although there is no present intention to do so. The
Board of Directors could also adopt additional policies depending upon the
circumstances. Any determination to modify or rescind such policies, or to adopt
additional policies, including any such decision that could have disparate
effects upon holders of TCI Group Common Stock, Liberty Media Group Common Stock
or Telephony Group Common Stock, would be made by the Board of Directors as set
forth under "-- Fiduciary Duties of the Board of Directors Are to All
Stockholders Regardless of Class or Series." See "Management and Allocation
Policies."
NO ASSURANCE AS TO MARKET PRICE
Because there has been no prior market for the Telephony Group Common
Stock, there can be no assurance as to the market price of the Telephony Group
Common Stock following its issuance and sale. If a relatively small number of
shares of either or both of the Series A Telephony Group Common Stock or the
Series B Telephony Group Common Stock are issued, there would only be a limited
market, if any, for such shares, and holders could have difficulty selling such
shares. Further, if an active trading market does develop, there can be no
assurance that it will be maintained. No investment banking opinion as to any
anticipated range of trading prices for the Telephony Group Common Stock in the
open market has been obtained by the Company. Moreover, it is not possible to
predict the impact of the issuance of the Telephony Group Common Stock on the
market price of the TCI Group Common Stock.
The market prices of the Telephony Group Common Stock would be determined
in the trading markets and could be influenced by many factors, including the
combined results of the Telephony Group and the consolidated results of the
Company, of Sprint PCS and of Teleport (as well as other entities in which TCI
Telephony may have investments), as well as the performance of the Telephony
Group, Sprint PCS and Teleport (or such other entities) 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 Telephony Group Common Stock based on the reported
financial results or other measures of performance or prospects of the Telephony
Group, Sprint PCS and Teleport. Financial effects of the Groups that affect the
Company's consolidated results of operations or financial condition could affect
the market prices of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, the Company cannot
predict the impact on the market price of the Telephony Group Common Stock of
certain terms of such securities, such as basing the consideration to be paid if
all or substantially all of the properties and assets of the Telephony Group are
sold in a Disposition
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<PAGE> 46
on the Telephony Group Net Proceeds of such Disposition, the ability of the
Company to convert shares of Telephony Group Common Stock into TCI Group Common
Stock at a conversion ratio based on an appraised value determination for the
Telephony Group Common Stock and a trading market valuation for the TCI Group
Common Stock or the discretion of the Board of Directors to make various other
determinations with respect to the Groups and the separate series of Common
Stock. There is no assurance that the Series A Telephony Group Common Stock will
be included in any stock market index in which the Series A TCI Group Common
Stock is now included, or that the Series A TCI Group Common Stock will continue
to be included in such index. Not being included in an index could adversely
affect demand for the Telephony Group Common Stock or the TCI Group Common Stock
and, consequently, the market price thereof.
POTENTIAL CONVERSION OF TELEPHONY GROUP COMMON STOCK
The Telephony Group Stock Proposal will permit the conversion, solely at
the Company's option, of all of the outstanding shares of Telephony Group Common
Stock into TCI Group Common Stock upon the terms described under "Description of
Telephony Group Common Stock and Effects on Existing Common Stock -- Conversion
and Redemption." The Company cannot predict the impact on the market prices of
the TCI Group Common Stock or the Telephony Group Common Stock of its ability to
effect any such conversion or the effect, if any, that the exercise by the
Company of this conversion right would have on the market price of the TCI Group
Common Stock or the Telephony Group Common Stock prevailing at such time. See
"-- Potential Divergence of Interests; No Specific Procedures for Resolution."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS OF THE TELEPHONY GROUP
The terms of the Telephony Group Common Stock provide that if the Company
were to dispose of all or substantially all of the properties and assets of the
Telephony Group, other than in a transaction in which the Company receives
primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business and other than in connection
with the disposition of all or substantially all of the assets of the Company,
the Company would be required, at its option, either to (i) distribute to
holders of Telephony Group Common Stock an amount equal to their proportionate
interest in the Telephony Group Net Proceeds of such Disposition, either by
special dividend or by redemption of all or part of the outstanding shares of
Telephony Group Common Stock or (ii) convert outstanding shares of Telephony
Group Common Stock into shares of the corresponding series of TCI Group Common
Stock at a conversion ratio based on 110% of the average daily ratio of the
Market Value of a share of Series A Telephony Group Common Stock to the Market
Value of a share of Series A TCI Group Common Stock over a specified period
following such Disposition. "Telephony 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)
attributed to the Telephony Group. If the Telephony Group were a separate
independent company and its shares were acquired by another person, certain of
those costs, including corporate and shareholder level taxes, might not be
payable in connection with such an acquisition. As a result, the consideration
that would be received by stockholders of such a separate independent company in
connection with such a stock acquisition might be greater than the Net Proceeds
that would be received by holders of Telephony Group Common Stock if all or
substantially all of the properties and assets of the Telephony Group were sold.
In addition, no assurance can be given that the Net Proceeds per share of
Telephony Group Common Stock to be received in connection with a Disposition of
all or substantially all of the properties and assets of the Telephony Group
will be equal to or more than the market value per share of Telephony Group
Common Stock prior to or after announcement of such Disposition. See
"-- Potential Conversion of Telephony Group Common Stock" and "-- No Assurance
as to Market Price" above and "Description of Telephony Group Common Stock and
Effects on Existing Common Stock -- Conversion and Redemption."
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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 adoption of the Telephony Group Stock
Proposal would authorize issuance of the Telephony Group Common Stock with
economic terms designed to reflect the separate performance of the Telephony
Group, a person interested in acquiring only the Telephony Group without
negotiation with the Company's management would still be required to seek
control of the voting power represented by all of the outstanding capital stock
of the Company, including the TCI Group Common Stock, the Liberty Media Group
Common Stock and the Telephony Group Common Stock. See "Description of Telephony
Group Common Stock and Effects on Existing Common Stock -- Voting Rights."
ABSENCE OF APPROVAL RIGHTS WITH RESPECT TO FUTURE ISSUANCES OF AUTHORIZED
SHARES
The authorized but unissued shares of capital stock would be available for
issuance from time to time by the Company at the sole discretion of the Board of
Directors for any proper corporate purpose. Such issuances could include shares
of Telephony Group Common Stock, as well as the issuance of such shares upon the
conversion or exercise of securities of the Company that are convertible into or
exercisable or exchangeable for such shares. The approval of the stockholders of
the Company will not be sought by the Company for the issuance of authorized but
unissued shares of Telephony Group Common Stock (or the reissuance of previously
issued shares that have been reacquired by the Company) or securities of the
Company that are convertible into or exercisable or exchangeable for such
shares, unless deemed advisable by the Board of Directors or required by
applicable law, regulation or Nasdaq National Market requirements.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Company Charter and the Company's Bylaws contain provisions
which may serve to discourage or make more difficult a change in control of the
Company without the support of the Board of Directors or without meeting various
other conditions. The Company is subject to Section 203 of the DGCL, which, in
general, prohibits a "business combination" between a corporation and an
"interested stockholder" unless certain conditions are met. The Company Charter
and Bylaw provisions which may discourage or make more difficult a change in
control of the Company include the requirement of a supermajority vote to
approve specified actions, the authorization of the Company's Board of Directors
to issue additional shares of Series Preferred Stock in one or more series and
to fix and state the designations, powers, preferences, qualifications,
limitations, restrictions and relative rights of the shares of each such series
without further action by the Company's stockholders, certain procedures
required in connection with the nomination of directors of the Company and the
other provisions described under "Anti-Takeover Considerations." In addition,
the existence of the Telephony Group Common Stock would present complexities and
could in certain circumstances pose obstacles, financial and otherwise, to an
acquiring person. For example, a potential acquiror would have to take into
consideration that holders of different series of Common Stock might be more or
less receptive to the acquiror's proposal, that a tender offer would have to be
structured so as to take into account different prices at which shares of the
different series might be acquired, that a merger would require allocation of
consideration among the different series of Common Stock and the effects of
actions the Company might take such as causing a conversion of the Telephony
Group Common Stock. The provisions of the DGCL, the Amended Charter and the
Company's Bylaws and the existence of the Telephony Group Common Stock could,
under certain circumstances, prevent stockholders from profiting from an
increase in the market value of their shares as a result of a change in control
of the Company by delaying or preventing such change in control. See
"Anti-Takeover Considerations."
MANAGEMENT AND ALLOCATION POLICIES
If the Telephony Group Stock Proposal is approved by stockholders, the
Company will prepare and include in its filings with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), consolidated
financial statements of the Company and combined financial statements of the
Telephony Group (for so long as the Telephony Group Common Stock is outstanding)
and the Liberty Media Group (for
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<PAGE> 48
so long as the Liberty Media Group Common Stock is outstanding). Except for the
financial statements included in this Proxy Statement and in the Registration
Statement, the Company does not intend to provide separate combined financial
statements for the Telephony Group until shares of Telephony Group Common Stock
are first sold or offered for sale. The combined financial statements of each
Group will principally reflect the combined financial position, results of
operations and cash flows of the businesses included therein. Consistent with
the Amended Charter and applicable policies, the Group financial information
could also include allocated portions of individual assets and liabilities that
are not separately identified with the operations of a specific Group.
Notwithstanding allocations of assets and liabilities for the purpose of
preparing Group combined financial statements, holders of each series of Common
Stock would continue to be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. See "Factors to be
Considered -- Stockholders of One Company; Financial Effects on One Business
Could Affect Other Businesses."
If the Telephony Group Stock Proposal is approved by stockholders, upon
initial issuance of Telephony Group Common Stock, cash management, taxes and
allocation of principal corporate activities among the Groups would be based
upon methods that management of the Company believes to be reasonable and would
be reflected in the respective Group financial information as follows:
(i) All debt incurred or preferred stock issued by the Company and its
subsidiaries would (unless the Board of Directors otherwise provides) be
specifically attributed to and, in the case of the Liberty Media Group and
the Telephony Group, 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, TCI Telephony's obligations with respect to the
Telephony Preferred Stock and indebtedness under the Revolving Credit
Facility will be attributable to the Telephony Group.
(ii) For all periods prior to the distribution of the Liberty Media
Group Common Stock on August 10, 1995 (the "Liberty Media Group
Distribution"), all financial impacts of equity offerings are and will be
attributed entirely to the TCI Group. After the Liberty Media Group
Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock are and will be attributed entirely to the TCI
Group, all financial impacts of issuances of additional shares of Liberty
Media Group Common Stock the proceeds of which are attributed to the
Liberty Media Group are and will be to such extent reflected in the
combined financial statements of the Liberty Media Group, and all financial
impacts of issuances of additional shares of Liberty Media Group Common
Stock the proceeds of which are attributed to the TCI Group in respect of a
reduction in any Inter-Group Interest in the Liberty Media Group are and
will be to such extent attributed to the TCI Group. All financial impacts
of issuances of shares of Telephony Group Common Stock the proceeds of
which are attributed to the Telephony Group will be to such extent
attributed to the Telephony Group, and all financial impacts of issuances
of shares of Telephony Group Common Stock the proceeds of which are
attributed to the TCI Group in respect of a reduction in the TCI Group's
Inter-Group Interest in the Telephony Group will be to such extent
reflected in the combined financial statements of the TCI Group. Financial
impacts of dividends or other distributions on, and purchases of, TCI Group
Common Stock will be attributed entirely to the TCI Group, and financial
impacts of dividends or other distributions on Telephony Group Common Stock
will be attributed entirely to the Telephony Group, except that dividends
or other distributions on the Telephony Group Common Stock will (if at the
time there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in
addition to the charge for the dividend or other distribution paid on the
outstanding shares of Telephony Group Common Stock), with an amount equal
to the product of the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of
Telephony Group Common Stock and a fraction the numerator of which is the
Telephony Group Inter-Group Interest
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Fraction and the denominator of which is the Telephony Group Outstanding
Interest Fraction. Financial impacts of repurchases of Telephony Group
Common Stock the consideration for which is charged to the Telephony Group
will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony
Group Common Stock the consideration for which is charged to the TCI Group
will be to such extent attributed to the TCI Group and will result in an
increase in the TCI Group's Inter-Group Interest in the Telephony Group.
(iii) To the extent cash needs of one Group exceed cash provided by
such Group, one of the other Groups may transfer funds to such Group. The
TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities
attributed to the other Groups are remitted to the TCI Group and certain
cash disbursements of the other Groups will be funded by the TCI Group on a
daily basis. Such transfers of funds among the Groups will be reflected as
borrowings or, if determined by the Board of Directors, in the case of a
transfer from the TCI Group to either the Liberty Media Group or the
Telephony Group, reflected as the creation of, or increase in the TCI
Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI
Group, reflected as a reduction in the TCI Group's Inter-Group Interest in
such Group. There are no specific criteria for determining when a transfer
will be reflected as borrowings or as an increase or reduction in an
Inter-Group Interest. The Board of Directors expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors
as it deems relevant, including, without limitation, the needs of the
Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general
economic conditions. Generally, it is expected that entities included in
the Liberty Media Group will seek their own long-term debt financing,
whereas the Telephony Group is expected to require additional advances from
the TCI Group for some period of time. To satisfy this need, the Company
has agreed to provide the Revolving Credit Facility to TCI Telephony for a
period commencing December 1, 1996 and ending December 31, 2001 that 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 will be payable
by the Telephony 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 (i) by the amount of the first $300
million of net proceeds of any external debt or equity financings
attributed to the Telephony Group (including the Offerings) resulting in
the reduction of the maximum amount of such borrowings under the Revolving
Credit Facility to an amount not less than $200 million and (ii) below $200
million, if (but only to the extent that) the net proceeds of any such
external financings attributed to the Telephony Group which are completed
on or prior to December 1, 1998 exceed $600 million (including the first
$300 million of such proceeds referred to above). The maximum amount of the
borrowings permitted under the Revolving Credit Facility will be increased
on a dollar-for-dollar basis by the dollar amount of any borrowings
thereunder, the proceeds of which are used by the Telephony Group to pay a
portion of the exercise price for the purchase of all or part of the ResTel
Business from the TCI Group.
(iv) 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 of and the investment opportunities available to each
Group and the availability, cost and time associated with alternative
financing sources.
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(v) In the event of a transfer of funds or other assets from the TCI
Group to the Telephony Group that the Board of Directors has determined to
reflect as increasing the TCI Group's Inter-Group Interest in the Telephony
Group, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would be increased by an amount determined by dividing
the amount of funds or the value of the assets transferred by the Market
Value of a share of Series A Telephony Group Common Stock as of the date of
such transfer, and the Telephony Group Inter-Group Interest Fraction would
be increased and the Telephony Group Outstanding Interest Fraction would be
decreased accordingly. In the event of a transfer of funds or other assets
from the Telephony Group to the TCI Group that the Board of Directors has
determined to reflect as a decrease in the TCI Group's Inter-Group Interest
in the Telephony Group, the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would be decreased by an amount
determined by dividing the amount of funds or the value of the assets
transferred by the Market Value of a share of Series A Telephony Group
Common Stock as of the date of such transfer and the Telephony Group
Inter-Group Interest Fraction would be decreased and the Telephony Group
Outstanding Interest Fraction would be increased accordingly.
(vi) The combined balance sheets of a Group would reflect its net
loans to or borrowings from the other Groups. Similarly, the respective
combined statements of operations of the Groups would reflect interest
income or expense, as the case may be, associated with such loans or
borrowings and the respective combined statements of cash flows of the
Groups would reflect changes in the amounts of loans or borrowings deemed
outstanding. In the historical financial information included in this Proxy
Statement and the Annexes hereto, net borrowings of the Telephony Group
have been included as a component of the Telephony Group's combined equity.
Subsequent to the date of such financial statements, a portion of such net
borrowings was converted into a $500 million investment in Telephony
Preferred Stock. The balance of such net borrowings through November 30,
1996 will continue to be reflected as a component of the Telephony Group's
combined equity. Amounts borrowed by the Telephony Group from another Group
on and subsequent to December 1, 1996 (including pursuant to the Revolving
Credit Facility), will be reflected on the Telephony Group's financial
statements as indebtedness to the applicable lender.
(vii) Certain corporate general and administrative costs (including,
but not limited to, certain corporate, legal, finance, accounting, tax,
data processing, employee benefit and insurance costs) would be charged to
both the Liberty Media Group and the Telephony Group at rates set at the
beginning of each year based on projected utilization for that year. The
balance of such costs would be attributed to the TCI Group. The
utilization-based charges would be set at levels that management believes
to be reasonable and that would approximate the costs that the Liberty
Media Group and the Telephony Group would incur for comparable services on
a stand-alone basis. Assuming shares of Telephony Group Common Stock had
first been issued on January 1, 1996, the Company estimates that such costs
of the Telephony Group would have aggregated approximately $548,000 for the
nine months ended September 30, 1996. Certain other corporate general and
administrative costs related specifically to management of a Group would be
allocated entirely to such Group. The scope of the services charged to the
Liberty Media Group and the Telephony Group on an allocated basis could be
adjusted from time to time depending on the extent to which it is
determined that services should instead be performed directly by employees
of entities included in such Group.
(viii) If additional assets are transferred to the Telephony Group
from the TCI Group, there may be additional services that the TCI Group
would then provide to the Telephony Group. For example, if the ResTel
Business is transferred to the Telephony Group, the TCI Group may provide
installation, sales and customer services to the Telephony Group in
addition to rights of use of TCI's upgraded cable distribution plant. The
charges for any such services would be negotiated at the time and taken
into account in the determination of the purchase price for the ResTel
Business or other assets being transferred.
(ix) Federal income taxes and certain state and local taxes would be
paid on a consolidated basis. However, pursuant to a tax sharing agreement,
federal income taxes are calculated, with certain adjustments, on a
separate return basis for each Group (applying provisions of the Internal
Revenue
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Code of 1986, as amended, and related regulations as if such Group filed a
separate consolidated return for federal income tax purposes). Based upon
these separate calculations, an allocation of tax liabilities is made such
that each separate Group is responsible to the Company for its gross share
of the Company's consolidated federal income tax liabilities, such gross
share being determined without regard to (a) tax benefits that are
attributable to the Company or the other Groups or (b) certain tax benefits
that are attributable to a Group but that are taken into account in
determining the Company's consolidated federal income tax benefit
carryovers. Similarly, the Company is responsible to each Group for tax
benefits attributable to such Group and actually used by the Company in
determining its consolidated federal income tax liability. Notwithstanding
the foregoing, the Company and TCI Telephony have agreed that the Company
may use up to $500 million of tax benefits generated by the Telephony Group
in determining its consolidated federal income tax liability, without
providing a credit to the Telephony Group in such amount. Tax attributes,
including but not limited to net operating losses, investment tax credits,
alternative minimum tax net operating losses, alternative minimum tax
credits, deferred intercompany gains and tax basis in assets, would be
inventoried and tracked for each Group. In addition, pursuant to such tax
sharing agreement, state and local income taxes are calculated on a
separate return basis for each Group (applying provisions of state and
local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes), and the Company's combined or
unitary tax liability is allocated between the Groups based upon such
separate calculation. The Company has retained the right to file all
returns, make all elections and control all audits and contests.
(x) Effective December 1, 1996, two executive officers of TCI
Communications, Inc., a subsidiary of the Company, were each granted
options (the "Executive Options") representing 1.0% of the Company's common
equity in the Telephony Group. Upon the effectiveness of the Certificate of
Amendment, each such option would convert into an option to purchase a
number of shares of Series A Telephony Group Common Stock equal to 1% of
the initial Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest. The issuance of any shares pursuant to such options
would be made from the Available Shares (and will not reduce the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest).
The aggregate exercise price for each such option, which would be payable
to TCI Telephony, would be equal to 1% of (i) the Company's cumulative
investment in the Telephony Group 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 the TCI Telephony
Preferred Stock) and (y) the amount of the tax benefits generated by the
Telephony Group (up to $500 million) as and when used by the TCI Group.
Each such executive officer was also granted a similar option representing
1% of the Company's common equity in the ResTel Business. Any exercise by
one of such executive officers of all or part of one of such options (as to
either the Telephony Group or the ResTel Business) 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 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.
(xi) The Board of Directors expects to determine, either in specific
instances or by setting generally applicable policies from time to time,
whether to allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group or one or more of
the other Groups, after consideration of such factors as it deems relevant.
Notwithstanding the policies described above, determinations with respect
to the transfer of funds from one Group to one of the other Groups would be made
at the discretion of the Board of Directors, except to the extent that the
Company is contractually obligated to make a transfer of funds to an entity
included in a Group. Nothing in the foregoing policies (as opposed to any such
contractual obligation) obligates the Board of Directors to cause a Group to
provide funds to one of the other Groups if the Board of Directors determines
that it is in the best interests of the Company not to do so.
The above management and allocation policies could be modified or rescinded
by the Board of Directors, in its sole discretion, without approval of
stockholders, although there is no present intention to do so. The
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Board of Directors could also adopt additional policies depending upon the
circumstances. The Board of Directors intends that any determination it might
make to modify or rescind such policies, or to adopt additional policies,
including any such decision that could have disparate effects upon holders of
different series of Common Stock, would be made by the Board of Directors as set
forth under "Factors to be Considered -- Fiduciary Duties of the Board of
Directors Are to All Stockholders Regardless of Class or Series."
DESCRIPTION OF TELEPHONY GROUP COMMON STOCK AND EFFECTS ON EXISTING COMMON STOCK
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE INDEX OF CERTAIN
DEFINED TERMS CONTAINED IN ANNEX I TO THIS PROXY STATEMENT AND TO ANNEX II TO
THIS PROXY STATEMENT, WHICH CONTAINS THE FULL TEXT OF THE PROPOSED AMENDMENTS TO
THE COMPANY CHARTER.
GENERAL
The Company Charter currently provides that the Company is authorized to
issue 2,777,375,096 shares of capital stock, including (i) 2,725,000,000 shares
of Common Stock, of which 1,750,000,000 shares are designated Series A TCI Group
Common Stock, 150,000,000 shares are designated Series B TCI Group Common Stock,
750,000,000 shares are designated Series A Liberty Media Group Common Stock and
75,000,000 shares are designated Series B Liberty Media Group Common Stock and
(ii) 52,375,096 shares of Preferred Stock. If the Telephony Group Stock Proposal
is approved, the Company Charter will be amended to, among other things,
increase the authorized number of shares of Common Stock from 2,725,000,000 to
3,550,000,000, and authorize two new series of Common Stock to consist of:
750,000,000 newly authorized shares designated Series A Telephony Group Common
Stock and 75,000,000 newly authorized shares designated Series B Telephony Group
Common Stock.
The authorized but unissued shares of Telephony Group Common Stock will be
available for issuance by the Company from time to time, as determined by the
Board of Directors, for any proper corporate purpose, which could include
raising capital, acquiring other companies or making investments or providing
compensation or benefits to employees. The issuance of such shares would not be
subject to approval by the stockholders of the Company, unless deemed advisable
by the Board of Directors or required by applicable law, regulation or Nasdaq
National Market requirements.
VOTING RIGHTS
Under the Telephony Group Stock Proposal, holders of Series A Telephony
Group Common Stock will be entitled to one vote for each share of such stock
held and holders of Series B Telephony Group Common Stock will be entitled to
ten votes for each share of such stock held, on all matters presented to such
stockholders. Holders of Series A TCI Group Common Stock and Series A Liberty
Media Group Common Stock will continue to be entitled to one vote for each share
of such stock held and holders of Series B TCI Group Common Stock and Series B
Liberty Media Group Common Stock will continue to be entitled to ten votes for
each share of such stock held. Except as may otherwise be required by the laws
of the State of Delaware, or, with respect to any class of Preferred Stock or
any series of such a class, in the Amended Charter (including any resolution or
resolutions providing for the establishment of such class or series pursuant to
authority vested in the Board of Directors by the Amended Charter), the holders
of TCI Group Common Stock, the holders of Liberty Media Group Common Stock, the
holders of Telephony Group Common Stock and the holders of each class or series
of Preferred Stock, if any, entitled to vote thereon will vote as one class with
respect to all matters to be voted on by stockholders of the Company.
Under the Telephony Group Stock Proposal, the term "Voting Securities," as
defined in the Amended Charter, will include the Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, in addition to 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 C Preferred Stock and any other class or series of Preferred Stock
entitled to vote with the holders of
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Common Stock generally upon all matters which may be submitted to a vote of
stockholders at any annual or special meeting. The Amended Charter (like the
Company Charter) provides that the affirmative vote of holders of at least
66 2/3% of the total voting power of the then-outstanding Voting Securities,
voting together as a single class, is required for (i) the amendment, alteration
or repeal of any provision of the Amended Charter or the addition or insertion
of other provisions therein, (ii) the adoption, amendment or repeal of any
provision of the Company's Bylaws, unless approved by at least 75% of the
members of the Board of Directors then in office, in which case no vote of
stockholders will be required, (iii) the merger or consolidation of the Company
with or into any other corporation other than a merger or consolidation which
does not require the consent of stockholders under the DGCL or which at least
75% of the members of the Board of Directors then in office have approved (in
which case such merger or consolidation would require the approval of a majority
of the total voting power of the then-outstanding Voting Securities), (iv) the
sale, lease or exchange of all or substantially all of the property and assets
of the Company or (v) the dissolution of the Company. Both the Amended Charter
and the Company Charter provide that a director may only be removed for "cause"
(as defined) and that any action to remove a director must be approved by the
holders of 66 2/3% of the total voting power of the then-outstanding shares
entitled to vote in the election of directors (which would include the Class B
Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock
in addition to the Voting Securities).
The holders of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock will not have any rights to vote as a separate class or
series on any matter coming before the stockholders of the Company, except with
respect to certain limited class and series voting rights provided under the
DGCL. Similarly, under the Company Charter and the Amended Charter, none of the
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
have any separate class or series voting rights, except as provided under the
DGCL. Under the DGCL, the approval of the holders of a majority of the
outstanding shares of any class of capital stock of a corporation, voting
separately as a class, is required to approve any amendment to the charter that
would alter or change the powers, preferences or special rights of the shares of
such class so as to affect them adversely, provided that, if any amendment would
alter or change the powers, preferences or special rights of one or more series
of the class so as to affect them adversely, but would not so affect the entire
class, then only the shares of the series so affected by the amendment would be
entitled to vote thereon separately as a class. Because the Series A TCI Group
Common Stock, the Series B TCI Group Common Stock, the Series A Liberty Media
Group Common Stock, the Series B Liberty Media Group Common Stock, the Series A
Telephony Group Common Stock and the Series B Telephony Group Common Stock will
each be a separate series of a single class of stock, each series would be
entitled to vote separately as a class upon an amendment to the Amended Charter
that would alter or change the powers, preferences or special rights of such
series so as to affect them adversely only if the other series were not so
affected. The DGCL does not provide for any other separate voting rights of a
class or series of capital stock (other than with respect to a change in par
value or, in certain circumstances not applicable in the case of the Company's
outstanding stock, an increase or decrease in the authorized shares of such
class or series). Consequently, because most matters brought to a stockholder
vote will require the approval of only a specified percentage of all of the
Company's outstanding capital stock entitled to vote on such matters (including
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock) voting together as a single class, if the holders
of one or more series of Common Stock have more than the number of votes
required to approve any such matter, such holders would be in a position to
control the outcome of the vote on such matter.
DIVIDENDS
Dividends on Telephony Group Common Stock. Dividends on Telephony Group
Common Stock will be limited to legally available funds of the Company under the
DGCL and will be subject to the prior payment of dividends on outstanding shares
of Preferred Stock. The DGCL limits the amount of distributions on the Common
Stock to the funds of the Company legally available for that purpose, which are
determined on the basis of the entire Company and not just the Groups.
Consequently, the amount of legally available funds will be reduced by the
amount of any net losses of the Groups and any dividends or distributions on, or
repurchases
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of, the TCI Group Common Stock, the Liberty Media Group Common Stock or the
Telephony Group Common Stock and dividends on, or certain repurchases of,
Preferred Stock. Certain loan agreements to which certain subsidiaries of the
Company are parties or are subject contain restricted payment provisions that
limit the amount of dividends, other than stock dividends, that those companies
may pay. Future loan agreements may also contain similar restrictions and
limits.
Dividends on the Telephony Group Common Stock, in addition to the
limitations set forth in the foregoing paragraph, will be further limited to an
amount not in excess of the Telephony Group Available Dividend Amount, which is
intended to be similar to the amount that would be legally available for the
payment of dividends on the Telephony Group Common Stock under the DGCL if the
Telephony Group were a separate Delaware corporation. There can be no assurance
that there will be a Telephony Group Available Dividend Amount.
The "Telephony Group Available Dividend Amount," as of any date, means the
product of the Telephony Group Outstanding Interest Fraction and either (i) the
excess of (a) an amount equal to the total assets of the Telephony Group less
the total liabilities (not including preferred stock) of the Telephony Group as
of such date over (b) the aggregate par value of, or any greater amount
determined to be capital in respect of, all outstanding shares of Telephony
Group Common Stock and each class or series of Preferred Stock attributed to the
Telephony Group or (ii) in case there is no such excess, an amount equal to the
Corporation Earnings (Loss) Attributable to the Telephony Group (if positive)
for the fiscal year in which such date occurs and/or the preceding fiscal year.
The "Corporation Earnings (Loss) Attributable to the Telephony Group," for any
period, means the net earnings or loss of the Telephony Group for such period
determined on a basis consistent with the determination of the net earnings or
loss of the Telephony Group for such period as presented in the combined
financial statements of the Telephony Group, including income and expenses of
the Company attributed to the operations of the Telephony Group on a
substantially consistent basis, including, without limitation, corporate
administrative costs, net interest and income taxes.
Except for dividends declared or paid as described below under "-- Share
Distributions" and "-- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of Telephony Group Common Stock," any dividends paid on
the Series A Telephony Group Common Stock or the Series B Telephony Group Common
Stock will be paid only on both series, in equal amounts per share.
The Board of Directors, subject to the provisions described under this
caption "Dividends" and below under "-- Share Distributions," will have the
authority and discretion to declare and pay dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common Stock
in equal or unequal amounts, notwithstanding the relationship among the TCI
Group Available Dividend Amount, the Liberty Media Group Available Dividend
Amount and the Telephony Group Available Dividend Amount, the respective amounts
of prior dividends declared on, or liquidation rights of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common Stock
or any other factor. See "Dividend Policy."
At the time of any dividend or other distribution on the outstanding shares
of Telephony Group Common Stock (including any dividend of Telephony Group Net
Proceeds from the Disposition of all or substantially all of the properties and
assets of the Telephony Group as described under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock"), the TCI Group will (if at such time there is an Inter-Group
Interest in the Telephony Group) be credited, and the Telephony Group will be
charged (in addition to the charge for the dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or distribution paid or distributed in respect of outstanding shares of
Telephony Group Common Stock times (ii) a fraction the numerator of which is the
Telephony Group Inter-Group Interest Fraction and the denominator of which is
the Telephony Group Outstanding Interest Fraction.
See Annex IV -- Illustration of Certain Terms for illustrations of the
calculation of the Telephony Group Inter-Group Interest Fraction and the effects
of dividends on shares of Telephony Group Common Stock.
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Dividends on TCI Group Common Stock and Liberty Media Group Common
Stock. Under the Company Charter, dividends on the TCI Group Common Stock are
payable out of the lesser of assets of the Company legally available therefor
and the TCI Group Available Dividend Amount. Dividends on the Liberty Media
Group Common Stock are payable out of the lesser of assets of the Company
legally available therefor and the Liberty Media Group Available Dividend
Amount. The provisions of the Company Charter regarding dividends on the TCI
Group Common Stock and the Liberty Media Group Common Stock will not change
pursuant to the Telephony Group Stock Proposal. However, because the businesses
included in the Telephony Group are currently included in the TCI Group, the
Telephony Group Stock Proposal would affect the determination of, and could
reduce the amount available for dividends under, the TCI Group Available
Dividend Amount.
SHARE DISTRIBUTIONS
Distributions on TCI Group Common Stock. Under the Telephony Group Stock
Proposal, if at any time after the initial issuance of shares of Telephony Group
Common Stock a distribution is to be made with respect to the TCI Group Common
Stock in TCI Group Common Stock, Liberty Media Group Common Stock, Telephony
Group Common Stock, or any other securities of the Company or any other person
(a "share distribution"), such share distribution will be declared and paid only
as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series B TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series A TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B TCI Group Common
Stock) to holders of Series B TCI Group Common Stock;
(ii) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group
Common Stock) to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock, on an equal per share basis; provided that the sum
of (A) the aggregate number of shares of Series A Liberty Media Group
Common Stock to be so issued (or the number of such shares which would be
issuable upon conversion, exercise or exchange of any Convertible
Securities to be so issued) and (B) the number of shares of such series
that are subject to issuance upon conversion, exercise or exchange of any
Convertible Securities then outstanding that are attributed to the TCI
Group (other than Pre-Distribution Convertible Securities (as defined in
the Company Charter) and other than Convertible Securities convertible into
or exercisable or exchangeable for Committed Acquisition Shares (as defined
in the Company Charter)) is less than or equal to the Number of Shares
Issuable with Respect to the Liberty Media Group Inter-Group Interest;
(iii) a share distribution consisting of shares of Series A Telephony
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Telephony Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI Group
Common Stock, on an equal per share basis; or consisting of shares of
Series B Telephony Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series A Telephony Group Common Stock) to holders of Series A TCI
Group Common Stock and, on an equal per share basis, shares of Series B
Telephony Group Common Stock (or
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like Convertible Securities convertible into or exercisable or exchangeable
for shares of Series B Telephony 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 Telephony Group Common Stock and Series B Telephony
Group Common Stock to be so issued (or the number of such shares which
would be issuable upon conversion, exercise or exchange of any Convertible
Securities to be so issued) and (B) the number of shares of Series A
Telephony Group Common Stock that are subject to issuance upon conversion,
exercise or exchange of any Convertible Securities then outstanding that
are attributed to the TCI Group is less than or equal to the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest;
and
(iv) a share distribution consisting of any class or series of
securities of the Company or any other person other than TCI Group Common
Stock, Liberty Media Group Common Stock or Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of TCI Group Common Stock, Liberty Media Group Common Stock or
Telephony Group Common Stock), either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of Series A
TCI Group Common Stock and Series B TCI Group Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series
A TCI Group Common Stock and another class or series of securities to
holders of Series B TCI Group Common Stock, provided that the securities so
distributed (and, if the distribution consists of Convertible Securities,
the securities into which such Convertible Securities are convertible or
for which they are exercisable or exchangeable) do not differ in any
respect other than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions, with
holders of shares of Series B TCI Group Common Stock receiving the class or
series having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company, such
rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
The change that the provisions of the Telephony Group Stock Proposal
described above makes to the existing provisions of the Company Charter relating
to share distributions on the TCI Group Common Stock is to permit distributions
to be made on the TCI Group Common Stock in shares of Telephony Group Common
Stock (or Convertible Securities convertible into or exercisable or exchangeable
for Telephony Group Common Stock). Any such distribution would reduce the Number
of Shares Issuable with Respect to the Telephony Group Inter-Group Interest.
The Company will not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
Distributions on Telephony Group Common Stock. If at any time a share
distribution is to be made with respect to the Telephony Group Common Stock,
such share distribution will be declared and paid only as follows (or as
described under "-- Conversion and Redemption" with respect to the redemptions
and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A Telephony
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Telephony Group Common
Stock) to holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, on an equal per share basis; or consisting of
shares of Series B Telephony Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series A Telephony Group Common
Stock and
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Series B Telephony Group Common Stock, on an equal per share basis; or
consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series A Telephony Group Common Stock) to holders of Series A
Telephony Group Common Stock and, on an equal per share basis, shares of
Series B Telephony Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series B Telephony Group Common
Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Company or any other person other than as described in
the immediately preceding clause (i) and other than TCI Group Common Stock
or Liberty Media Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of TCI Group Common Stock or
Liberty Media Group Common Stock), either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock or
on the basis of a distribution of one class or series of securities to
holders of Series A Telephony Group Common Stock and another class or
series of securities to holders of Series B Telephony Group Common Stock,
provided that the securities so distributed (and, if the distribution
consists of Convertible Securities, the securities into which such
Convertible Securities are convertible or for which they are exercisable or
exchangeable) do not differ in any respect other than their relative voting
rights and related differences in designation, conversion, redemption and
share distribution provisions, with holders of shares of Series B Telephony
Group Common Stock receiving the class or series having the higher relative
voting rights (without regard to whether such rights differ to a greater or
lesser extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and the Series B
Telephony Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company, such
rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Telephony Group Common Stock
and the Series B Telephony Group Common Stock, and provided in each case
that such distribution is otherwise made on an equal per share basis.
Because under the Amended Charter the Telephony Group is not permitted to
have an Inter-Group Interest in either the TCI Group or the Liberty Media Group,
no distributions on the Telephony 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
Telephony Group Common Stock without reclassifying, subdividing or combining the
Series B Telephony Group Common Stock, on an equal per share basis, and the
Company will not reclassify, subdivide or combine the Series B Telephony Group
Common Stock without reclassifying, subdividing or combining the Series A
Telephony Group Common Stock, on an equal per share basis.
Distributions on Liberty Media Group Common Stock. Under the Telephony
Group Stock Proposal, the provisions of the Company Charter regarding share
distributions on the Liberty Media Group Common Stock would be modified to
expressly provide that share distributions on the Liberty Media Group Common
Stock consisting of Telephony Group Common Stock (or related Convertible
Securities) are not permitted.
CONVERSION AND REDEMPTION
Conversion at the Option of the Holder. Each share of Series B Telephony
Group Common Stock will be convertible, at the option of the holder thereof,
into one share of Series A Telephony Group Common Stock. Shares of Series A
Telephony Group Common Stock will not be convertible into shares of Series B
Telephony Group Common Stock.
Conversion at the Option of the Company. The Board of Directors may at any
time declare that (i) all of the outstanding shares of Series A Telephony Group
Common Stock will be converted into a number (or
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fraction) of fully paid and nonassessable shares of Series A TCI Group Common
Stock equal to the Telephony Group Optional Conversion Ratio, and (ii) all of
the outstanding shares of Series B Telephony Group Common Stock will be
converted into a number (or fraction) of fully paid and nonassessable shares of
Series B TCI Group Common Stock equal to the Telephony Group Optional Conversion
Ratio. As more fully described below, the Telephony Group Optional Conversion
Ratio is the ratio of the private market value of a share of Telephony Group
Common Stock determined by appraisal to the public trading price of a share of
TCI Group Common Stock.
Under the Amended Charter, the "Telephony Group Optional Conversion Ratio"
means the quotient (calculated to the nearest five decimal places) obtained by
dividing (x) the Telephony Group Common Stock Per Share Value by (y) the average
Market Value of one share of Series A TCI Group Common Stock over the 20-Trading
Day period ending on the Trading Day preceding the Appraisal Date. The Telephony
Group Common Stock Per Share Value will equal the quotient obtained by dividing
the Telephony Group Private Market Value by the Adjusted Outstanding Shares of
Telephony Group Common Stock, which will be determined in the manner provided
below.
The "Telephony Group Private Market Value" means an amount equal to the
private market value of the Telephony Group as of the last day of the calendar
month preceding the month in which the last of the two appraisers referred to in
the immediately following sentence are selected (the last day of such calendar
month is hereinafter referred to as the "Appraisal Date"). In the event that the
Company determines to establish the Telephony Group Private Market Value, an
investment banking firm of recognized national standing will be designated by
the Company (the "First Appraiser") and a second investment banking firm of
recognized national standing will be designated by a committee of the Board of
Directors all of whose members are independent directors as determined under
Nasdaq National Market rules (the "Second Appraiser"). The date upon which the
last of such appraisers is selected is hereinafter referred to as the "Selection
Date." Not later than 20 days after the Selection Date, the First Appraiser and
the Second Appraiser will each determine its initial view as to the private
market value of the Telephony Group as of the Appraisal Date and will consult
with one another with respect thereto. Not later than the 30th day after the
Selection Date, the First Appraiser and the Second Appraiser will each have
determined its final view as to such private market value. If the higher of the
respective final views of the First Appraiser and the Second Appraiser as to
such private market value (the "Higher Appraised Amount") is not more than 120%
of the lower of such respective final views (the "Lower Appraised Amount"), the
Telephony Group Private Market Value (subject to any adjustment described in the
second succeeding paragraph) will be the average of those two amounts. If the
Higher Appraised Amount is more than 120% of the Lower Appraised Amount, the
First Appraiser and the Second Appraiser will agree upon and jointly designate a
third investment banking firm of recognized national standing (the "Mutually
Designated Appraiser") to determine such private market value. The Mutually
Designated Appraiser will not be provided with any of the work of the First
Appraiser and the Second Appraiser. The Mutually Designated Appraiser will, no
later than the 20th day after the date the Mutually Designated Appraiser is
designated, determine such private market value (the "Mutually Appraised
Amount"), and the Telephony Group Private Market Value (subject to any
adjustment described in the second succeeding paragraph) will be (i) if the
Mutually Appraised Amount is between the Lower Appraised Amount and the Higher
Appraised Amount, (a) the average of (1) the Mutually Appraised Amount and (2)
the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer
to the Mutually Appraised Amount, or (b) the Mutually Appraised Amount, if
neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to
the Mutually Appraised Amount, or (ii) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such investment banking firm expresses its
final view of the private market value of the Telephony Group as a range of
values, such investment banking firm's final view of such private market value
will be deemed to be the midpoint of such range of values.
Each of the investment banking firms referred to in the immediately
preceding paragraph will be instructed to determine the private market value of
the Telephony Group as of the Appraisal Date based upon the amount a willing
purchaser would pay to a willing seller, in an arm's-length transaction, if it
were acquiring
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the Telephony Group, as if the Telephony Group were a publicly traded
non-controlled corporation and the purchaser was acquiring all of the capital
stock of such corporation and without consideration of any potential regulatory
constraints limiting the potential purchasers of the Telephony Group other than
that which would have existed if the Telephony Group were a publicly traded
non-controlled entity.
Following the determination of the Telephony Group Private Market Value,
the investment banking firms whose final views of the private market value of
the Telephony Group were used in the calculation of the Telephony Group Private
Market Value will determine the Adjusted Outstanding Shares of Telephony Group
Common Stock together with any further appropriate adjustments to the Telephony
Group Private Market Value resulting from such determination. The "Adjusted
Outstanding Shares of Telephony Group Common Stock" means a number, as
determined by such investment banking firms as of the Appraisal Date, equal to
the sum of the number of shares of Telephony Group Common Stock outstanding, the
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest, and the number of shares of Telephony Group Common Stock issuable upon
the conversion, exercise or exchange of those Convertible Securities the holders
of which would derive an economic benefit from conversion, exercise or exchange
of such Convertible Securities which exceeds the economic benefit of not
converting, exercising or exchanging such Convertible Securities. The "Telephony
Group Common Stock Per Share Value" means the quotient obtained by dividing the
Telephony Group Private Market Value by the Adjusted Outstanding Shares of
Telephony Group Common Stock, provided that if such investment banking firms do
not agree on the determinations provided for in this paragraph, the Telephony
Group Common Stock Per Share Value will be the average of the quotients so
obtained on the basis of the respective determinations of such firms.
If the Company determines to convert shares of Series A Telephony Group
Common Stock into Series A TCI Group Common Stock and shares of Series B
Telephony Group Common Stock into Series B TCI Group Common Stock at the
Telephony Group Optional Conversion Ratio, such conversion will occur on a
conversion date on or prior to the 120th day following the Appraisal Date. If
the Company determines not to undertake such conversion, the Company may at any
time thereafter undertake to reestablish the Telephony Group Common Stock Per
Share Value as of a subsequent date.
Any such conversion would dilute the interests of holders of TCI Group
Common Stock and would preclude holders of Telephony Group Common Stock from
retaining their interest in a security reflecting separately the business of the
Telephony Group.
See Annex IV -- Illustration of Certain Terms for an illustration of the
conversion of Telephony Group Common Stock into TCI Group Common Stock at the
Telephony Group Optional Conversion Ratio.
Mandatory Dividend, Redemption or Conversion of Telephony Group Common
Stock. Upon the Disposition in one transaction or a series of related
transactions by the Company and its subsidiaries of all or substantially all of
the properties and assets of the Telephony Group to any one or more persons,
entities or groups, 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 "-- Dividends," "-- Share Distributions,"
"-- Conversion and Redemption -- Redemption in Exchange for Stock of Subsidiary"
or "-- Liquidation Rights," (c) to any person, entity or group which the
Company, directly or indirectly, after giving effect to the Disposition,
controls or (d) in connection with a Related Business Transaction. For these
purposes, "substantially all of the properties and assets of the Telephony
Group" means a portion of such properties and assets that represents at least
80% of the then-current market value (as determined by the Board of Directors)
of the properties and assets of the Telephony Group as of such date.
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
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holders of the outstanding shares of Telephony Group Common Stock equally
on a share for share basis (subject to the provisions described in the last
sentence of the following paragraph), in an aggregate amount equal to the
product of the Telephony Group Outstanding Interest Fraction as of the
record date for determining the holders entitled to receive such dividend
and the Net Proceeds of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the Telephony Group Available Dividend Amount would have been
sufficient to pay a dividend in lieu thereof as described in clause (i) of
this paragraph, then:
(A) if such Disposition involves all (not merely substantially all)
of the properties and assets of the Telephony Group, redeem all
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock in exchange for cash and/or securities or
other property (other than Common Stock) in an aggregate amount equal to
the product of the Telephony Group Outstanding Interest Fraction as of
the date of such redemption and the Telephony Group Net Proceeds of such
Disposition, such aggregate amount to be allocated (subject to the
provisions described in the last sentence of the following paragraph) to
shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock in the ratio of the number of shares of each such
series outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Telephony Group Common Stock and
each share of Series B Telephony Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the Telephony Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the Telephony Group Outstanding Interest
Fraction as of the date shares are selected for redemption and the
Telephony Group Net Proceeds of such Disposition to the redemption of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, such aggregate amount to be allocated
(subject to the provisions described in the last sentence of the
following paragraph) to shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock in the ratio of the number of
shares of each such series outstanding, with the number of shares of
each such series to be redeemed to equal the lesser of (x) the whole
number nearest the number determined by dividing the aggregate amount so
allocated to the redemption of such series by the average Market Value
of one share of Series A Telephony Group Common Stock during the
ten-Trading Day period beginning on the 16th Trading Day following the
consummation of such Disposition and (y) the number of shares of such
series outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Telephony Group Common Stock and
each share of Series B Telephony Group Common Stock is the same); or
(iii) convert (A) each outstanding share of Series A Telephony Group
Common Stock into a number (or fraction) of fully paid and nonassessable
shares of Series A TCI Group Common Stock and (B) each outstanding share of
Series B Telephony Group Common Stock into a number (or fraction) of fully
paid and nonassessable shares of Series B TCI Group Common Stock, in each
case equal to 110% of the average daily ratio (calculated to the nearest
five decimal places) of the Market Value of one share of Series A Telephony
Group Common Stock to the Market Value of one share of Series A TCI Group
Common Stock during the ten-Trading Day period referred to in clause
(ii)(B) of this paragraph.
The Company may elect to pay the dividend or redemption price referred to
in clause (i) or (ii) of the preceding paragraph either in the same form as the
proceeds of the Disposition were received or in any other combination of cash or
securities or other property (other than Common Stock) that the Board of
Directors determines will have an aggregate market value on a fully distributed
basis, of not less than the amount of the Telephony Group Net Proceeds. If the
dividend or redemption price is paid in the form of securities of an issuer
other than the Company, the Board of Directors may determine either to (i) pay
the dividend or redemption price in the form of separate classes or series of
securities, with one class or series of such securities to holders of Series A
Telephony Group Common Stock and another class or series of securities to
holders of Series B Telephony Group Common Stock, provided that such securities
(and, if such securities are
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convertible into or exercisable or exchangeable for shares of another class or
series of securities, the securities so issuable upon such conversion, exercise
or exchange) do not differ in any respect other than their relative voting
rights and related differences in designation, conversion, redemption and share
distribution provisions with holders of shares of Series B Telephony Group
Common Stock receiving the class or series having the higher relative voting
rights (without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series A
Telephony Group Common Stock and the Series B Telephony Group Common Stock),
provided that if such securities constitute capital stock of a subsidiary of the
Company, such rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Telephony Group Common Stock and
the Series B Telephony Group Common Stock, and otherwise such securities will be
distributed on an equal per share basis, or (ii) pay the dividend or redemption
price in the form of a single class of securities without distinction between
the shares received by the holders of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock.
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 Telephony Group may be considered to be "disposed of" in exchange
for equity securities of an entity engaged or proposing to engage in similar or
complementary business areas to those of the Telephony Group while maintaining
the capital structure and delineation of business groups contemplated by the
Telephony Group Stock Proposal.
The option to convert the Telephony Group Common Stock into TCI Group
Common Stock in the event of a Disposition provides the Company with additional
flexibility by allowing the Company to deliver consideration in the form of
shares of TCI Group Common Stock rather than cash or securities or other
properties. This alternative could be used, for example, in circumstances when
the Company did not have sufficient legally available assets under the DGCL to
pay the full amount of an otherwise required dividend or redemption or when the
Company desired to retain such proceeds.
If less than substantially all of the properties and assets of the
Telephony Group were disposed of by the Company in one transaction, the Company
would not be required to pay a dividend on, redeem or convert the outstanding
shares of Telephony Group Common Stock, even if an additional transaction were
consummated at a later time in which additional properties and assets of the
Telephony Group were disposed of by the Company, which, together with the
properties and assets disposed of in the first transaction, would have
constituted substantially all of the properties and assets of the Telephony
Group at the time of the first transaction, unless such transactions constituted
a series of related transactions. The second transaction, however, could trigger
such a requirement if, at the time of the second transaction, the properties and
assets disposed of in such transaction constituted at least substantially all of
the properties and assets of the Telephony Group at such time. If less than
substantially all of the properties and assets of the Telephony Group were
disposed of by the Company, the holders of the Telephony Group Common Stock
would not be entitled to receive any dividend or have their shares redeemed or
converted for TCI Group Common Stock, although the Board of Directors could
determine, in its sole discretion, to pay a dividend on the Telephony Group
Common Stock in an amount related to the proceeds of such Disposition.
At the time of any dividend made as a result of a Disposition referred to
above, the TCI Group will be credited, and the Telephony Group will be charged
(in addition to the charge for the dividend paid in respect of outstanding
shares of Telephony Group Common Stock), with an amount equal to the product of
(i) the aggregate amount paid in respect of such dividend times (ii) a fraction
the numerator of which is the Telephony Group Inter-Group Interest Fraction and
the denominator of which is the Telephony Group Outstanding Interest Fraction.
See Annex IV -- Illustration of Certain Terms for an illustration of the
dividend on or redemption or conversion of Telephony Group Common Stock
following the Disposition of all or substantially all of the properties and
assets of the Telephony Group.
Redemption in Exchange for Stock of Subsidiary. At any time at which all of
the assets and liabilities attributed to the Telephony Group have become and
continue to be held directly or indirectly by any one or
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more corporations that are Qualifying Subsidiaries (the "Telephony Group
Subsidiaries"), the Board of Directors may, subject to the availability of
assets of the Company legally available therefor, redeem on a pro rata basis,
all of the outstanding shares of Telephony Group Common Stock in exchange for an
aggregate number of outstanding, fully paid and nonassessable shares of common
stock of each Telephony Group Subsidiary equal to the product of the Telephony
Group Outstanding Interest Fraction and the number of outstanding shares of
common stock of such Telephony Group Subsidiary that are owned by the Company.
In effecting such a redemption, the Board of Directors may determine either
to (i) redeem shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock in exchange for shares of separate classes or
series of common stock of each Telephony Group Subsidiary with relative voting
rights and related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock, with holders of shares of Series B Telephony Group Common Stock
receiving the class or series having the higher relative voting rights, or (ii)
redeem shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock in exchange for shares of a single class of common stock of
each Telephony Group Subsidiary without distinction between the shares
distributed to the holders of the two series of Telephony Group Common Stock.
See Annex IV -- Illustration of Certain Terms for an illustration of the
redemption of Telephony Group Common Stock in exchange for common stock of the
Telephony Group Subsidiaries.
Certain Provisions Respecting Convertible Securities. Unless the provisions
of any class or series of Convertible Securities which are convertible into or
exercisable or exchangeable for shares of Telephony Group Common Stock provide
specifically to the contrary, after any conversion date or redemption date on
which all outstanding shares of Telephony Group Common Stock were converted or
redeemed, any share of Telephony Group Common Stock that is issued on
conversion, exercise or exchange of any such Convertible Securities will,
immediately upon issuance pursuant to such conversion, exercise or exchange and
without any notice or any other action on the part of the Company or its Board
of Directors or the holder of such share of Telephony Group Common Stock, be
redeemed in exchange for, to the extent assets of the Company are legally
available therefor, the amount of $.01 per share in cash.
General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above under
"-- Conversion and Redemption -- Mandatory Dividend, Redemption or Conversion of
Telephony Group Common Stock," the Company will announce publicly by press
release (i) the Telephony Group Net Proceeds of such Disposition, (ii) the
number of outstanding shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock, (iii) the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (iv) the Telephony Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Company will
announce publicly by press release which of the actions described in clause (i),
(ii) or (iii) of the second paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend described in clause (i) of the
second paragraph under "-- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of Telephony Group Common Stock," the Company will, not
later than the 30th Trading Day following the consummation of such Disposition,
cause to be given to each holder of outstanding shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock 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
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in respect of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, (iv) the Telephony Group Net Proceeds of such
Disposition, (v) the Telephony 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 Telephony Group Common Stock and Series B
Telephony Group Common Stock and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof.
If the Company determines to undertake a redemption of shares of Telephony
Group Common Stock following a Disposition of all (not merely substantially all)
of the properties and assets of the Telephony Group as described in clause
(ii)(A) of the second paragraph under "-- Conversion and Redemption -- Mandatory
Dividend, Redemption or Conversion of Telephony Group Common Stock," the Company
will cause to be given to each holder of outstanding shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock a notice
setting forth (i) a statement that all shares of Telephony Group Common Stock
outstanding on the redemption date will be redeemed, (ii) the redemption date
(which will not be more than 85 Trading Days following the consummation of such
Disposition), (iii) the kind of shares of capital stock, cash and/or other
securities or property to be paid as a redemption price in respect of shares of
Telephony Group Common Stock outstanding on the redemption date, (iv) the
Telephony Group Net Proceeds of such Disposition, (v) the Telephony Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, (vi) the place or places where certificates for shares of Telephony
Group Common Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement), are to be surrendered for delivery of
certificates for shares of such capital stock, cash and/or other securities or
property, and (vii) the number of outstanding shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock and the number of shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof. Such notice will be sent not less than 35 Trading Days nor more than 45
Trading Days prior to the redemption date.
If the Company determines to undertake a redemption of shares of Telephony
Group Common Stock following a Disposition of substantially all (but not all) of
the properties and assets of the Telephony Group as described in clause (ii)(B)
of the second paragraph under "-- Conversion and Redemption -- Mandatory
Dividend, Redemption or Conversion of Telephony Group Common Stock," the Company
will, not later than the 30th Trading Day following the consummation of such
Disposition, cause to be given to each holder of record of outstanding shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
a notice setting forth (i) a date not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition
which will be the date on which shares of the Telephony Group Common Stock then
outstanding will be selected for redemption, (ii) the anticipated redemption
date (which will not be more than 85 Trading Days following the consummation of
such Disposition), (iii) the kind of shares of capital stock, cash and/or other
securities or property to be paid as a redemption price in respect of shares of
Telephony Group Common Stock selected for redemption, (iv) the Telephony Group
Net Proceeds of such Disposition, (v) the Telephony Group Outstanding Interest
Fraction as of a recent date preceding the date of such notice, (vi) the number
of outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof, and (vii)
a statement that the Company will not be required to register a transfer of any
shares of Telephony Group Common Stock for a period of 15 Trading Days next
preceding the date referred to in clause (i) of this sentence. Promptly
following the date referred to in clause (i) of the preceding sentence, but not
earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition, the Company will cause to be
given to each holder of shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock to be redeemed, a notice setting forth (i)
the number of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock held by such holder to be redeemed, (ii) a
statement that such shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock will be redeemed,
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(iii) the redemption date (which will not be more than 85 Trading Days following
the consummation of such Disposition), (iv) the kind and per share amount of
shares of capital stock, cash and/or other securities or property to be received
by such holder with respect to each share of such Telephony Group Common Stock
to be redeemed, including details as to the calculation thereof, and (v) the
place or places where certificates for shares of such Telephony Group Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement), are to be surrendered for delivery of certificates for shares
of such capital stock, cash and/or other securities or property. The outstanding
shares of Telephony Group Common Stock to be redeemed will be redeemed by the
Company pro rata among the holders of Telephony Group Common Stock or by such
other method as may be determined by the Board of Directors to be equitable.
In the event of any conversion as described above under "-- Conversion and
Redemption -- Conversion at the Option of the Company" or "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock a notice setting forth (i) a statement that all outstanding shares
of Telephony Group Common Stock will be converted, (ii) the conversion date
(which will not be more than 85 Trading Days following the consummation of such
Disposition in the event of a conversion pursuant to the provisions described
under "-- Conversion and Redemption -- Mandatory Dividend, Redemption or
Conversion of Telephony Group Common Stock" and which will not be more than 120
days after the Appraisal Date in the event of a conversion pursuant to the
provisions described under "-- Conversion and Redemption -- Conversion at the
Option of the Company"), (iii) the per share number (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 Telephony
Group Common Stock or Series B Telephony Group Common Stock, including details
as to the calculation thereof, (iv) the place or places where certificates for
shares of Telephony Group Common Stock, properly endorsed or assigned for
transfer (unless the Company waives such requirement), are to be surrendered,
and (v) the number of outstanding shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, and the number of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof. 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 Telephony Group
Common Stock and Series B Telephony Group Common Stock as described above under
"-- Conversion and Redemption -- Redemption in Exchange for Stock of
Subsidiary," the Company will promptly cause to be given to each holder of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
a notice setting forth (i) a statement that all outstanding shares of Telephony
Group Common Stock will be redeemed in exchange for shares of common stock of
the Telephony Group Subsidiaries, (ii) the redemption date, (iii) the Telephony
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice, (iv) the place or places where certificates for shares of Telephony
Group Common Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement), are to be surrendered for delivery of
certificates for shares of common stock of the Telephony Group Subsidiaries, and
(v) the number of outstanding shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock and the number of shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof. Such
notice will be sent 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 Telephony Group Common Stock and Series B
Telephony 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 Telephony Group Common Stock, a statement
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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 Telephony 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 Telephony 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 Telephony
Group Common Stock or of Convertible Securities nor any defect therein will
affect the sufficiency thereof with respect to any other holder of outstanding
shares of Telephony Group Common Stock or of Convertible Securities, or the
validity of any conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of
Telephony Group Common Stock upon any conversion, redemption, dividend or other
distribution described above. In connection with the determination of the number
of shares of any class of capital stock that is issuable or the amount of
securities that is deliverable to any holder of record upon any such conversion,
redemption, dividend or other distribution (including any fraction of shares or
securities), the Company may aggregate the number of shares of Telephony Group
Common Stock held at the relevant time by such holder of record. If the number
of shares of any class of capital stock or the amount of securities remaining to
be issued or delivered to any holder of Telephony Group Common Stock is a
fraction, the Company will, if such fraction is not issued or delivered to such
holder, pay a cash adjustment in respect of such fraction in an amount equal to
the fair market value of such fraction on the fifth Trading Day prior to the
date such payment is to be made (without interest). For purposes of the
preceding sentence, "fair market value" of any fraction will be (i) in the case
of any fraction of a share of capital stock of the Company, the product of such
fraction and the Market Value of one share of such capital stock and (ii) in the
case of any other fractional security, such value as is determined by the Board
of Directors.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of Telephony Group Common Stock; provided, however,
that if the conversion date or the redemption date with respect to the Telephony
Group Common Stock is subsequent to the record date for the payment of a
dividend or other distribution thereon or with respect thereto, the holders of
shares of Telephony Group Common Stock at the close of business on such record
date will be entitled to receive the dividend or other distribution payable on
or with respect to such shares on the date set for payment of such dividend or
other distribution, notwithstanding the conversion or redemption of such shares
or the Company's default in payment of the dividend or distribution due on such
date.
Before any holder of shares of Telephony Group Common Stock will be
entitled to receive certificates representing shares of any kind of capital
stock or cash and/or securities or other property to be received by such holder
with respect to any conversion or redemption of shares of Telephony Group Common
Stock, such holder is required to surrender at such place as the Company will
specify certificates for such shares, properly endorsed or assigned for transfer
(unless the Company waives such requirement). The Company will as soon as
practicable after surrender of certificates representing shares of Telephony
Group Common Stock deliver to the person for whose account such shares were so
surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock or cash
and/or securities or other property to which such person is entitled, together
with any payment for fractional securities referred to above. If less than all
of the shares of Telephony Group Common Stock represented by any one certificate
are to be redeemed, the Company will issue and deliver a new certificate for the
shares of Telephony Group Common Stock not redeemed. The Company will not be
required to register a transfer of (i) any shares of
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Telephony Group Common Stock for a period of 15 Trading Days next preceding any
selection of shares of Telephony Group Common Stock to be redeemed or (ii) any
shares of Telephony Group Common Stock selected or called for redemption. Shares
selected for redemption may not thereafter be converted pursuant to the
provisions described under "-- Conversion and Redemption -- Conversion at the
Option of the Holder."
From and after any applicable conversion date or redemption date, all
rights of a holder of shares of Telephony Group Common Stock that were converted
or redeemed will cease except for the right, upon surrender of the certificates
representing shares of Telephony Group Common Stock, to receive certificates
representing shares of the kind and amount of capital stock or cash and/or
securities or other property for which such shares were converted or redeemed,
together with any payment for fractional securities, and such holder will have
no other or further rights in respect of the shares of Telephony Group Common
Stock so converted or redeemed, including, but not limited to, any rights with
respect to any cash, securities or other property which are reserved or
otherwise designated by the Company as being held for the satisfaction of the
Company's obligations to pay or deliver any cash, securities or other property
upon the conversion, exercise or exchange of any Convertible Securities
outstanding as of the date of such conversion or redemption. No holder of a
certificate that, immediately prior to the applicable conversion date or
redemption date for the Telephony Group Common Stock, represented shares of
Telephony Group Common Stock will be entitled to receive any dividend or other
distribution with respect to shares of any kind of capital stock into or in
exchange for which the Telephony Group Common Stock was converted or redeemed
until surrender of such holder's certificate for a certificate or certificates
representing shares of such kind of capital stock. Upon such surrender, there
will be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable with respect to a record
date after the conversion date or redemption date, as the case may be, but that
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion date or
redemption date, as the case may be, of Telephony Group Common Stock, the
Company will, however, be entitled to treat the certificates for shares of
Telephony Group Common Stock that have not yet been surrendered for conversion
or redemption as evidencing the ownership of the number of whole shares of the
kind or kinds of capital stock for which the shares of Telephony Group Common
Stock represented by such certificates have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of Telephony Group Common Stock. The Company will not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of any shares of capital stock in a name other than
that in which the shares of Telephony Group Common Stock so converted or
redeemed were registered and no such issue or delivery will be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid.
LIQUIDATION RIGHTS
The Telephony Group Stock Proposal provides that, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any class or series of Preferred Stock is
entitled, (i) the holders of the shares of TCI Group Common Stock will share
equally, on a share for share basis, in a percentage of the funds of the Company
remaining for distribution to its common stockholders equal to 100% multiplied
by the average daily ratio (expressed as a decimal) of W/Z for the 20-Trading
Day period ending on the Trading Day prior to the date of the public
announcement of such liquidation, dissolution or winding up, (ii) the holders of
the shares of Liberty Media Group Common Stock will share equally, on a
share-for-share basis, in a percentage of the funds of the Company remaining for
distribution to its common stockholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of X/Z for such 20-Trading Day period and
(iii) the holders of the shares of Telephony Group Common Stock will share
equally, on a share for share basis, in a percentage of the funds of the Company
remaining for distribution to its common stockholders equal to 100% multiplied
by the average
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daily ratio (expressed as a decimal) of Y/Z for such 20-Trading Day period,
where W is the aggregate Market Capitalization of the Series A TCI Group Common
Stock and the Series B TCI Group Common Stock, X is the aggregate Market
Capitalization of the Series A Liberty Media Group Common Stock and the Series B
Liberty Media Group Common Stock, Y is the aggregate Market Capitalization of
the Series A Telephony Group Common Stock and the Series B Telephony Group
Common Stock, and Z is the aggregate Market Capitalization of the Series A TCI
Group Common Stock, the Series B TCI Group Common Stock, the Series A Liberty
Media Group Common Stock, the Series B Liberty Media Group Common Stock, the
Series A Telephony Group Common Stock and the Series B Telephony Group Common
Stock. Neither a consolidation, merger nor sale of assets will be construed to
be a "liquidation," "dissolution" or "winding up" of the Company. Under the
present terms of the Company Charter, the funds of the Company remaining for
distribution to its common stockholders following the liquidation, dissolution
or winding up of the Company would be allocated between the TCI Group Common
Stock and the Liberty Media Group Common Stock based upon the average daily
ratio (expressed as a decimal), for the same Trading Day period prior to the
public announcement of such liquidation, dissolution or winding up, of the
Market Capitalization of the TCI Group Common Stock or Liberty Media Group
Common Stock, as applicable, to the aggregate Market Capitalization of the TCI
Group Common Stock and the Liberty Media Group Common Stock. The "Market
Capitalization" of any class or series of capital stock of the Company on any
trading day means the product of (i) the Market Value of one share of such class
or series on such trading day and (ii) the number of shares of such class or
series outstanding on such trading day.
No holder of Telephony Group Common Stock will have any special right to
receive specific assets of the Telephony Group in the case of any dissolution,
liquidation or winding up of the Company.
DETERMINATIONS BY THE BOARD OF DIRECTORS
The Amended Charter will provide that any determinations made by the Board
of Directors under any provision described under "Description of Telephony Group
Common Stock and Effects on Existing Common Stock" will be final and binding on
all stockholders of the Company, except as may otherwise be required by law.
Such a determination would not be binding if it were established that the
determination was made in breach of a fiduciary duty of the Board of Directors.
See "Factors to be Considered -- Fiduciary Duties of the Board of Directors Are
to All Stockholders Regardless of Class or Series." The Company will prepare a
statement of any such determination by the Board of Directors respecting the
fair market value of any properties, assets or securities and will file such
statement with the Secretary of the Company.
PREEMPTIVE RIGHTS
Under the Telephony Group Stock Proposal, the holders of the TCI Group
Common Stock, Liberty Media Group Common Stock and Telephony Group Common Stock
will not have any preemptive rights to subscribe for any additional shares of
capital stock or other obligations convertible into or exercisable for shares of
capital stock that may hereafter be issued by the Company.
CERTAIN DEFINITIONS
As used in this Proxy Statement, the following terms have the meanings
specified below:
"Convertible Securities" means any securities of the Company (other
than any series of Common Stock) that are convertible into, exchangeable
for or evidence the right to purchase any shares of any series of Common
Stock, whether upon conversion, exercise or exchange, pursuant to
anti-dilution 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.
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
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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 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
for such period, including income and expenses of the Company attributed to
the operations of the Liberty Media Group on a substantially consistent
basis, including, without limitation, corporate administrative costs, net
interest and income taxes. The Liberty Media Group Available Dividend
Amount is intended to be similar to the amount that would be legally
available for the payment of dividends on the Liberty Media Group Common
Stock under the DGCL if the Liberty Media Group were a separate Delaware
corporation.
"Market Value" of a share of any class or series of capital stock of
the Company on any day means the average of the high and low reported sale
prices regular way of a share of such class or series on such day (if such
day is a trading day, and if such day is not a trading day, on the trading
day immediately preceding such day) or in case no such reported sale takes
place on such trading day the average of the reported closing bid and asked
prices regular way of a share of such class or series on such trading day,
in either case on the Nasdaq National Market, or if the shares of such
class or series are not quoted on the Nasdaq National Market on such
trading day, the average of the closing bid and asked prices of a share of
such class or series in the over-the-counter market on such trading day as
furnished by any New York Stock Exchange member firm selected from time to
time by the Company, or if such closing bid and asked prices are not made
available by any such New York Stock Exchange member firm on such trading
day, the market value of a share of such class or series as determined by
the Board of Directors; provided, that for purposes of determining the
ratios described under "-- Conversion and Redemption -- Conversion at the
Option of the Company," "-- Conversion and Redemption -- Mandatory
Dividend, Redemption or Conversion of Telephony Group Common Stock" and
"-- Liquidation Rights," (a) the "Market Value" of a share of any series of
Common Stock on any day prior to the "ex" date or any similar date for any
dividend or distribution paid or to be paid with respect to such series of
Common Stock will be reduced by the fair market value of the per share
amount of such dividend or distribution as determined by the Board of
Directors and (b) the "Market Value" of a share of any series of Common
Stock on any day prior to (i) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or
otherwise) of outstanding shares of such series of Common Stock or (ii) the
"ex" date or any similar date for any dividend or distribution with respect
to any such series of Common Stock in shares of such series of Common
Stock, will be appropriately adjusted to reflect such subdivision,
combination, dividend or distribution.
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets of a Group in which the
Company receives as proceeds of such Disposition primarily equity
securities (including, without limitation, capital stock, convertible
securities, partnership or limited partnership interests and other types of
equity securities, without regard to the voting power or contractual or
other management or governance rights related to such equity securities) of
the purchaser or acquiror of such assets and properties of the applicable
Group, any entity which succeeds (by merger, formation of a joint venture
enterprise or otherwise) to such assets and properties of the applicable
Group or a third party issuer, which purchaser, acquiror or other issuer is
engaged or proposes to engage primarily in one or more businesses similar
or complementary to the businesses conducted by the applicable Group prior
to such Disposition, as determined in good faith by the Board of Directors.
The "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
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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. "Corporation Earnings
(Loss) Attributable to the TCI Group," for any period, means the net
earnings or loss of the TCI Group for such period, including income and
expenses of the Company attributed to the operations of the TCI Group on a
substantially consistent basis, including, without limitation, corporate
administrative costs, net interest and income taxes. The TCI Group
Available Dividend Amount is intended to be similar to the amount that
would be legally available for the payment of dividends on the TCI Group
Common Stock under the DGCL if the TCI Group were a separate Delaware
corporation.
"Telephony Group Inter-Group Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest as of such date
and the denominator of which is the sum of (a) such Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest as of
such date and (b) the aggregate number of shares of Telephony Group Common
Stock outstanding as of such date.
"Telephony Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the
Telephony Group, an amount, if any, equal to the gross proceeds of such
Disposition after any payment of, or reasonable provision for, (a) any
taxes payable by TCI 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 Telephony
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 Telephony Group, including, without limitation, any
indemnity or guarantee obligations incurred in connection with the
Disposition or any liabilities for future purchase price adjustments and
any preferential amounts plus any accumulated and unpaid dividends and
other obligations in respect of Preferred Stock attributed to the Telephony
Group. For purposes of this definition, any properties and assets of the
Telephony Group remaining after such Disposition shall constitute
"reasonable provision" for such amount of taxes, costs and liabilities
(contingent or otherwise) as can be supported by such properties and
assets. To the extent the proceeds of any Disposition include any
securities or other property other than cash, the Board of Directors shall
determine the value of such securities or property, including for the
purpose of determining the equivalent value thereof if the Board of
Directors determines to pay a dividend or redemption price in cash or
securities or other property as provided in the third paragraph under
"-- Conversion and Redemption -- Mandatory Dividend, Redemption or
Conversion of Telephony Group Common Stock."
"Telephony Group Outstanding Interest Fraction," as of any date, shall mean
a fraction the numerator of which is the aggregate number of shares of Telephony
Group Common Stock outstanding on such date and the denominator of which is the
sum of (a) such aggregate number of shares of Series A Telephony Group Common
Stock outstanding on such date and (b) the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest as of such date.
INTER-GROUP INTEREST IN THE TELEPHONY GROUP
Currently, all of the investments attributed to the Telephony Group are
part of the TCI Group and the Company's equity in and share of losses of the
entities in which such investments are attributed entirely to the TCI Group.
Upon effectiveness of the Telephony Group Stock Proposal, these investments will
cease to be attributed to the TCI Group; however, until shares of Telephony
Group Common Stock are issued, the TCI Group Common Stock will continue to be
intended to reflect all of the common stockholders' equity value of the Company
attributed to the Telephony Group -- i.e., the Inter-Group Interest of the TCI
Group in the Telephony Group will initially be 100% -- in addition to the
separate performance of all businesses of the Company not included in the
Liberty Media Group or the Telephony Group. At such time as shares of Telephony
Group Common Stock are first issued, the Company's equity in and share of losses
of the entities in
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which the investments attributed to the Telephony Group are held will be
reflected in the separate combined financial statements of the Telephony Group
and will cease to be attributed to the TCI Group, except to the extent of the
then Inter-Group Interest, as adjusted to reflect such issuance.
Prior to the issuance of any shares of Telephony Group Common Stock, the
Board of Directors will designate the number of shares of the aggregate 825
million authorized shares of Telephony Group Common Stock that are deemed to
represent the then Inter-Group Interest (i.e., 100% of the common stockholders'
equity value of the Company attributable to the Telephony Group), and such
number will represent the initial Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest. Authorized shares of Telephony Group
Common Stock in excess of the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest and the outstanding shares of Telephony
Group Common Stock will be available for issuance as additional equity for the
Telephony Group. Shares of Telephony Group Common Stock sold in the initial
offering will not include shares attributed to the Inter-Group Interest.
As shares of Telephony Group Common Stock are offered and sold from time to
time by the Company, the Company will identify (i) the number of shares of
Telephony Group Common Stock offered and sold that represent the Inter-Group
Interest, if any, the sale of which shares will reduce the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest on a
share-for-share basis and the net proceeds of which sale will be attributed
entirely to the TCI Group, and (ii) the number of such shares that represent an
additional equity interest in the Telephony Group, the sale of which shares will
reduce the Available Shares and the net proceeds of which sale will be
attributed entirely to and reflected entirely in the combined financial
statements of the Telephony Group. The authorized shares of Telephony Group
Common Stock in excess of the total number of shares outstanding will be
available for issuance or sale without further approval by the Company's
stockholders and may be issued at any time at prices that would dilute the value
of the outstanding shares of Telephony Group Common Stock. The Board of
Directors expects to make such determination, in its sole discretion, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the relative levels of internally
generated cash flow of the Groups, the capital expenditure plans of and
investment opportunities available to the Groups, the long-term business
prospects for the Groups and the availability, cost and time associated with
alternative financing sources. See "Factors to be Considered -- Fiduciary Duties
of the Board of Directors Are to All Stockholders Regardless of Class or
Series." For illustrations of the effects of the issuance of shares of Telephony
Group Common Stock, see Annex IV -- Illustration of Certain Terms
The TCI Group's Inter-Group Interest in the Telephony Group would be
increased if a subsequent transfer of cash or other property from the TCI Group
to the Telephony Group is specifically designated by the Board of Directors as
being made to increase such Inter-Group Interest (in contrast to transfers made
for other consideration such as transfers as loans or in purchase and sale
transactions) or if outstanding shares of Telephony Group Common Stock are
retired or otherwise cease to be outstanding following their purchase with funds
attributed to the TCI Group. In structuring the terms of the Telephony Group
Stock Proposal, the Board of Directors determined that the Telephony Group
should not be permitted to create an interest in either the TCI Group or the
Liberty Media Group corresponding to the Inter-Group Interest, and the Company
Charter likewise does not permit the Liberty Media Group to create an interest
in the Telephony Group or the TCI Group corresponding to the Inter-Group
Interest. In making these determinations, the Board of Directors concluded that
an interest corresponding to the Inter-Group Interest held by the Telephony
Group in either the TCI Group or the Liberty Media Group could influence
adversely the ability of the Telephony Group Common Stock to reflect the
separate performance of the Telephony Group, and that an interest corresponding
to an Inter-Group Interest held by the Liberty Media Group in the Telephony
Group could influence adversely the ability of the Liberty Media Group Common
Stock to reflect the separate performance of the Liberty Media Group.
In general, if the TCI Group's Inter-Group Interest in the Telephony Group
is increased by a transfer of funds or other assets from the TCI Group to the
Telephony Group, the Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be increased by an amount determined by
dividing the amount of funds or value of the assets transferred by the Market
Value of a share of Series A Telephony Group Common Stock as of the date of such
transfer. Any decrease in the Number of Shares
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Issuable with Respect to the Telephony Group Inter-Group Interest resulting from
a transfer of funds or other assets from the Telephony Group to the TCI Group
determined by the Board of Directors to be made in respect of such a decrease
would be similarly calculated. To the extent outstanding shares of Telephony
Group Common Stock are retired or otherwise cease to be outstanding following
their purchase with funds attributed to the TCI Group, the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest would increase
on a share-for-share basis. Shares of Telephony Group Common Stock purchased
with funds attributed to the TCI Group which remain outstanding (as a result of
being held by a subsidiary included in the TCI Group) would not increase its
Inter-Group Interest in the Telephony Group but would represent an outstanding
interest in the common stockholders' equity value of the Company attributable to
the Telephony Group. Similarly, shares of Telephony Group Common Stock purchased
with funds attributed to the Liberty Media Group which remain outstanding would
not create an interest in the Telephony Group corresponding to the Inter-Group
Interest, but would represent an outstanding interest in the common
stockholders' equity value of the Company attributable to the Telephony Group.
The Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest will also (a) be adjusted from time to time as appropriate to reflect
(i) subdivisions (by stock split or otherwise) and combinations (by reverse
stock split or otherwise) of the Telephony Group Common Stock, (ii) dividends or
distributions payable in shares of Telephony Group Common Stock to holders of
Telephony Group Common Stock and (iii) reclassifications of Telephony Group
Common Stock and (b) be decreased by the number of shares of Telephony Group
Common Stock (i) issued upon conversion or exercise of Convertible Securities
that are not attributed to the Telephony Group or (ii) issued by the Company as
a dividend or distribution or by reclassification or exchange to holders of TCI
Group Common Stock. The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would not be represented by outstanding shares of
Telephony Group Common Stock and would have no voting rights.
The "Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest" means the number of shares of Telephony Group Common Stock
that could be issued or sold by the Company for the account of the TCI Group in
respect of its Inter-Group Interest in the Telephony Group. The "Telephony Group
Outstanding Interest Fraction" means the percentage interest in the common
stockholders' equity value of the Company attributable to the Telephony Group
that is represented at any time by the outstanding shares of Telephony Group
Common Stock, and the "Telephony Group Inter-Group Interest Fraction" means any
remaining percentage interest in the common stockholders' equity value of the
Company attributable to the Telephony Group that is attributed to the TCI Group
and represented by the Inter-Group Interest. The sum of the Telephony Group
Outstanding Interest Fraction and the Telephony Group Inter-Group Interest
Fraction would always equal 100%. The full definitions of "Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest," "Telephony
Group Outstanding Interest Fraction" and "Telephony Group Inter-Group Interest
Fraction" are set forth in Annex II.
The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be represented by outstanding shares of Telephony
Group Common Stock and, therefore, would not be entitled to any voting rights.
In addition, outstanding shares of Telephony Group Common Stock that are held by
majority-owned subsidiaries of the Company (as to which the Company owns a
majority of the shares entitled to vote in the election of directors) would not,
in accordance with the DGCL, be entitled to vote on matters presented to
stockholders or be counted for quorum purposes. Accordingly, the Company will
not have any voting rights with respect to any Inter-Group Interest in the
Telephony Group, and the outcome of any vote of the Telephony Group Common Stock
would be determined by the holders of the outstanding shares of Telephony Group
Common Stock (excluding any shares held by such majority-owned subsidiaries of
the Company).
For financial reporting purposes, shares of Telephony Group Common Stock
acquired by consolidated subsidiaries of the Company included in the TCI Group
which remain outstanding following such acquisition would be combined with the
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest and reported as the TCI Group's investment in the Telephony Group. Any
differences between such reported investment and the TCI Group's Inter-Group
Interest in the Telephony Group would be reconcilable by adding to such
Inter-Group Interest the number of outstanding shares of Telephony Group Common
Stock
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held by consolidated subsidiaries of the Company. Because these shares would
still be outstanding for purposes of the receipt of dividends and payment of
redemption or liquidation amounts, the TCI Group would obtain substantially the
same economic benefits from such outstanding shares as it would have received
had such shares been retired or otherwise ceased to be outstanding following
their purchase and added to the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest.
Whenever additional shares of Telephony Group Common Stock are issued or
sold by the Company for the account of the TCI Group in respect of a reduction
in its Inter-Group Interest in the Telephony Group, the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest would decrease
on a share-for-share basis and the Telephony Group Inter-Group Interest Fraction
would decrease and the Telephony Group Outstanding Interest Fraction would
increase accordingly. If the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest is reduced to zero as a result of any
combination of one or more of such issuances or sales, shares of Telephony 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 Telephony Group is
subsequently created. If the net proceeds of any issuance or sale by the Company
of Telephony Group Common Stock are allocated to the Telephony Group, the Number
of Shares Issuable with Respect to the Telephony Group Inter-Group Interest
would not be reduced, but the Telephony Group Inter-Group Interest Fraction
would decrease and the Telephony Group Outstanding Interest Fraction would
increase accordingly.
If the Board of Directors determines to issue or deliver shares of
Telephony Group Common Stock as a distribution on the TCI Group Common Stock,
such distribution would be treated as a distribution of shares issuable with
respect to the TCI Group's Inter-Group Interest in the Telephony Group, and as a
result, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would decrease by the number of shares distributed to the
holders of TCI Group Common Stock, resulting in a proportionate decrease in the
Telephony Group Inter-Group Interest Fraction and increase in the Telephony
Group Outstanding Interest Fraction.
If shares of Telephony Group Common Stock are retired or otherwise cease to
be outstanding following their purchase with funds attributed to the TCI Group,
the Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest would increase on a share-for-share basis and the Telephony Group
Inter-Group Interest Fraction would increase and the Telephony Group Outstanding
Interest Fraction would decrease accordingly. If the purchase of shares of
Telephony Group Common Stock were made with funds attributed to the Telephony
Group, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be increased, but the Telephony Group Inter-Group
Interest Fraction would increase and the Telephony Group Outstanding Interest
Fraction would decrease accordingly. The Board of Directors would, in its sole
discretion, determine whether purchases of Telephony Group Common Stock should
be made with consideration attributed to the TCI Group or the Telephony Group,
by considering such factors as it deems relevant, including, without limitation,
the needs of the Company, the relative levels of internally generated cash flow
of the Groups, the capital expenditure plans of the Groups, the investment
opportunities available to the Groups, the long-term business prospects for the
Groups and the availability, cost and time associated with alternative financing
sources.
The Board of Directors could, in its sole discretion, determine from time
to time to have the Company contribute cash or other property of the TCI Group
as additional equity to the Telephony Group, which would increase the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest by the
number determined by dividing the amount of such cash or the fair value (as
determined by the Board of Directors) of such property by the Market Value of
one share of Series A Telephony Group Common Stock as of the date of such
contribution. In such event, the Telephony Group Inter-Group Interest Fraction
will increase and the Telephony Group Outstanding Interest Fraction will
decrease accordingly. The Board of Directors could, in its sole discretion, also
determine from time to time to transfer cash or other property of the Telephony
Group from the Telephony Group to the TCI Group in respect of a reduction in its
Inter-Group Interest in the Telephony Group, in which case the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest would be
decreased by the number determined by dividing the amount of such cash or the
fair value (as determined by the Board of Directors) of such property by the
Market Value of one
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share of Series A Telephony Group Common Stock as of the date of such
contribution. In such event, the Telephony Group Inter-Group Interest Fraction
would decrease and the Telephony Group Outstanding Interest Fraction would
increase accordingly. The Board of Directors could, in its sole discretion,
determine to make contributions or other transfers referred to in this paragraph
after consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding shares of Telephony Group Common Stock (other than in
shares of Telephony Group Common Stock, which will result in an adjustment to
the Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest as described above), the TCI Group will be credited, and the Telephony
Group will be charged (in addition to the charge for such dividend or other
distribution paid upon outstanding shares), 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 Telephony Group Common Stock
(including any dividend of Telephony Group Net Proceeds from the Disposition of
all or substantially all of the assets and properties of the Telephony Group),
times (ii) a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction.
See Annex IV -- Illustration of Certain Terms for illustrations of the
calculation of the TCI Group's Inter-Group Interest in the Telephony Group and
the effects thereon of dividends on, and the sale or purchase of, shares of
Telephony Group Common Stock and contributions of cash or other property of the
TCI Group to the Telephony Group.
DIVIDEND POLICY
The Company has never paid 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, if the Telephony Group Stock
Proposal is approved, the Telephony Group Common Stock. However, the Board of
Directors reserves the right to pay such dividends at any time and from time to
time out of funds legally available therefor.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. Any future dividends on the TCI Group Common Stock, the Liberty Media
Group Common Stock and the Telephony Group Common Stock would be paid on such
basis as the Board of Directors determines, subject to the provisions described
under "Description of Telephony Group Common Stock and Effects on Existing
Common Stock -- Dividends." In making its determination, the Board of Directors
expects to follow a policy under which it will consider, among other factors,
the relative financial condition, results of operations and business
requirements of the respective Groups. See Annex V for the Consolidated
Financial Information of the Company, the Combined Financial Information of the
Telephony Group and the Combined Financial Information of the TCI Group.
For information concerning dividends on the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Telephony Group Common Stock, see
"Description of Telephony Group Common Stock and Effects on Existing Common
Stock -- Dividends."
STOCK TRANSFER AGENT AND REGISTRAR
The Bank of New York will act as transfer agent and registrar for the
Telephony Group Common Stock upon issuance thereof.
INCLUSION IN NASDAQ NATIONAL MARKET
The Company anticipates applying for inclusion of the Series A Telephony
Group Common Stock and the Series B Telephony Group Common Stock in the Nasdaq
National Market. The Series A TCI Group Common Stock, Series B TCI Group Common
Stock, Series A Liberty Media Group Common Stock and
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Series B Liberty Media Group Common Stock will continue to be included in the
Nasdaq National Market under the symbols "TCOMA," "TCOMB," LBTYA" and "LBTYB,"
respectively.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material Federal income tax consequences of
the Telephony Group Stock Proposal is based on the opinion of Baker & Botts,
L.L.P., counsel to the Company, and Baker & Botts, L.L.P. has advised the
Company that this summary accurately describes such material consequences. The
discussion is based on the Internal Revenue Code of 1986, as amended to the date
hereof (the "Code"), Treasury Department regulations, published positions of the
Service and court decisions now in effect, all of which are subject to change.
In particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the Telephony Group Common Stock, or the
Treasury Department could change the current law in future regulations,
including regulations issued pursuant to its authority under Section 337(d) of
the Code (granting the Treasury regulatory authority with respect to the proper
tax treatment of corporate distributions of appreciated property to
shareholders). Any further legislation or regulations could be enacted or
promulgated so as to apply retroactively to the Telephony Group Stock Proposal.
However, upon advice of counsel, the Company believes that, as a practical
matter, it is unlikely that such legislation or regulations would apply
retroactively to the Telephony Group Common Stock. The discussion contained
herein and counsel's opinion are based on the assumption that the Telephony
Group Stock Proposal will be implemented as described herein.
The Company has not applied for an advance tax ruling from the Service
because the Service has announced that it will not issue advance rulings on the
classification of stock with characteristics similar to the Telephony Group
Common Stock.
IT IS IMPORTANT TO NOTE THAT THE OPINION OF COUNSEL DESCRIBED HEREIN IS
BASED UPON THE LAW IN EFFECT AS OF THE DATE HEREOF. THE TELEPHONY GROUP STOCK
PROPOSAL CONTEMPLATES THE POSSIBILITY OF THE PASSAGE OF TIME BETWEEN THE DATE
HEREOF AND THE ISSUANCE OF SHARES OF TELEPHONY GROUP COMMON STOCK. THEREFORE,
THE COMPANY WILL SEEK APPROPRIATE ADVICE FROM ITS COUNSEL TO UPDATE THIS OPINION
PRIOR TO THE INITIAL ISSUANCE OF SUCH SHARES.
TAX IMPLICATIONS TO STOCKHOLDERS
This discussion addresses those stockholders who will hold Telephony Group
Common Stock and/or TCI Group Common Stock as capital assets within the meaning
of Section 1221 of the Code. This discussion is included for general information
only. It does not discuss all aspects of Federal income taxation that could be
relevant to a stockholder in light of such stockholder's particular tax
circumstances and does not apply to certain types of stockholders who could be
subject to special treatment under the Federal income tax laws. STOCKHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE APPLICATION OF THE
FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS WELL AS TO THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS TO WHICH THEY
COULD BE SUBJECT.
Distribution and Receipt of Telephony Group Common Stock. Following
approval by stockholders of the Telephony Group Stock Proposal, the Company
currently intends, subject to prevailing market and other conditions, to offer
shares of Series A Telephony Group Common Stock for cash in an initial public
offering. Additional shares of Telephony Group Common Stock could be offered in
the future for cash in one or more public offerings or issued as a distribution
to the holders of TCI Group Common Stock on a pro rata basis; and the Company
may, from time to time, issue shares of Telephony Group Common Stock for other
corporate purposes.
In the opinion of counsel, the Telephony Group Common Stock should be
treated as stock of the Company for Federal income tax purposes. Therefore,
counsel is also of the opinion that in the event of a future distribution of the
Telephony Group Common Stock by the Company to the holders of TCI Group Common
Stock, such distribution should, in the absence of special circumstances,
constitute a stock dividend and be tax-free under Section 305 of the Code if the
various requirements of Section 305 are met in the particular transaction. If
such a distribution of Telephony Group Common Stock is so treated, the basis
each
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stockholder has in the TCI Group Common Stock with respect to which the
Telephony Group Common Stock is distributed would be allocated between such TCI
Group Common Stock and the Telephony Group Common Stock received in proportion
to the respective fair market values of each. The holding period of the
Telephony Group Common Stock would include the holding period of the TCI Group
Common Stock with respect to which it is distributed, assuming that the TCI
Group Common Stock is held as a capital asset on the date of distribution.
Although it is counsel's opinion that any future distribution of Telephony
Group Common Stock should generally not result in the recognition of any income,
gain or loss by stockholders, there are no Federal income tax regulations, court
decisions or published rulings of the Service bearing directly on stock with
characteristics of the Telephony Group Common Stock, particularly the dividend
and liquidation features. In addition, the Service announced during 1987 that it
was studying the Federal income tax consequences of stock which has certain
voting and liquidation rights in an issuing corporation, but whose dividend
rights are determined by reference to the earnings and profits of a segregated
portion of the issuing corporation's assets, and that it would not issue any
advance rulings regarding such stock. In 1995, the Service withdrew the
characterization of such stock from its list of matters under consideration but
reiterated that it would not issue advance rulings regarding such stock. In the
absence of such a ruling, there is a risk that the Service could assert that the
Telephony Group Common Stock does not constitute stock of the Company but is
other property.
If the Telephony Group Common Stock were treated as property other than
stock of the Company, any future distribution of the Telephony Group Common
Stock to holders of TCI Group Common Stock could be taxed as a dividend to
stockholders in an amount equal to the fair market value of the Telephony Group
Common Stock on the date received. If the distribution is so taxed, shareholders
would generally have a tax basis in the Telephony Group Stock equal to such fair
market value on receipt.
Sale or Exchange of Common Stock. Upon a stockholder's taxable sale or
exchange of the Telephony Group Common Stock, such stockholder would recognize
gain or loss equal to the difference between (i) any cash received plus the fair
market value of any other consideration received and (ii) the tax basis of the
stock sold or exchanged. Such tax basis would, in the case of a purchase of the
stock, be the amount paid therefor or, if received in a distribution, would be
determined in the manner described above under "-- Tax Implications to
Stockholders -- Distribution and Receipt of Telephony Group Common Stock."
Should the Company redeem the Telephony Group Common Stock in the future by
distributing shares of the Telephony Group Subsidiaries in exchange therefor, it
intends to do so in a manner that 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 Telephony Group Common Stock could, depending upon
their individual circumstances, either (a) recognize gain on the redemption in
an amount equal to the difference between the fair market value of the Telephony
Group Subsidiaries stock received and the stockholders' tax basis in their
shares being redeemed or (b) be treated as having received a taxable dividend in
an amount equal to the fair market value of the received Telephony Group
Subsidiaries stock.
The excess of net long-term capital gains over net short-term capital loss
could be taxed at a rate lower than ordinary income for certain noncorporate
taxpayers. A capital gain is long-term if the asset is held for more than one
year and is short-term if held for one year or less. The distinction between
capital gain or loss and ordinary income is also relevant for purposes of, among
other things, the limitation on the deductibility of capital losses.
Dividends. Dividend payments received by a holder of Telephony 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 Telephony Group Common
Stock of the holder, then as capital gain. Corporate shareholders would
generally be eligible for a dividends deduction with respect to the
distribution.
Conversion. If the Telephony Group Common Stock is treated as stock of the
Company as discussed above, a conversion of such stock into TCI Group Common
Stock pursuant to the terms of the Telephony Group Stock Proposal should
constitute a tax free exchange. However, it is not clear that an exchange of
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shares of Telephony Group Common Stock for shares of TCI Group Common Stock, or
shares of TCI Group Common Stock for shares of Telephony Group Common Stock,
would constitute a tax free exchange under the Code.
Adjustments to Convertible Securities. In the event of a future
distribution by the Company of Telephony Group Common Stock to holders of TCI
Group Common Stock, any outstanding Convertible Securities convertible into, or
exercisable or exchangeable for, TCI Group Common Stock will, on the effective
date of such distribution, either become convertible into, or exercisable or
exchangeable for, a combination of TCI Group Common Stock and Telephony Group
Common Stock, or into an increased amount of TCI Group Common Stock. To the
extent that the conversion right, or exercise right or exchange right of such
Convertible Securities is adjusted pursuant to their terms only as necessary to
prevent dilution, such adjustment should not be deemed a taxable stock
distribution to holders of the Convertible Securities.
Nonresident Alien Holders. Dividend payments received by a holder of
Telephony Group Common Stock who is a Nonresident Alien (as defined below) would
be subject to United States Federal withholding tax 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 Telephony
Group Common Stock sold or exchanged would be a United States Real Property
Interest only if, at any time during the five years prior to the sale or
exchange of such stock, or at any time during the period that the Nonresident
Alien held such stock, whichever time was shorter, the Company had been a
"United States real property holding corporation" as defined in Section
897(c)(2) of the Code and the Nonresident Alien owned directly or indirectly
more than 5% of such series of Telephony Group Common Stock. The Company
believes that it is not, has not been and will not become a "United States real
property holding corporation" for Federal income tax purposes.
A "Nonresident Alien" is any person who, for Federal income tax purposes,
is a foreign corporation, a nonresident alien individual, a nonresident alien
fiduciary or a foreign estate or trust, or a foreign partnership that includes
as a member any of the foregoing persons.
Backup Withholding. Certain noncorporate holders of Telephony Group Common
Stock could be subject to backup withholding at a rate of 31% on the payment of
dividends on such stock. Backup withholding will apply only if the holder (i)
failed to furnish its Taxpayer Identification Number ("TIN"), which, for an
individual, is his or her Social Security number, (ii) furnished an incorrect
TIN, (iii) was notified by the Service that it had failed to properly report
payments of interest or dividends or (iv) under certain circumstances, failed to
certify under penalties of perjury that it (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 Telephony
Group Common Stock would be allowed as a credit against such stockholder's
Federal income tax liability and could entitle such stockholder to a refund,
provided that the required information was furnished to the Service.
TAX IMPLICATIONS TO THE COMPANY
As noted above, in the opinion of counsel, the Telephony Group Common Stock
should be treated as stock of the Company for federal income tax purposes.
Accordingly, no gain or loss should be recognized by the Company on the sale of
Telephony Group Common Stock or on any subsequent distribution of such stock to
holders of TCI Group Common Stock. If, however, the Telephony Group Common Stock
were treated as property other than stock of the Company, the Company could
recognize gain on the distribution or sale of
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Telephony Group Common Stock in an amount equal to the difference between the
fair market value of such distributed stock, or the proceeds received therefrom
in the case of a sale, and its tax basis in the hands of the Company, which
basis would probably be zero. If the Telephony Group Common Stock is treated as
stock of a subsidiary of the Company, and not as stock of the Company, the
Telephony Group could, depending upon the amount of stock issued, be treated as
not includable in the Company's consolidated federal income tax return. If so
treated, any dividends paid or deemed paid to the Company by the Telephony Group
would be taxed to the Company.
EXISTING CAPITAL STOCK
Pursuant to the Telephony Group Stock Proposal, the authorized shares of
Common Stock would increase; two new series of Common Stock, designated Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock, would be
authorized, and certain of the rights and powers of the TCI Group Common Stock
and the Liberty Media Group Common Stock would be changed. Each series of Common
Stock and each class and series of Preferred Stock currently outstanding will
remain authorized following approval of the Telephony Group Stock Proposal.
The Company is currently authorized to issue 2,725,000,000 shares of Common
Stock, of which 1,750,000,000 shares are designated Series A TCI Group Common
Stock, 150,000,000 shares are designated Series B TCI Group Common Stock,
750,000,000 shares are designated Series A Liberty Media Group Common Stock and
75,000,000 shares are designated Series B Liberty Media Group Common Stock.
As of October 31, 1996, 579,395,742 shares of Series A TCI Group Common
Stock, 84,663,501 shares of Series B TCI Group Common Stock, 227,819,597 shares
of Series A Liberty Media Group Common Stock (after giving effect to the Liberty
Stock Distribution) and 21,191,669 shares of Series B Liberty Media Group Common
Stock (in each case net of shares held in treasury) had been issued and were
outstanding and 100,524,365 shares of Series A TCI Group Common Stock were held
by subsidiaries of the Company. As of that date, 119,320,915 shares of Series A
TCI Group Common Stock and 31,263,022 shares of Series A Liberty Media Group
Common Stock (after giving effect to the Liberty Stock Distribution) were
reserved for issuance upon conversion, exchange or exercise of outstanding
convertible or exchangeable securities and options. In addition, TCI has
reserved a number of shares of Series A TCI Group Common Stock equal to the
number of shares of Series B TCI Group Common Stock outstanding, and a number of
shares of Series A Liberty Media Group Common Stock equal to the number of
shares of Series B Liberty Media Group Common Stock outstanding, in either case
for issuance upon conversion, at the option of the holder, of the Series B TCI
Group Common Stock and Series B Liberty Media Group Common Stock, respectively.
Additionally, subsidiaries of the Company own shares of the Company's
Convertible Redeemable Participating Preferred Stock, Series F (the "Series F
Preferred Stock"), which are convertible in the aggregate into 358,323,046
shares of Series A TCI Group Common Stock. For a more complete description of
the existing terms of the TCI Group Common Stock and the Liberty Media Group
Common Stock, reference is made to the Company's Registration Statement on Form
8-A dated July 11, 1995, as amended by Amendment No. 1 dated September 29, 1995
and Amendment No. 2 dated October 25, 1995, filed by the Company with the SEC
under the Exchange Act, and to the Company Charter. See "ADDITIONAL
INFORMATION."
Of the 52,375,096 shares of Preferred Stock authorized by the Company
Charter, 700,000 shares are designated Class A Preferred Stock, par value $0.01
per share (the "Class A Preferred Stock"), 1,675,096 shares are designated Class
B Preferred Stock and 50,000,000 shares are designated as Series Preferred
Stock, issuable in series. Of the Series Preferred Stock, 80,000 shares are
designated as Series C Preferred Stock, 1,000,000 shares are designated as
Convertible Preferred Stock, Series D (the "Series D Preferred Stock"), 400,000
shares are designated as Redeemable Convertible Preferred Stock, Series E (the
"Series E Preferred Stock"), 500,000 shares are designated as Series F Preferred
Stock, 7,259,380 shares are designated as Series G Preferred Stock and 7,259,380
shares are designated as Series H Preferred Stock. 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
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authorized and unissued shares of Series Preferred Stock, may be reissued as
shares of another series of Series Preferred Stock, but may not be reissued as
Series E Preferred Stock.
As of October 31, 1996, 1,620,026 shares of Class B Preferred Stock, 70,575
shares of Series C Preferred Stock, 997,222 shares of Series D Preferred Stock,
278,307 shares of Series F Preferred Stock, 6,695,527 shares of Series G
Preferred Stock and 6,695,527 shares of Series H Preferred Stock were
outstanding. All of the 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 the date of this Proxy
Statement, (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
37 shares of Series A Liberty Media Group Common Stock; (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, three and one-half shares of Series A
Liberty Media Group Common Stock and one share of the Series A common stock of
TCI Satellite Entertainment, Inc.; (iii) each share of Series F Preferred Stock
is convertible into 1496.65 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, in each case subject to
antidilution adjustments. The Series C Preferred Stock, the Series G Preferred
Stock and 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, the
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 Company Charter (including the Certificate of
Designation with respect to each outstanding series of Preferred Stock).
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Company Charter and the Company's Bylaws contain provisions
which may serve to discourage or make more difficult a change in control of the
Company without the support of the Board of Directors or without meeting various
other conditions. The principal provisions of the DGCL and the aforementioned
corporate governance documents are outlined below.
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DGCL Section 203, in general, prohibits a "business combination" between a
corporation and an "interested stockholder" within three years of the date such
stockholder became an "interested stockholder," unless (i) prior to such date
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
directors who are also officers and by certain employee stock plans or (iii) on
or after such date, the business combination is approved by the board of
directors and authorized by the affirmative vote at a stockholders' meeting of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. The term "business combination" is defined to include,
among other transactions between the interested stockholder and the corporation
or any direct or indirect majority-owned subsidiary thereof, a merger or
consolidation; a sale, pledge, transfer or other disposition (including as part
of a dissolution) of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation on a
consolidated basis or the aggregate market value of all the outstanding stock of
the corporation; certain transactions that would increase the interested
stockholder's proportionate share ownership of the stock of any class or series
of the corporation or such subsidiary; and any receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or any such
subsidiary. In general, and subject to certain exceptions, an "interested
stockholder" is any person who is the owner of 15% or more of the outstanding
voting stock (or, in the case of a corporation with classes of voting stock with
disparate voting power, 15% or more of the voting power of the outstanding
voting stock) of the corporation, and the affiliates and associates of such
person. The term "owner" is broadly defined to include any person that
individually or with or through his or its affiliates or associates, among other
things, beneficially owns such stock, or has the right to acquire such stock
(whether such right is exercisable immediately or only after the passage of
time) pursuant to any agreement or understanding or upon the exercise of
warrants or options or otherwise or has the right to vote such stock pursuant to
any agreement or understanding, or has an agreement or understanding with the
beneficial owner of such stock for the purpose of acquiring, holding, voting or
disposing of such stock. The restrictions of DGCL Section 203 do not apply to
corporations that have elected, in the manner provided therein, not to be
subject to such section or, with certain exceptions, which do not have a class
of voting stock that is listed on a national securities exchange or authorized
for quotation on an interdealer quotation system of a registered national
securities association or held of record by more than 2,000 stockholders.
The Company Charter does not contain any provision "opting out" of the
application of DGCL Section 203 and the Company has not taken any of the actions
necessary for it to "opt out" of such provision. As a result, the provisions of
Section 203 will remain applicable to transactions between the Company and any
of its "interested stockholders."
The Company Charter also contains certain provisions which could make a
change in control of the Company more difficult. For example, the Company
Charter requires, subject to the rights, if any, of any class or series of
Preferred Stock, the affirmative vote of 66 2/3% of the total voting power of
the outstanding shares of Voting Securities, voting together as a single class,
to approve (i) a merger or consolidation of the Company with, or into, another
corporation, other than a merger or consolidation which does not require the
consent of stockholders under the DGCL or a merger or consolidation which has
been approved by 75% of the members of the Board of Directors (in which case, in
accordance with the DGCL, the affirmative vote of a majority of the total voting
power of the outstanding Voting Securities would, with certain exceptions, be
required for approval), (ii) the sale, lease or exchange of all or substantially
all of the property and assets of the Company or (iii) the dissolution of the
Company. "Voting Securities" is currently defined as the TCI Group Common Stock,
the Liberty Media Group Common Stock and any class or series of Preferred Stock
entitled to vote generally with the holders of Common Stock on matters submitted
to stockholders for a vote, and if the Telephony Group Stock Proposal is
approved, would include the Telephony Group Common Stock. The Company Charter
also provides for a Board of Directors of not less than three members, divided
into three classes of approximately equal size, with each class to be elected
for a three-year term at each special meeting of stockholders. The exact number
of directors, currently nine, is fixed by the Board of Directors. The holders of
TCI Group Common Stock, Liberty Media Group Common Stock, Class B Preferred
Stock, Series C
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Preferred Stock, Series G Preferred Stock and Series H Preferred Stock, voting
together as a single class, vote in elections for directors. (The holders of the
Company's Series F Preferred Stock are entitled to vote in the election of
directors; however, the DGCL prohibits the voting of such shares because such
shares are held by subsidiaries of the Company.) Stockholders of the Company do
not have cumulative voting rights.
The Company Charter authorizes the issuance of 50,000,000 shares of Series
Preferred Stock, of which 33,901,240 remain available for issuance as October
31, 1996. Under the Company Charter, the Board of Directors is authorized,
without further action by the stockholders of the Company, to establish the
preferences, limitations and relative rights of the Series Preferred Stock. In
addition, 1,900,000,000 shares of TCI Group Common Stock and 825,000,000 shares
of Liberty Media Group Common Stock are currently authorized by the Company
Charter, of which 1,135,416,392 and 575,988,733 remain available for issuance as
of October 31, 1996 (after giving effect to the Liberty Stock Distribution, but
without taking into consideration shares reserved for issuance upon conversion,
exchange or exercise of outstanding convertible or exchangeable securities and
options). If the Telephony Group Stock Proposal is approved by stockholders,
there would be 825,000,000 shares of Telephony Group Common Stock authorized.
The issue and sale of shares of TCI Group Common Stock and Liberty Media Group
Common Stock, Telephony Group Common Stock and/or Series Preferred Stock could
occur in connection with an attempt to acquire control of the Company, and the
terms of such shares of Series Preferred Stock could be designed in part to
impede the acquisition of such control.
The Company Charter requires the affirmative vote of 66 2/3% of the total
voting power of the outstanding shares of Voting Securities, voting together as
a single class, to approve any amendment, alteration or repeal of any provision
of the Company Charter or the addition or insertion of other provisions therein.
The Company Charter and the Company's Bylaws provide that a special meeting
of stockholders will be held at any time, subject to the rights of the holders
of any class or series of Preferred Stock, upon the call of the Secretary of the
Company upon (i) the written request of the holders of not less than 66 2/3% of
the total voting power of the outstanding shares of Voting Securities or (ii) at
the request of not less than 75% of the members of the Board of Directors.
Subject to the rights of any class or series of Preferred Stock, the Company's
Bylaws require that written notice of the intent to make a nomination at a
meeting of stockholders must be received by the Secretary of the Company, at the
Company's principal executive offices, not later than (a) with respect to an
election of directors to be held at an annual meeting of stockholders, 90 days
in advance of such meeting, and (b) with respect to an election of directors to
be held at a special meeting of stockholders, the close of business on the
seventh day following the day on which notice of such meeting is first given to
stockholders. The notice must contain: (1) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (2) a representation that the stockholder is a holder of record of
the Company's Voting Securities entitled to vote at the meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (3) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (4) such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Commission had each
proposed nominee been nominated, or intended to be nominated, by the Board of
Directors; and (5) the consent of each nominee to serve as a director of the
Company if so elected. Any actions to remove directors is required to be for
"cause" (as defined in the Company Charter) and be approved by the holders of
66 2/3% of the total voting power of the outstanding shares entitled to vote in
the election of directors.
The Company believes that the Telephony Group Stock Proposal, if approved
by the stockholders, should not make a change in control of the Company more
difficult. Although the number of authorized shares of Common Stock will
increase, and the number of outstanding shares will increase upon the issuance
of the Telephony Group Common Stock, the cost to an acquiring person of
obtaining majority control would depend on the aggregate market value and the
terms of the outstanding shares. The Company cannot predict whether, to what
extent or during what periods of time such cost may increase or decrease. See
"Factors to be Considered -- No Assurance as to Market Price."
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Nevertheless, the existence of the Telephony Group Common Stock would
present complexities and could in certain circumstances pose obstacles,
financial and otherwise, to an acquiring person. For example, a potential
acquiror would have to take into consideration that holders of different series
of Common Stock might be more or less receptive to the acquiror's proposal, that
a tender offer would have to be structured so as to take into account different
prices at which shares of the different series might be acquired, that a merger
would require allocation of consideration among the different series of Common
Stock and the effects of actions the Company might take such as causing a
conversion of the Telephony Group Common Stock.
INDEPENDENT AUDITORS
The firm of KPMG Peat Marwick LLP serves as the Company's independent
certified public accountants. A partner of KPMG Peat Marwick LLP will be present
at the Special Meeting with the opportunity to make a statement if KPMG Peat
Marwick LLP so desires and will be available to respond to appropriate
questions.
INCORPORATION BY REFERENCE
The following documents previously filed by the Company with the SEC under
the Exchange Act are hereby incorporated by reference in this Proxy Statement
(Commission File No. 0-20421):
A. The Company's Annual Report on Form 10-K for the year ended December
31, 1995;
B. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996;
C. The Company's Current Report on Form 8-K, dated September 3, 1996.
D. The Company's Registration Statement on Form 8-A dated July 11, 1995,
as amended by Amendment No. 1 dated September 29, 1995 and Amendment
No. 2 dated October 25, 1995.
Reference is made to the financial statements of TeleWest P.C. and
subsidiaries and the historical and pro forma financial statements for the
Company which are included in the above-referenced documents. All financial
statements included in any document filed by the Company with the SEC pursuant
to Sections 13(a), 13(c), or 15(d) of the Exchange Act subsequent to the date of
this Proxy Statement and prior to the date on which the Special Meeting is held
which amend or supplement the financial statements or pro forma financial
statements incorporated by reference herein shall be deemed to be incorporated
by reference into this Proxy Statement as of the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
All information appearing in this Proxy Statement is qualified in its
entirety by the information and financial statements (including notes thereto)
incorporated herein by reference.
74
<PAGE> 82
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy and information
statements and other information with the SEC. Such reports, proxy and
information statements and other information filed by the Company with the SEC
can be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549,
and at the regional offices of the SEC located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained from the
SEC at prescribed rates by writing to the Public Reference Section of the SEC,
Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549. The
SEC maintains a Web site on the Internet that contains reports, proxy and
information statements and other information regarding registrants (including
the Company) that file electronically with the SEC. The address of the SEC's Web
site is http://www.sec.gov. In addition, materials filed by the Company should
be available for inspection at the offices of the National Association of
Securities Dealers, Inc., Reports Section, 1735 K Street, NW, Washington, D.C.
20006.
OTHER MATTERS
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY ANY
PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM STEPHEN M. BRETT,
SENIOR VICE PRESIDENT, TELE-COMMUNICATIONS, INC., 5619 DTC PARKWAY, ENGLEWOOD,
COLORADO 80111-3000, (303) 267-5500. DOCUMENTS SO REQUESTED WILL BE PROVIDED BY
FIRST CLASS MAIL OR EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF
SUCH REQUEST.
Englewood, Colorado
February 5, 1997
75
<PAGE> 83
ANNEX I
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
1996 Act.................................................... III-8
Adjusted Liberty Media Group Outstanding Interest
Fraction.................................................. II-28
Adjusted Outstanding Shares of Liberty Media Group Common
Stock..................................................... II-4
Adjusted Outstanding Shares of Telephony Group Common
Stock..................................................... II-6
Amended Charter............................................. 17
APC......................................................... III-3
Appraisal Date.............................................. 51
Appraiser................................................... II-28
AT&T........................................................ III-7
Available Shares............................................ 20
BizTel...................................................... III-8
BTA......................................................... III-5
Business Line Restructuring................................. 21
Cable Stockholders.......................................... III-8
CAPs........................................................ III-1
Certificate of Amendment.................................... 17
Class A Preferred Stock..................................... 70
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock........................................... II-1
Class B Preferred Stock..................................... 3
CLEC........................................................ III-1
Code........................................................ 67
Comcast..................................................... 17
Committed Acquisition Shares................................ II-28
Common Stock................................................ 1
Communications Act.......................................... III-11
Company..................................................... 1
Company Charter............................................. 17
Continental................................................. III-8
Conversion Date............................................. II-28
Convertible Securities...................................... 60
Corporation Earnings (Loss) Attributable to the Liberty
Media Group............................................... II-29
Corporation Earnings (Loss) Attributable to the TCI Group... II-29
Corporation Earnings (Loss) Attributable to the Telephony
Group..................................................... II-29
Cox......................................................... 17
Cox Contributed Property.................................... III-2
Cox-California.............................................. III-3
DGCL........................................................ 32
Digital Satellite Business.................................. 22
Disposition................................................. 60
ESPP........................................................ 4
ETC......................................................... III-7
Exchange Act................................................ 40
Executive Options........................................... 44
fair market value........................................... II-18
FCC......................................................... III-3
</TABLE>
I-1
<PAGE> 84
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
Final Judgment.............................................. III-9
First Appraiser............................................. 51
Group....................................................... 24
HFC Plant................................................... 35
Higher Appraised Amount..................................... 51
ILECs....................................................... III-7
Independent Committee....................................... II-29
Inter-Group Interest........................................ 20
International............................................... 9
Kearns...................................................... 7
Liberty Media Group......................................... II-29
Liberty Media Group Available Dividend Amount............... 60
Liberty Media Group Common Stock............................ 1
Liberty Media Group Common Stock Per Share Value............ II-4
Liberty Media Group Distribution............................ 41
Liberty Media Group Inter-Group Interest Fraction........... II-31
Liberty Media Group Net Proceeds............................ II-31
Liberty Media Group Optional Conversion Ratio............... II-4
Liberty Media Group Outstanding Interest Fraction........... II-31
Liberty Media Group Private Market Value.................... II-31
Liberty Media Group Proposal................................ 22
Liberty Media Group Subsidiaries............................ II-11
Liberty Stock Distribution.................................. 3
Lower Appraised Amount...................................... 51
Market Capitalization....................................... II-31
Market Value................................................ 61
Mutually Appraised Amount................................... 51
Mutually Designated Appraiser............................... 51
Nonresident Alien........................................... 69
Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest................................ II-32
Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest................................ II-33
Parents..................................................... III-1
Partners.................................................... III-1
Partnership Agreement....................................... III-6
PCS......................................................... 17
PCS Ventures................................................ 17
Percentage Interest......................................... III-2
PhillieCo................................................... 17
Pops........................................................ 18
POTS........................................................ 18
Pre-Distribution Convertible Securities..................... II-34
Preferred Stock............................................. II-1
Qualifying Subsidiary....................................... II-34
Record Date................................................. 2
Redemption Date............................................. II-34
Registration Statement...................................... 20
Related Business Transaction................................ 61
Representatives............................................. III-6
Required Majority Vote...................................... III-6
</TABLE>
I-2
<PAGE> 85
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
ResTel Business............................................. 18
Revolving Credit Facility................................... 37
SBU......................................................... 22
SEC......................................................... 20
Second Appraiser............................................ 51
Selection Date.............................................. 51
Series A Liberty Media Group Common Stock................... 1
Series A TCI Group Common Stock............................. 1
Series A Telephony Group Common Stock....................... 1
Series B Liberty Media Group Common Stock................... 1
Series B TCI Group Common Stock............................. 1
Series B Telephony Group Common Stock....................... 1
Series C Preferred Stock.................................... 1
Series D Preferred Stock.................................... 70
Series E Preferred Stock.................................... 70
Series F Preferred Stock.................................... 70
Series G Preferred Stock.................................... 3
Series H Preferred Stock.................................... 3
Series Preferred Stock...................................... II-1
Service..................................................... 27
share distribution.......................................... II-7
SONET....................................................... III-8
Special Meeting............................................. i
Sprint...................................................... 17
Sprint PCS.................................................. 17
Sprint PCS Partnerships..................................... 17
Sprint Spectrum............................................. III-2
Sprint Spectrum Registration Statement...................... III-7
Stockholders Agreement...................................... III-9
Subsidiary.................................................. II-35
TCG......................................................... 17
TCG Reorganization.......................................... III-7
TCI......................................................... 1
TCI Group................................................... II-35
TCI Group Available Dividend Amount......................... 61
TCI Group Common Stock...................................... 1
TCI Telephony............................................... 17
Telephony Business.......................................... 18
Telephony Group............................................. II-36
Telephony Group Available Dividend Amount................... II-37
Telephony Group Common Stock................................ 1
Telephony Group Common Stock Per Share Value................ II-6
Telephony Group Inter-Group Interest Fraction............... 62
Telephony Group Net Proceeds................................ 39
Telephony Group Optional Conversion Ratio................... 51
Telephony Group Outstanding Interest Fraction............... 62
Telephony Group Private Market Value........................ 51
Telephony Group Stock Proposal.............................. 1
Telephony Group Subsidiaries................................ II-19
</TABLE>
I-3
<PAGE> 86
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
Telephony Preferred Stock................................... 21
Teleport.................................................... 17
Teleport Class A Stock...................................... III-8
Teleport Class B Stock...................................... III-8
TIN......................................................... 69
TINTA Series A Stock........................................ 9
TINTA Series B Stock........................................ 9
Trading Day................................................. II-38
TTS-Delaware................................................ 17
UACI........................................................ 14
US WEST..................................................... III-9
Voting Securities........................................... II-39
WestMarc.................................................... 16
WestMarc Preferred Stock.................................... 16
WTCI........................................................ 18
WTCI Business............................................... 18
</TABLE>
I-4
<PAGE> 87
ANNEX II
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
TELE-COMMUNICATIONS, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
FIRST: That the Restated Certificate of Incorporation of the Corporation is
hereby amended as follows:
(I) THE FIRST PARAGRAPH OF ARTICLE IV OF THE RESTATED CERTIFICATE OF
INCORPORATION OF THE CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY
AS FOLLOWS:
"AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation shall
have authority to issue is three billion six hundred two million three hundred
seventy-five thousand ninety-six (3,602,375,096) shares, which shall be divided
into the following classes:
(a) Three billion five hundred fifty million (3,550,000,000) shares
shall be of a class designated Common Stock, par value $1.00 per share
("Common Stock"), such class to be divided into series as provided in
Section E of this Article IV;
(b) Seven hundred thousand (700,000) shares shall be of a class
designated Class A Preferred Stock, par value $.01 per share ("Class A
Preferred Stock");
(c) One million six hundred seventy-five thousand ninety-six
(1,675,096) shares shall be of a class designated Class B 6% Cumulative
Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share
("Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock");
and
(d) Fifty million (50,000,000) shares shall be of a class designated
Series Preferred Stock, par value $.01 per share ("Series Preferred
Stock"), such class to be issuable in series as provided in Section D of
this Article IV.
The Class A Preferred Stock, the Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock and the Series Preferred Stock are
collectively referred to as "Preferred Stock.""
(II) SECTION E OF ARTICLE IV OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"SECTION E
SERIES A TCI GROUP COMMON STOCK, SERIES B TCI GROUP COMMON
STOCK, SERIES A LIBERTY MEDIA GROUP COMMON STOCK,
SERIES B LIBERTY MEDIA GROUP COMMON STOCK,
SERIES A TELEPHONY GROUP COMMON STOCK AND
SERIES B TELEPHONY GROUP COMMON STOCK
One billion seven hundred fifty million (1,750,000,000) shares of Common
Stock shall be of a series designated Tele-Communications, Inc. Series A TCI
Group Common Stock (the "Series A TCI Group Common Stock"), one hundred fifty
million (150,000,000) shares of Common Stock shall be of a series designated
Tele-Communications, Inc. Series B TCI Group Common Stock (the "Series B TCI
Group Common Stock"), seven hundred fifty million (750,000,000) shares of Common
Stock shall be of a series designated Tele-Communications, Inc. Series A Liberty
Media Group Common Stock (the "Series A Liberty
II-1
<PAGE> 88
Media Group Common Stock"), seventy-five million (75,000,000) shares of Common
Stock shall be of a series designated Tele-Communications, Inc. Series B Liberty
Media Group Common Stock (the "Series B Liberty Media Group Common Stock"),
seven hundred fifty million (750,000,000) shares of Common Stock shall be of a
series designated Tele-Communications, Inc. Series A Telephony Group Common
Stock (the "Series A Telephony Group Common Stock") and seventy five million
(75,000,000) shares of Common Stock shall be of a series designated
Tele-Communications, Inc. Series B Telephony Group Common Stock (the "Series B
Telephony Group Common Stock").
Each share of Series A TCI Group Common Stock and each share of Series B
TCI Group Common Stock shall, except as otherwise provided in this Section E, be
identical in all respects and shall have equal rights, powers and privileges.
Each share of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock shall, except as otherwise provided in
this Section E, be identical in all respects and shall have equal rights, powers
and privileges.
Each share of Series A Telephony Group Common Stock and each share of
Series B Telephony Group Common Stock shall, except as otherwise provided in
this Section E, be identical in all respects and shall have equal rights, powers
and privileges.
1. Voting Rights.
Holders of Series A TCI Group Common Stock shall be entitled to one vote
for each share of such stock held, holders of Series B TCI Group Common Stock
shall be entitled to ten votes for each share of such stock held, holders of
Series A Liberty Media Group Common Stock shall be entitled to one vote for each
share of such stock held, holders of Series B Liberty Media Group Common Stock
shall be entitled to ten votes for each share of such stock held, holders of
Series A Telephony Group Common Stock shall be entitled to one vote for each
share of such stock held, and holders of Series B Telephony Group Common Stock
shall be entitled to ten votes for each share of such stock held, on all matters
presented to such stockholders. Except as may otherwise be required by the laws
of the State of Delaware or, with respect to any class of Preferred Stock or any
series of such a class, in this Certificate (including any resolution or
resolutions providing for the establishment of such class or series pursuant to
authority vested in the Board of Directors by this Certificate), the holders of
shares of Series A TCI Group Common Stock, the holders of shares of Series B TCI
Group Common Stock, the holders of shares of Series A Liberty Media Group Common
Stock, the holders of shares of Series B Liberty Media Group Common Stock, the
holders of shares of Series A Telephony Group Common Stock, the holders of
shares of Series B Telephony Group Common Stock and the holders of shares of
each class or series of Preferred Stock, if any, entitled to vote thereon, shall
vote as one class with respect to the election of directors and with respect to
all other matters to be voted on by stockholders of the Corporation (including,
without limitation, any proposed amendment to this Certificate that would
increase the number of authorized shares of Common Stock or any series thereof
or of any other class or series of stock or decrease the number of authorized
shares of any class or series of stock (but not below the number of shares
thereof then outstanding)), and no separate vote or consent of the holders of
shares of Series A TCI Group Common Stock, the holders of shares of Series B TCI
Group Common Stock, the holders of shares of Series A Liberty Media Group Common
Stock, the holders of shares of Series B Liberty Media Group Common Stock, the
holders of shares of Series A Telephony Group Common Stock, the holders of
shares of Series B Telephony Group Common Stock, or the holders of shares of any
such class or series of Preferred Stock shall be required for the approval of
any such matter.
2. Conversion Rights.
(a) CONVERSION OF SERIES B TCI GROUP COMMON STOCK INTO SERIES A TCI GROUP
COMMON STOCK. Each share of Series B TCI Group Common Stock shall be
convertible, at the option of the holder thereof, into one share of Series A TCI
Group Common Stock. Any such conversion may be effected by any holder of Series
B TCI Group Common Stock by surrendering such holder's certificate or
certificates for the Series B TCI Group Common Stock to be converted, duly
endorsed, at the office of the Corporation or any transfer agent
II-2
<PAGE> 89
for the Series B TCI Group Common Stock, together with a written notice to the
Corporation at such office that such holder elects to convert all or a specified
number of shares of Series B TCI Group Common Stock represented by such
certificate and stating the name or names in which such holder desires the
certificate or certificates for Series A TCI Group Common Stock to be issued. If
so required by the Corporation, any certificate for shares surrendered for
conversion shall be accompanied by instruments of transfer, in form satisfactory
to the Corporation, duly executed by the holder of such shares or the duly
authorized representative of such holder. Promptly thereafter, the Corporation
shall issue and deliver to such holder or such holder's nominee or nominees, a
certificate or certificates for the number of shares of Series A TCI Group
Common Stock to which such holder shall be entitled as herein provided. Such
conversion shall be deemed to have been made at the close of business on the
date of receipt by the Corporation or any such transfer agent of the certificate
or certificates, notice and, if required, instruments of transfer referred to
above, and the person or persons entitled to receive the Series A TCI Group
Common Stock issuable on such conversion shall be treated for all purposes as
the record holder or holders of such Series A TCI Group Common Stock on that
date. A number of shares of Series A TCI Group Common Stock equal to the number
of shares of Series B TCI Group Common Stock outstanding from time to time shall
be set aside and reserved for issuance upon conversion of shares of Series B TCI
Group Common Stock. Shares of Series A TCI Group Common Stock shall not be
convertible into shares of Series B TCI Group Common Stock.
(b) CONVERSION OF SERIES B LIBERTY MEDIA GROUP COMMON STOCK INTO SERIES A
LIBERTY MEDIA GROUP COMMON STOCK. Each share of Series B Liberty Media Group
Common Stock shall be convertible, at the option of the holder thereof, into one
share of Series A Liberty Media Group Common Stock. Any such conversion may be
effected by any holder of Series B Liberty Media Group Common Stock by
surrendering such holder's certificate or certificates for the Series B Liberty
Media Group Common Stock to be converted, duly endorsed, at the office of the
Corporation or any transfer agent for the Series B Liberty Media Group Common
Stock, together with a written notice to the Corporation at such office that
such holder elects to convert all or a specified number of shares of Series B
Liberty Media Group Common Stock represented by such certificate and stating the
name or names in which such holder desires the certificate or certificates for
Series A Liberty Media Group Common Stock to be issued. If so required by the
Corporation, any certificate for shares surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder of such shares or the duly authorized representative
of such holder. Promptly thereafter, the Corporation shall issue and deliver to
such holder or such holder's nominee or nominees, a certificate or certificates
for the number of shares of Series A Liberty Media Group Common Stock to which
such holder shall be entitled as herein provided. Such conversion shall be
deemed to have been made at the close of business on the date of receipt by the
Corporation or any such transfer agent of the certificate or certificates,
notice and, if required, instruments of transfer referred to above, and the
person or persons entitled to receive the Series A Liberty Media Group Common
Stock issuable on such conversion shall be treated for all purposes as the
record holder or holders of such Series A Liberty Media Group Common Stock on
that date. A number of shares of Series A Liberty Media Group Common Stock equal
to the number of shares of Series B Liberty Media Group Common Stock outstanding
from time to time shall be set aside and reserved for issuance upon conversion
of shares of Series B Liberty Media Group Common Stock. Shares of Series A
Liberty Media Group Common Stock shall not be convertible into shares of Series
B Liberty Media Group Common Stock.
(c) CONVERSION OF SERIES B TELEPHONY GROUP COMMON STOCK INTO SERIES A
TELEPHONY GROUP COMMON STOCK. Each share of Series B Telephony Group Common
Stock shall be convertible, at the option of the holder thereof, into one share
of Series A Telephony Group Common Stock. Any such conversion may be effected by
any holder of Series B Telephony Group Common Stock by surrendering such
holder's certificate or certificates for the Series B Telephony Group Common
Stock to be converted, duly endorsed, at the office of the Corporation or any
transfer agent for the Series B Telephony Group Common Stock, together with a
written notice to the Corporation at such office that such holder elects to
convert all or a specified number of shares of Series B Telephony Group Common
Stock represented by such certificate and stating the name or names in which
such holder desires the certificate or certificates for Series A Telephony Group
Common Stock to be issued. If so required by the Corporation, any certificate
for shares surrendered for conversion shall be accompanied by instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
II-3
<PAGE> 90
holder of such shares or the duly authorized representative of such holder.
Promptly thereafter, the Corporation shall issue and deliver to such holder or
such holder's nominee or nominees, a certificate or certificates for the number
of shares of Series A Telephony Group Common Stock to which such holder shall be
entitled as herein provided. Such conversion shall be deemed to have been made
at the close of business on the date of receipt by the Corporation or any such
transfer agent of the certificate or certificates, notice and, if required,
instruments of transfer referred to above, and the person or persons entitled to
receive the Series A Telephony Group Common Stock issuable on such conversion
shall be treated for all purposes as the record holder or holders of such Series
A Telephony Group Common Stock on that date. A number of shares of Series A
Telephony Group Common Stock equal to the number of shares of Series B Telephony
Group Common Stock outstanding from time to time shall be set aside and reserved
for issuance upon conversion of shares of Series B Telephony Group Common Stock.
Shares of Series A Telephony Group Common Stock shall not be convertible into
shares of Series B Telephony Group Common Stock.
(d) CONVERSION OF SERIES A LIBERTY MEDIA GROUP COMMON STOCK INTO SERIES A
TCI GROUP COMMON STOCK AND SERIES B LIBERTY MEDIA GROUP COMMON STOCK INTO SERIES
B TCI GROUP COMMON STOCK AT THE OPTION OF THE CORPORATION. (i) At the option of
the Corporation by action of its Board of Directors, (A) all shares of Series A
Liberty Media Group Common Stock shall be convertible into a number (or
fraction) of fully paid and nonassessable shares of Series A TCI Group Common
Stock equal to the Liberty Media Group Optional Conversion Ratio, and (B) all
shares of Series B Liberty Media Group Common Stock shall be convertible into a
number (or fraction) of fully paid and nonassessable shares of Series B TCI
Group Common Stock equal to the Liberty Media Group Optional Conversion Ratio.
(ii) For purposes of this paragraph 2(d), the "Liberty Media Group Optional
Conversion Ratio" shall mean the quotient (calculated to the nearest five
decimal places) obtained by dividing (A) the Liberty Media Group Common Stock
Per Share Value by (B) the average Market Value of one share of Series A TCI
Group Common Stock over the 20-Trading Day period ending on the Trading Day
preceding the Appraisal Date.
(iii) In the event that the Corporation determines to establish the Liberty
Media Group Private Market Value, the Corporation shall designate the First
Appraiser, and the Independent Committee shall designate the Second Appraiser.
Not later than 20 days after the Selection Date, the First Appraiser and the
Second Appraiser shall each determine its initial view as to the private market
value of the Liberty Media Group as of the Appraisal Date and shall consult with
one another with respect thereto. Not later than the 30th day after the
Selection Date, the First Appraiser and the Second Appraiser shall each have
determined its final view as to such private market value. If the Higher
Appraised Amount is not more than 120% of the Lower Appraised Amount, the
Liberty Media Group Private Market Value (subject to any adjustment provided in
subparagraph (iv) of this paragraph 2(d)) shall be the average of those two
amounts. If the Higher Appraised Amount is more than 120% of the Lower Appraised
Amount, the First Appraiser and the Second Appraiser shall agree upon and
jointly designate the Mutually Designated Appraiser to determine such private
market value. The Mutually Designated Appraiser shall not be provided with any
of the work of the First Appraiser and Second Appraiser. The Mutually Designated
Appraiser shall, no later than the 20th day after the date the Mutually
Designated Appraiser is designated, determine the Mutually Appraised Amount, and
the Liberty Media Group Private Market Value (subject to any adjustment provided
in subparagraph (iv) of this paragraph 2(d)) shall be (A) if the Mutually
Appraised Amount is between the Lower Appraised Amount and the Higher Appraised
Amount, (I) the average of (1) the Mutually Appraised Amount and (2) the Lower
Appraised Amount or the Higher Appraised Amount, whichever is closer to the
Mutually Appraised Amount, or (II) the Mutually Appraised Amount, if neither the
Lower Appraised Amount nor the Higher Appraised Amount is closer to the Mutually
Appraised Amount, or (B) if the Mutually Appraised Amount is greater than the
Higher Appraised Amount or less than the Lower Appraised Amount, the average of
the Higher Appraised Amount and the Lower Appraised Amount. For these purposes,
if any such Appraiser expresses its final view of the private market value of
the Liberty Media Group as a range of values, such Appraiser's final view of
such private market value shall be deemed to be the midpoint of such range of
values.
(iv) Following the determination of the Liberty Media Group Private Market
Value, the Appraiser or Appraisers whose final views of the private market value
of the Liberty Media Group were used in the
II-4
<PAGE> 91
calculation of the Liberty Media Group Private Market Value shall determine the
Adjusted Outstanding Shares of Liberty Media Group Common Stock together with
any further appropriate adjustments to the Liberty Media Group Private Market
Value resulting from such determination. The "Adjusted Outstanding Shares of
Liberty Media Group Common Stock" shall mean a number, as determined by such
Appraiser(s) as of the Appraisal Date, equal to the sum of the number of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding, the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest, the number of Committed Acquisition
Shares issuable, the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock issuable upon the
conversion, exercise or exchange of all Pre-Distribution Convertible Securities
and the number of shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock issuable upon the conversion, exercise or
exchange of those Convertible Securities (other than Pre-Distribution
Convertible Securities and other than Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares) the holders of which would derive an economic benefit from conversion,
exercise or exchange of such Convertible Securities which exceeds the economic
benefit of not converting, exercising or exchanging such Convertible Securities.
The "Liberty Media Group Common Stock Per Share Value" shall mean the quotient
obtained by dividing the Liberty Media Group Private Market Value by the
Adjusted Outstanding Shares of Liberty Media Group Common Stock, provided that
if such Appraiser(s) do not agree on the determinations provided for in this
subparagraph (iv), the Liberty Media Group Common Stock Per Share Value shall be
the average of the quotients so obtained on the basis of the respective
determinations of such firms.
(v) If the Corporation determines to convert shares of Series A Liberty
Media Group Common Stock into Series A TCI Group Common Stock and shares of
Series B Liberty Media Group Common Stock into Series B TCI Group Common Stock
at the Liberty Media Group Optional Conversion Ratio, such conversion shall
occur on a Conversion Date on or prior to the 120th day following the Appraisal
Date. If the Corporation determines not to undertake such conversion, the
Corporation may at any time thereafter undertake to reestablish the Liberty
Media Group Common Stock Per Share Value as of a subsequent date.
(vi) The Corporation shall not convert shares of Series A Liberty Media
Group Common Stock into shares of Series A TCI Group Common Stock without
converting shares of Series B Liberty Media Group Common Stock into shares of
Series B TCI Group Common Stock, and the Corporation shall not convert shares of
Series B Liberty Media Group Common Stock into shares of Series B TCI Group
Common Stock without converting shares of Series A Liberty Media Group Common
Stock into shares of Series A TCI Group Common Stock. The Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common Stock shall also
be convertible at the option of the Corporation in accordance with paragraph
5(b)(iii) of this Section E.
(e) CONVERSION OF SERIES A TELEPHONY GROUP COMMON STOCK INTO SERIES A TCI
GROUP COMMON STOCK AND SERIES B TELEPHONY GROUP COMMON STOCK INTO SERIES B TCI
GROUP COMMON STOCK AT THE OPTION OF THE CORPORATION. (i) At the option of the
Corporation by action of its Board of Directors, (A) all shares of Series A
Telephony Group Common Stock shall be convertible into a number (or fraction) of
fully paid and nonassessable shares of Series A TCI Group Common Stock equal to
the Telephony Group Optional Conversion Ratio, and (B) all shares of Series B
Telephony Group Common Stock shall be convertible into a number (or fraction) of
fully paid and nonassessable shares of Series B TCI Group Common Stock equal to
the Telephony Group Optional Conversion Ratio.
(ii) For purposes of this paragraph 2(e), the "Telephony Group Optional
Conversion Ratio" shall mean the quotient (calculated to the nearest five
decimal places) obtained by dividing (A) the Telephony Group Common Stock Per
Share Value by (B) the average Market Value of one share of Series A TCI Group
Common Stock over the 20-Trading Day period ending on the Trading Day preceding
the Appraisal Date.
(iii) In the event that the Corporation determines to establish the
Telephony Group Private Market Value, the Corporation shall designate the First
Appraiser, and the Independent Committee shall designate the Second Appraiser.
Not later than 20 days after the Selection Date, the First Appraiser and the
Second Appraiser shall each determine its initial view as to the private market
value of the Telephony Group as of the
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Appraisal Date and shall consult with one another with respect thereto. Not
later than the 30th day after the Selection Date, the First Appraiser and the
Second Appraiser shall each have determined its final view as to such private
market value. If the Higher Appraised Amount is not more than 120% of the Lower
Appraised Amount, the Telephony Group Private Market Value (subject to any
adjustment provided in subparagraph (iv) of this paragraph 2(e)) shall be the
average of those two amounts. If the Higher Appraised Amount is more than 120%
of the Lower Appraised Amount, the First Appraiser and the Second Appraiser
shall agree upon and jointly designate the Mutually Designated Appraiser to
determine such private market value. The Mutually Designated Appraiser shall not
be provided with any of the work of the First Appraiser and Second Appraiser.
The Mutually Designated Appraiser shall, no later than the 20th day after the
date the Mutually Designated Appraiser is designated, determine the Mutually
Appraised Amount and the Telephony Group Private Market Value (subject to any
adjustment provided in subparagraph (iv) of this paragraph 2(e)) shall be (A) if
the Mutually Appraised Amount is between the Lower Appraised Amount and the
Higher Appraised Amount, (I) the average of (1) the Mutually Appraised Amount
and (2) the Lower Appraised Amount or the Higher Appraised Amount, whichever is
closer to the Mutually Appraised Amount, or (II) the Mutually Appraised Amount,
if neither the Lower Appraised Amount nor the Higher Appraised Amount is closer
to the Mutually Appraised Amount, or (B) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such Appraiser expresses its final view of
the private market value of the Telephony Group as a range of values, such
Appraiser's final view of such private market value shall be deemed to be the
midpoint of such range of values.
(iv) Following the determination of the Telephony Group Private Market
Value, the Appraiser or Appraisers whose final views of the private market value
of the Telephony Group were used in the calculation of the Telephony Group
Private Market Value shall determine the Adjusted Outstanding Shares of
Telephony Group Common Stock together with any further appropriate adjustments
to the Telephony Group Private Market Value resulting from such determination.
The "Adjusted Outstanding Shares of Telephony Group Common Stock" shall mean a
number, as determined by such Appraiser(s) as of the Appraisal Date, equal to
the sum of the number of shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock outstanding, the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest, and the number of
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock issuable upon the conversion, exercise or exchange of those
Convertible Securities the holders of which would derive an economic benefit
from conversion, exercise or exchange of such Convertible Securities which
exceeds the economic benefit of not converting, exercising or exchanging such
Convertible Securities. The "Telephony Group Common Stock Per Share Value" shall
mean the quotient obtained by dividing the Telephony Group Private Market Value
by the Adjusted Outstanding Shares of Telephony Group Common Stock, provided
that if such Appraiser(s) do not agree on the determinations provided for in
this subparagraph (iv), the Telephony Group Common Stock Per Share Value shall
be the average of the quotients so obtained on the basis of the respective
determinations of such firms.
(v) If the Corporation determines to convert shares of Series A Telephony
Group Common Stock into Series A TCI Group Common Stock and shares of Series B
Telephony Group Common Stock into Series B TCI Group Common Stock at the
Telephony Group Optional Conversion Ratio, such conversion shall occur on a
Conversion Date on or prior to the 120th day following the Appraisal Date. If
the Corporation determines not to undertake such conversion, the Corporation may
at any time thereafter undertake to reestablish the Telephony Group Common Stock
Per Share Value as of a subsequent date.
(vi) The Corporation shall not convert shares of Series A Telephony Group
Common Stock into shares of Series A TCI Group Common Stock without converting
shares of Series B Telephony Group Common Stock into shares of Series B TCI
Group Common Stock, and the Corporation shall not convert shares of Series B
Telephony Group Common Stock into shares of Series B TCI Group Common Stock
without converting shares of Series A Telephony Group Common Stock into shares
of Series A TCI Group Common Stock. The Series A Telephony Group Common Stock
and the Series B Telephony Group Common Stock shall also be convertible at the
option of the Corporation in accordance with paragraph 6(b)(iii) of this Section
E.
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3. Dividends.
(a) DIVIDENDS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B TCI GROUP
COMMON STOCK. Dividends on the Series A TCI Group Common Stock and the Series B
TCI Group Common Stock may be declared and paid only out of the lesser of (i)
assets of the Corporation legally available therefor and (ii) the TCI Group
Available Dividend Amount. Subject to paragraph 4 of this Section E, whenever a
dividend is paid to the holders of Series A TCI Group Common Stock, the
Corporation shall also pay to the holders of Series B TCI Group Common Stock a
dividend per share equal to the dividend per share paid to the holders of Series
A TCI Group Common Stock, and whenever a dividend is paid to the holders of
Series B TCI Group Common Stock, the Corporation shall also pay to the holders
of Series A TCI Group Common Stock a dividend per share equal to the dividend
per share paid to the holders of Series B TCI Group Common Stock.
(b) DIVIDENDS ON SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND SERIES B
LIBERTY MEDIA GROUP COMMON STOCK. Dividends on the Series A Liberty Media Group
Common Stock and the Series B Liberty Media Group Common Stock may be declared
and paid only out of the lesser of (i) assets of the Corporation legally
available therefor and (ii) the Liberty Media Group Available Dividend Amount.
Subject to paragraph 4 and the last sentence of paragraph 5(b) of this Section
E, whenever a dividend is paid to the holders of Series A Liberty Media Group
Common Stock, the Corporation shall also pay to the holders of Series B Liberty
Media Group Common Stock a dividend per share equal to the dividend per share
paid to the holders of Series A Liberty Media Group Common Stock, and whenever a
dividend is paid to the holders of Series B Liberty Media Group Common Stock,
the Corporation shall also pay to the holders of Series A Liberty Media Group
Common Stock a dividend per share equal to the dividend per share paid to the
holders of Series B Liberty Media Group Common Stock.
(c) DIVIDENDS ON SERIES A TELEPHONY GROUP COMMON STOCK AND SERIES B
TELEPHONY GROUP COMMON STOCK. Dividends on the Series A Telephony Group Common
Stock and the Series B Telephony Group Common Stock may be declared and paid
only out of the lesser of (i) assets of the Corporation legally available
therefor and (ii) the Telephony Group Available Dividend Amount. Subject to
paragraph 4 and the last sentence of paragraph 6(b) of this Section E, whenever
a dividend is paid to the holders of Series A Telephony Group Common Stock, the
Corporation shall also pay to the holders of Series B Telephony Group Common
Stock a dividend per share equal to the dividend per share paid to the holders
of Series A Telephony Group Common Stock, and whenever a dividend is paid to the
holders of Series B Telephony Group Common Stock, the Corporation shall also pay
to the holders of Series A Telephony Group Common Stock a dividend per share
equal to the dividend per share paid to the holders of Series B Telephony Group
Common Stock.
(d) DISCRIMINATION BETWEEN OR AMONG SERIES OF COMMON STOCK. The Board of
Directors, subject to the provisions of paragraph 3(a), 3(b) and 3(c) of this
Section E, shall have the authority and discretion to declare and pay dividends
on (i) the Series A TCI Group Common Stock and Series B TCI Group Common Stock,
(ii) the Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, or (iii) the Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, in equal or unequal amounts,
notwithstanding the relationship between the TCI Group Available Dividend
Amount, the Liberty Media Group Available Dividend Amount and the Telephony
Group Available Dividend Amount, the respective amounts of prior dividends
declared on, or the liquidation rights of, the Series A TCI Group Common Stock
and Series B TCI Group Common Stock, the Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, or the Series A Telephony
Group Common Stock and the Series B Telephony Group Common Stock, or any other
factor.
4. Share Distributions.
The Corporation may declare and pay a distribution consisting of shares of
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock, Series B Liberty Media Group Common Stock,
Series A Telephony Group Common Stock, Series B Telephony Group Common Stock or
any other securities of the Corporation or any other Person (hereinafter
sometimes called a "share distribution") to holders of the Common Stock only in
accordance with the provisions of this paragraph 4.
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(a) DISTRIBUTIONS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B TCI GROUP
COMMON STOCK. If at any time a share distribution is to be made with respect to
the Series A TCI Group Common Stock or Series B TCI Group Common Stock, such
share distribution may be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series B TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series A TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B TCI Group Common
Stock) to holders of Series B TCI Group Common Stock;
(ii) subsequent to the Liberty Media Group Distribution, a share
distribution consisting of shares of Series A Liberty Media Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A Liberty Media Group Common Stock) to
holders of Series A TCI Group Common Stock and Series B TCI Group Common
Stock, on an equal per share basis; provided that the sum of (A) the
aggregate number of shares of Series A Liberty Media Group Common Stock to
be so issued (or the number of such shares which would be issuable upon
conversion, exercise or exchange of any Convertible Securities to be so
issued) and (B) the number of shares of such series that are subject to
issuance upon conversion, exercise or exchange of any Convertible
Securities then outstanding that are attributed to the TCI Group (other
than Pre-Distribution Convertible Securities and other than Convertible
Securities convertible into or exercisable or exchangeable for Committed
Acquisition Shares) is less than or equal to the Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest;
(iii) a share distribution consisting of shares of Series A Telephony
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Telephony Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI Group
Common Stock, on an equal per share basis; or consisting of shares of
Series B Telephony Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series A Telephony Group Common Stock) to holders of Series A TCI
Group Common Stock and, on an equal per share basis, shares of Series B
Telephony Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B Telephony Group
Common Stock) to holders of Series B TCI Group Common Stock; provided that
the sum of (A) the aggregate number of shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock to be so distributed
(or the number of such shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock which would be issuable upon
conversion, exercise or exchange of any Convertible Securities to be so
distributed) and (B) the number of shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock that are subject to
issuance upon conversion, exercise or exchange of any Convertible
Securities then outstanding that are attributed to the TCI Group, is less
than or equal to the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest.
(iv) a share distribution consisting of any class or series of
securities of the Corporation or any other Person other than Series A TCI
Group Common Stock, Series B TCI Group Common Stock, Series A Liberty Media
Group Common Stock, Series B Liberty Media Group Common Stock, Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock (or
Convertible
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Securities convertible into or exercisable or exchangeable for shares of
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock, Series B Liberty Media Group Common
Stock, Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock), either on the basis of a distribution of identical
securities, on an equal per share basis, to holders of Series A TCI Group
Common Stock and Series B TCI Group Common Stock or on the basis of a
distribution of one class or series of securities to holders of Series A
TCI Group Common Stock and another class or series of securities to holders
of Series B TCI Group Common Stock, provided that the securities so
distributed (and, if the distribution consists of Convertible Securities,
the securities into which such Convertible Securities are convertible or
for which they are exercisable or exchangeable) do not differ in any
respect other than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions, with
holders of shares of Series B TCI Group Common Stock receiving the class or
series having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock), provided that if the securities so
distributed constitute capital stock of a Subsidiary of the Corporation,
such rights shall not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Corporation shall
not reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
(b) DISTRIBUTIONS ON SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND SERIES B
LIBERTY MEDIA GROUP COMMON STOCK. If at any time a share distribution is to be
made with respect to the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, such share distribution may be declared and
paid only as follows (or as permitted by paragraph 5 of this Section E with
respect to the redemptions and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group
Common Stock) to holders of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, on an equal per share basis; or
consisting of shares of Series B Liberty Media Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B Liberty Media Group Common Stock) to holders of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock, on an equal per share basis; or consisting of shares of Series A
Liberty Media Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Liberty Media
Group Common Stock) to holders of Series A Liberty Media Group Common Stock
and, on an equal per share basis, shares of Series B Liberty Media Group
Common Stock (or like Convertible Securities convertible into or
exercisable or exchangeable for shares of Series B Liberty Media Group
Common Stock) to holders of Series B Liberty Media Group Common Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Corporation or any other Person other than as described
in clause (i) of this paragraph 4(b) and other than Series A TCI Group
Common Stock, Series B TCI Group Common Stock, Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock)
either on the basis of a distribution of identical securities, on an equal
per share basis, to holders of Series A Liberty
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Media Group Common Stock and Series B Liberty Media Group Common Stock or
on the basis of a distribution of one class or series of securities to
holders of Series A Liberty Media Group Common Stock and another class or
series of securities to holders of Series B Liberty Media Group Common
Stock, provided that the securities so distributed (and, if the
distribution consists of Convertible Securities, the securities into which
such Convertible Securities are convertible or for which they are
exercisable or exchangeable) do not differ in any respect other than their
relative voting rights and related differences in designation, conversion,
redemption and share distribution provisions, with holders of shares of
Series B Liberty Media Group Common Stock receiving the class or series
having the higher relative voting rights (without regard to whether such
rights differ to a greater or lesser extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Liberty Media Group Common
Stock and the Series B Liberty Media Group Common Stock), provided that if
the securities so distributed constitute capital stock of a Subsidiary of
the Corporation, such rights shall not differ to a greater extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A Liberty
Media Group Common Stock and the Series B Liberty Media Group Common Stock,
and provided in each case that such distribution is otherwise made on an
equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Series A
Liberty Media Group Common Stock without reclassifying, subdividing or combining
the Series B Liberty Media Group Common Stock, on an equal per share basis, and
the Corporation shall not reclassify, subdivide or combine the Series B Liberty
Media Group Common Stock without reclassifying, subdividing or combining the
Series A Liberty Media Group Common Stock, on an equal per share basis.
(c) DISTRIBUTIONS ON SERIES A TELEPHONY GROUP COMMON STOCK AND SERIES B
TELEPHONY GROUP COMMON STOCK. If at any time a share distribution is to be made
with respect to the Series A Telephony Group Common Stock or Series B Telephony
Group Common Stock, such share distribution may be declared and paid only as
follows (or as permitted by paragraph 6 of this Section E with respect to the
redemptions and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A Telephony
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Telephony Group Common
Stock) to holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, on an equal per share basis; or consisting of
shares of Series B Telephony Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, on an equal per share
basis; or consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series A Telephony Group Common Stock) to holders of Series A
Telephony Group Common Stock and, on an equal per share basis, shares of
Series B Telephony Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
Telephony Group Common Stock) to holders of Series B Telephony Group Common
Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Corporation or any other Person other than as described
in clause (i) of this paragraph 4(c) and other than Series A TCI Group
Common Stock, Series B TCI Group Common Stock, Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock) either on the basis of a distribution of identical securities, on an
equal per share basis, to holders of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock, or on the basis of a
distribution of one class or series of securities to holders of Series A
Telephony Group Common Stock and another class or series of securities to
holders of Series B Telephony Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of Convertible
Securities, the securities
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into which such Convertible Securities are convertible or for which they
are exercisable or exchangeable) do not differ in any respect other than
their relative voting rights and related differences in designation,
conversion, redemption and share distribution provisions, with holders of
shares of Series B Telephony Group Common Stock receiving the class or
series having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Telephony Group Common Stock
and the Series B Telephony Group Common Stock), provided that if the
securities so distributed constitute capital stock of a Subsidiary of the
Corporation, such rights shall not differ to a greater extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A Telephony
Group Common Stock and the Series B Telephony Group Common Stock, and
provided in each case that such distribution is otherwise made on an equal
per share basis.
The Corporation shall not reclassify, subdivide or combine the Series A
Telephony Group Common Stock without reclassifying, subdividing or combining the
Series B Telephony Group Common Stock, on an equal per share basis, and the
Corporation shall not reclassify, subdivide or combine the Series B Telephony
Group Common Stock without reclassifying, subdividing or combining the Series A
Telephony Group Common Stock, on an equal per share basis.
5. Redemption and Other Provisions Relating to the Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock.
(a) REDEMPTION IN EXCHANGE FOR STOCK OF LIBERTY MEDIA GROUP SUBSIDIARIES.
At any time at which all of the assets and liabilities attributed to the Liberty
Media Group have become and continue to be held directly or indirectly by any
one or more corporations all of the capital stock of which is owned by the
Corporation (the "Liberty Media Group Subsidiaries"), the Board of Directors
may, subject to the availability of assets of the Corporation legally available
therefor, redeem, on a pro rata basis, all of the outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
in exchange for an aggregate number of outstanding fully paid and nonassessable
shares of common stock of each Liberty Media Group Subsidiary equal to the
product of the Adjusted Liberty Media Group Outstanding Interest Fraction and
the number of outstanding shares of common stock of such Liberty Media Group
Subsidiary held by the Corporation. Any such redemption shall occur on a
Redemption Date set forth in a notice to holders of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock and Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the terms
of such Convertible Securities) pursuant to paragraph 5(d)(vi). In effecting
such a redemption, the Board of Directors may determine either to (i) redeem
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock in exchange for shares of separate classes or series of
common stock of each Liberty Media Group Subsidiary with relative voting rights
and related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, with holders of shares of Series B Liberty Media Group
Common Stock receiving the class or series having the higher relative voting
rights, or (ii) redeem shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock in exchange for shares of a single
class of common stock of each Liberty Media Group Subsidiary without distinction
between the shares distributed to the holders of the Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock. If the
Corporation determines to undertake a redemption as described in clause (i) of
the preceding sentence, the outstanding shares of common stock of each Liberty
Media Group Subsidiary not distributed to holders of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock shall consist
solely of the class or series having the lower relative voting rights.
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF DISPOSITION OF
LIBERTY MEDIA GROUP ASSETS. In the event of the Disposition, in one transaction
or a series of related transactions, by the Corporation
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and its subsidiaries of all or substantially all of the properties and assets of
the Liberty Media Group to one or more persons, entities or groups (other than
(w) in connection with the Disposition by the Corporation of all of the
Corporation's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Corporation within the meaning of paragraph 7 of this Section E, (x) a
dividend, other distribution or redemption in accordance with any provision of
paragraph 3, paragraph 4, paragraph 5(a) or paragraph 7 of this Section E, (y)
to any person, entity or group which the Corporation, directly or indirectly,
after giving effect to the Disposition, controls or (z) in connection with a
Related Business Transaction), the Corporation shall, on or prior to the 85th
Trading Day following the consummation of such Disposition, either:
(i) subject to paragraph 3(b) of this Section E, declare and pay a
dividend in cash and/or in securities or other property (other than a
dividend or distribution of Common Stock) to the holders of the outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock equally on a share for share basis (subject to the
last sentence of this Section 5(b)), in an aggregate amount equal to the
product of the Liberty Media Group Outstanding Interest Fraction as of the
record date for determining the holders entitled to receive such dividend
and the Liberty Media Group Net Proceeds of such Disposition; or
(ii) provided that there are assets of the Corporation legally
available therefor and the Liberty Media Group Available Dividend Amount
would have been sufficient to pay a dividend in lieu thereof pursuant to
clause (i) of this paragraph 5(b), then:
(A) if such Disposition involves all (not merely substantially all)
of the properties and assets of the Liberty Media Group, redeem all
outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock in exchange for cash and/or
securities or other property (other than Common Stock) in an aggregate
amount equal to the product of the Adjusted Liberty Media Group
Outstanding Interest Fraction as of the date of such redemption and the
Liberty Media Group Net Proceeds, such aggregate amount to be allocated
(subject to the last sentence of this paragraph 5(b)) to shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock in the ratio of the number of shares of each such
series outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Liberty Media Group Common Stock
and each share of Series B Liberty Media Group Common Stock is the
same); or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the Liberty Media Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the Liberty Media Group Outstanding
Interest Fraction as of the date shares are selected for redemption and
the Liberty Media Group Net Proceeds to the redemption of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock, such aggregate amount to be allocated (subject
to the last sentence of this paragraph 5(b)) to shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock in the ratio of the number of shares of each such series
outstanding, and the number of shares of each such series to be redeemed
to equal the lesser of (x) the whole number nearest the number
determined by dividing the aggregate amount so allocated to the
redemption of such series by the average Market Value of one share of
Series A Liberty Media Group Common Stock during the ten-Trading Day
period beginning on the 16th Trading Day following the consummation of
such Disposition and (y) the number of shares of such series outstanding
(so that the amount of consideration paid for the redemption of each
share of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock is the same);
such redemption to be effected in accordance with the applicable provisions
of paragraph 5(d) of this Section E; or
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(iii) convert (A) each outstanding share of Series A Liberty Media
Group Common Stock into a number (or fraction) of fully paid and
nonassessable shares of Series A TCI Group Common Stock and (B) each
outstanding share of Series B Liberty Media Group Common Stock into a
number (or fraction) of fully paid and nonassessable shares of Series B TCI
Group Common Stock, in each case equal to 110% of the average daily ratio
(calculated to the nearest five decimal places) of the Market Value of one
share of Series A Liberty Media Group Common Stock to the Market Value of
one share of Series A TCI Group Common Stock during the ten-Trading Day
period referred to in clause (ii)(B) of this paragraph 5(b).
For purposes of this paragraph 5(b):
(x) as of any date, "substantially all of the properties and assets of
the Liberty Media Group" shall mean a portion of such properties and assets
that represents at least 80% of the then-current market value (as
determined by the Board of Directors) of the properties and assets of the
Liberty Media Group as of such date;
(y) in the case of a Disposition of properties and assets in a series
of related transactions, such Disposition shall not be deemed to have been
consummated until the consummation of the last of such transactions; and
(z) the Corporation may pay the dividend or redemption price referred
to in clause (i) or (ii) of this subparagraph 5(b) either in the same form
as the proceeds of the Disposition were received or in any other
combination of cash or securities or other property (other than Common
Stock) that the Board of Directors determines will have an aggregate market
value on a fully distributed basis, of not less than the amount of the
Liberty Media Group Net Proceeds. If the dividend or redemption price is
paid in the form of securities of an issuer other than the Corporation, the
Board of Directors may determine either to (1) pay the dividend or
redemption price in the form of separate classes or series of securities,
with one class or series of such securities to holders of Series A Liberty
Media Group Common Stock and another class or series of securities to
holders of Series B Liberty Media Group Common Stock, provided that such
securities (and, if such securities are convertible into or exercisable or
exchangeable for shares of another class or series of securities, the
securities so issuable upon such conversion, exercise or exchange) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions, with holders of shares of Series B Liberty Media Group Common
Stock receiving the class or series having the higher relative voting
rights (without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series
A Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock), provided that if such securities constitute capital stock of
a Subsidiary of the Corporation, such rights shall not differ to a greater
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock, and otherwise such securities shall be distributed on an equal per
share basis, or (2) pay the dividend or redemption price in the form of a
single class of securities without distinction between the shares received
by the holders of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock.
(c) CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless the
provisions of any class or series of Pre-Distribution Convertible Securities or
Convertible Securities which are convertible into or exercisable or exchangeable
for Committed Acquisition Shares provide specifically to the contrary, after any
Conversion Date or Redemption Date on which all outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
were converted or redeemed, any share of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock that is issued on conversion,
exercise or exchange of any Pre-Distribution Convertible Securities or any
Convertible Securities which are convertible into or exercisable or exchangeable
for Committed Acquisition Shares shall, immediately upon issuance pursuant to
such conversion, exercise or exchange and without any notice or any other action
on the part of the Corporation or its Board of Directors or the holder of such
share of Series A Liberty
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Media Group Common Stock or Series B Liberty Media Group Common Stock, be
converted into (in case all such outstanding shares were converted) or redeemed
in exchange for (in case all such outstanding shares were redeemed) the kind and
amount of shares of capital stock, cash and/or other securities or property that
a holder of such Pre-Distribution Convertible Securities or any Convertible
Securities which are convertible into or exercisable or exchangeable for
Committed Acquisition Shares would have been entitled to receive pursuant to the
terms of such securities had such terms provided that the conversion, exercise
or exchange privilege in effect immediately prior to any such conversion or
redemption of all outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock would be adjusted so that
the holder of any such Pre-Distribution Convertible Securities or any
Convertible Securities which are convertible into or exercisable or exchangeable
for Committed Acquisition Shares thereafter surrendered for conversion, exercise
or exchange would be entitled to receive the kind and amount of shares of
capital stock, cash and/or other securities or property such holder would have
received as a result of such action had such securities been converted,
exercised or exchanged immediately prior thereto. With respect to any
Convertible Securities which are created, established or otherwise first
authorized for issuance subsequent to the record date for the Liberty
Distribution (other than Pre-Distribution Convertible Securities and Convertible
Securities which are convertible into or exercisable or exchangeable for
Committed Acquisition Shares), the terms and provisions of which do not provide
for adjustments specifying the kind and amount of capital stock, cash and/or
securities or other property that such holder would be entitled to receive upon
the conversion, exercise or exchange of such Convertible Securities following
any Conversion Date or Redemption Date on which all outstanding shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
were converted or redeemed, then upon such conversion, exercise or exchange of
such Convertible Securities, any share of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock that is issued on conversion,
exercise or exchange of any such Convertible Securities shall, immediately upon
issuance pursuant to such conversion, exercise or exchange and without any
notice or any other action on the part of the Corporation or its Board of
Directors or the holder of such share of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock, be redeemed in exchange for,
to the extent assets of the Corporation are legally available therefor, the
amount of $.01 per share in cash.
(d) GENERAL.
(i) Not later than the 10th Trading Day following the consummation of a
Disposition referred to in subparagraph 5(b) of this Section E, the Corporation
shall announce publicly by press release (A) the Liberty Media Group Net
Proceeds of such Disposition, (B) the number of outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
(C) the number of shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock into or for which Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities constitute Pre-Distribution Convertible Securities or Convertible
Securities which are convertible into or exercisable or exchangeable for
Committed Acquisition Shares) and the number of Committed Acquisition Shares
issuable, (D) the Liberty Media Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice and (E) the Adjusted Liberty Media
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Corporation
shall announce publicly by press release which of the actions specified in
clauses (i), (ii) or (iii) of paragraph 5(b) of this Section E it has
irrevocably determined to take.
(ii) If the Corporation determines to pay a dividend pursuant to clause (i)
of subparagraph 5(b) of this Section E, the Corporation shall, not later than
the 30th Trading Day following the consummation of such Disposition, cause to be
given to each holder of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock, and to each holder
of Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(A) the record date for determining holders entitled to receive such dividend,
which shall be not earlier than the 40th Trading
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Day and not later than the 50th Trading Day following the consummation of such
Disposition, (B) the anticipated payment date of such dividend (which shall not
be more than 85 Trading Days following the consummation of such Disposition),
(C) the kind of shares of capital stock, cash and/or other securities or
property to be distributed in respect of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock, (D) the Liberty
Media Group Net Proceeds of such Disposition, (E) the Liberty Media Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, (F) the number of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock and the number of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof and (G) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible Securities shall be entitled to receive such dividend only if they
appropriately convert, exercise or exchange such Convertible Securities prior to
the record date referred to in clause (A) of this sentence. Such notice shall be
sent by first-class mail, postage prepaid, at such holder's address as the same
appears on the transfer books of the Corporation.
(iii) If the Corporation determines to undertake a redemption of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock following a Disposition of all (not merely substantially all) of
the properties and assets of the Liberty Media Group pursuant to clause (ii) (A)
of paragraph 5(b) of this Section E, the Corporation shall cause to be given to
each holder of outstanding shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the terms
of such Convertible Securities), a notice setting forth (A) a statement that all
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock outstanding on the Redemption Date shall be redeemed, (B) the
Redemption Date (which shall not be more than 85 Trading Days following the
consummation of such Disposition), (C) the kind of shares of capital stock, cash
and/or other securities or property to be paid as a redemption price in respect
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock outstanding on the Redemption Date, (D) the Liberty
Media Group Net Proceeds of such Disposition, (E) the Adjusted Liberty Media
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice, (F) the place or places where certificates for shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property, (G) the number of
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities constitute
Pre-Distribution Convertible Securities or Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares) and the number of Committed Acquisition Shares issuable, and (H) in the
case of a notice to holders of Convertible Securities, a statement to the effect
that holders of such Convertible Securities shall be entitled to participate in
such redemption only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the Redemption Date referred to in
clause (B) of this sentence and a statement as to what, if anything, such
holders shall be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, paragraph 5(c) of this Section E if such holders
convert, exercise or exchange such Convertible Securities following such
Redemption Date. Such notice shall be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
Redemption Date, at such holder's address as the same appears on the transfer
books of the Corporation.
(iv) If the Corporation determines to undertake a redemption of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock following a Disposition of substantially all (but not all) of the
properties and assets of the Liberty Media Group pursuant to clause
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(ii)(B) of paragraph 5(b) of this Section E, the Corporation shall, not later
than the 30th Trading Day following the consummation of such Disposition, cause
to be given to each holder of record of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock, and to
each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) a date not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition which
shall be the date on which shares of the Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock then outstanding shall be
selected for redemption, (B) the anticipated Redemption Date (which shall not be
more than 85 Trading Days following the consummation of such Disposition), (C)
the kind of shares of capital stock, cash and/or other securities or property to
be paid as a redemption price in respect of shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock selected for
redemption, (D) the Liberty Media Group Net Proceeds of such Disposition, (E)
the Liberty Media Group Outstanding Interest Fraction as of a recent date
preceding the date of such notice, (F) the number of outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock and the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion or exercise prices thereof, (G) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities shall be entitled to participate in such
selection for redemption only if such holders appropriately convert, exercise or
exchange such Convertible Securities on or prior to the date referred to in
clause (A) of this sentence and a statement as to what, if anything, such
holders shall be entitled to receive pursuant to the terms of such Convertible
Securities if such holders convert, exercise or exchange such Convertible
Securities following such date and (H) a statement that the Corporation will not
be required to register a transfer of any shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock for a period of 15
Trading Days next preceding the date referred to in clause (A) of this sentence.
Promptly following the date referred to in clause (A) of the preceding sentence,
but not earlier than the 40th Trading Day and not later than the 50th Trading
Day following the consummation of such Disposition, the Corporation shall cause
to be given to each holder of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock to be so redeemed, a notice
setting forth (A) the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock held by such holder to be
redeemed, (B) a statement that such shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock shall be redeemed,
(C) the Redemption Date (which shall not be more than 85 Trading Days following
the consummation of such Disposition), (D) the kind and per share amount of
shares of capital stock, cash and/or other securities or property to be received
by such holder with respect to each share of such Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock to be redeemed,
including details as to the calculation thereof, and (E) the place or places
where certificates for shares of such Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be surrendered
for delivery of certificates for shares of such capital stock, cash and/or other
securities or property. The notices referred to in this clause (iv) shall be
sent by first-class mail, postage prepaid, at such holder's address as the same
appears on the transfer books of the Corporation. The outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock to be redeemed shall be redeemed by the Corporation pro rata among
the holders of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock or by such other method as may be determined by the
Board of Directors to be equitable.
(v) In the event of any conversion pursuant to paragraph 2(d) of this
Section E or pursuant to this paragraph 5 (other than pursuant to paragraph
5(c)), the Corporation shall cause to be given to each holder of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock and to each holder of Convertible Securities convertible into
or exercisable or exchangeable for shares of either such series (unless
provision for such notice is otherwise made pursuant to the terms of such
Convertible Securities), a notice setting forth (A) a statement that all
outstanding shares of Series A
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Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
shall be converted, (B) the Conversion Date (which shall not be more than 85
Trading Days following the consummation of such Disposition in the event of a
conversion pursuant to paragraph 5(b) and which shall not be more than 120 days
after the Appraisal Date in the event of a conversion pursuant to paragraph
2(d)), (C) the per share number of shares of Series A TCI Group Common Stock or
Series B TCI Group Common Stock, as applicable, to be received with respect to
each share of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock, including details as to the calculation thereof, (D)
the place or places where certificates for shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock, properly
endorsed or assigned for transfer (unless the Corporation shall waive such
requirement), are to be surrendered, (E) the number of outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock, the number of Committed Acquisition Shares issuable and the number
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock into or for which outstanding Convertible Securities
are then convertible, exercisable or exchangeable and the conversion, exercise
or exchange prices thereof and (F) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible Securities shall be entitled to participate in such conversion only
if such holders appropriately convert, exercise or exchange such Convertible
Securities on or prior to the Conversion Date referred to in clause (B) of this
sentence and a statement as to what, if anything, such holders shall be entitled
to receive pursuant to the terms of such Convertible Securities or, if
applicable, paragraph 5(c) of this Section E if such holders convert, exercise
or exchange such Convertible Securities following such Conversion Date. Such
notice shall be sent by first-class mail, postage prepaid, not less than 35
Trading Days nor more than 45 Trading Days prior to the Conversion Date, at such
holder's address as the same appears on the transfer books of the Corporation.
(vi) If the Corporation determines to redeem shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock pursuant
to subparagraph (a) of this paragraph 5, the Corporation shall promptly cause to
be given to each holder of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such series
(unless provision for such notice is otherwise made pursuant to the terms of
such Convertible Securities), a notice setting forth (A) a statement that all
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock shall be redeemed in exchange for shares of
common stock of the Liberty Media Group Subsidiaries, (B) the Redemption Date,
(C) the Adjusted Liberty Media Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (D) the place or places where
certificates for shares of Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock, properly endorsed or assigned for transfer
(unless the Corporation shall waive such requirement), are to be surrendered for
delivery of certificates for shares of common stock of the Liberty Media Group
Subsidiaries, (E) the number of outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock and the number
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock into or for which outstanding Convertible Securities
are then convertible, exercisable or exchangeable and the conversion, exercise
or exchange prices thereof (and stating which, if any, of such Convertible
Securities constitute Pre-Distribution Convertible Securities or Convertible
Securities which are convertible into or exercisable or exchangeable for
Committed Acquisition Shares) and the number of Committed Acquisition Shares
issuable, and (F) in the case of a notice to holders of Convertible Securities,
a statement to the effect that holders of such Convertible Securities shall be
entitled to participate in such redemption only if such holders appropriately
convert, exercise or exchange such Convertible Securities on or prior to the
Redemption Date referred to in clause (B) of this sentence and a statement as to
what, if anything, such holders shall be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, paragraph 5(c) of this
Section E if such holders convert, exercise or exchange such Convertible
Securities following the Redemption Date. Such notice shall be sent by
first-class mail, postage prepaid, not less than 35 Trading Days nor more than
45 Trading Days prior to the Redemption Date, at such holder's address as the
same appears on the transfer books of the Corporation.
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(vii) Neither the failure to mail any notice required by this paragraph
5(d) to any particular holder of Series A Liberty Media Group Common Stock,
Series B Liberty Media Group Common Stock or of Convertible Securities nor any
defect therein shall affect the sufficiency thereof with respect to any other
holder of outstanding shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock or of Convertible Securities, or the
validity of any conversion or redemption.
(viii) The Corporation shall not be required to issue or deliver fractional
shares of any class of capital stock or any fractional securities to any holder
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock upon any conversion, redemption, dividend or other distribution
pursuant to paragraph 2(d) of this Section E or pursuant to this paragraph 5. In
connection with the determination of the number of shares of any class of
capital stock that shall be issuable or the amount of securities that shall be
deliverable to any holder of record upon any such conversion, redemption,
dividend or other distribution (including any fractions of shares or
securities), the Corporation may aggregate the number of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
held at the relevant time by such holder of record. If the number of shares of
any class of capital stock or the amount of securities remaining to be issued or
delivered to any holder of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock is a fraction, the Corporation shall, if such
fraction is not issued or delivered to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the fair market value of such
fraction on the fifth Trading Day prior to the date such payment is to be made
(without interest). For purposes of the preceding sentence, "fair market value"
of any fraction shall be (A) in the case of any fraction of a share of capital
stock of the Corporation, the product of such fraction and the Market Value of
one share of such capital stock and (B) in the case of any other fractional
security, such value as is determined by the Board of Directors.
(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock; provided, however, that if
the Conversion Date or the Redemption Date with respect to the Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock shall be
subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock at
the close of business on such record date shall be entitled to receive the
dividend or other distribution payable on or with respect to such shares on the
date set for payment of such dividend or other distribution, notwithstanding the
conversion or redemption of such shares or the Corporation's default in payment
of the dividend or distribution due on such date.
(x) Before any holder of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock shall be entitled to receive
certificates representing shares of any kind of capital stock or cash and/or
securities or other property to be received by such holder with respect to
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock pursuant to paragraph 2(d) of this Section E or pursuant to
this paragraph 5, such holder shall surrender at such place as the Corporation
shall specify certificates for such shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock, properly endorsed or
assigned for transfer (unless the Corporation shall waive such requirement). The
Corporation shall as soon as practicable after such surrender of certificates
representing shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock deliver to the person for whose account shares
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock were so surrendered, or to the nominee or nominees of such person,
certificates representing the number of whole shares of the kind of capital
stock or cash and/or securities or other property to which such person shall be
entitled as aforesaid, together with any payment for fractional securities
contemplated by paragraph 5(d)(viii). If less than all of the shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
represented by any one certificate are to be redeemed, the Corporation shall
issue and deliver a new certificate for the shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock not redeemed.
The Corporation shall not be required to register a transfer of (1) any shares
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock for a period of 15
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Trading Days next preceding any selection of shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock to be redeemed
or (2) any shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock selected or called for redemption. Shares
selected for redemption may not thereafter be converted pursuant to paragraph
2(b) of this Section E.
(xi) From and after any applicable Conversion Date or Redemption Date, all
rights of a holder of shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock that were converted or redeemed shall
cease except for the right, upon surrender of the certificates representing
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, to receive certificates representing shares of the kind and
amount of capital stock or cash and/or securities or other property for which
such shares were converted or redeemed, together with any payment for fractional
securities contemplated by paragraph 5(d)(viii) of this Section E and such
holder shall have no other or further rights in respect of the shares of Series
A Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
so converted or redeemed, including, but not limited to, any rights with respect
to any cash, securities or other properties which are reserved or otherwise
designated by the Corporation as being held for the satisfaction of the
Corporation's obligations to pay or deliver any cash, securities or other
property upon the conversion, exercise or exchange of any Convertible Securities
outstanding as of the date of such conversion or redemption or any Committed
Acquisition Shares which may then be issuable. No holder of a certificate that,
immediately prior to the applicable Conversion Date or Redemption Date for the
Series A Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock, represented shares of Series A Liberty Media Group Common Stock or Series
B Liberty Media Group Common Stock shall be entitled to receive any dividend or
other distribution with respect to shares of any kind of capital stock into or
in exchange for which the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock was converted or redeemed until surrender of
such holder's certificate for a certificate or certificates representing shares
of such kind of capital stock. Upon such surrender, there shall be paid to the
holder the amount of any dividends or other distributions (without interest)
which theretofore became payable with respect to a record date after the
Conversion Date or Redemption Date, as the case may be, but that were not paid
by reason of the foregoing, with respect to the number of whole shares of the
kind of capital stock represented by the certificate or certificates issued upon
such surrender. From and after a Conversion Date or Redemption Date, as the case
may be, for any shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, the Corporation shall, however, be entitled to
treat the certificates for shares of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock that have not yet been surrendered
for conversion or redemption as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock for which the shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
represented by such certificates shall have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
(xii) The Corporation shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issue or delivery
of any shares of capital stock and/or other securities on conversion or
redemption of shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock pursuant to this Section E. The Corporation
shall not, however, be required to pay any tax that may be payable in respect of
any transfer involved in the issue and delivery of any shares of capital stock
in a name other than that in which the shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock so converted or
redeemed were registered and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount of
any such tax, or has established to the satisfaction of the Corporation that
such tax has been paid.
6. Redemption and Other Provisions Relating to the Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock.
(a) REDEMPTION IN EXCHANGE FOR STOCK OF TELEPHONY GROUP SUBSIDIARIES. At
any time at which all of the assets and liabilities attributed to the Telephony
Group have become and continue to be held directly or indirectly by any one or
more Qualifying Subsidiaries (the "Telephony Group Subsidiaries"), the Board of
Directors may, subject to the availability of assets of the Corporation legally
available therefor, redeem, on a
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pro rata basis, all of the outstanding shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock in exchange for an aggregate
number of outstanding fully paid and nonassessable shares of common stock of
each Telephony Group Subsidiary equal to the product of the Telephony Group
Outstanding Interest Fraction and the number of outstanding shares of common
stock of such Telephony Group Subsidiary held by the Corporation. Any such
redemption shall occur on a Redemption Date set forth in a notice to holders of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
and Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities) pursuant to paragraph
6(d)(vi). In effecting such a redemption, the Board of Directors may determine
either to (i) redeem shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock in exchange for shares of separate classes or
series of common stock of each Telephony Group Subsidiary with relative voting
rights and related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock, with holders of shares of Series B Telephony Group Common Stock
receiving the class or series having the higher relative voting rights, or (ii)
redeem shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock in exchange for shares of a single class of common stock of
each Telephony Group Subsidiary without distinction between the shares
distributed to the holders of the Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock.
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF DISPOSITION OF
TELEPHONY GROUP ASSETS. In the event of the Disposition, in one transaction or a
series of related transactions, by the Corporation and its subsidiaries of all
or substantially all of the properties and assets of the Telephony Group to one
or more persons, entities or groups (other than (w) in connection with the
Disposition by the Corporation of all of the Corporation's properties and assets
in one transaction or a series of related transactions in connection with the
liquidation, dissolution or winding up of the Corporation within the meaning of
paragraph 7 of this Section E, (x) a dividend, other distribution or redemption
in accordance with any provision of paragraph 3, paragraph 4, paragraph 6(a) or
paragraph 7 of this Section E, (y) to any person, entity or group which the
Corporation, directly or indirectly, after giving effect to the Disposition,
controls or (z) in connection with a Related Business Transaction), the
Corporation shall, on or prior to the 85th Trading Day following the
consummation of such Disposition, either:
(i) subject to paragraph 3(c) of this Section E, declare and pay a
dividend in cash and/or in securities or other property (other than a
dividend or distribution of Common Stock) to the holders of the outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock equally on a share for share basis (subject to the last
sentence of this Section 6(b)), in an aggregate amount equal to the product
of the Telephony Group Outstanding Interest Fraction as of the record date
for determining the holders entitled to receive such dividend and the
Telephony Group Net Proceeds of such Disposition; or
(ii) provided that there are assets of the Corporation legally
available therefor and the Telephony Group Available Dividend Amount would
have been sufficient to pay a dividend in lieu thereof pursuant to clause
(i) of this paragraph 6(b), then:
(A) if such Disposition involves all (not merely substantially all)
of the properties and assets of the Telephony Group, redeem all
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock in exchange for cash and/or securities or
other property (other than Common Stock) in an aggregate amount equal to
the product of the Telephony Group Outstanding Interest Fraction as of
the date of such redemption and the Telephony Group Net Proceeds, such
aggregate amount to be allocated (subject to the last sentence of this
paragraph 6(b)) to shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock in the ratio of the number of
shares of each such series outstanding (so that the amount of
consideration paid for the redemption of each share of Series A
Telephony Group Common Stock and each share of Series B Telephony Group
Common Stock is the same); or
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(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the Telephony Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the Telephony Group Outstanding Interest
Fraction as of the date shares are selected for redemption and the
Telephony Group Net Proceeds to the redemption of outstanding shares of
Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock, such aggregate amount to be allocated (subject to the last
sentence of this paragraph 6(b)) to shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock in the ratio of
the number of shares of each such series outstanding, and the number of
shares of each such series to be redeemed to equal the lesser of (x) the
whole number nearest the number determined by dividing the aggregate
amount so allocated to the redemption of such series by the average
Market Value of one share of Series A Telephony Group Common Stock
during the ten-Trading Day period beginning on the 16th Trading Day
following the consummation of such Disposition and (y) the number of
shares of such series outstanding (so that the amount of consideration
paid for the redemption of each share of Series A Telephony Group Common
Stock and each share of Series B Telephony Group Common Stock is the
same);
such redemption to be effected in accordance with the applicable provisions
of paragraph 6(d) of this Section E; or
(iii) convert (A) each outstanding share of Series A Telephony Group
Common Stock into a number (or fraction) of fully paid and nonassessable
shares of Series A TCI Group Common Stock and (B) each outstanding share of
Series B Telephony Group Common Stock into a number (or fraction) of fully
paid and nonassessable shares of Series B TCI Group Common Stock, in each
case equal to 110% of the average daily ratio (calculated to the nearest
five decimal places) of the Market Value of one share of Series A Telephony
Group Common Stock to the Market Value of one share of Series A TCI Group
Common Stock during the ten-Trading Day period referred to in clause
(ii)(B) of this paragraph 6(b).
For purposes of this paragraph 6(b):
(x) as of any date, "substantially all of the properties and assets of
the Telephony Group" shall mean a portion of such properties and assets
that represents at least 80% of the then-current market value (as
determined by the Board of Directors) of the properties and assets of the
Telephony Group as of such date;
(y) in the case of a Disposition of properties and assets in a series
of related transactions, such Disposition shall not be deemed to have been
consummated until the consummation of the last of such transactions; and
(z) the Corporation may pay the dividend or redemption price referred
to in clause (i) or (ii) of this subparagraph 6(b) either in the same form
as the proceeds of the Disposition were received or in any other
combination of cash or securities or other property (other than Common
Stock) that the Board of Directors determines will have an aggregate market
value on a fully distributed basis, of not less than the amount of the
Telephony Group Net Proceeds. If the dividend or redemption price is paid
in the form of securities of an issuer other than the Corporation, the
Board of Directors may determine either to (1) pay the dividend or
redemption price in the form of separate classes or series of securities,
with one class or series of such securities to holders of Series A
Telephony Group Common Stock and another class or series of securities to
holders of Series B Telephony Group Common Stock, provided that such
securities (and, if such securities are convertible into or exercisable or
exchangeable for shares of another class or series of securities, the
securities so issuable upon such conversion, exercise or exchange) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions, with holders of shares of Series B Telephony Group Common Stock
receiving the class or series having the higher relative voting rights
(without regard to whether such rights differ to a greater or lesser extent
than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series
A Telephony Group Common Stock and the Series B Telephony Group Common
Stock), provided that if such
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securities constitute capital stock of a Subsidiary of the Corporation,
such rights shall not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock, and otherwise such securities
shall be distributed on an equal per share basis, or (2) pay the dividend
or redemption price in the form of a single class of securities without
distinction between the shares received by the holders of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock.
(c) CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless the
provisions of any class or series of Convertible Securities which are or become
convertible into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock provide specifically
to the contrary, after any Conversion Date or Redemption Date on which all
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock were converted or redeemed, any share of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock that is
issued on conversion, exercise or exchange of any such Convertible Securities
will, immediately upon issuance pursuant to such conversion, exercise or
exchange and without any notice or any other action on the part of the
Corporation or its Board of Directors or the holder of such share of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock, be
redeemed in exchange for, to the extent assets of the Corporation are legally
available therefor, the amount of $.01 per share in cash.
(d) GENERAL.
(i) Not later than the 10th Trading Day following the consummation of a
Disposition referred to in subparagraph 6(b) of this Section E, the Corporation
shall announce publicly by press release (A) the Telephony Group Net Proceeds of
such Disposition, (B) the number of outstanding shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, (C) the number of
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock into or for which Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof, and (D) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice. Not earlier than the 26th Trading
Day and not later than the 30th Trading Day following the consummation of such
Disposition, the Corporation shall announce publicly by press release which of
the actions specified in clauses (i), (ii) or (iii) of paragraph 6(b) of this
Section E it has irrevocably determined to take.
(ii) If the Corporation determines to pay a dividend pursuant to clause (i)
of subparagraph 6(b) of this Section E, the Corporation shall, not later than
the 30th Trading Day following the consummation of such Disposition, cause to be
given to each holder of outstanding shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, and to each holder of
Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(A) the record date for determining holders entitled to receive such dividend,
which shall be not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition, (B) the anticipated
payment date of such dividend (which shall not be more than 85 Trading Days
following the consummation of such Disposition), (C) the kind of shares of
capital stock, cash and/or other securities or property to be distributed in
respect of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, (D) the Telephony Group Net Proceeds of such
Disposition, (E) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (F) the number of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and the number of shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (G) in the case of a notice
to holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities shall be entitled to receive such dividend only if
they appropriately convert, exercise or exchange such Convertible Securities
prior to the record date referred to in clause (A) of this sentence. Such notice
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shall be sent by first-class mail, postage prepaid, at such holder's address as
the same appears on the transfer books of the Corporation.
(iii) If the Corporation determines to undertake a redemption of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
following a Disposition of all (not merely substantially all) of the properties
and assets of the Telephony Group pursuant to clause (ii)(A) of paragraph 6(b)
of this Section E, the Corporation shall cause to be given to each holder of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such series
(unless provision for notice is otherwise made pursuant to the terms of such
Convertible Securities), a notice setting forth (A) a statement that all shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock outstanding on the Redemption Date shall be redeemed, (B) the Redemption
Date (which shall not be more than 85 Trading Days following the consummation of
such Disposition), (C) the kind of shares of capital stock, cash and/or other
securities or property to be paid as a redemption price in respect of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
outstanding on the Redemption Date, (D) the Telephony Group Net Proceeds of such
Disposition, (E) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (F) the place or places where
certificates for shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, properly endorsed or assigned for transfer (unless
the Corporation waives such requirement), are to be surrendered for delivery of
certificates for shares of such capital stock, cash and/or other securities or
property, (G) the number of outstanding shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock and the number of shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof, and (H) in the case of a notice to holders of Convertible Securities, a
statement to the effect that holders of such Convertible Securities shall be
entitled to participate in such redemption only if such holders appropriately
convert, exercise or exchange such Convertible Securities on or prior to the
Redemption Date referred to in clause (B) of this sentence and a statement as to
what, if anything, such holders shall be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, paragraph 6(c) of this
Section E if such holders convert, exercise or exchange such Convertible
Securities following such Redemption Date. Such notice shall be sent by
first-class mail, postage prepaid, not less than 35 Trading Days nor more than
45 Trading Days prior to the Redemption Date, at such holder's address as the
same appears on the transfer books of the Corporation.
(iv) If the Corporation determines to undertake a redemption of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
following a Disposition of substantially all (but not all) of the properties and
assets of the Telephony Group pursuant to clause (ii)(B) of paragraph 6(b) of
this Section E, the Corporation shall, not later than the 30th Trading Day
following the consummation of such Disposition, cause to be given to each holder
of record of outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the terms
of such Convertible Securities), a notice setting forth (A) a date not earlier
than the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition which shall be the date on which shares of the
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
then outstanding shall be selected for redemption, (B) the anticipated
Redemption Date (which shall not be more than 85 Trading Days following the
consummation of such Disposition), (C) the kind of shares of capital stock, cash
and/or other securities or property to be paid as a redemption price in respect
of shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock selected for redemption, (D) the Telephony Group Net Proceeds of
such Disposition, (E) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (F) the number of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and the number of shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion or
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exercise prices thereof, (G) in the case of a notice to holders of Convertible
Securities, a statement to the effect that holders of such Convertible
Securities shall be entitled to participate in such selection for redemption
only if such holders appropriately convert, exercise or exchange such
Convertible Securities on or prior to the date referred to in clause (A) of this
sentence and a statement as to what, if anything, such holders shall be entitled
to receive pursuant to the terms of such Convertible Securities if such holders
convert, exercise or exchange such Convertible Securities following such date
and (H) a statement that the Corporation will not be required to register a
transfer of any shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock for a period of 15 Trading Days next preceding the
date referred to in clause (A) of this sentence. Promptly following the date
referred to in clause (A) of the preceding sentence, but not earlier than the
40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition, the Corporation shall cause to be given to
each holder of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock to be so redeemed, a notice setting forth (A) the
number of shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock held by such holder to be redeemed, (B) a statement that such
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock shall be redeemed, (C) the Redemption Date (which shall not be more
than 85 Trading Days following the consummation of such Disposition), (D) the
kind and per share amount of shares of capital stock, cash and/or other
securities or property to be received by such holder with respect to each share
of such Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock to be redeemed, including details as to the calculation thereof,
and (E) the place or places where certificates for shares of such Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property. The notices
referred to in this clause (iv) shall be sent by first-class mail, postage
prepaid, at such holder's address as the same appears on the transfer books of
the Corporation. The outstanding shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock to be redeemed shall be redeemed by
the Corporation pro rata among the holders of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock or by such other method as may
be determined by the Board of Directors to be equitable.
(v) In the event of any conversion pursuant to paragraph 2(e) of this
Section E or pursuant to this paragraph 6 (other than pursuant to paragraph
6(c)), the Corporation shall cause to be given to each holder of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and to each holder of Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for such notice is otherwise made pursuant to the terms of such Convertible
Securities), a notice setting forth (A) a statement that all outstanding shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock shall be converted, (B) the Conversion Date (which shall not be more than
85 Trading Days following the consummation of such Disposition in the event of a
conversion pursuant to paragraph 6(b) and which shall not be more than 120 days
after the Appraisal Date in the event of a conversion pursuant to paragraph
2(e)), (C) the per share number of shares of Series A TCI Group Common Stock or
Series B TCI Group Common Stock, as applicable, to be received with respect to
each share of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock, including details as to the calculation thereof, (D) the place or
places where certificates for shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement), are to be
surrendered, (E) the number of outstanding shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock and the number of shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof and (F) in the case of a notice to holders of Convertible Securities, a
statement to the effect that holders of such Convertible Securities shall be
entitled to participate in such conversion only if such holders appropriately
convert, exercise or exchange such Convertible Securities on or prior to the
Conversion Date referred to in clause (B) of this sentence and a statement as to
what, if anything, such holders shall be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, paragraph 6(c) of this
Section E if such
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holders convert, exercise or exchange such Convertible Securities following such
Conversion Date. Such notice shall be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
Conversion Date, at such holder's address as the same appears on the transfer
books of the Corporation.
(vi) If the Corporation determines to redeem shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock pursuant to
subparagraph (a) of this paragraph 6, the Corporation shall promptly cause to be
given to each holder of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such series
(unless provision for such notice is otherwise made pursuant to the terms of
such Convertible Securities), a notice setting forth (A) a statement that all
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock shall be redeemed in exchange for shares of common
stock of the Telephony Group Subsidiaries, (B) the Redemption Date, (C) the
Telephony Group Outstanding Interest Fraction as of a recent date preceding the
date of such notice, (D) the place or places where certificates for shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for shares
of common stock of the Telephony Group Subsidiaries, (E) the number of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof, and (F) in
the case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities shall be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Redemption
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 6(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following the Redemption Date. Such notice shall be sent by first-class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Redemption Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(vii) Neither the failure to mail any notice required by this paragraph
6(d) to any particular holder of Series A Telephony Group Common Stock, Series B
Telephony Group Common Stock or of Convertible Securities nor any defect therein
shall affect the sufficiency thereof with respect to any other holder of
outstanding shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock or of Convertible Securities, or the validity of
any conversion or redemption.
(viii) The Corporation shall not be required to issue or deliver fractional
shares of any class of capital stock or any fractional securities to any holder
of Series A Telephony Group Common Stock or Series B Telephony Group Common
Stock upon any conversion, redemption, dividend or other distribution pursuant
to paragraph 2(e) of this Section E or pursuant to this paragraph 6. In
connection with the determination of the number of shares of any class of
capital stock that shall be issuable or the amount of securities that shall be
deliverable to any holder of record upon any such conversion, redemption,
dividend or other distribution (including any fractions of shares or
securities), the Corporation may aggregate the number of shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock held at
the relevant time by such holder of record. If the number of shares of any class
of capital stock or the amount of securities remaining to be issued or delivered
to any holder of Series A Telephony Group Common Stock or Series B Telephony
Group Common Stock is a fraction, the Corporation shall, if such fraction is not
issued or delivered to such holder, pay a cash adjustment in respect of such
fraction in an amount equal to the fair market value of such fraction on the
fifth Trading Day prior to the date such payment is to be made (without
interest). For purposes of the preceding sentence, "fair market value" of any
fraction shall be (A) in the case of any fraction of a share of capital stock of
the Corporation, the product of such fraction and the Market Value of one share
of such capital stock and (B) in the case of any other fractional security, such
value as is determined by the Board of Directors.
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(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Series A Telephony Group Common Stock
or Series B Telephony Group Common Stock; provided, however, that if the
Conversion Date or the Redemption Date with respect to the Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock shall be subsequent
to the record date for the payment of a dividend or other distribution thereon
or with respect thereto, the holders of shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock at the close of business
on such record date shall be entitled to receive the dividend or other
distribution payable on or with respect to such shares on the date set for
payment of such dividend or other distribution, notwithstanding the conversion
or redemption of such shares or the Corporation's default in payment of the
dividend or distribution due on such date.
(x) Before any holder of shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock shall be entitled to receive certificates
representing shares of any kind of capital stock or cash and/or securities or
other property to be received by such holder with respect to shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock pursuant
to paragraph 2(e) of this Section E or pursuant to this paragraph 6, such holder
shall surrender at such place as the Corporation shall specify certificates for
such shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock, properly endorsed or assigned for transfer (unless the Corporation
shall waive such requirement). The Corporation shall as soon as practicable
after such surrender of certificates representing shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock deliver to the
person for whose account shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock were so surrendered, or to the nominee or
nominees of such person, certificates representing the number of whole shares of
the kind of capital stock or cash and/or securities or other property to which
such person shall be entitled as aforesaid, together with any payment for
fractional securities contemplated by paragraph 6(d)(viii). If less than all of
the shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock represented by any one certificate are to be redeemed, the
Corporation shall issue and deliver a new certificate for the shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock not
redeemed. The Corporation shall not be required to register a transfer of (1)
any shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock for a period of 15 Trading Days next preceding any selection of
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock to be redeemed or (2) any shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock selected or called for
redemption. Shares selected for redemption may not thereafter be converted
pursuant to paragraph 2(c) of this Section E.
(xi) From and after any applicable Conversion Date or Redemption Date, all
rights of a holder of shares of Series A Telephony Group Common Stock or Series
B Telephony Group Common Stock that were converted or redeemed shall cease
except for the right, upon surrender of the certificates representing shares of
Series A Telephony Group Common Stock or Series B Telephony Group Common Stock,
to receive certificates representing shares of the kind and amount of capital
stock or cash and/or securities or other property for which such shares were
converted or redeemed, together with any payment for fractional securities
contemplated by paragraph 6(d)(viii) of this Section E and such holder shall
have no other or further rights in respect of the shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock so converted or
redeemed, including, but not limited to, any rights with respect to any cash,
securities or other properties which are reserved or otherwise designated by the
Corporation as being held for the satisfaction of the Corporation's obligations
to pay or deliver any cash, securities or other property upon the conversion,
exercise or exchange of any Convertible Securities outstanding as of the date of
such conversion or redemption. No holder of a certificate that, immediately
prior to the applicable Conversion Date or Redemption Date for the Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock,
represented shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock shall be entitled to receive any dividend or other
distribution with respect to shares of any kind of capital stock into or in
exchange for which the Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock was converted or redeemed until surrender of such
holder's certificate for a certificate or certificates representing shares of
such kind of capital stock. Upon such
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surrender, there shall be paid to the holder the amount of any dividends or
other distributions (without interest) which theretofore became payable with
respect to a record date after the Conversion Date or Redemption Date, as the
case may be, but that were not paid by reason of the foregoing, with respect to
the number of whole shares of the kind of capital stock represented by the
certificate or certificates issued upon such surrender. From and after a
Conversion Date or Redemption Date, as the case may be, for any shares of Series
A Telephony Group Common Stock or Series B Telephony Group Common Stock, the
Corporation shall, however, be entitled to treat the certificates for shares of
Series A Telephony Group Common Stock or Series B Telephony Group Common Stock
that have not yet been surrendered for conversion or redemption as evidencing
the ownership of the number of whole shares of the kind or kinds of capital
stock for which the shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock represented by such certificates shall have been
converted or redeemed, notwithstanding the failure to surrender such
certificates.
(xii) The Corporation shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issue or delivery
of any shares of capital stock and/or other securities on conversion or
redemption of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock pursuant to this Section E. The Corporation shall
not, however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue and delivery of any shares of capital stock in a
name other than that in which the shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock so converted or redeemed were
registered and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax, or has established to the satisfaction of the Corporation that such tax has
been paid.
7. Liquidation.
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) the holders of the shares of Series A TCI
Group Common Stock and the holders of the shares of Series B TCI Group Common
Stock shall share equally, on a share for share basis, in a percentage of the
funds of the Corporation remaining for distribution to its common stockholders
equal to 100% multiplied by the average daily ratio (expressed as a decimal) of
W/Z for the 20-Trading Day period ending on the Trading Day prior to the date of
the public announcement of such liquidation, dissolution or winding up, (b) the
holders of the shares of Series A Liberty Media Group Common Stock and the
holders of the shares of Series B Liberty Media Group Common Stock shall share
equally, on a share for share basis, in a percentage of the funds of the
Corporation remaining for distribution to its common stockholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of X/Z for such
20-Trading Day period, and (c) the holders of the shares of Series A Telephony
Group Common Stock and the holders of the Series B Telephony Group Common Stock
shall share equally, on a share for share basis, in a percentage of the funds of
the Corporation remaining for distribution to its common stockholders equal to
100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for
such 20-Trading Day period, where W is the aggregate Market Capitalization of
the Series A TCI Group Common Stock and the Series B TCI Group Common Stock, X
is the aggregate Market Capitalization of the Series A Liberty Media Group
Common Stock and the Series B Liberty Media Group Common Stock, Y is the
aggregate Market Capitalization of the Series A Telephony Group Common Stock and
the Series B Telephony Group Common Stock, and Z is the aggregate Market
Capitalization of the Series A TCI Group Common Stock, the Series B TCI Group
Common Stock, the Series A Liberty Media Group Common Stock, the Series B
Liberty Media Group Common Stock, the Series A Telephony Group Common Stock and
the Series B Telephony Group Common Stock. Neither the consolidation or merger
of the Corporation with or into any other corporation or corporations nor the
sale, transfer or lease of all or substantially all of the assets of the
Corporation shall itself be deemed to be a liquidation, dissolution or winding
up of the Corporation within the meaning of this paragraph 7.
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8. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision in
this Section E shall be final and binding on all stockholders of the
Corporation, except as may otherwise be required by law. The Corporation shall
prepare a statement of any such determination by the Board of Directors
respecting the fair market value of any properties, assets or securities and
shall file such statement with the Secretary of the Corporation.
9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph
9 shall have, for all purposes of this Section E, the meanings herein specified:
"Adjusted Liberty Media Group Outstanding Interest Fraction," as of
any date, shall mean a fraction the numerator of which is the aggregate
number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock outstanding on such date and the
denominator of which is the sum of (a) such aggregate number of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding on such date, (b) the Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest as of such
date, (c) the aggregate number of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock issuable,
determined as of such date, upon conversion, exercise or exchange of
Pre-Distribution Convertible Securities and (d) the number of Committed
Acquisition Shares issuable, determined as of such date.
"Appraisal Date," with respect to any determination of the Liberty
Media Group Private Market Value or the Telephony Group Private Market
Value, shall mean the last day of the calendar month preceding the month in
which the Selection Date occurs.
"Appraiser" means each of the First Appraiser, the Second Appraiser
and the Mutually Designated Appraiser.
"Committed Acquisition Shares" shall mean (a) the shares of Series A
Liberty Media Group Common Stock that the Corporation had, prior to the
record date for the Liberty Media Group Distribution, agreed to issue, but
as of such record date had not issued, and (b) the shares of Series A
Liberty Media Group Common Stock that are issuable upon conversion,
exercise or exchange of Convertible Securities that the Corporation had,
prior to the record date for the Liberty Media Group Distribution, agreed
to issue, but as of such record date has not issued, in each case including
obligations of the Corporation to issue shares of the Corporation's Class A
Common Stock, par value $1.00 per share, which as a result of the Liberty
Media Group Distribution, constitute obligations to issue, among other
securities, Series A Liberty Media Group Common Stock or Convertible
Securities which are convertible into or exercisable or exchangeable for
Series A Liberty Media Group Common Stock; provided, however, that
Committed Acquisition Shares shall not include any shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common
Stock issuable upon conversion, exercise or exchange of Pre-Distribution
Convertible Securities. The type and amount of Committed Acquisition Shares
issuable shall be appropriately adjusted to reflect subdivisions and
combinations of the Series A Liberty Media Group Common Stock and dividends
or distributions of shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock to holders of Series A Liberty
Media Group Common Stock and other reclassifications of the Series A
Liberty Media Group Common Stock, in each case occurring (or the record
date for which it occurs) after the Liberty Media Group Distribution.
"Conversion Date" shall mean any date fixed by the Board of Directors
for a conversion of shares of (i) Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, or (ii) Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, as the case
may be, as set forth in a notice to holders of the applicable series of
Common Stock pursuant to paragraph 5(d) or 6(d), as applicable, of this
Section E.
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"Convertible Securities" shall mean any securities of the Corporation
(other than any series of Common Stock) that are convertible into,
exchangeable for or evidence the right to purchase any shares of any series
of Common Stock, whether upon conversion, exercise, exchange, pursuant to
antidilution provisions of such securities or otherwise.
"Corporation Earnings (Loss) Attributable to the Liberty Media
Group," for any period, shall mean the net earnings or loss of the Liberty
Media Group for such period determined on a basis consistent with the
determination of the net earnings or loss of the Liberty Media Group for
such period as presented in the combined financial statements of the
Liberty Media Group for such period, including income and expenses of the
Corporation attributed to the operations of the Liberty Media Group on a
substantially consistent basis, including without limitation, corporate
administrative costs, net interest and income taxes.
"Corporation Earnings (Loss) Attributable to the TCI Group," for any
period, shall mean the net earnings or loss of the TCI Group for such
period determined on a basis consistent with the determination of the net
earnings or loss of the TCI Group for such period as presented in the
combined financial statements of the TCI Group for such period, including
income and expenses of the Corporation attributed to the operations of the
TCI Group on a substantially consistent basis, including without
limitation, corporate administrative costs, net interest and income taxes.
"Corporation Earnings (Loss) Attributable to the Telephony Group," for
any period, shall mean the net earnings or loss of the Telephony Group for
such period determined on a basis consistent with the determination of the
net earnings or loss of the Telephony Group for such period as presented in
the combined financial statements of the Telephony Group for such period,
including income and expenses of the Corporation attributed to the
operations of the Telephony Group on a substantially consistent basis,
including without limitation, corporate administrative costs, net interest
and income taxes.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock or otherwise) of properties or assets.
"First Appraiser" means, with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private
Market Value, an investment banking firm of recognized national standing
selected by the Corporation to make such determination.
"Higher Appraised Amount," with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private
Market Value, the higher of the respective final views of the First
Appraiser and the Second Appraiser as to such private market value.
"Independent Committee" means a committee of the Board of Directors of
the Corporation formed in order to select the Second Appraiser, all of
whose members are "independent directors" as determined under Nasdaq
National Market rules.
"Liberty Media Group" shall mean, as of any date that any shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock have been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its subsidiaries
in Liberty Media Corporation or any of its subsidiaries (including any
successor thereto by merger, consolidation or sale of all or
substantially all of its assets, whether or not in connection with a
Related Business Transaction) and their respective properties and
assets,
(b) all assets and liabilities of the Corporation or any of its
subsidiaries to the extent attributed to any of the properties or assets
referred to in clause (a) of this sentence, whether or not such assets
or liabilities are assets and liabilities of Liberty Media Corporation
or any of its subsidiaries (or a successor as described in clause (a) of
this sentence),
(c) all assets and properties contributed or otherwise transferred
to the Liberty Media Group from the TCI Group, and
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(d) the interest of the Corporation or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Corporation or
any of its subsidiaries for the Liberty Media Group, as determined by
the Board of Directors;
provided that (i) from and after any dividend or other distribution with
respect to any shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock (other than a dividend or other
distribution payable in shares of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock, with respect to which
adjustment shall be made as provided in clause (a) of the definition of
"Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest," or in other securities of the Corporation attributed
to the Liberty Media Group for which provision shall be made as set forth
in the penultimate sentence of this definition), the Liberty Media Group
shall no longer include an amount of assets or properties equal to the
aggregate amount of such kind of assets or properties so paid in respect of
shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock multiplied by a fraction the numerator of which is
equal to the Liberty Media Group Inter-Group Interest Fraction in effect
immediately prior to the record date for such dividend or other
distribution and the denominator of which is equal to the Liberty Media
Group Outstanding Interest Fraction in effect immediately prior to the
record date for such dividend or other distribution and (ii) from and after
any transfer of assets or properties from the Liberty Media Group to the
TCI Group, the Liberty Media Group shall no longer include the assets or
properties so transferred. If the Corporation shall pay a dividend or make
any other distribution with respect to shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock payable in
securities of the Corporation attributed to the Liberty Media Group other
than Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, the TCI Group shall be deemed to hold an amount of such
other securities equal to the amount so distributed multiplied by the
fraction specified in clause (i) of this definition (determined as of a
time immediately prior to the record date for such dividend or other
distribution), and to the extent interest or dividends are paid or other
distributions are made on such other securities so distributed to the
holders of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock, the Liberty Media Group shall no longer include a
corresponding ratable amount of the kind of assets paid as such interest or
dividends or other distributions in respect of such securities so deemed to
be held by the TCI Group. The Corporation may also, to the extent any such
other securities constitute Convertible Securities which are at the time
convertible, exercisable or exchangeable, cause such Convertible Securities
deemed to be held by the TCI Group to be deemed to be converted, exercised
or exchanged (and to the extent the terms of such Convertible Securities
require payment or delivery of consideration in order to effect such
conversion, exercise or exchange, the Liberty Media Group shall in such
case include an amount of the kind of properties or assets required to be
paid or delivered as such consideration for the amount of the Convertible
Securities deemed converted, exercised or exchanged as if such Convertible
Securities were outstanding), in which case such Convertible Securities
shall no longer be deemed to be held by the TCI Group or attributed to the
Liberty Media Group.
"Liberty Media Group Available Dividend Amount," as of any date, shall
mean the product of the Liberty Media Group Outstanding Interest Fraction
and either: (a) the excess of (i) an amount equal to the total assets of
the Liberty Media Group less the total liabilities (not including preferred
stock) of the Liberty Media Group as of such date over (ii) the aggregate
par value of, or any greater amount determined to be capital in respect of,
all outstanding shares of Series A Liberty Media Group Common Stock, Series
B Liberty Media Group Common Stock and each class or series of Preferred
Stock attributed to the Liberty Media Group or (b) in case there is no such
excess, an amount equal to the Corporation Earnings (Loss) Attributable to
the Liberty Media Group (if positive) for the fiscal year in which such
date occurs and/or the preceding fiscal year.
"Liberty Media Group Distribution" shall mean the share distribution
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock made to the holders of record of Series A TCI
Group Common Stock and Series B TCI Group Common Stock as of the close of
business on August 4, 1995.
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"Liberty Media Group Inter-Group Interest Fraction," as of any date,
shall mean a fraction the numerator of which is the Number of Shares
Issuable with Respect to the Liberty Media Group Inter-Group Interest as of
such date and the denominator of which is the sum of (a) such Number of
Shares Issuable with Respect to the Liberty Media Group Inter-Group
Interest as of such date and (b) the aggregate number of shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock outstanding as of such date.
"Liberty Media Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the
Liberty Media Group, an amount, if any, equal to the gross proceeds of such
Disposition after any payment of, or reasonable provision for, (a) any
taxes payable by the Corporation in respect of such Disposition or in
respect of any resulting dividend or redemption pursuant to clause (i) or
(ii), respectively, of paragraph 5(b) of this Section E (or which would
have been payable but for the utilization of tax benefits attributable to
the TCI Group or the Telephony Group), (b) any transaction costs,
including, without limitation, any legal, investment banking and accounting
fees and expenses and (c) any liabilities and other obligations (contingent
or otherwise) of, or attributed to, the Liberty Media Group, including,
without limitation, any indemnity or guarantee obligations incurred in
connection with the Disposition or any liabilities for future purchase
price adjustments and any preferential amounts plus any accumulated and
unpaid dividends and other obligations (without duplication of amounts
allocated for the satisfaction of the Corporation's obligations with
respect to Pre-Distribution Convertible Securities and Committed
Acquisition Shares issuable which are included in the determination of the
Adjusted Liberty Media Group Outstanding Interest Fraction) in respect of
Preferred Stock attributed to the Liberty Media Group. For purposes of this
definition, any properties and assets of the Liberty Media Group remaining
after such Disposition shall constitute "reasonable provision" for such
amount of taxes, costs and liabilities (contingent or otherwise) as can be
supported by such properties and assets. To the extent the proceeds of any
Disposition include any securities or other property other than cash, the
Board of Directors shall determine the value of such securities or
property, including for the purpose of determining the equivalent value
thereof if the Board of Directors determines to pay a dividend or
redemption price in cash or securities or other property as provided in
clause (z) of paragraph 5(b) of this Section E.
"Liberty Media Group Outstanding Interest Fraction," as of any date,
shall mean a fraction the numerator of which is the aggregate number of
shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock outstanding on such date and the denominator of
which is the sum of (a) such aggregate number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock
outstanding on such date and (b) the Number of Shares Issuable with Respect
to the Liberty Media Group Inter-Group Interest as of such date.
"Liberty Media Group Private Market Value" shall mean an amount equal
to the private market value of the Liberty Media Group as of the Appraisal
Date. Each of the First Appraiser, the Second Appraiser and the Mutually
Designated Appraiser, if any, shall be instructed to determine the private
market value of the Liberty Media Group as of the Appraisal Date based upon
the amount a willing purchaser would pay to a willing seller, in an arm's
length transaction, if it were acquiring the Liberty Media Group, as if the
Liberty Media Group were a publicly traded non-controlled corporation and
the purchaser was acquiring all of the capital stock of such corporation,
and without consideration of any potential regulatory constraints limiting
the potential purchasers of the Liberty Media Group other than that which
would have existed if the Liberty Media Group were a publicly traded
non-controlled entity.
"Lower Appraised Amount," with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private
Market Value, the lower of the respective final views of the First
Appraiser and the Second Appraiser as to such private market value.
"Market Capitalization" of any class or series of capital stock of the
Corporation on any Trading Day shall mean the product of (i) the Market
Value of one share of such class or series on such Trading Day and (ii) the
number of shares of such class or series outstanding on such Trading Day.
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"Market Value" of any class or series of capital stock of the
Corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such day (if
such day is a Trading Day, and if such day is not a Trading Day, on the
Trading Day immediately preceding such day) or in case no such reported
sale takes place on such Trading Day the average of the reported closing
bid and asked prices regular way of a share of such class or series on such
Trading Day, in either case on the Nasdaq National Market, or if the shares
of such class or series are not quoted on such Nasdaq National Market on
such Trading Day, the average of the closing bid and asked prices of a
share of such class or series in the over-the-counter market on such
Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the Corporation, or if such closing bid and
asked prices are not made available by any such New York Stock Exchange
member firm on such Trading Day, the market value of a share of such class
or series as determined by the Board of Directors; provided that for
purposes of determining the ratios set forth in paragraphs 2(d), 2(e),
5(b), 6(b) and 7 of this Section E, (a) the "Market Value" of any share of
any series of Common Stock on any day prior to the "ex" date or any similar
date for any dividend or distribution paid or to be paid with respect to
such series of Common Stock shall be reduced by the fair market value of
the per share amount of such dividend or distribution as determined by the
Board of Directors and (b) the "Market Value" of any share of any series of
Common Stock on any day prior to (i) the effective date of any subdivision
(by stock split or otherwise) or combination (by reverse stock split or
otherwise) of outstanding shares of such series of Common Stock or (ii) the
"ex" date or any similar date for any dividend or distribution with respect
to any such series of Common Stock in shares of such series of Common Stock
shall be appropriately adjusted to reflect such subdivision, combination,
dividend or distribution.
"Mutually Appraised Amount," with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private
Market Value, the determination by the Mutually Designated Appraiser of
such private market value.
"Mutually Designated Appraiser" shall mean, if required with respect
to any determination of the Liberty Media Group Private Market Value or the
Telephony Group Private Market Value, the investment banking firm of
recognized national standing jointly designated by the First Appraiser and
the Second Appraiser to make such determination.
"Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest" after the Liberty Media Group Distribution shall be
zero and shall from time to time thereafter, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by stock split
or otherwise) and combinations (by reverse stock split or otherwise) of
the Series A Liberty Media Group Common Stock and dividends or
distributions of shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock to holders of Series A Liberty
Media Group Common Stock and other reclassifications of Series A Liberty
Media Group Common Stock,
(b) decreased (but not to less than zero) by (i) the aggregate
number of shares of Series A Liberty Media Group Common Stock issued or
sold by the Corporation after the Liberty Media Group Distribution other
than Committed Acquisition Shares, the proceeds of which are attributed
to the TCI Group, (ii) the aggregate number of shares of Series A
Liberty Media Group Common Stock issued or delivered upon conversion,
exercise or exchange of Convertible Securities (other than
Pre-Distribution Convertible Securities and Convertible Securities which
are convertible into or exercisable or exchangeable for Committed
Acquisition Shares), the proceeds of which are attributed to the TCI
Group, (iii) the aggregate number of shares of Series A Liberty Media
Group Common Stock issued or delivered by the Corporation as a dividend
or distribution to holders of Series A TCI Group Common Stock and Series
B TCI Group Common Stock, (iv) the aggregate number of shares of Series
A Liberty Media Group Common Stock issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities (other
than Pre-Distribution Convertible Securities and Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares) issued or delivered by the Corporation after the
Liberty Media Group Distribution as a dividend or distribution or by
reclassification or exchange to
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holders of Series A TCI Group Common Stock and Series B TCI Group Common
Stock and (v) the aggregate number of shares of Series A Liberty Media
Group Common Stock (rounded, if necessary, to the nearest whole number),
equal to the aggregate fair value (as determined by the Board of
Directors) of assets or properties attributed to the Liberty Media Group
that are transferred from the Liberty Media Group to the TCI Group in
consideration of a reduction in the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest, divided by the
Market Value of one share of Series A Liberty Media Group Common Stock
as of the date of such transfer, and
(c) increased by (i) the aggregate number of any shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock which are retired or otherwise cease to be outstanding following
their purchase with funds attributed to the TCI Group, (ii) a number
(rounded, if necessary, to the nearest whole number), equal to the fair
value (as determined by the Board of Directors) of assets or properties
theretofore attributed to the TCI Group that are contributed to the
Liberty Media Group in consideration of an increase in the Number of
Shares Issuable with Respect to the Liberty Media Group Inter-Group
Interest, divided by the Market Value of one share of Series A Liberty
Media Group Common Stock as of the date of such contribution and (iii)
the aggregate number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock into or for which
Convertible Securities are deemed to be converted, exercised or
exchanged pursuant to the last sentence of the definition of "TCI Group"
in this paragraph 9. The Corporation shall not issue or sell shares of
Series B Liberty Media Group Common Stock in respect of a reduction in
the Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest.
Whenever a change in the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest occurs, the Corporation shall
prepare and file a statement of such change with the Secretary of the
Corporation.
"Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest" shall initially be that number of shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock
which represent 100% of the common stockholders' equity value of the
Corporation attributable to the Telephony Group, as determined by the Board
of Directors of the Corporation prior to the first issuance of shares of
Series A Telephony Group Common Stock or Series B Telephony Group Common
Stock, and shall from time to time thereafter, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by stock split
or otherwise) and combinations (by reverse stock split or otherwise) of
the Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and dividends or distributions of shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock to
holders of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock and other reclassifications of the Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock,
(b) decreased (but not to less than zero) by (i) the aggregate
number of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock issued or sold by the Corporation the
proceeds of which are attributed to the TCI Group, (ii) the aggregate
number of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock issued or delivered upon conversion,
exercise or exchange of Convertible Securities, the proceeds of which
are attributed to the TCI Group, (iii) the aggregate number of shares of
Series A Telephony Group Common Stock or Series B Telephony Group Common
Stock issued or delivered by the Corporation as a dividend or
distribution to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock, (iv) the aggregate number of shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock
issued or delivered upon the conversion, exercise or exchange of any
Convertible Securities issued or delivered by the Corporation as a
dividend or distribution or by reclassification or exchange to holders
of Series A
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TCI Group Common Stock and Series B TCI Group Common Stock and (v) the
aggregate number of shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock (rounded, if necessary, to the
nearest whole number), equal to the aggregate fair value (as determined
by the Board of Directors) of assets or properties attributed to the
Telephony Group that are transferred from the Telephony Group to the TCI
Group in consideration of a reduction in the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest, divided by the
Market Value of one share of Series A Telephony Group Common Stock as of
the date of such transfer, and
(c) increased by (i) the aggregate number of any shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock
which are retired or otherwise cease to be outstanding following their
purchase with funds attributed to the TCI Group, (ii) a number (rounded,
if necessary, to the nearest whole number), equal to the fair value (as
determined by the Board of Directors) of assets or properties,
theretofore attributed to the TCI Group that are contributed to the
Telephony Group in consideration of an increase in the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest,
divided by the Market Value of one share of Series A Telephony Group
Common Stock as of the date of such contribution and (iii) the aggregate
number of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock into or for which Convertible Securities
are deemed to be converted, exercised or exchanged pursuant to the last
sentence of the definition of "TCI Group" in this paragraph 9.
Whenever a change in the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest occurs, the Corporation shall prepare
and file a statement of such change with the Secretary of the Corporation.
"Pre-Distribution Convertible Securities" shall mean Convertible
Securities that were outstanding on the record date for the Liberty Media
Group Distribution and were, prior to such date, convertible into or
exercisable or exchangeable for shares of the Class A Common Stock, par
value $1.00 per share, of the Corporation.
"Qualifying Subsidiary" shall mean a Subsidiary of the Corporation in
which (x) the Corporation's ownership and voting interest is sufficient to
satisfy the requirements of the Internal Revenue Service for a distribution
of the Corporation's interest in such Subsidiary to the holders of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock that
is tax free to such holders or (y) the Corporation owns, directly or
indirectly, all of the issued and outstanding capital stock.
"Redemption Date" shall mean any date fixed for a redemption or
purchase of shares of (i) Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock or (ii) Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock, as the case may be,
as set forth in a notice to holders of such series pursuant to this
Certificate.
"Related Business Transaction" shall mean any Disposition of all or
substantially all of the properties and assets of the Liberty Media Group
or the Telephony Group, as the case may be, in which the Corporation
receives as proceeds of such Disposition primarily equity securities
(including, without limitation, capital stock, convertible securities,
partnership or limited partnership interests and other types of equity
securities, without regard to the voting power or contractual or other
management or governance rights related to such equity securities) of the
purchaser or acquiror of such assets and properties of the Liberty Media
Group or the Telephony Group, as the case may be, any entity which succeeds
(by merger, formation of a joint venture enterprise or otherwise) to such
assets and properties of the Liberty Media Group or the Telephony Group, as
the case may be, or a third party issuer, which purchaser, acquiror or
other issuer is engaged or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by the
Liberty Media Group or the Telephony Group, as the case may be, prior to
such Disposition, as determined in good faith by the Board of Directors.
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"Second Appraiser" means, with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private
Market Value, an investment banking firm of recognized national standing
selected by the Independent Committee to make such determination.
"Selection Date," with respect to any determination of the Liberty
Media Group Private Market Value or the Telephony Group Private Market
Value, shall mean the date upon which the Second Appraiser for such
determination is selected by the Independent Committee.
"Subsidiary" shall mean, with respect to any person or entity, any
corporation or partnership 50% or more of whose outstanding voting
securities or partnership interests, as the case may be, are directly or
indirectly owned by such person or entity.
"TCI Group" shall mean, as of any date:
(a) the interest of the Corporation or any of its subsidiaries in
all of the businesses in which the Corporation or any of its
subsidiaries (or any of their predecessors or successors) is or has been
engaged, directly or indirectly, and the respective assets and
liabilities of the Corporation or any of its subsidiaries, other than
any businesses, assets or liabilities of the Liberty Media Group or the
Telephony Group;
(b) a proportionate interest in the businesses, assets and
liabilities of the Liberty Media Group equal to the Liberty Media Group
Inter-Group Interest Fraction as of such date;
(c) a proportionate interest in the businesses, assets and
liabilities of the Telephony Group equal to the Telephony Group
Inter-Group Interest Fraction as of such date;
(d) from and after any dividend or other distribution with respect
to shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock (other than a dividend or other
distribution payable in shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock, with respect to
which adjustment shall be made as provided in clause (a) of the
definition of "Number of Shares Issuable with Respect to the Liberty
Media Group Inter-Group Interest," or in other securities of the
Corporation attributed to the Liberty Media Group, for which provision
shall be made as set forth in the penultimate sentence of this
definition), an amount of assets or properties theretofore included in
the Liberty Media Group equal to the aggregate amount of such kind of
assets or properties so paid in respect of such dividend or other
distribution with respect to shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock multiplied by
a fraction the numerator of which is equal to the Liberty Media Group
Inter-Group Interest Fraction in effect immediately prior to the record
date for such dividend or other distribution and the denominator of
which is equal to the Liberty Media Group Outstanding Interest Fraction
in effect immediately prior to the record date for such dividend or
other distribution; and
(e) from and after any dividend or other distribution with respect
to shares of Series A Telephony Group Common Stock or Series B Telephony
Group Common Stock (other than a dividend or other distribution payable
in shares of Series A Telephony Group Common Stock or Series B Telephony
Group Common Stock, with respect to which adjustment shall be made as
provided in clause (a) of the definition of "Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest," or in other
securities of the Corporation attributed to the Telephony Group, for
which provision shall be made as set forth in the penultimate sentence
of this definition), an amount of assets or properties theretofore
included in the Telephony Group equal to the aggregate amount of such
kind of assets or properties so paid in respect of such dividend or
other distribution with respect to shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock multiplied by a
fraction the numerator of which is equal to the Telephony Group
Inter-Group Interest Fraction in effect immediately prior to the record
date for such dividend or other distribution and the denominator of
which is equal to the Telephony Group Outstanding Interest Fraction in
effect immediately prior to the record date for such dividend or other
distribution; and
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(f) any assets or properties transferred from the Liberty Media
Group or the Telephony Group to the TCI Group;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group or the Telephony
Group, the TCI Group shall no longer include such assets or properties so
contributed or transferred (other than pursuant to its interest in the
businesses, assets and liabilities of the Liberty Media Group or the
Telephony Group pursuant to clauses (b) or (c), respectively, above). If
(1) the Corporation shall pay a dividend or make any other distribution
with respect to shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock payable in other securities of
the Corporation attributed to the Liberty Media Group, the TCI Group shall
be deemed to hold an amount of such other securities equal to the amount so
distributed multiplied by the fraction specified in clause (d) of this
definition (determined as of a time immediately prior to the record date
for such dividend or other distribution), and to the extent interest or
dividends are paid or other distributions are made on such other securities
so distributed to holders of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, the TCI Group shall include a
corresponding ratable amount of the kind of assets paid as such interest or
dividends or other distributions in respect of such securities so deemed to
be held by the TCI Group, or (2) the Corporation shall pay a dividend or
make any other distribution with respect to shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock payable in
other securities of the Corporation attributed to the Telephony Group, the
TCI Group shall be deemed to hold an amount of such other securities equal
to the amount so distributed multiplied by the fraction specified in clause
(e) of this definition (determined as of a time immediately prior to the
record date for such dividend or other distribution), and to the extent
interest or dividends are paid or other distributions are made on such
other securities so distributed to holders of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock, the TCI Group shall
include a corresponding ratable amount of the kind of assets paid as such
interest or dividends or other distributions in respect of such securities
so deemed to be held by the TCI Group. The Corporation may also, to the
extent any such other securities constitute Convertible Securities which
are at the time convertible, exercisable or exchangeable, cause such
Convertible Securities deemed to be held by the TCI Group to be deemed to
be converted, exercised or exchanged (and to the extent the terms of such
Convertible Securities require payment or delivery of consideration in
order to effect such conversion, exercise or exchange, the TCI Group shall
in such case no longer include an amount of the kind of properties or
assets required to be paid or delivered as such consideration for the
amount of the Convertible Securities deemed converted, exercised or
exchanged as if such Convertible Securities were outstanding), in which
case such Convertible Securities shall no longer be deemed to be held by
the TCI Group or attributed to the Liberty Media Group or the Telephony
Group.
"TCI Group Available Dividend Amount," as of any date, shall mean
either: (a) the excess of (i) an amount equal to the total assets of the
TCI Group less the total liabilities (not including preferred stock) of the
TCI Group as of such date over (ii) the aggregate par value of, or any
greater amount determined to be capital in respect of, all outstanding
shares of Series A TCI Group Common Stock, Series B TCI Group Common Stock
and each class or series of Preferred Stock attributed to the TCI Group or
(b) in case there is no such excess, an amount equal to the Corporation
Earnings (Loss) Attributable to the TCI Group (if positive) for the fiscal
year in which such date occurs and/or the preceding fiscal year.
"Telephony Group" shall mean, as of any date that any shares of Series
A Telephony Group Common Stock or Series B Telephony Group Common Stock
have been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its subsidiaries
in TCI Telephony Services, Inc. ("TCI Telephony") or any of its
subsidiaries (including any successor thereto by merger, consolidation
or sale of all or substantially all of its assets, whether or not in
connection with a Related Business Transaction) and their respective
properties and assets,
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(b) all assets and liabilities of the Corporation or any of its
subsidiaries to the extent attributed to any of the properties or assets
referred to in clause (a) of this sentence, whether or not such assets
or liabilities are assets and liabilities of TCI Telephony or any of its
subsidiaries (or a successor as described in clause (a) of this
sentence),
(c) all assets and properties contributed or otherwise transferred
to the Telephony Group from the TCI Group, and
(d) the interest of the Corporation or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Corporation or
any of its subsidiaries for the Telephony Group, as determined by the
Board of Directors;
provided that (i) from and after any dividend or other distribution with
respect to any shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock (other than a dividend or other distribution
payable in shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock, with respect to which adjustment shall be
made as provided in clause (a) of the definition of "Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest," or in
other securities of the Corporation attributed to the Telephony Group for
which provision shall be made as set forth in the penultimate sentence of
this definition), the Telephony Group shall no longer include an amount of
assets or properties equal to the aggregate amount of such kind of assets
or properties so paid in respect of shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock multiplied by a
fraction the numerator of which is equal to the Telephony Group Inter-Group
Interest Fraction in effect immediately prior to the record date for such
dividend or other distribution and the denominator of which is equal to the
Telephony Group Outstanding Interest Fraction in effect immediately prior
to the record date for such dividend or other distribution and (ii) from
and after any transfer of assets or properties from the Telephony Group to
the TCI Group, the Telephony Group shall no longer include the assets or
properties so transferred. If the Corporation shall pay a dividend or make
any other distribution with respect to shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock payable in securities
of the Corporation attributed to the Telephony Group other than Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock, the
TCI Group shall be deemed to hold an amount of such other securities equal
to the amount so distributed multiplied by the fraction specified in clause
(i) of this definition (determined as of a time immediately prior to the
record date for such dividend or other distribution), and to the extent
interest or dividends are paid or other distributions are made on such
other securities so distributed to the holders of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock, the Telephony Group
shall no longer include a corresponding ratable amount of the kind of
assets paid as such interest or dividends or other distributions in respect
of such securities so deemed to be held by the TCI Group. The Corporation
may also, to the extent any such other securities constitute Convertible
Securities which are at the time convertible, exercisable or exchangeable,
cause such Convertible Securities deemed to be held by the TCI Group to be
deemed to be converted, exercised or exchanged (and to the extent the terms
of such Convertible Securities require payment or delivery of consideration
in order to effect such conversion, exercise or exchange, the Telephony
Group shall in such case include an amount of the kind of properties or
assets required to be paid or delivered as such consideration for the
amount of the Convertible Securities deemed converted, exercised or
exchanged as if such Convertible Securities were outstanding), in which
case such Convertible Securities shall no longer be deemed to be held by
the TCI Group or attributed to the Telephony Group.
"Telephony Group Available Dividend Amount," as of any date, shall
mean the product of the Telephony Group Outstanding Interest Fraction and
either: (a) the excess of (i) an amount equal to the total assets of the
Telephony Group less the total liabilities (not including preferred stock)
of the Telephony Group as of such date over (ii) the aggregate par value
of, or any greater amount determined to be capital in respect of, all
outstanding shares of Series A Telephony Group Common Stock, Series B
Telephony Group Common Stock and each class or series of Preferred Stock
attributed to the Telephony
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Group or (b) in case there is no such excess, an amount equal to the
Corporation Earnings (Loss) Attributable to the Telephony Group (if
positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year.
"Telephony Group Inter-Group Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest as of such date
and the denominator of which is the sum of (a) such Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest as of
such date and (b) the aggregate number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock outstanding as
of such date.
"Telephony Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the
Telephony Group, an amount, if any, equal to the gross proceeds of such
Disposition after any payment of, or reasonable provision for, (a) any
taxes payable by the Corporation in respect of such Disposition or in
respect of any resulting dividend or redemption pursuant to clause (i) or
(ii), respectively, of paragraph 6(b) of this Section E (or which would
have been payable but for the utilization of tax benefits attributable to
the TCI Group or the Liberty Media Group), (b) any transaction costs,
including, without limitation, any legal, investment banking and accounting
fees and expenses and (c) any liabilities and other obligations (contingent
or otherwise) of, or attributed to, the Telephony Group, including, without
limitation, any indemnity or guarantee obligations incurred in connection
with the Disposition or any liabilities for future purchase price
adjustments and any preferential amounts plus any accumulated and unpaid
dividends and other obligations in respect of Preferred Stock attributed to
the Telephony Group. For purposes of this definition, any properties and
assets of the Telephony Group remaining after such Disposition shall
constitute "reasonable provision" for such amount of taxes, costs and
liabilities (contingent or otherwise) as can be supported by such
properties and assets. To the extent the proceeds of any Disposition
include any securities or other property other than cash, the Board of
Directors shall determine the value of such securities or property,
including for the purpose of determining the equivalent value thereof if
the Board of Directors determines to pay a dividend or redemption price in
cash or securities or other property as provided in clause (z) of paragraph
6(b) of this Section E.
"Telephony Group Outstanding Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the aggregate number of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock outstanding on such date and the denominator of which is the sum of
(a) such aggregate number of shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock outstanding on such date
and (b) the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest as of such date.
"Telephony Group Private Market Value" shall mean an amount equal to
the private market value of the Telephony Group as of the Appraisal Date.
Each of the First Appraiser, the Second Appraiser and the Mutually
Designated Appraiser, if any, shall be instructed to determine the private
market value of the Telephony Group as of the Appraisal Date based upon the
amount a willing purchaser would pay to a willing seller, in an arm's
length transaction, if it were acquiring the Telephony Group, as if the
Telephony Group were a publicly traded non-controlled corporation and the
purchaser was acquiring all of the capital stock of such corporation, and
without consideration of any potential regulatory constraints limiting the
potential purchasers of the Telephony Group other than that which would
have existed if the Telephony Group were a publicly traded non-controlled
entity.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the Corporation is not traded
on the Nasdaq National Market System or in the over-the-counter market.""
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(IV)SECTION C OF ARTICLE V OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"SECTION C
REMOVAL OF DIRECTORS
Subject to the rights of the holders of any class or series of Preferred
Stock, directors may be removed from office only for cause (as hereinafter
defined) upon the affirmative vote of the holders of 66 2/3% of the total voting
power of the then outstanding shares of Series A TCI Group Common Stock, Series
B TCI Group Common Stock, Series A Liberty Media Group Common Stock, Series B
Liberty Media Group Common Stock, Series A Telephony Group Common Stock, Series
B Telephony Group Common Stock and any class or series of Preferred Stock
entitled to vote at an election of directors, voting together as a single class.
Except as may be provided by law, "cause" for removal, for purposes of this
Section C, shall exist only if: (i) the director whose removal is proposed has
been convicted of a felony, or has been granted immunity to testify in an action
where another has been convicted of a felony, by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal; (ii)
such director has become mentally incompetent, whether or not so adjudicated,
which mental incompetence directly affects his ability as a director of the
Corporation, as determined by at least 66 2/3% of the members of the Board of
Directors then in office (other than such director); or (iii) such director's
actions or failure to act have been determined by at least 66 2/3% of the
members of the Board of Directors then in office (other than such director) to
be in derogation of the director's duties."
(V)SECTION A OF ARTICLE VIII OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"ARTICLE VIII
MEETINGS OF STOCKHOLDERS
SECTION A
ANNUAL AND SPECIAL MEETINGS
Subject to the rights of the holders of any class or series of Preferred
Stock, stockholder action may be taken only at an annual or special meeting.
Except as otherwise provided in the terms of any class or series of Preferred
Stock or unless otherwise prescribed by law or by another provision of this
Certificate, special meetings of the stockholders of the Corporation, for any
purpose or purposes, shall be called by the Secretary of the Corporation (i)
upon the written request of the holders of not less than 66 2/3% of the total
voting power of the outstanding Voting Securities (as hereinafter defined) or
(ii) at the request of at least 75% of the members of the Board of Directors
then in office. The term "Voting Securities" shall include the Series A TCI
Group Common Stock, the Series B TCI Group Common Stock, the Series A Liberty
Media Group Common Stock, the Series B Liberty Media Group Common Stock, the
Series A Telephony Group Common Stock, the Series B Telephony Group Common Stock
and any class or series of Preferred Stock entitled to vote with the holders of
Common Stock generally upon all matters which may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
SECOND: That said amendments were duly adopted by the Board of Directors of
the Corporation, and pursuant to resolution of the Board of Directors of the
Corporation, the annual meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute and the Restated Certificate of Incorporation
of the Corporation were voted in favor of said amendments.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware."
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IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment this day of , 1997.
TELE-COMMUNICATIONS, INC.
By:
------------------------------------
Name:
Title:
ATTEST:
By:
- ------------------------------------
Name:
Title:
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ANNEX III
DESCRIPTION OF TELEPHONY GROUP
GENERAL
The Telephony Group would initially consist of all of the Company's equity
interest in TTS-Delaware, an indirectly wholly owned subsidiary of the Company,
its subsidiaries, their respective assets, and all assets and liabilities of the
Company and its subsidiaries to the extent attributed to any of the foregoing
assets, whether or not such assets or liabilities are assets and liabilities of
TTS-Delaware or any of its subsidiaries (together with its consolidated
subsidiaries (unless the context indicates otherwise), "TCI Telephony"). The
principal assets of TCI Telephony are its investments 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" brand, and its
investment in Teleport. The PCS Ventures include the Sprint PCS Partnerships and
PhillieCo. The partners (the "Partners") of each of the Sprint PCS Partnerships
are subsidiaries of Sprint, Comcast, Cox and the Company (collectively, the
"Parents"). 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. TCG, the largest competitive local exchange carrier (or "CLEC") in
the United States as measured by route miles, offers a wide range of local
telecommunications services in major metropolitan markets nationwide, primarily
to businesses, long distance carriers and resellers, and wireless communications
companies. The Company has a 31.1% equity interest (which represents a 36.4%
voting interest) in the outstanding common stock of TCG. TCI Telephony also
holds a 50% partnership interest in Kansas City Fiber Network, L.P. and a 40%
partnership interest in NHT Partnership, which are competitive access providers
(or "CAPs") serving the Kansas City and Buffalo metropolitan areas,
respectively. Beyond the ownership of these assets, TCI Telephony also has the
right to acquire TCI's interests in the ResTel Business and the WTCI Business.
The Telephony Group would 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 Telephony Group and such other businesses, assets and liabilities as TCI
or any of its subsidiaries may in the future acquire for the Telephony Group, as
determined by the Board of Directors. It is currently the intention of the
Company that any businesses, assets and liabilities so attributed to the
Telephony Group in the future would be businesses, assets and liabilities of, or
related to, the interests of the Company and its subsidiaries in the Telephony
Business.
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
is the largest broadband wireless personal communications services company in
the United States in terms of total licensed "Pops" (or population equivalents),
with licenses (including those owned by licensees that have affiliated or have
agreed to affiliate with Sprint PCS, including PhillieCo) to provide service in
33 MTAs covering 190.9 million Pops (73% of the total United States population)
and including eight of the nation's ten largest MTAs. Broadband PCS systems
differ from traditional analog cellular telephone service principally in that
PCS systems operate at a higher frequency band (1850-1990 MHz radio spectrum),
have more spectrum allotted and have different license areas.
Sprint PCS initiated the commercial launch of its service in December 1996
in Fresno, California; Milwaukee, Wisconsin; Portland, Oregon; Spokane,
Washington; Albany and Syracuse, New York; and Pittsburgh, Pennsylvania. In
addition, APC (as defined below) launched its PCS service in the
Baltimore/Washington MTA in November 1995, and Cox-California (as defined below)
commenced the commercial launch of its service in San Diego, California in
December 1996. Sprint PCS currently plans to launch in additional markets,
including New York City, San Francisco, Dallas/Ft. Worth, Boston, Miami,
Minneapolis/St. Paul, Denver, Seattle and Kansas City, on a market-by-market
basis during 1997 and thereafter. When the foregoing phase of launch is
completed, Sprint PCS service will be available in 35 of the
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top 50 markets in the United States, including markets served by APC,
Cox-California and PhillieCo. The timing of launch in individual markets will be
determined by various factors, principally zoning and microwave relocation,
equipment delivery schedules, completion of network testing and optimization and
local market and competitive considerations.
Sprint PCS will require significant funds for development, construction,
testing and deployment of its PCS network. The Partners of Sprint PCS 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 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. As of
December 31, 1996, 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. The Company expects that the remaining approximately
$1.2 billion of such amount (of which TCI Telephony's share would be
approximately $360 million) would be contributed by the Partners by the end of
the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed by the Partners). Sprint Spectrum, L.P.,
a subsidiary of the Sprint PCS Partnerships ("Sprint Spectrum"), has obtained
approximately $3.1 billion in secured vendor financing in the aggregate from the
certain 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 senior notes and senior discount notes.
Further, in connection with such debt financings by Sprint Spectrum, the
Company and the other Parents entered into a Capital Contribution Agreement with
Sprint Spectrum, of which the secured creditors in such debt financings are
beneficiaries, pursuant to which each Partner or Parent, as applicable, agreed
to make contributions, or cause contributions to be made, to Sprint Spectrum
from time to time upon the occurrence of certain events, up to a maximum
aggregate amount equal to (a) such Parent's percentage interest in Sprint PCS
(as to each Partner or Parent, as applicable, its "Percentage Interest") of the
sum of (i) $1.0 billion plus (ii) the agreed value of the certain property to be
contributed to Sprint PCS by Cox (aggregating approximately $24 million as of
December 31, 1996) (the "Cox Contributed Property"), less (b) the sum of (i) the
aggregate amount of cash equity contributions made by such Parent (directly or
indirectly) to Sprint Spectrum and its subsidiaries (but not other affiliates of
Sprint PCS, including APC and Cox-California) subsequent to December 31, 1995
other than pursuant to the Capital Contribution Agreement, (ii) such Parent's
Percentage Interest of the amount of the aggregate cash proceeds of equity
capital (subject to certain exclusions) obtained by Sprint Spectrum from sources
other than the Parents and their subsidiaries, and (iii) in the case of Cox, the
agreed value of the Cox Contributed Property. The liabilities of the Company
under the Capital Contribution Agreement would be attributed to the Telephony
Group. The events that would require such contributions to be made are (x) a
determination as of any date that the projected cash expenditures of Sprint
Spectrum and its subsidiaries during the three months following such
determination exceed the cash, cash equivalents and borrowing availability of
Sprint Spectrum and its subsidiaries as of such determination date, plus their
expected cash receipts, other than from borrowings, during such three-month
period, (y) a default in the payment of any amount due under any of the
agreements evidencing such debt financing and other agreements evidencing
secured indebtedness that Sprint Spectrum may enter into in the future and (z)
the acceleration of Sprint Spectrum's obligations under any of such agreements.
During 1996, approximately $500 million in cash was contributed directly or
indirectly to Sprint Spectrum (of which TCI Telephony had contributed
approximately $150 million), thereby reducing the Parents' respective
obligations under the Capital Contribution Agreement by such amount and reducing
the Company's obligation to approximately $150 million as of December 31, 1996.
Based on the currently expected timing of TCI Telephony's additional
contributions to Sprint PCS (including the currently expected timing of Sprint
PCS's expected capital contributions to APC and Cox-California and to its
subsidiaries other than Sprint Spectrum and its subsidiaries), the Company does
not expect that its obligations under the Capital Contribution Agreement will
result in the obligation to make any incremental capital contributions to Sprint
PCS in addition to TCI Telephony's pro rata portion of the balance of the $4.2
billion that the Partners agreed to contribute.
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Sprint PCS believes that rapid growth in consumer and business demands for
wireless services, technological advances, increased customer expectations for
quality, and convenience of use and deregulation are reshaping the
telecommunications market. In order to compete in this changing environment,
accelerate subscriber growth and increase customer retention, Sprint PCS intends
to offer customers integrated telecommunications packages and national service
offerings. The Parents and Sprint PCS expect to package Sprint PCS's wireless
services with other of the Parents' communications products and services,
including the local and long distance telecommunications services and the
cable-based entertainment services of Sprint and TCI, Cox and Comcast. Sprint
PCS and the Parents will market PCS wireless products and services nationally
under the Sprint brand name through diverse distribution channels including
those of the Parents.
PCS is the first all-digital wireless service and will be able to provide
enhanced integrated services not currently offered by traditional analog
cellular providers. Sprint PCS believes that the enhanced features and services,
in conjunction with increased competition within the industry, will contribute
to the acceleration of growth in the wireless telecommunications market.
According to the Cellular Telephone Industry Association, the number of cellular
telephone subscribers nationwide has grown from approximately 680,000 in 1986 to
an estimated 34 million as of December 31, 1995. The Personal Communications
Industry Association estimates that the number of cellular and PCS wireless
services subscribers will be over 104 million by the year 2005 and that PCS
subscriptions will account for approximately 40 million of such subscriptions.
POPULATION COVERAGE
Sprint PCS was the successful bidder for 29 PCS licenses in the A Block and
B Block PCS auctions conducted by the Federal Communications Commission (the
"FCC"), which concluded in March 1995. Sprint PCS's 29 wholly-owned markets
include, among others, the New York City, San Francisco, Detroit, Dallas/Fort
Worth and Boston/Providence MTAs, and cover 150.3 million Pops. Additionally,
Cox has agreed to contribute to Sprint PCS, upon FCC approval which has been
obtained, a PCS license for the Omaha MTA that it separately purchased in the
broadband PCS auction that concluded in March 1995.
In order to increase its Pop coverage, Sprint PCS has affiliated and
expects to continue to affiliate with other PCS providers, including those in
which Sprint PCS or affiliates of its Partners have an interest. Pursuant to
affiliation agreements, each affiliated PCS service provider will be included in
Sprint PCS's national network and will use the Sprint brand name. Sprint PCS
owns a 49% limited partnership interest in American PCS, L.P. ("APC"), which
owns a PCS license for and operates a broadband PCS system in the Washington
D.C./Baltimore MTA, which MTA covers 8.3 million Pops. APC launched its PCS
service in November 1995 and was the nation's first commercially operational PCS
system. APC has affiliated with Sprint PCS and is marketing its products and
services under the Sprint brand name. As of July, 1996, APC had approximately
100,000 subscribers. In December 1996, Sprint PCS acquired a 49% limited
partnership interest in Cox California PCS, L.P. ("Cox-California"), a
partnership formed to hold a PCS license for the Los Angeles/San Diego MTA
covering 21.5 million Pops, and Cox-California agreed to affiliate with Sprint
PCS. Cox, which currently owns this PCS license, has agreed to contribute the
license to Cox-California and will manage and control Cox-California. Sprint PCS
also expects to affiliate with, and provide various services to, PhillieCo, a
limited partnership organized by subsidiaries of Sprint, TCI and Cox that owns a
PCS license for the Philadelphia MTA covering 9.1 million Pops. TCI Telephony
owns a 35.3% partnership interest in PhillieCo, which interest would be
attributed to the Telephony Group. 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.
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The table below presents the owned and affiliated Pops of Sprint PCS after
giving effect to such affiliation agreements:
<TABLE>
<CAPTION>
NET POPS
DIRECT OR INDIRECT ATTRIBUTED
1995 OWNERSHIP INTEREST TO
# OF POPULATION ATTRIBUTED TO TELEPHONY
OWNED/AFFILIATED MTAS IN MTA(S) TELEPHONY GROUP GROUP(1)
---------------- ---- ---------- ------------------ ----------
(MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C>
Owned by Sprint PCS...................... 29 150.3 30.0% 45.1
Omaha (to be contributed to Sprint PCS by
Cox)(2)................................ 1 1.7 30.0% .5
Affiliated:
APC (Baltimore/Washington)(3).......... 1 8.3 14.7% 1.2
Cox-California (Los Angeles/San
Diego)(4)........................... 1 21.5 14.7% 3.2
PhillieCo (Philadelphia)(5)............ 1 9.1 35.3% 3.2
-- ----- ----
Total.......................... 33 190.9 53.2
== ===== ====
</TABLE>
- ---------------
(1) Represents aggregate Pops represented by the PCS licenses held by the
applicable PCS licensee multiplied by the direct or indirect percentage
equity interest in such licensee that would be attributed to the Telephony
Group. The number of Pops represented by PCS licenses is based upon the
Donnelley Marketing Service estimate of the December 31, 1995 population of
a geographic area. 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 that would be attributed
to the Telephony Group is not intended to imply that TCI Telephony has any
actual ownership interest in or right to acquire such an interest, or other
rights with respect to, such Pops or the applicable PCS license(s),
including upon liquidation or dissolution of the applicable PCS licensee.
(2) Contribution will be credited towards capital contributions required of Cox
under the Partnership Agreement (as defined herein) to the same extent as if
Cox had made a cash contribution in an amount equal to the sum of (i)
$995,564, together with interest at the annual rate of 13.4% computed from
November 17, 1994 through the date the Omaha license is contributed, plus
(ii) $4,062,400, together with interest at the annual rate of 13.4% computed
from June 30, 1995 through the date the Omaha license is contributed.
(3) Sprint PCS owns a 49% limited partnership interest in APC, which 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-California, 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.
Including its current affiliates, Sprint PCS has licenses (or interests in
licensees) and affiliate relationships in 33 MTAs covering nearly 191 million
Pops (73% of the United States population.) There are 18 MTAs currently not
served by Sprint PCS's licenses and affiliations. Sprint PCS continues to
explore a number of possibilities to expand Pop coverage. Opportunities exist
for affiliations with or investments in other PCS providers (including other
affiliates of Sprint PCS) operating in territories not covered by Sprint PCS's
licenses. Likewise, the ability to exchange capacity or enter into resale
agreements with other providers or enter into roaming arrangements with other
providers' systems are options under consideration. There can be
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no assurance, however, that Sprint PCS will be successful in expanding its Pop
coverage beyond that currently covered by existing licenses and existing and
expected affiliation agreements.
Pursuant to an agreement among the Partners, 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. In such auctions, Sprint was the high bidder for
licenses in approximately 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-California, APC or
PhillieCo. In accordance with such agreement and the 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, although no
assurance can be given that Sprint and Sprint PCS will enter into any such
affiliation agreement.
The Company is also currently negotiating to acquire a minority equity
interest in a limited partnership that would operate a PCS system utilizing C
block PCS licenses for eight BTAs covering an aggregate of approximately 2.2
million Pops as an affiliate of the Sprint PCS network, although no assurance
can be given that the Company will acquire such interest or that such
partnership will enter into an affiliation agreement with Sprint PCS.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in the
capacity and quality of digital technology, shorter cycles for new products and
enhancements and changes in consumer preferences and expectations. Accordingly,
TCI Telephony expects competition in the wireless telecommunications business to
be dynamic and intense as a result of the entrance of new competitors and the
development of new technologies, products and services. TCI Telephony
anticipates that market prices for two-way wireless services generally will
decline in the future based upon increased competition.
Each of the markets in which Sprint PCS competes will be served by other
two-way wireless service providers, including cellular and PCS operators and
resellers. Many of these competitors have been operating for a number of years,
currently serve a substantial subscriber base and have significantly greater
financial and technical resources than those available to Sprint PCS. Certain of
Sprint PCS's competitors are operating, or planning to operate, through joint
ventures and affiliation arrangements, wireless telecommunications systems that
encompass most of the United States. In addition, several entities have received
and several others are seeking FCC authorization to construct and operate global
satellite networks to provide domestic and international mobile communications
services from geostationary and low earth orbit satellites.
Continuing technological advances in telecommunications and FCC policies
that encourage the development of new spectrum-based technologies make it
impossible to predict the extent of future competition. The FCC has adopted
rules that provide preferences, including discounted licenses, to companies that
develop new spectrum based communications technologies without bidding in
FCC-sanctioned auctions. Such a preference may encourage the development of new
technologies that compete with cellular and PCS service. In addition, the
Omnibus Budget Reconciliation Act of 1993 requires, among other things, the
allocation to commercial use of a portion of 200 MHZ of the spectrum currently
reserved for government use. It is possible that some portion of the spectrum
that is reallocated will be used to create new land-mobile services or to expand
existing land-mobile services.
Sprint PCS will directly compete with several other PCS providers in each
of its PCS markets, including AT&T Wireless Services, Inc., BellSouth
Telecommunications, Inc., Omnipoint Corporation, Pacific Bell Mobile Services,
Inc., PCS PrimeCo L.P. and Western Wireless Corporation. Sprint PCS also expects
that existing analog wireless service providers in the PCS markets, some of
which have been operational for a number of years and have significantly greater
financial and technical resources than those available to Sprint PCS, will
upgrade their systems to provide comparable services in competition with its PCS
system. These cellular competitors include AirTouch Communications, Inc., AT&T
Wireless Services, Inc., BellSouth
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Mobility, Inc., Ameritech Mobile Communications, Inc., Bell Atlantic NYNEX
Mobile, Southwestern Bell Mobile Systems, GTE Mobilnet, Inc. and U.S. Cellular
Corp.
MANAGEMENT
Pursuant to the Agreement of Limited Partnership (the "Partnership
Agreement") of Sprint Spectrum Holding Company, L.P., the general Partners of
Sprint PCS conduct the business and affairs of Sprint PCS and have all the
powers of Sprint PCS except for those specifically reserved to all of the
Partners (general and limited) by the Delaware Revised Uniform Limited
Partnership Act or the Partnership Agreement. The general Partners conduct such
business and exercise such powers through their representatives on the
Partnership Board (the "Representatives"). The Partnership Board currently has
six voting Representatives, three of whom are currently designated by Sprint and
one of whom is currently designated by each of Comcast, Cox and the Company. The
Representative or Representatives designated by each Partner have an aggregate
voting power equal to the Percentage Interest of the Partner appointing him or
them. Based on the current Percentage Interest of TCI Telephony in Sprint PCS,
TCI Telephony's Representative on the Partnership Board has a 30% voting
Percentage Interest. In addition, the voting Percentage Interests of the
Representatives of Sprint, Comcast and Cox are 40%, 15% and 15%, respectively.
Except as set forth below, all actions required or permitted to be taken by
the Partnership Board must be approved by the affirmative vote of
Representatives having voting power of 75% or more of the Percentage Interests
of the Partners whose Representatives are entitled to vote on such action (other
than those required to abstain pursuant to the terms of the Partnership
Agreement) (a "Required Majority Vote"). As a result, subject to certain
exceptions and based on TCI Telephony's current 30% voting Percentage Interest,
no action may be taken by the Partnership Board without the consent of TCI
Telephony's Representative (other than any action with respect to a matter with
respect to which the TCI Telephony's Representative is required to abstain
pursuant to the terms of the Partnership Agreement). The unanimous vote of the
Partnership Board is required for specified matters including, but not limited
to, admission of new Partners or equity holders, actions that would result in
voluntary bankruptcy or the dissolution of Sprint PCS or any subsidiary,
approval of transactions which would subject Sprint PCS to certain restrictions
relating to FCC regulatory oversight, actions relating to the incurrence of
indebtedness that is recourse to the Partners, certain acquisitions and
dispositions of assets and the approval of a request for withdrawal by a general
partner.
The unanimous consent of all of the Partners (other than those required to
abstain pursuant to the terms of the Partnership Agreement) is required for the
engagement by Sprint PCS in businesses outside those specified in the
Partnership Agreement or the conducting of business by Sprint PCS or its
subsidiaries in the Philadelphia MTA, the loan or advancement by Sprint PCS or
any subsidiary of funds to, or the guarantee of any obligations of, a Partner or
any affiliate thereof, the making of any non-pro rata cash or in-kind
distributions to a Partner other than in accordance with the terms of the
Partnership Agreement, the approval of, amendment, modification or supplement
to, procedures relating to the winding up of the affairs of Sprint PCS and,
subject to certain exceptions, the incurrence of any debt for loans made by a
Partner or affiliate thereof and any amendment, modification or supplement to
the Partnership Agreement. If any such action is not so approved solely due to
the failure of one or more limited Partners who is not entitled to
representation on the Partnership Board to consent, the Partnership Agreement
provides means by which the consenting Partners may purchase all of such
non-consenting Partner's interest.
COMPETITIVE ACTIVITIES
Subject to certain exceptions, the Partnership Agreement restricts any
Partner and its controlled affiliates from bidding on, acquiring or, directly or
indirectly, owning, managing, operating, joining, controlling or financing, or
participating in the management, operation, control or financing of, or being
connected as a principal, agent, representative, consultant, beneficial owner of
an interest in any person or entity, or otherwise with, or use or permit its
name to be used in connection with, any business that engages in the bidding for
or acquisition of any Wireless Business (as defined in the Partnership
Agreement) license or engages in any Wireless Business or provides, offers,
promotes or brands wireless communications services that use radio spectrum for
cellular, PCS, paging or other voice or data wireless services.
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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-California,
filed with the SEC a registration statement pursuant to which it completed an
underwritten public offering 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.
TELEPORT
The Telephony Group's wireline telephony activities would consist primarily
of its investment 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(SM)" by providing high quality, integrated local telecommunications
services, primarily over fiber optic digital networks, to meet the voice, data,
and video transmission needs of its customers. TCG's customers are principally
telecommunications-intensive businesses, long distance carriers and resellers,
and wireless communications companies. TCG offers these customers what it
believes to be technologically advanced local telecommunications services, as
well as superior customer service, flexible pricing and vendor and route
diversity. While Teleport's carrier business has continued to grow, in 1995 end
user customers accounted for approximately 62% of Teleport's revenues on a
historical basis. During 1995, Teleport's top 10 customers accounted for
approximately 57% of TCG's total pro forma revenues (after giving effect to the
restructuring of Teleport's operations in connection with its initial public
offering in June 1996 (the "TCG Reorganization")). AT&T Corp. ("AT&T") and
Sprint each accounted for more than 10% of such revenues, and no customer
accounted for 15% or more of such revenues.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. Teleport currently operates high capacity
state-of-the-art digital networks in 53 metropolitan markets, including 17 of
the 20 largest metropolitan areas. Teleport operates networks in 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
and Omaha, and is developing networks in Atlanta, Birmingham, Charlotte,
Chattanooga, Cincinnati, Columbus (Ohio), Knoxville, Minneapolis/St. Paul,
Nashville, Orlando, Sacramento and Tampa. TCG has also agreed to acquire the
remaining direct and indirect equity interests in Eastern TeleLogic Corporation
("ETC"), a CLEC in Philadelphia and in neighboring Camden, New Jersey and
Wilmington, Delaware. As of September 30, 1996, Teleport's networks spanned over
6,250 route miles, contained over 316,000 fiber miles and served approximately
6,800 buildings.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a pro
forma basis after giving effect to the TCG Reorganization, Teleport's revenues
were approximately $184.9 million for 1995 and approximately $196 million for
the nine months ended September 30, 1996, substantially all of which were
derived from the provision of local telecommunications services.
TCG estimates that total revenues from the local telecommunications market
in the United States were approximately $96 billion in 1995, based on 1988-1994
FCC statistics. In the past, CAPs, including Teleport, were limited to serving
only the dedicated services portion of this market, which TCG estimates (based
on such statistics) was approximately $5 billion in 1995, whereas the local
switched services portion of this market for business customers is estimated to
have been approximately $55 billion. Teleport has expanded into the switched
services market in a number of states over the last five years by constructing
switched networks
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and obtaining the necessary regulatory authorizations and interconnection
arrangements. With the passage of the Telecommunications Act of 1996 (the "1996
Act"), Teleport believes that it is well positioned to address a significantly
larger portion of the local telecommunications market and to improve its
operating margins in the switched and dedicated services markets by expanding
its networks, installing additional high capacity digital switches and offering
new products and services.
TCI Telephony currently owns 48,779,388 shares of Class B Common Stock of
Teleport ("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 Class A Common Stock
of Teleport ("Teleport Class A Stock"). TCI Telephony also owns an additional
1,011,528 shares of Teleport Class A Stock. Such shares of Teleport Class B
Stock and Teleport Class A Stock in the aggregate represent approximately 31.1%
of the outstanding common stock of Teleport and approximately 36.4% of the
aggregate voting power of such securities. In addition, subsidiaries of Cox,
Comcast and Continental Cablevision, Inc. ("Continental" and, collectively with
TCI, Cox and Comcast, the "Cable Stockholders") own shares of Teleport Class B
Stock and Teleport Class A Stock representing approximately 24.4%, 16.0% and
11.1%, respectively, of the outstanding common stock of Teleport (representing
approximately 29.1%, 19.1% and 13.3%, respectively, of the aggregate voting
power of such securities). Such amounts do not reflect the 2,757,083 shares of
Teleport Class A Stock that are to be issued in connection with the acquisition
by Teleport of Comcast's indirect equity interest in ETC or the shares to be
issued in connection with TCG's proposed acquisition of CERF Net Services, Inc.
TCG has benefited substantially from its relationships with the 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'S SERVICES
Teleport provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, dedicated services, high-speed switched data
services and video channel transmission services. Switched voice services
offered by Teleport use primarily high-capacity digital switches to route voice
transmissions anywhere on the public switched telephone network. TCG's dedicated
services, which include private line and special access services, use
high-capacity digital circuits to carry voice, data and video transmissions from
point-to-point in multiple configurations. Teleport provides its media industry
customers with point-to-point, broadcast-quality video channels for video
transmissions between two or more locations, including video link services to
all the major television networks as well as to other programmers. Teleport also
provides private network management and systems integration services for
businesses that require combinations of various dedicated and switched
telecommunications services.
Teleport uses the latest technologies and network architectures to develop
a highly reliable infrastructure for delivering high speed, quality digital
transmissions of voice, data and video telecommunications. The basic
transmission platform consists primarily of optical fiber equipped with high
capacity synchronous optical network ("SONET") equipment deployed in
self-healing rings. These SONET rings give TCG the capability of routine
customer traffic simultaneously in both directions around the ring thereby
eliminating loss of service in the event of a cable cut. Teleport extends SONET
rings or point to point links from rings to each customer's premises over its
own fiber optic cable, unbundled facilities obtained from ILECS, microwave
(including 38 GHz milliwave) transmission facilities and other technologies. TCG
also installs diverse building entry points where a customer's security needs
require such redundancy. TCG then places necessary customer dedicated or shared
electronic equipment at a location near or in the customer's premises to
terminate the link.
In February 1996, Teleport acquired a minority investment in BizTel
Communications, Inc., which, through a wholly owned subsidiary, Biztel, Inc.
("BizTel"), holds FCC licenses to provide telecommunications service utilizing
38 GHz digital transmission in 156 geographic areas, which have a population of
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approximately 175 million people, and including more than 80 of the largest 100
metropolitan markets and all markets where TCG operates. BizTel also has 102
licenses pending FCC approval in geographic areas which have a population of an
additional 44 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 January 13, 1997, TCG announced that it would acquire CERFnet Services
Inc., a provider of Internet-related services to business and corporate clients
(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 common stock.
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, Pacific Telesis Group, SBC
Communications Inc., U S WEST, Inc. ("US WEST") and GTE Corporation. Teleport
believes that ILECs generally benefit from their long-standing relationships
with customers, substantial technical and financial resources and federal and
state regulations that are likely to provide them with increased pricing
flexibility as competition increases. In addition, in most of the metropolitan
areas in which Teleport currently operates, at least one, and sometimes several,
other CAPs or CLECs offer substantially similar services and substantially
similar prices to those of Teleport. Other CLECS, CAPs, cable television
companies, electric utilities, long distance carriers, microwave carriers,
wireless telephone system operators and private networks built by large end
users may offer services similar to those offered by Teleport.
GOVERNANCE BY CABLE STOCKHOLDERS
Subsidiaries of the Cable Stockholders and Teleport are parties to a
stockholders agreement (the "Stockholders Agreement") which provides for, among
other things, the corporate governance of Teleport, certain registration rights
and certain transfer restrictions relating to sales and conversions of shares of
Teleport Class B Stock. Under the Stockholders Agreement, (i) ten of the
thirteen members of the Board of Directors are designated by the holders of the
Teleport Class B Stock and (ii) a holder of Teleport Class B Stock generally is
entitled to designate one director nominee for each 9% of the outstanding shares
of Teleport Class B Stock held by it and its affiliates. As a result of its
merger with US WEST, Continental currently does not have the right to designate
any of such directors under the terms of the Stockholders Agreement. TCI
Telephony, Cox, Comcast and Continental currently own 37.2%, 29.8%, 19.5% and
13.5%, respectively, of the outstanding Teleport Class B Stock. As a result, TCI
Telephony is currently entitled to designate four directors for election to the
Board of Directors of Teleport. In addition, the Stockholders Agreement provides
that the chief executive officer and two independent directors will continue to
be designated for election to Teleport's Board of Directors.
The Stockholders Agreement prohibits any transfer of Teleport Class B Stock
held by the parties thereto, unless expressly permitted under the terms thereof.
Parties to the Stockholders Agreement have certain rights of first refusal
thereunder with respect to proposed sales of the Teleport Class B Stock. In
addition, if any party desires to convert Teleport Class B Stock to Class A
Common Stock, it must first offer that stock to the other holders of Teleport
Class B Stock who are entitled to designate at least one director to the
Teleport Board of Directors. If such other holders do not elect to buy such
stock, then such stock can be converted to Teleport Class A Stock and sold by
the selling stockholder free of restrictions under the Stockholders Agreement.
In connection with its recent merger with Continental, US WEST has agreed
to the entry of a federal antitrust consent decree (the "Final Judgment") which,
among other things, provides for the divestiture of Continental's interest in
TCG. Under the terms of the proposal Final Judgment, which is currently pending
before the United States District Court for the District of Columbia, US WEST is
required to divest a portion of Continental's interest in TCG sufficient to
cause it to own less than 10% of the outstanding shares of TCG common stock on
or before June 30, 1997, and to divest any remaining portion of its interest in
TCG on or
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before December 31, 1998. Such divestiture will be subject to the right of first
offer provisions of the Stockholders Agreement described above.
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 Nasdaq
National 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.
POSSIBLE ACQUISITION OF RESTEL BUSINESS AND WTCI BUSINESS
RESTEL BUSINESS
Beyond its current investments, TCI Telephony has the right, but not the
obligation, to acquire TCI's developmental stage ResTel Business, which provides
wireline residential telephony services (i.e., conventional telephone service or
"POTS" and related services) via TCI's cable plant to residential and small
business customers in certain of the geographic areas served by TCI's cable
television systems. The right to acquire the ResTel Business may be exercised by
TCI Telephony in whole or in part (by geographic area) and at any time or from
time to time, as applicable, provided that TCI Telephony is at the time of
exercise a subsidiary of TCI and TCI is then conducting such business. TCI
Telephony is currently in the process of studying the customer acceptance and
economic attractiveness of the ResTel Business.
As part of its evaluation of the customer acceptance and economic
attractiveness of the residential telephony opportunity utilizing upgraded cable
plants, TCI launched service commercially in Hartford, Connecticut in October
1996 and in Arlington Heights, Illinois in January 1997. TCI is currently
testing the provision of residential telephony service over its cable plant in
Freemont, California and anticipates commercially launching the service there in
the first half of 1997. TCI currently expects that its residential telephony
service will be available to 260,000 homes in these three markets in the
aggregate by the end of the first half of 1997.
TCI is positioning its product as a high quality, yet lower cost
alternative to conventional telephone service provided by the ILEC. In addition,
TCI believes that the technology it is deploying in these markets can support
more reliable service offerings and more responsive customer service than that
of the ILEC. TCI currently expects that the residential telephony service, if
ultimately rolled out on a large scale basis, would be sold both directly to
residential and small business customers as well as indirectly, via wholesale
offerings, to other local market entrants.
The cost per subscriber of the residential telephony business is directly
impacted by the penetration rate achieved in a particular market (with the
penetration rate being the percentage that the number of subscribers to the
service in such market represents of the households technically capable of
subscribing to the service). Therefore, a key determinant of whether a
residential strategy is deployed will be TCI's evaluation of achievable
penetration rate levels.
The method of determining the purchase price for the ResTel Business, and
the arrangements between the Telephony Group and the TCI Group for the use by
TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined. In making such determinations, the Board
will consider, among other things, the TCI Group's aggregate investment
(historically and through any upgrade for two-way service) in the cable plant
that TCI Telephony would use to conduct the ResTel Business, the use of such
plant by TCI's various Groups or subsidiaries (e.g., for cable television,
telephony and Internet services), including the use by the Telephony Group of
the underlying plant for the ResTel Business and the use by the TCI Group of the
upgraded plant for other two-way services (such as Internet services and, if
developed in the future, interactive television services), and the ongoing costs
to maintain the
III-10
<PAGE> 137
plant. The purchase price and other arrangements between the Groups determined
by the Board of Directors may or may not reflect the terms and conditions that
either Group might have obtained in an arms'-length negotiation with a third
party. It is currently anticipated that if TCI Telephony exercises its right to
acquire the ResTel Business, it will enter into a long-term agreement with TCI
for the use of the cable plant via which it would conduct the ResTel Business
and for the payment by TCI Telephony of an allocated share of the costs to
maintain such plant. The portion of TCI's investment in the plant that the Board
determines to allocate to the Telephony Group may be included in the purchase
price for the ResTel Business or as a usage fee pursuant to such long-term
agreement.
If TCI Telephony exercises its right to acquire the ResTel Business in
whole or in part, payment of the purchase price may be in funds generated by the
Telephony Group (whether through external financings, future operations or sales
of assets), in funds borrowed from TCI or otherwise through the issuance of debt
or preferred equity securities by TCI Telephony to TCI or other potential
financing opportunities, provided, that the Board of Directors has determined
that the payment of such purchase price will not be made through an increase in
the Inter-Group Interest of the TCI Group in the Telephony Group. Whether or not
TCI Telephony will exercise its rights to acquire the ResTel Business (in whole
or in part) will depend upon a number of factors, including the penetration
rates for the service in the geographic area or areas in which the service has
been commercially launched, the cost of providing the service at the penetration
rate achieved in that area, the price to be paid by TCI Telephony to acquire
such business from the TCI Group and pursuant to its arrangements with the TCI
Group regarding the use of the cable plant, and the ability of TCI Telephony to
fund the continued development and ongoing operation of the ResTel Business in
that area.
WTCI BUSINESS
TCI Telephony also has the right to acquire TCI's interests in the
business, currently being conducted by TCI's indirect subsidiary, WTCI, of
providing long-distance transport of video, voice and data traffic and other
telecommunications services primarily to inter-exchange carriers on a wholesale
basis using a digital broadband microwave network located throughout a 14-state
region in the western United States. WTCI's gross revenues for the year ended
December 31, 1995 of approximately $32 million included $24 million attributable
to wholesale carrier revenues. For the nine months ended September 30, 1996,
WTCI's gross revenues of approximately $24 million included approximately $19
million attributable to wholesale carrier revenues. Such right may be exercised
at any time, provided that TCI Telephony is then a subsidiary of TCI and TCI is
then conducting such business, at a price based on the fair market value of such
business (as determined by the Board). With regard to the WTCI Business, the
factors which may affect whether TCI Telephony will exercise its acquisition
right include the costs to acquire and operate the business and TCI Telephony's
ability to fund such costs.
GOVERNMENT REGULATION
REGULATION OF PCS AND OTHER WIRELESS ACTIVITIES
PCS licensees are subject to regulation at the federal and, in certain
respects, at the state and local level. The FCC regulates the licensing,
construction, operation, acquisition and interconnection arrangements of
wireless telecommunications systems in the United States under the
Communications Act of 1934, as amended by the 1996 Act (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) impose fines and
forfeitures for violations of any of the FCC's rules and (vi) regulate the
technical standards of PCS networks.
The FCC has established service areas for PCS throughout the United States
and its possessions and territories based upon the Rand McNally market
definition of 51 MTAs and 493 smaller BTAs. At least two BTAs are contained
within each MTA. The FCC has allocated 120 MHz of radio spectrum in the 1850 to
1990 MHz band, divided into six separate spectrum blocks, for licensed broadband
PCS services. The A and
III-11
<PAGE> 138
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. An affiliate of Sprint participated in the FCC's D and E
Block auctions and was the high bidder for licenses in approximately 139 BTSs
where Sprint PCS does not currently have license coverage.
In November 1996, the FCC proposed to create a new wireless communications
service in the 2.3 GHz band that would allow licensees to provide a broad range
of wireless services, potentially including PCS services. The FCC proposes to
award these licenses through competitive bidding. The FCC is currently in the
process of receiving and reviewing comments in response to its proposal.
PCS systems must comply with certain FCC and Federal Aviation
Administration 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.
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 will license separately these
microwave facilities and regulate the technical parameters and service
requirements of these facilities.
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, as amended by the 1996 Act. In particular,
state and local governments can manage public rights of way and require
compensation for the use of such rights of way by telecommunications carriers,
including PCS providers, so long as the compensation is fair and reasonable,
imposed on a competitively neutral and non-discriminatory basis, and
publicly-disclosed by the governmental entity. States and localities cannot
regulate the placement of wireless facilities so as to prohibit the provision of
wireless services or to discriminate among providers of such services. In
addition, so long as a wireless system complies with the FCC's rules, the 1996
Act prohibits states and localities from using environmental effects as a basis
to regulate the placement, construction or operation of wireless facilities.
WIRELINE TELEPHONY ACTIVITIES
The wireline telephony activities of Teleport (and those of the other
entities in which the Telephony Group has investments) are subject to regulation
at the federal, state, and local level. Nationally, the recent trend has been
for federal and state legislators and regulators to permit and promote
additional competition in the local telecommunications industry. 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. In general, the regulatory framework applicable to the Company's
ResTel Business is substantially similar to that applicable to Teleport.
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
However, states retain jurisdiction under the 1996 Act to adopt regulations
necessary to preserve universal service, protect public safety and welfare,
ensure the continued quality of telecommunications services and safeguard the
rights of consumers. States also are responsible for mediating and arbitrating
interconnection arrangements between new entrants (CLECs) and established
telephone
III-12
<PAGE> 139
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. Nondominant carriers, such as TCG, were required to file federal
tariffs for interstate long distance and access services and periodic reports
with the FCC concerning their interstate circuits and deployment of network
facilities. As a result of recent FCC rulings, the reporting requirements for
non-dominant domestic interstate carriers have been eliminated, tariff
obligations for domestic interstate, interexchange services offered by TCG have
been lifted, and all such tariffs must be canceled by September 22, 1997. The
tariff obligation remains applicable to any TCG interstate access or
international long distance services. TCG must offer its interstate services on
a non-discriminatory basis, at just and reasonable rates and subject to the
complaint provisions of the Communications Act. TCG is not subject to rate of
return or price cap regulation by the FCC and may install and operate digital
facilities for the transmission of interstate communications without prior FCC
authorization. Under the 1996 Act, TCG has additional federal regulatory
obligations when it provides local exchange service in a market.
In addition, most state public utility commissions require TCG and other
carriers that wish to provide local and other jurisdictionally intrastate common
carrier services to be authorized to provide such services. TCG's operating
subsidiaries and affiliates are authorized as common carriers in a number of
states. The authority held by TCG's subsidiaries and affiliates varies in the
scope of the intrastate services permitted. TCG has filed or expects to file
applications for authority to provide local exchange service in all of its
markets in which it does not have such authority. TCG typically is not subject
to price regulation or to rate of return regulation for its intrastate services.
In most states, TCG is required to file tariffs setting forth the terms,
conditions and prices for its intrastate services. In some jurisdictions, the
tariff can list a rate range or set prices for intrastate services. TCG may be
subject to additional regulatory burdens in some states, such as quality of
service requirements and universal service contributions. State public utility
commissions also are actively involved in the mediation and arbitration of
disputes between ILECs and TCG and other CLECs concerning local interconnection
and access arrangements.
Under the 1996 Act, state and local governments may manage public rights of
way and require compensation for their use, so long as such fees are fair and
reasonable, applied on a competitively neutral and non-discriminatory basis, and
publicly disclosed by the relevant governmental entity. TCG also may be required
to obtain from municipal authorities street opening and construction permits and
other rights of way to install and expand its digital networks in certain
cities. In some cities, TCG's affiliates or subcontractors may already possess
the requisite authorizations to construct or expand TCG's networks.
III-13
<PAGE> 140
ANNEX IV
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of the
Inter-Group Interest of the TCI Group in the Telephony Group and the application
of certain terms of the Telephony Group Stock Proposal based on the assumptions
set forth herein and using 825 million shares as the number of authorized shares
of Telephony Group Common Stock, 100 million shares as the initial Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest and 10
million shares as the number of shares of Series A Telephony Group Common Stock
sold in an initial public offering (the "Offering"), with the proceeds of such
sale being credited entirely to the Telephony Group, as diagramed below. Unless
otherwise specified, each illustration below should be read independently as if
none of the other transactions illustrated in this Annex IV had occurred. Actual
calculations may be slightly different due to rounding. The following
illustrations are not intended to be complete and are qualified in their
entirety by the more detailed information contained in the Proxy Statement and
the other Annexes thereto. Capitalized terms used herein have the respective
meanings ascribed to them in the Proxy Statement. See Annex I -- Index of
Certain Defined Terms.
<TABLE>
<CAPTION>
BEFORE PROPOSED AFTER PROPOSED
INITIAL PUBLIC OFFERING INITIAL PUBLIC OFFERING
----------------------- -----------------------
<S> <C>
100 million Number of Shares Issuable 100 million Number of Shares Issuable
with Respect to the Telephony Group with Respect to the Telephony Group
Inter-Group Interest Inter- Group Interest
725 million Available Shares 715 million Available Shares
10 million Outstanding Shares
</TABLE>
At any given time, the Telephony Group Outstanding Interest Fraction, which
represents the percentage interest in the equity value of the Company
attributable to the Telephony Group that is represented by the outstanding
shares of Telephony Group Common Stock, would be equal to:
Outstanding Shares of Telephony Group Common Stock
- --------------------------------------------------------------------------------
Outstanding Shares of Telephony Group Common Stock +
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest
The balance of the equity of the Telephony Group is represented by the TCI
Group's Inter-Group Interest in the Telephony Group and, at any given time, the
Telephony Group Inter-Group Interest Fraction, which represents the percentage
interest in the common stockholders' equity value of the Company attributable to
the Telephony Group that is attributed to the TCI Group, would be equal to:
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest
- --------------------------------------------------------------------------------
Outstanding Shares of Telephony Group Common Stock +
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest
The sum of the Telephony Group Outstanding Interest Fraction and the
Telephony Group Inter-Group Interest Fraction would always equal 100%.
INITIAL PUBLIC OFFERING
- The following illustration assumes the initial issuance of 10 million
shares of Series A Telephony Group Common Stock in the Offering. The
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest would be 100 million shares immediately following the Offering.
As a result, the Telephony Group Inter-Group Interest Fraction would be
90.9%, calculated as follows:
100 million
-------------------------------
10 million + 100 million
IV-1
<PAGE> 141
The Telephony Group Outstanding Interest Fraction would accordingly
represent an interest of 9.1% in the Telephony Group.
- The shares sold in the Offering would be entitled to vote and in the
aggregate would represent an interest in the Telephony Group equal to the
Telephony Group Outstanding Interest Fraction. The Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest would
not be issued, outstanding or entitled to vote.
- Immediately after the Offering, the Company would have 815 million
authorized and unissued shares of Telephony Group Common Stock remaining
(825 million minus 10 million issued and outstanding) of which 715
million represent Available Shares. Authorized and unissued shares may be
issued without further action by shareholders and if issued from
Available Shares would result in the reduction of the percentage equity
interest of existing holders and may be issued at prices which could
dilute the equity interest of existing holders. The issuance and sale of
any of the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest, however, would not dilute the percentage equity
interest of a holder of Telephony Group Common Stock because the number
of shares that would be used in the denominator for such calculation
would remain the same after any such issue.
- In addition, with a Telephony Group Outstanding Interest Fraction of 9.1%
(and a Telephony Group Inter-Group Interest Fraction of 90.9%), the
financial statements of the Telephony Group would be charged in respect
of the Inter-Group Interest with an amount equal to 999% (representing
the ratio of the Telephony Group Inter-Group Interest Fraction (90.9%) to
the Telephony Group Outstanding Interest Fraction (9.1%)) of the
aggregate amount of any dividend or other distribution paid on the
outstanding shares of Telephony Group Common Stock (other than a dividend
or other distribution payable in shares of Telephony Group Common Stock
or in certain other securities.) If, for example, a dividend of $1 per
share were declared and paid on the 10 million shares of Telephony Group
Common Stock outstanding (an aggregate of $10 million), the TCI Group
would be credited with $99.9 million, and the Telephony Group would be
charged with that amount in addition to the $10 million dividend on the
outstanding shares of Telephony Group Common Stock (a total of $109.9
million). An example of the effects of a distribution of Telephony Group
Common Stock is set forth below under the caption "Telephony Group Common
Stock Dividends."
FUTURE OFFERINGS OF TELEPHONY GROUP COMMON STOCK
The following illustrations reflect the sale by the Company of 15 million
additional shares of Telephony Group Common Stock on a date on which the Number
of Shares Issuable with Respect to the Telephony Group Inter-Group Interest is
100 million.
OFFERINGS FOR THE TELEPHONY GROUP
Assume all such shares are identified as issued for the account of the
Telephony Group, with the net proceeds credited to the Telephony Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Newly issued shares......................................... 15 million
----------
Total shares issued and outstanding after offering.......... 25 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be changed by the issuance of any shares
of Telephony Group Common Stock for the account of the Telephony Group.
IV-2
<PAGE> 142
- The Telephony Group Outstanding Interest Fraction would be 20%,
calculated as follows:
25 million
-------------------------
25 million + 100 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 80% in the Telephony Group.
- The Company would have 800 million authorized and unissued shares of
Telephony Group Common Stock remaining (825 million minus 25 million
issued and outstanding).
OFFERING FOR THE TCI GROUP
Assume all of such shares are identified as issued for the account of the
TCI Group with respect to the Inter-Group Interest, with the net proceeds
credited to the TCI Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Newly issued shares......................................... 15 million
----------
Total shares issued and outstanding after offering.......... 25 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Inter-Group
Interest would be decreased by the number of shares of Telephony Group
Common Stock issued for the account of the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest prior to offering.............. 100 million
Shares issued in offering................................... 15 million
-----------
Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest after offering................. 85 million
===========
</TABLE>
- The Telephony Group Outstanding Interest Fraction would be 22.7%,
calculated as follows:
25 million
------------------------------
25 million + 85 million
The Telephony Inter-Group Interest Fraction would accordingly represent
an interest of 77.3% in the Telephony Group.
- The Company would have 800 million authorized and unissued shares of
Telephony Group Common Stock remaining (825 million minus 25 million
issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE DISTRIBUTION
If the Company were to issue any debt or preferred stock convertible into
shares of Telephony Group Common Stock, the Telephony Group Inter-Group Interest
Fraction and the Telephony Group Outstanding Interest Fraction would be
unchanged at the time of such issuance. If any shares of Telephony Group Common
Stock were issued upon conversion of such convertible security, however, then
the Telephony Inter-Group Interest Fraction and the Telephony Group Outstanding
Interest Fraction would be affected in a manner similar to that shown above
under "Offering for the Telephony Group," if such convertible security were
attributed to the Telephony Group, or under "Offering for the TCI Group," if
such convertible security were attributed to the TCI Group.
PURCHASES OF TELEPHONY GROUP COMMON STOCK
The following two illustrations reflect the purchase by the Company of 5
million shares of Telephony Group Common Stock, which are retired or otherwise
cease to be outstanding following their purchase. The illustrations assume that
there are 25 million shares outstanding prior to the purchase and that the
Number of
IV-3
<PAGE> 143
Shares Issuable with Respect to the Telephony Group Inter-Group Interest prior
to such purchase is 85 million.
PURCHASE WITH TELEPHONY GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the Telephony Group, with the Telephony Group being charged with
the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 25 million
Shares purchased............................................ 5 million
----------
Total shares issued and outstanding after purchase.......... 20 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be changed by the purchase of any shares
of Telephony Group Common Stock which are purchased with funds attributed
to the Telephony Group.
- The Telephony Group Outstanding Interest Fraction would be 19%,
calculated as follows:
20 million
------------------------
20 million + 85 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 81% in the Telephony Group.
- In this case, the TCI Group would be credited, and the Telephony Group
would be charged, with an amount equal to 426% (representing the ratio of
the Telephony Group Inter-Group Interest Fraction (81%) to the Telephony
Group Outstanding Interest Fraction (19%)) of the aggregate amount of any
dividend or other distribution paid on the outstanding shares of
Telephony Group Common Stock (other than a dividend or other distribution
payable in shares of Telephony Group Common Stock or certain other
securities).
- The Company would have 805 million authorized and unissued shares of
Telephony Group Common Stock (825 million minus 20 million issued and
outstanding).
PURCHASE WITH TCI GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TCI Group, with the TCI Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 25 million
Shares purchased............................................ 5 million
----------
Total shares issued and outstanding after purchase.......... 20 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would be increased by the number of shares of
Telephony Group Common Stock which are so purchased with funds attributed
to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest prior to purchase.............. 85 million
Shares purchased............................................ 5 million
----------
Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest after purchase................. 90 million
==========
</TABLE>
IV-4
<PAGE> 144
- The Telephony Group Outstanding Interest Fraction would be 18.2%
calculated as follows:
20 million
------------------------------
20 million + 90 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 81.8% in the Telephony Group.
- In this case, the TCI Group would be credited, and the Telephony Group
would be charged, with an amount equal to 449% (representing the ratio of
the Telephony Group Inter-Group Interest Fraction (81.8%) to the
Telephony Group Outstanding Interest Fraction (18.2%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of Telephony Group Common Stock (other than a dividend or other
distribution payable in shares of Telephony Group Common Stock or in
certain other securities).
- The Company would have 805 million authorized and unissued shares of
Telephony Group Common Stock (825 million minus 20 million issued and
outstanding).
TRANSFERS OF ASSETS BETWEEN THE TCI GROUP AND THE TELEPHONY GROUP
CONTRIBUTION OF ASSETS FROM THE TCI GROUP TO THE TELEPHONY GROUP
The following illustration reflects the contribution by the TCI Group to
the Telephony Group with respect to the Inter-Group Interest of $100 million of
assets attributed to the TCI Group on a date on which the Market Value of the
Telephony Group Common Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Newly issued shares......................................... 0
----------
Total shares issued and outstanding after contribution...... 10 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would be increased to reflect the contribution to
the Telephony Group of assets theretofore attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Inter-Group Interest prior to contribution................ 100 million
Adjustment to reflect contribution to the Telephony Group of
assets attributed to the TCI Group ($100 million divided
by $20)................................................... 5 million
-----------
Number of Shares Issuable with Respect to the Telephony
Inter-Group Interest after contribution................... 105 million
===========
</TABLE>
- The Telephony Group Outstanding Interest Fraction would be 8.7%,
calculated as follows:
10 million
-------------------------
10 million + 105 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 91.3% in the Telephony Group.
- In this case, the TCI Group would be credited, and the Telephony Group
would be charged, with an amount equal to 1049% (representing the ratio
of the Telephony Group Inter-Group Interest Fraction (91.3%) to the
Telephony Group Outstanding Interest Fraction (8.7%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of Telephony Group Common Stock (other than a dividend or other
distribution payable in shares of Telephony Group Common Stock or in
certain other securities).
IV-5
<PAGE> 145
- The Company would have 815 million authorized and unissued shares of
Telephony Group Common Stock (825 million minus 10 million issued and
outstanding).
TRANSFER OF ASSETS FROM THE TELEPHONY GROUP TO THE TCI GROUP
The following illustration reflects the transfer by the Telephony Group to
the TCI Group in reduction of the Inter-Group Interest of $100 million of assets
attributed to the Telephony Group on a date on which the Market Value of
Telephony Group Common Stock is $20 per share and the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest is 100 million.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Shares purchased............................................ 0
----------
Total shares issued and outstanding after transfer.......... 10 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would be decreased to reflect the contribution to
the TCI Group of assets theretofore attributed to the Telephony Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Group
Inter-Group Interest prior to transfer.................... 100 million
Adjustment to reflect transfer to the TCI Group of assets
attributed to the Telephony Group......................... 5 million
-----------
Number of Shares Issuable with Respect to the Telephony
Group
Inter-Group Interest after transfer....................... 95 million
===========
</TABLE>
The Telephony Group will not make transfers of assets to the TCI Group in
reduction of the Inter-Group Interest if the effect would be to reduce
the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest to less than zero. The Telephony Group cannot have
an interest in the TCI Group corresponding to the Inter-Group Interest.
- The Telephony Group Outstanding Interest Fraction would be 9.5%,
calculated as follows:
10 million
------------------------
10 million + 95 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 90.5% in the Telephony Group.
- In this case, the TCI Group would be credited, and the Telephony Group
would be charged, with an amount equal to 953% (representing the ratio of
the Telephony Group Inter-Group Interest Fraction (90.5%) to the
Telephony Group Outstanding Interest Fraction (9.5%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of Telephony Group Common Stock (other than a dividend or other
distribution payable in shares of Telephony Group Common Stock or in
certain other securities).
- The Company would have 815 million authorized and unissued shares of
Telephony Group Common Stock (825 million minus 10 million issued and
outstanding).
IV-6
<PAGE> 146
TELEPHONY GROUP COMMON STOCK DIVIDENDS
The following illustrations reflects dividends of Telephony Group Common
Stock on outstanding Telephony Group Common Stock and outstanding TCI Group
Common Stock, respectively, on a date on which the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest is 100 million.
TELEPHONY GROUP COMMON STOCK DIVIDEND ON TELEPHONY GROUP COMMON STOCK
Assume the Company declares a dividend of one-half of one share of
Telephony Group Common Stock on each outstanding share of Telephony Group Common
Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Newly issued shares......................................... 5 million
----------
Total shares issued and outstanding after dividend.......... 15 million
==========
</TABLE>
- The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would be increased proportionately to reflect the
stock dividend payable in shares of Telephony Group Common Stock to
holders of Telephony Group Common Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Group
Inter-Group Interest prior to dividend.................... 100 million
Adjustment to reflect dividend of shares on outstanding
shares of Telephony Group Common Stock.................... 50 million
-----------
Number of Shares Issuable with Respect to the Telephony
Group
Inter-Group Interest after dividend....................... 150 million
===========
</TABLE>
- The Telephony Group Outstanding Interest Fraction would be 9.1%,
calculated as follows:
15 million
------------------------
15 million + 150 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 90.9% in the Telephony Group. The Telephony
Group Outstanding Interest Fraction and the Telephony Group Inter-Group
Interest Fraction would be unchanged from the corresponding percentages
prior to the dividend.
- The Company would have 810 million authorized and unissued shares of
Telephony Group Common Stock remaining (825 million minus 15 million
issued and outstanding.)
TELEPHONY GROUP COMMON STOCK DIVIDEND ON TCI GROUP COMMON STOCK
Assume an aggregate of 800 million shares of TCI Group Common Stock are
outstanding and the Company declares a dividend of one-tenth of one share of
Telephony Group Common Stock on each outstanding share of TCI Group Common
Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 10 million
Newly issued shares......................................... 80 million
----------
Total shares issued and outstanding after dividend.......... 90 million
==========
</TABLE>
- Any dividend of shares of Telephony Group Common Stock on the outstanding
shares of TCI Group Common Stock will be treated as a dividend payable
from the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest. As a result, the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest would decrease by the
number of shares of
IV-7
<PAGE> 147
Telephony Group Common Stock distributed on the outstanding shares of TCI
Group Common Stock as a dividend.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony
Group
Inter-Group Interest prior to dividend.................... 100 million
Shares distributed on outstanding shares of TCI Group Common
Stock..................................................... 80 million
-----------
Number of Shares Issuable with Respect to the Telephony
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 Telephony Group Common Stock exceeding the
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest.
- The Telephony Group Outstanding Interest Fraction would be 81.8%,
calculated as follows:
90 million
------------------------
90 million + 20 million
The Telephony Group Inter-Group Interest Fraction would accordingly
represent an interest of 18.2% in the Telephony Group.
- The Company would have 735 million authorized and unissued shares of
Telephony Group Common Stock remaining (825 million minus 90 million
issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the Telephony Group
Common Stock at the option of the Company, (b) mandatory dividend, redemption or
conversion of the Telephony Group Common Stock following the Disposition of all
or substantially all of the properties and assets of the Telephony Group and (c)
redemption of all of the Telephony Group Common Stock in exchange for stock of a
subsidiary holding all the assets and liabilities of the Telephony Group, in
each case assuming that (i) the number of outstanding shares of Telephony Group
Common Stock is 10 million and (ii) the Number of Shares Issuable with Respect
to the Telephony Group Inter-Group Interest is 100 million.
CONVERSION AT THE OPTION OF THE COMPANY
Assume that the Company elects to convert the Telephony Group Common Stock
into TCI Group Common Stock at the Telephony Group Optional Conversion Ratio,
the Telephony Group Private Market Value is determined to be $2.2 billion and
the number of shares of Telephony Group Common Stock deemed to be issued upon
the conversion, exercise or exchange of Convertible Securities that are
convertible into or exercisable or exchangeable for Telephony Group Common Stock
is 10 million.
- The Adjusted Outstanding Shares of Telephony Group Common Stock would be
120 million (representing the sum of (i) the number of outstanding shares
of Telephony Group Common Stock, (ii) the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest, and (iii) the number
of shares of Telephony Group Common Stock deemed to be issued upon the
conversion, exercise or exchange of Convertible Securities convertible
into or exercisable or exchangeable for Telephony Group Common Stock),
calculated as follows:
10 million + 100 million + 10 million
- The Telephony Group Common Stock Per Share Value would be $18.33
(representing the quotient of the Telephony Group Private Market Value
($2.2 billion) and the Adjusted Outstanding Shares of Telephony Group
Common Stock (120 million)).
- In this case, assuming that the average Market Value of the Series A TCI
Group Common Stock for the 20-Trading Day period ending on the Trading
Day preceding the date as of which the Telephony
IV-8
<PAGE> 148
Group Private Market Value is determined is $15, the Telephony Group
Optional Conversion Ratio would be 1.222 (representing the quotient of
the Telephony Group Common Stock Per Share Value ($18.33) and such
average Market Value of the Series A TCI Group Common Stock ($15)), and
each outstanding share of Telephony Group Common would be converted into
1.222 shares of TCI Group Common Stock.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF TELEPHONY GROUP COMMON STOCK
Assume that a Disposition of all (not merely substantially all) of the
properties and assets of the Telephony Group occurs and the Net Proceeds from
such Disposition equal $2.2 billion.
- If the Company elected to redeem all outstanding shares of Telephony
Group Common Stock, the aggregate redemption price would be $200 million
(representing the product of the Telephony Group Outstanding Interest
Fraction and the Net Proceeds of such Disposition), calculated as
follows:
<TABLE>
<C> <C>
10 million
------------------------- X $2.2 billion
10 million + 100 million
</TABLE>
In this case, each outstanding share of Telephony Group Common Stock
would be redeemed in exchange for $20 per share (representing the
quotient of the aggregate redemption price ($200 million) and the number
of outstanding shares of Telephony Group Common Stock (10 million)).
- If the Company elected to convert the Telephony Group Common Stock into
TCI Group Common Stock, assuming that the Market Value of one share of
Series A Telephony Group Common Stock on each Trading Day during the
ten-Trading Day period beginning on the 16th Trading Day following the
consummation of such Disposition is $20 and the Market Value of one share
of Series A TCI Group Common Stock on each Trading Day during such period
is $15, the Telephony Group Common Stock would be converted into TCI
Group Common Stock at a ratio of 1.467 (representing 110% of the average
daily ratio during such period of the Market Value of one share of Series
A Telephony Group Common Stock to the Market Value of one share of Series
A TCI Group Common Stock) shares of TCI Group Common Stock for each share
of Telephony Group Common Stock.
Assume that a Disposition of substantially all (but not all) of the
properties and assets of the Telephony Group occurs and the Telephony Group Net
Proceeds from such Disposition equal $2.2 billion.
- If the Company elected to pay a dividend to the holders of Telephony
Group Common Stock, the aggregate amount of such dividend would be $200
million (representing the product of the Telephony Group Outstanding
Interest Fraction and the Telephony Group Net Proceeds of such
Disposition), calculated as follows:
<TABLE>
<C> <C>
10 million
------------------------- X $2.2 billion
10 million + 100 million
</TABLE>
In this case, the TCI Group would be credited, and the Telephony Group
would be charged, with $2 billion, an amount equal to 999% (representing
the ratio of the Telephony Group Inter-Group Interest Fraction (90.9%)
and the Telephony Group Outstanding Interest Fraction (9.1%)) of the
aggregate amount of such dividend.
- If the Company elected to redeem shares of Telephony Group Common Stock,
the aggregate redemption price would be $200 million (representing the
product of the Telephony Group Outstanding Interest Fraction and the
Telephony Group Net Proceeds of such Disposition), calculated as follows:
<TABLE>
<C> <C>
10 million
------------------------- X $2.2 billion
10 million + 100 million
</TABLE>
In this case, assuming that the average Market Value of one share of
Series A Telephony Group Common Stock for the ten-Trading Day period
beginning on the 16th Trading Day following the consummation of such
Disposition is $25, an aggregate of 8 million (equal to the quotient of
the
IV-9
<PAGE> 149
aggregate redemption price and such average Market Value) shares of
Telephony Group Common Stock would be redeemed in exchange for $25 per
share.
- If the Company elected to convert the Telephony Group Common Stock into
TCI Group Common Stock, assuming that the Market Value of one share of
Series A Telephony Group Common Stock on each Trading Day during the
ten-Trading Day period referred to in the preceding paragraph is $25 and
the Market Value of one share of Series A TCI Group Common Stock on each
Trading Day during such period is $15, the Telephony Group Common Stock
would be converted into TCI Group Common Stock at a ratio of 1.833
(representing 110% of the average daily ratio during such period of the
Market Value of one share of Series A Telephony Group Common Stock to the
Market Value of one share of Series A TCI Group Common Stock) shares of
TCI Group Common Stock for each share of Telephony Group Common Stock.
REDEMPTION IN EXCHANGE FOR STOCK OF TELEPHONY GROUP SUBSIDIARY
Assume that the Company elects to redeem all of the outstanding shares of
Telephony Group Common Stock in exchange for shares of common stock of the
Telephony Group Subsidiary and that the total number of outstanding shares of
common stock of the Telephony Group Subsidiary owned by the Company is 220
million.
- In this case, shares of Telephony Group Common Stock would be redeemed in
exchange for an aggregate number of shares of common stock of the
Telephony Group Subsidiary equal to 20 million (representing the product
of the Telephony Group Outstanding Interest Fraction and the number of
shares of common stock of the Telephony Group Subsidiary), calculated as
follows:
<TABLE>
<C> <C>
10 million
------------------------- X 220 million
10 million + 100 million
</TABLE>
In this case, each outstanding share of Telephony Group Common Stock
would be redeemed in exchange for 2 shares of common stock of the
Telephony Group Subsidiary, and the Company would retain 200 million
shares of common stock of the Telephony Group Subsidiary.
IV-10
<PAGE> 150
APPENDIX V
FINANCIAL INFORMATION
INDEX TO APPENDIX V
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Selected Historical and Pro Forma Financial Data............ V-2
Condensed Pro Forma Combined Financial Statements:
Tele-Communications, Inc.................................. V-5
"Telephony Group"......................................... V-11
Tele-Communications, Inc. and Subsidiaries:
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1995, 1994 and 1993....................... V-16
Independent Auditors' Report.............................. V-32
Consolidated Balance Sheets, December 31, 1995 and 1994... V-33
Consolidated Statements of Operations, Years ended
December 31, 1995, 1994 and 1993....................... V-34
Consolidated Statements of Stockholders' Equity, Years
ended December 31, 1995,
1994, 1993............................................. V-35
Consolidated Statements of Cash Flows, Years ended
December 31, 1995, 1994 and
1993................................................... V-37
Notes to Consolidated Financial Statements, December 31,
1995, 1994 and 1993.................................... V-38
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Nine months ended
September 30, 1996 and 1995............................ V-73
Consolidated Balance Sheets, September 30, 1996 and
December 31, 1995 (unaudited).......................... V-80
Consolidated Statements of Operations, Three month and
nine month periods ended September 30, 1996 and 1995
(unaudited)............................................ V-82
Consolidated Statement of Stockholders' Equity, Nine
months ended September 30, 1996 (unaudited)............ V-83
Consolidated Statements of Cash Flows, Nine months ended
September 30, 1996 and
1995 (unaudited)....................................... V-84
Notes to Consolidated Financial Statements, September 30,
1996 (unaudited)....................................... V-85
"Telephony Group":
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1995, 1994 and 1993....................... V-97
Independent Auditors' Report.............................. V-106
Combined Balance Sheets, December 31, 1995 and 1994....... V-107
Combined Statements of Operations, Years ended December
31, 1995, 1994 and 1993................................ V-108
Combined Statements of Combined Equity, Years ended
December 31, 1995, 1994, 1993.......................... V-109
Combined Statements of Cash Flows, Years ended December
31, 1995, 1994 and 1993................................ V-110
Notes to Combined Financial Statements, December 31, 1995,
1994 and 1993.......................................... V-111
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Nine months ended
September 30, 1996 and 1995............................ V-125
Combined Balance Sheets, September 30, 1996 and December
31, 1995 (unaudited)................................... V-133
Combined Statements of Operations, Three month and nine
month periods ended September 30, 1996 and 1995
(unaudited)............................................ V-134
Combined Statement of Combined Equity, Nine months ended
September 30, 1996 (unaudited)......................... V-135
Combined Statements of Cash Flows, Nine months ended
September 30, 1996 and 1995 (unaudited)................ V-136
Notes to Combined Financial Statements, September 30, 1996
(unaudited)............................................ V-137
</TABLE>
V-1
<PAGE> 151
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
TELEPHONY GROUP
The following table supplementally sets forth selected historical combined
income statement data for the Telephony Group for each of the three fiscal years
in the period ended December 31, 1995 and for the nine month periods ended
September 30, 1996 and 1995. Additionally, the following table supplementally
sets forth selected historical combined balance sheet data for the Telephony
Group as of September 30, 1996, December 31, 1995 and December 31, 1994. The
selected financial data as of and for the nine months ended September 30, 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 Telephony Group as of and for the nine months ended
September 30, 1996. The table sets forth pro forma combined statement of
operations and balance sheet data after giving effect to the conversion by TCI
Group of $500 million of its interest in Telephony Group into a preferred stock
due from Telephony Group. Additionally, the pro forma loss attributable to
common shareholders of the Telephony Group assumes the sale of 10% of the equity
value of the Telephony Group. 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 statements
and notes thereto of the Telephony Group and with the consolidated financial
statements and notes thereto of the Company included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- --------------------------------------
PRO PRO
FORMA FORMA
1996 1996 1995 1995 1995 1994 1993
--------- ------- ------- --------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Operating Loss...................................... $ (464) (464) (233) (477) (477) (50) --
Share of losses of PCS Ventures..................... $(78,358) (78,358) (10,841) (33,890) (33,890) (992) --
Share of losses of TCG.............................. $(31,591) (31,591) (19,884) (29,975) (29,975) (19,366) (8,182)
Net loss............................................ $(63,534) (63,534) (18,250) (38,954) (38,954) (11,771) (4,768)
Dividends on redeemable preferred stock (1)......... (22,500) -- -- (30,000) -- -- --
-------- ------- ------- ------- ------- ------- ------
Loss attributable to Telephony Group common
shareholders and TCI Group
Inter-Group Interest.............................. $(86,034) (63,534) (18,250) (68,954) (38,954) (11,771) (4,768)
======== ======= ======= ======= ======= ======= ======
Pro forma loss attributable to Telephony Group
common shareholders(4)............................ $ (8,603) -- -- (6,895) -- -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------------- -----------------
PRO FORMA
1996 1996 1995 1994
---------- ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Summary Balance Sheet Data:
Investment in PCS Ventures................................ $ 816,355 816,355 689,062 37,930
Investment in TCG......................................... $ 294,148 294,148 244,012 197,424
Total assets.............................................. $1,119,545 1,119,545 943,653 240,334
Redeemable preferred stock (2)............................ $ 500,000 -- -- --
Combined equity (2 and 3)................................. $ 598,294 1,098,294 943,653 240,334
</TABLE>
- ---------------
(1) Reflects dividends on the redeemable preferred stock discussed in note 2
below.
(2) Reflects the conversion, on December 1, 1996, by the TCI Group of $500
million of its interest in the Telephony Group into a 6% cumulative
compounding redeemable preferred stock of TCI Telephony which is mandatorily
redeemable by TCI Telephony on December 1, 2011 (the "TCI Telephony
Preferred Stock").
(3) The TCI Group has a contractual right to use up to $500 million of tax
benefits generated by the Telephony Group without charge from the Telephony
Group. Such right can be satisfied only through and to the extent of future
income tax benefits generated by the Telephony Group.
(4) Pro forma loss attributable to common shareholders of Telephony Group
reflects the assumed sale by the Company of 10% of the equity value of the
Telephony Group.
V-2
<PAGE> 152
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, 1995 and the nine
month periods ended September 30, 1996 and 1995. The table also sets forth
selected unaudited pro forma balance sheet data for the Company as of September
30, 1996, giving pro forma effect to the Company's distribution to the holders
of the outstanding TCI Group Common Stock of TCI Satellite Entertainment, Inc.
(the "SatCo Spin-off") as if such transaction had occurred as of September 30,
1996, and selected unaudited pro forma statement of operations data for the year
ended December 31, 1995, giving pro forma effect to 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 acquisition of a 51% ownership
interest in Cablevision S.A. and certain affiliated companies (the "Cablevision
Acquisition") and selected unaudited pro forma statement of operations data for
the nine months ended September 30, 1996, giving pro forma effect to the SatCo
Spin-Off and the VII Cable Acquisition as if the same had occurred prior to
January 1, 1995. The selected financial data as of and for the nine months ended
September 30, 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 and for the nine months
ended September 30, 1996. Additionally, the pro forma losses attributable to the
TCI Group common shareholders and to the Telephony Group common shareholders
assumes the conversion by TCI Group of $500 million of its interest in Telephony
Group into the TCI Telephony Preferred Stock and further assumes the sale by the
Company of 10% of the equity value of the Telephony Group. 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 Cablevision Acquisition been effective at or prior
to such assumed dates, or of the future results of operations of TCI. 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 Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------
PRO PRO
FORMA FORMA
1996 1996 1995 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue...................................... $6,081 6,089 4,888 7,134 6,851 4,936 4,153 3,574 3,214
Operating, selling, general and
administrative expenses.................... $4,278 4,383 3,378 4,964 4,865 3,138 2,295 1,937 1,784
Depreciation and amortization................ $1,129 1,150 985 1,445 1,372 1,108 911 764 756
Operating income............................. $ 690 572 491 653 542 788 916 864 674
Earnings (loss) from:
Continuing operations...................... $(424) (438) (107) (212) (171) 62 (5) 8 (77)
Discontinued operations.................... -- -- -- -- -- -- -- (15)
------ ------ ------ ------ ------ ------ ------ ------ ------
(424) (438) (107) (212) (171) 62 (5) (7) (96)
Dividend requirements on preferred stock..... (27) (27) (26) (34) (34) (8) (2) (15) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Earnings (loss) attributable to common
shareholders............................... $(451) (465) (133) (246) (205) 54 (7) (22) (96)
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings (loss) attributable to common
shareholders:
TCI Class A and Class B common stock....... $ -- -- (71) -- (71) 54 (7) (22) (96)
TCI Group Common Stock..................... (478) (501) (57) (212) (107) -- -- -- --
Liberty Media Group Common Stock........... 36 36 (5) (27) (27) -- -- -- --
Telephony Group Common Stock(1)............ (9) -- -- (7) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
$(451) (465) (133) (246) (205) 54 (7) (22) (96)
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
V-3
<PAGE> 153
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------
PRO PRO
FORMA FORMA
1996 1996 1995 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) -- (.11) .10 (.02) (.01) (.22)
TCI Group Series A and Series B common
stock.................................... $(.72) (.75) (.09) (.32) (.16) -- -- -- --
Liberty Media Group Series A and Series B
common stock............................. $ .22 .22 (.03) (.16) (.16) -- -- -- --
Primary weighted average common and common
equivalent shares outstanding:
TCI Class A and Class B common stock....... -- -- 648 -- 648 541 433 424 360
TCI Group Series A and Series B common
stock.................................... 665 665 656 656 656 -- -- -- --
Liberty Media Group Series A and Series B
common stock............................. 166 166 164 164 164 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------- -----------------------------------------------
PRO FORMA
1996 1996 1995 1994 1993 1992 1991
--------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net....................... $ 7,631 8,767 7,026 5,876 4,935 4,562 4,081
Franchise costs, net.............................. $15,137 15,137 12,230 9,444 9,197 9,300 8,104
Total assets...................................... $29,635 30,575 25,130 19,276 16,527 16,315 15,169
Total debt........................................ $15,118 15,118 13,211 11,162 9,900 10,285 9,455
Stockholders' equity.............................. $ 3,905 4,362 4,550 2,655 2,116 1,728 1,571
Shares outstanding (net of treasury shares):
Class A common stock............................ -- -- -- 491 403 382 370
Class B common stock............................ -- -- -- 85 47 48 49
TCI Group Series A common stock................. 584 584 572 -- -- -- --
TCI Group Series B common stock................. 85 85 85 -- -- -- --
Liberty Media Group Series A common stock....... 146 146 143 -- -- -- --
Liberty Media Group Series B common stock....... 21 21 21 -- -- -- --
</TABLE>
- ---------------
(1) Pro forma loss attributable to holders of Telephony Group Common Stock
assumes the sale of 10% of the equity value of the Telephony Group.
(2) Pro forma loss attributable to holders of TCI Group Common Stock assumes the
sale of 10% of the equity value of the Telephony Group and as such reflects
a reduction of 10% of TCI Group's share of losses of Telephony Group.
V-4
<PAGE> 154
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of TCI,
dated as of September 30, 1996, assumes that 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 1) had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI for the nine months ended September 30, 1996 assumes that the
Distribution, and the acquisition of all the common stock of a subsidiary of
Viacom, Inc. ("VII Cable") (the "VII Cable Acquisition") (see note 2), had
occurred as of January 1, 1995.
The following unaudited condensed pro forma combined statement of
operations of TCI for the year ended December 31, 1995 assumes that the
Distribution, the VII Cable Acquisition, and the acquisition of a 51% ownership
interest in Cablevision S.A. and certain affiliated companies (collectively
"Cablevision") (the "Cablevision Acquisition") (see note 3) had occurred as of
January 1, 1995.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Distribution, the VII
Cable Acquisition and the Cablevision Acquisition had occurred as of January 1,
1995. 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.
V-5
<PAGE> 155
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------
TCI SATELLITE TCI
HISTORICAL DISTRIBUTION(1) PRO FORMA
---------- --------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash, receivables and other current assets............... $ 1,264 (24) 1,240
Note receivable from Satellite........................... -- 250 250
Investment in affiliates and Turner Broadcasting System,
Inc., and related receivables.......................... 3,736 (30) 3,706
Property and equipment, net of accumulated
depreciation........................................... 8,767 (1,136) 7,631
Franchise costs, intangibles and other assets,
net of amortization.................................... 16,808 -- 16,808
------- ------ ------
$30,575 (940) 29,635
======= ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals.................................... $ 1,942 (460) 1,482
Debt..................................................... 15,118 -- 15,118
Deferred income taxes.................................... 5,731 (23) 5,708
Other liabilities........................................ 183 -- 183
------- ------ ------
Total liabilities.............................. 22,974 (483) 22,491
------- ------ ------
Minority interests....................................... 1,585 -- 1,585
Redeemable preferred stock............................... 654 -- 654
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debt securities of TCIC................... 1,000 -- 1,000
Stockholders' equity:
Preferred Stock........................................ -- -- --
TCI Group Series A common stock........................ 685 -- 685
TCI Group Series B common stock........................ 85 -- 85
Liberty Media Group Series A common stock.............. 146 -- 146
Liberty Media Group Series B common stock.............. 21 -- 21
Additional paid-in capital............................. 4,308 (457) 3,851
Cumulative foreign currency translation adjustment..... (12) -- (12)
Unrealized holding gains for available-for-sale
securities.......................................... 335 -- 335
Accumulated deficit.................................... (892) -- (892)
Treasury stock......................................... (314) -- (314)
------- ------ ------
4,362 (457) 3,905
------- ------ ------
$30,575 (940) 29,635
======= ====== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-6
<PAGE> 156
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------------
TCI SATELLITE VII CABLE PRO FORMA TCI
HISTORICAL DISTRIBUTION(1) HISTORICAL(2) ADJUSTMENTS(2) PRO FORMA
---------- --------------- ------------- -------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 6,089 (300) 293 (1)(4) 6,081
Operating, cost of sales, selling,
general and administrative expenses,
compensation relating to stock
appreciation rights................. (4,367) 294 (189) -- (4,262)
Depreciation and amortization......... (1,150) 87 (52) (14)(5) (1,129)
------- ---- ---- --- ------
Operating income.................... 572 81 52 (15) 690
Interest expense...................... (803) -- (31) (46)(9) (880)
Interest and dividend income.......... 42 19 2 -- 63
Share of losses of affiliates, net.... (308) 1 -- -- (307)
Other income (expense), net (101). -- 1 (18)(10) (118)
------- ---- ---- --- ------
Earnings (loss) before income
taxes............................. (598) 101 24 (79) (552)
Income tax benefit (expense).......... 160 (31) (13) 12(11) 128
------- ---- ---- --- ------
Net earnings (loss)................. (438) 70 11 (67) (424)
Dividend requirement on redeemable
preferred stocks.................... (27) -- -- -- (27)
------- ---- ---- --- ------
Net earnings (loss) attributable to
common stockholders............... $ (465) 70 11 (67) (451)
======= ==== ==== === ======
Primary earnings (loss) attributable
to common stockholders per common
and common equivalent share:
TCI Group Series A and Series B
common stock...................... $ (.75) (.72)(12)
======= ======
Liberty Media Group Series A and
Series B common stock............. $ .22 .22
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-7
<PAGE> 157
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------
TCI SATELLITE VII CABLE CABLEVISION PRO FORMA TCI
HISTORICAL DISTRIBUTION(1) HISTORICAL(2) HISTORICAL(3) ADJUSTMENTS(2)(3) PRO FORMA
---------- --------------- ------------- ------------- ----------------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenue...................... $ 6,851 (209) 442 52 (2)(4) 7,134
Operating, cost of sales,
selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring
charges.................... (4,937) 214 (279) (34) -- (5,036)
Depreciation and
amortization............... (1,372) 56 (82) (2) (45)(5) (1,445)
------- ---- ---- --- ----- ------
Operating income (loss).... 542 61 81 16 (47) 653
Interest expense............. (1,010) -- (48) -- (3)(6) (1,154)
(4)(7)
(5)(8)
(84)(9)
Interest and dividend
income..................... 52 25 -- -- -- 77
Share of earnings (losses) of
affiliates, net............ (193) 9 -- -- -- (184)
Gains........................ 337 -- -- -- -- 337
Other income (expense),
net........................ (19) -- 34 -- (27)(4) (43)
(31)(10)
------- ---- ---- --- ----- ------
Earnings (loss) before
income taxes............. (291) 95 67 16 (201) (314)
Income tax benefit
(expense).................. 120 (32) (33) (5) 52(11)(4) 102
------- ---- ---- --- ----- ------
Net earnings (loss)........ (171) 63 34 11 (149) (212)
Dividend requirement on
redeemable preferred
stocks..................... (34) -- -- -- -- (34)
------- ---- ---- --- ----- ------
Net earnings (loss)
attributable to common
stockholders............. $ (205) 63 34 11 (149) (246)
======= ==== ==== === ===== ======
Loss attributable to common
stockholders per common
share:
TCI Class A and Class B
common stock............. $ (.11) --(13)
======= ======
TCI Group Series A and
Series B common stock.... $ (.16) (.32)(13)
======= ======
Liberty Media Group Series
A and Series B common
stock.................... $ (.16) (.16)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-8
<PAGE> 158
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) 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.
On the date of the Distribution, Satellite issued to TCI Communications,
Inc. ("TCIC"), a subsidiary of TCI, a promissory note in the principal
amount of $250 million, representing a portion of Satellite's intercompany
balance owed to TCIC on that date. The remainder of such intercompany
balance was assumed by TCI on the date of the Distribution in the form of a
capital contribution to Satellite. Such promissory note will bear interest
at the rate of 10% per annum and will mature on September 30, 2001. Such
interest income to TCIC, amounting to $25 million per annum, has been
reflected in the accompanying condensed proforma combined statements of
operations.
(2) 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 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 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.
(3) On April 25, 1995, TCI consummated the Cablevision Acquisition for an
aggregate purchase price of $286 million. The purchase price was paid with
cash consideration of approximately $199 million (including a previously
paid deposit of $20 million) and the Company's issuance of approximately
V-9
<PAGE> 159
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$87 million in secured negotiable promissory notes payable (the
"Cablevision Notes"). The Company has an option during the two year period
ended April 25, 1997 to increase its ownership interest in Cablevision to
80% at a cost per subscriber similar to the initial purchase price. The
exercise of such option has not been reflected in the accompanying
condensed pro forma combined financial statements.
All amounts presented with respect to Cablevision are stated in U.S.
dollars. During the periods covered by the accompanying condensed pro forma
financial statements, an exchange rate of one U.S. dollar to one Argentine
peso was maintained by the Argentine government.
(4) Reflects the conveyance to New Viacom Sub of certain nonmaterial assets,
liabilities and related results of operations of VII Cable, including for
the year ended December 31, 1995, a pre-tax gain of $27 million from the
sale of marketable securities and a provision for income taxes of $11
million.
(5) Represents depreciation and amortization of VII Cable's and Cablevision's
allocated excess purchase prices based upon weighted average lives of
12 1/2 years for property and equipment for Cablevision and 40 years for
franchise costs for VII Cable and 20 years for franchise costs for
Cablevision. The valuations and other studies which will provide the basis
of the allocation of the cost to acquire VII Cable have not yet been
completed and, consequently, the purchase accounting adjustments made in
connection with the development of the unaudited condensed pro forma
combined financial statements are preliminary.
(6) Represents assumed interest expense on the $87 million principal amount of
the Cablevision Notes, calculated at an assumed interest rate of 10.0% per
annum.
(7) Represents additional interest expense on assumed indebtedness of
Cablevision. Such additional interest expense was not reflected in the
historical financial statements of Cablevision as the related borrowings
were not utilized to support the assets acquired by the Company. The pro
forma adjustment assumes that Cablevision's April 25, 1995 borrowings ($77
million including capital lease obligations) were outstanding since January
1, 1995 and that such borrowings bore interest at 14.5% per annum.
(8) Represents assumed interest expense incurred by the Company on the
borrowings of $179 million to pay the remaining cash portion of the
Cablevision purchase price. Such interest expense was calculated at the
Company's weighted average interest rate of 8.1% for the year ended
December 31, 1995.
(9) 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% and 7.78% for the nine months ended September 30,
1996 and for the year ended December 31, 1995, respectively, based upon
historical interest rates adjusted for anticipated terms of the Loan
Facility.
(10) 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.
(11) 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.
(12) Reflects loss per common share based upon 665.0 million weighted average
shares of TCI Group at September 30, 1996. Such amount represents the
weighted average shares disclosed in TCI's historical financial statements.
(13) Reflects loss per common share based upon 656.4 million weighted average
shares of TCI Group for the entire period ended December 31, 1995,
respectively. Such amounts represent TCI Group weighted average shares, as
disclosed in its historical financial statements for the period from August
11, 1995 through December 31, 1995.
V-10
<PAGE> 160
"TELEPHONY GROUP"
PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
The following unaudited pro forma combined balance sheet of Telephony
Group, dated as of September 30, 1996, assumes that the conversion by TCI Group
of $500 million of its interest in Telephony Group into a preferred stock due
from Telephony Group (the "Conversion") (see note 1) had occurred as of such
date.
The following unaudited pro forma combined statements of operations of
Telephony Group for the nine months ended September 30, 1996 and the year ended
December 31, 1995 assumes that the Conversion had occurred as of January 1,
1995.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Conversion had
occurred as of January 1, 1995. These pro forma combined financial statements of
Telephony Group should be read in conjunction with the historical financial
statements and the related notes thereto of Telephony Group.
V-11
<PAGE> 161
"TELEPHONY GROUP"
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
TELEPHONY TELEPHONY
GROUP THE GROUP
HISTORICAL CONVERSION(1) PRO FORMA
---------- ------------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Investment in the PCS Ventures......................... $ 816,355 -- 816,355
Investment in Teleport................................. 294,148 -- 294,148
Other investments in affiliates........................ 9,042 -- 9,042
---------- -------- ---------
$1,119,545 -- 1,119,545
========== ======== =========
DEFERRED TAX LIABILITY AND COMBINED EQUITY
Deferred tax liability................................. $ 21,251 -- 21,251
Combined equity........................................ 1,098,294 (500,000) 598,294
Preferred stock due TCI Group.......................... -- 500,000 500,000
---------- -------- ---------
$1,119,545 -- 1,119,545
========== ======== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-12
<PAGE> 162
"TELEPHONY GROUP"
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------
TELEPHONY TELEPHONY
GROUP THE GROUP
HISTORICAL CONVERSION(1)(2) PRO FORMA
-------------- ---------------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Charges from TCI Group and compensation
relating to stock appreciation rights........ $ 464 -- 464
-------- ------- -------
Operating income............................. (464) -- (464)
Share of losses of the PCS Ventures............ (78,358) -- (78,358)
Share of losses of Teleport.................... (31,591) -- (31,591)
Share of losses of other affiliates............ (1,396) -- (1,396)
Interest income from affiliates................ 3,527 -- 3,527
Gain on sale of stock by Teleport.............. 12,410 -- 12,410
-------- ------- -------
Loss before income taxes..................... (95,872) -- (95,872)
Income tax benefit............................. 32,338 -- 32,338
-------- ------- -------
Net loss..................................... (63,534) -- (63,534)
Dividend requirement on redeemable preferred
stocks....................................... -- (22,500) (22,500)
-------- ------- -------
Net loss attributable to common
stockholders and TCI Group
Inter-Group Interest............... $(63,534) (22,500) (86,034)
======== ======= =======
Net loss attributable to common
stockholders....................... $ -- (8,603)(3) (8,603)
======== ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-13
<PAGE> 163
"TELEPHONY GROUP"
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
TELEPHONY GROUP THE TELEPHONY GROUP
HISTORICAL CONVERSION(1)(2) PRO FORMA
--------------- ---------------- ---------------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C>
Charges from TCI Group and compensation
relating to stock appreciation rights....... $ 477 -- 477
-------- ------- -------
Operating income............................ (477) -- (477)
Share of losses of the PCS Ventures........... (33,890) -- (33,890)
Share of losses of Teleport................... (29,975) -- (29,975)
Share of losses of other affiliates........... (1,468) -- (1,468)
Interest income from affiliates............... 5,854 -- 5,854
-------- ------- -------
Loss before income taxes.................... (59,956) -- (59,956)
Income tax benefit............................ 21,002 -- 21,002
-------- ------- -------
Net loss.................................... (38,954) -- (38,954)
Dividend requirement on redeemable preferred
stocks...................................... -- (30,000) (30,000)
-------- ------- -------
Net loss attributable to common
stockholders and TCI Group Inter-
Group Interest.................... $(38,954) (30,000) (68,954)
======== ======= =======
Net loss attributable to common
stockholders...................... $ -- (6,895)(3) (6,895)
======== ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-14
<PAGE> 164
"TELEPHONY GROUP"
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) Assumes the conversion by TCI Group of $500 million it interest in the
Telephony Group into a 6% cumulative compounding redeemable preferred stock
due from the Telephony Group. Such preferred stock is due December 1, 2011.
(2) Reflects estimated dividend requirement on the preferred stock discussed in
note 1.
(3) Pro forma Loss attributable to common shareholders of Telephony Group
reflects the assumed sale by the Company of 10% of the equity value of the
Telephony Group.
V-15
<PAGE> 165
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Summary of Operations
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated on
August 4, 1994 and was structured as a tax free exchange of Class A and Class B
shares of both companies and preferred stock of Liberty for like shares of a
newly formed holding company, TCI/Liberty Holding Company. In connection with
the TCI/Liberty Combination, Old TCI changed its name to TCI Communications,
Inc. ("TCIC") and TCI/Liberty Holding Company changed its name to
Tele-Communications, Inc. ("TCI" or the "Company").
During the fourth quarter of 1994, the Company was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable and
Communications; Programming; International Cable and Programming ("TINTA"); and
Technology/Venture Capital. The Company reorganized its structure to provide for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While
neither the International Cable and Programming unit nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in nature
to warrant separate operational focus.
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty Group
Stock") which is intended to reflect the separate performance of TCI's business
which produces and distributes cable television programming services ("Liberty
Media Group"). While the Liberty Group Stock constitutes common stock of TCI,
the issuance of the Liberty Group Stock did not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of holders
of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed
one hundred percent of the equity value attributable to Liberty Media Group (the
"Distribution") to its security holders of record on August 4, 1995.
Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock ("TCI Group Stock"). The TCI Group
Stock is intended to reflect the performance of those businesses of the Company
not attributed to Liberty Media Group. Such businesses are referred to herein as
"TCI Group". Liberty Media Group and TCI Group are sometimes herein after
referred to individually as a "Group".
Subsequent to consummation of the TCI/Liberty Combination, the Company
operates principally in two industry segments: cable and communications services
and programming services. Home shopping is a programming service which includes
a retail function. Separate amounts for the aforementioned home shopping
services have been provided to enhance the readers understanding of the Company.
The Technology/Venture Capital and the International Cable and Programming
portions of the Company's business have been included with cable and
communications services due to their relative insignificance. The amounts
provided for the Company's programming services segment represent the results of
Liberty Media Group since the date of the TCI/Liberty Combination. The tables
below set forth for the periods presented, the percentage relationship that
certain items bear to revenue. This summary provides trend data relating to the
normal recurring operations of the Company. Other items of significance are
discussed under separate captions below.
V-16
<PAGE> 166
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------- ------------- ------------
(AMOUNTS IN MILLIONS, EXCEPT FOR
PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Cable and Communications Services:
Revenue...................................... 100% $5,384 100% $4,247 100% $4,153
Operating costs and expenses before
depreciation and amortization............. 64 3,457 58 2,474 56 2,326
Depreciation and amortization................ 24 1,274 23 992 22 911
---- ------ ---- ------ --- ------
Operating income..................... 12% $ 653 19% $ 781 22% $ 916
==== ====== ==== ====== === ======
Programming Services:
Electronic Retailing Services:
Net sales................................. 100% $1,019 100% $ 482 -- $ --
Cost of sales............................. 69 702 65 313 -- --
Operating costs and expenses before
depreciation and amortization........... 35 359 30 145 -- --
Depreciation and amortization............. 4 43 3 15 -- --
---- ------ ---- ------ --- ------
Operating income (loss).............. (8)% $ (85) 2% $ 9 -- $ --
==== ====== ==== ====== === ======
Other Programming Services:
Revenue................................... 100% $ 521 100% $ 240 -- $ --
Operating costs and expenses before
depreciation and amortization........... 94 492 96 231 -- --
Depreciation and amortization............. 11 55 5 11 -- --
---- ------ ---- ------ --- ------
Operating loss....................... (5)% $ (26) (1)% $ (2) -- $ --
==== ====== ==== ====== === ======
Eliminations:
Revenue...................................... 100% $ (73) 100% $ (33) -- $ --
Operating costs and expenses before
depreciation and amortization............. (100) (73) (100) (33) -- --
---- ------ ---- ------ --- ------
Operating income..................... --% $ -- --% $ -- --% $ --
==== ====== ==== ====== === ======
Tele-Communications, Inc. Consolidated:
Revenue...................................... 100% $6,851 100% $4,936 100% $4,153
Cost of sales................................ 10 702 6 313 -- --
Operating costs and expenses before
depreciation and amortization............. 62 4,235 57 2,817 56 2,326
Depreciation and amortization................ 20 1,372 21 1,018 22 911
---- ------ ---- ------ --- ------
Operating income..................... 8% $ 542 16% $ 788 22% $ 916
==== ====== ==== ====== === ======
</TABLE>
V-17
<PAGE> 167
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
CABLE AND COMMUNICATIONS SERVICES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the Federal Communications Commission ("FCC") adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. As a result of such actions, the Company's basic and tier service
rates and its equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the FCC. The
regulations established benchmark rates in 1993 which were further reduced in
1994, to which the rates charged by cable operators for Regulated Services were
required to conform.
The FCC also allowed cable operators to justify rates under "cost of
service" rules, which allow "high cost" systems to establish rates in excess of
the benchmark level. The FCC's interim cost of service rules allowed a cable
operator to recover through rates for regulated cable services its normal
operating expenses plus a rate of return equal to 11.25 percent on the rate
base. However, the FCC significantly limited the inclusion in the rate base of
acquisition costs in excess of the book value of tangible assets. As a result,
the Company pursued cost of service justifications in only a few cases. On
December 15, 1995, the FCC adopted slightly more favorable cost of service
rules.
The regulations also provide mechanisms for adjusting rates when regulated
tiers are affected by channel additions or deletions. Additional programming
costs resulting from channel additions can be accorded the same external
treatment as other program costs increases, and cable operators presently are
permitted to recover a mark-up on their programming expenses. Under one option,
operators are allowed a flat ($.20) fee increase per channel added to an
existing cable programming services tier ("CPST"), with an aggregate cap on such
increases ($1.20) plus a license fee reserve ($.30) through 1996. In 1997, an
additional flat ($.20) fee increase will be available, and the license fees for
additional channels and for increases in existing channels will no longer be
subject to the aggregate cap. This optional approach for adding services is
scheduled to expire on December 31, 1997.
The Company reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 in response to FCC regulations. The Company believes that it
has complied in all material respects with the provisions of the 1992 Cable Act,
including its rate setting provisions. However, the Company's rates for
Regulated Services are subject to review by the FCC, if a complaint has been
filed, or by the appropriate franchise authority, if such authority has been
certified. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
On October 30, 1995, the FCC accepted for comment a proposed resolution of
all complaints against the CPST currently pending against cable systems owned by
the Company. If the proposed resolution is accepted by the FCC, the Company will
settle all pending complaints by a one-time credit to each subscriber in CPST
regulated franchises. The aggregate amount of such credits is approximately $9
million and had previously been accrued by the Company. In addition, the FCC
will find that the CPST rates in CPST regulated franchises on September 15, 1995
comply with federal regulations. The Company has committed not to file any
additional cost-of-service filings until May 15, 1996 in franchises that were
subject to CPST regulation prior to September 15, 1995. However, the Company
will be able to avail itself of the other mechanisms under FCC rules to recover
costs, including abbreviated cost-of-service filings covering system rebuilds
and upgrades. In the proposed resolution, the Company does not admit any
violation of, or any failure to conform to, the 1992 Cable Act or the rules
promulgated thereunder. The comment period has ended and the Company is awaiting
final action by the FCC.
(Continued)
V-18
<PAGE> 168
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom
Act") was signed into law. Because the 1996 Telecom Act does not deregulate CPST
rates until 1999 (and basic service tier rates will remain regulated
thereafter), the Company believes that the 1993 and 1994 rate regulations have
had and will continue to have a material adverse effect on its results of
operations.
Revenue from Cable and Communications increased 26% from 1994 to 1995. Such
increase is due to the effect of certain acquisitions (13%), growth in the
Company's satellite subscribers (4%), increases in the rates charged to the
Company's subscribers from inflation increases, the provision of new channels
and increases in equipment costs (4%), growth in subscriber levels within the
Company's cable television systems (4%) and an increase in the Company's
long-distance voice and data service revenue (1%).
Revenue increased 2% from 1993 to 1994. Such increase was the result of the
TCI/Liberty Combination in August of 1994 (1%), growth in subscriber levels
within the Company's cable television systems (5%), the effect of certain other
acquisitions (2%) and certain new services (1%), net of a decrease in revenue
(4%) due to rate reductions required by rate regulation implemented pursuant to
the 1992 Cable Act and a decrease in revenue (3%) due to the transfer of Netlink
USA ("Netlink") to the Programming unit in the Reorganization. Netlink's
operations were included in Cable and Communications Services in 1993, but have
been reflected in Programming Services for all of 1994 and 1995. In the second
half of 1994, as a result of the FCC revision of its rate regulations which
reduced benchmark rates, the Company experienced an additional decrease, in
excess of that which was incurred in 1993, in the price charged for its
Regulated Services.
Included in the Company's revenue from cable operations of $5,105 million,
$4,203 million and $4,098 million for the years ended December 31, 1995, 1994
and 1993, respectively, is $5,038 million, $4,177 million and $4,098 million
attributable to TCIC and $67 million, $26 million and $0 attributable to other
cable operations.
Operating costs and expenses before depreciation and amortization increased
40% for the year ended December 31, 1995. Exclusive of the effects of
acquisitions (13%) and Primestar (7%) (see discussion below), such expenses
increased 20%. Programming expenses accounted for the majority of such increase.
In this regard, programming expenses represented $1,251 million (36%), $903
million (36%) and $740 million (32%) of operating costs and expenses before
depreciation and amortization during 1995, 1994 and 1993, respectively. The
Company cannot determine whether and to what extent increases in the cost of
programming will affect its future operating costs. However, such programming
costs have increased at a greater percentage than increases in revenue of
Regulated Services. The Company will experience an increase in programming costs
in the first five months of 1996 without increasing its rates charged to its
customers at that time. In June of 1996, the Company will be entitled to an
increase in its service rates for increased programming costs and inflation. FCC
regulations provide for the Company to further increase its rates by an
additional amount intended to recover increased programming costs incurred
during the first five months of 1996 and not previously recovered, as well as
interest on said amounts.
During 1995, the Company changed its approach to how it ordered and stored
excess cable distribution equipment. The Company created material support
centers and consolidated all of its excess inventory. In conjunction with this
change, the Company incurred $5 million of costs. Additionally, during 1995, the
Company incurred approximately $22 million in expenses related to initiatives to
improve its customer service, to begin the redesign of its computer and
accounting systems and promote and market the Company's products. During the
fourth quarter of 1995, the Company incurred $25 million in expenses related to
payment of bonuses to the majority of its employees.
The Company had an investment in a direct broadcast satellite partnership,
Primestar Partners ("Primestar"). Primestar provides programming and marketing
support to each of its cable partners who then provide satellite service to
their customers. During 1995, the Company's revenue and expenses related to such
satellite service have increased significantly as the number of the Company's
Primestar subscribers increased from approximately 100,000 subscribers at
January 1, 1995 to approximately 550,000 subscribers at December 31, 1995.
During the year ended December 31, 1995, revenue increased from $30 million to
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$207 million and operating, selling, general and administrative expenses
increased from $18 million to $197 million, as compared to the year ended
December 31, 1994.
Operating costs and expenses before depreciation and amortization increased
6% for the year ended December 31, 1994 compared to the corresponding period of
1993. The consolidation of Liberty resulted in an increase of $18 million in
operating, selling, general and administrative expenses from Liberty's cable
television systems. In 1993, the Company incurred certain one-time direct
charges relating to the implementation of the FCC rate regulations.
The increase in the Company's depreciation expense in 1995 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems. The
systems, which facilitate digital transmission of voice, video and data signals,
will have optical fiber to neighborhood nodes with coaxial cable distribution
downstream from that point. The increase in amortization expense in 1995 is due
to acquisitions.
The Company records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
ELECTRONIC RETAILING SERVICES
This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination. HSN's primary business is the sale of merchandise to
viewers of the home shopping programming produced and distributed by Home
Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of HSN.
During the year ended December 31, 1995, HSN's net sales increased from
$482 million to $1,019 million. Such increase is due to the consolidation of HSN
in August of 1994 in connection with the TCI/Liberty Combination. However, on an
annualized basis, HSN's net sales decreased approximately 10%. Such annualized
decrease is the net affect of a 19% decrease in the number of packages shipped,
partially offset by a 9% increase on the average price per unit sold.
In September 1994, HSN appointed new management personnel to institute
procedures intended to improve purchasing and other merchandising practices.
Their strategies included offering a greater variety of products, developing
strong private label lines, selling higher margin items and offering name brand
and other high quality merchandise. These efforts were aimed at long-term
improvements in sales by attracting new customers and increasing the frequency
of repeat purchases. However, the impact of these strategies was to adversely
affect sales during 1995.
Since June 5, 1995, HSN has operated two full-time networks renamed HSN,
the primary network, and Spree!. On August 5, 1995, HSN relaunched the HSN
network with more scheduled programs and theme related shows, new sets, graphics
and music. During the third quarter of 1995, HSN relaunched the Spree! network
with a more spontaneous format, new graphics and music. These changes were
designed to eliminate programming redundancies, distinguish the networks and
reach a broader range of potential customers.
Management of HSN also instituted promotional programs to help increase
sales, including a national advertising campaign and a "no interest -- no
payments" credit promotion through February 1996 for certain purchases made
during the third and fourth quarters of 1995 using HSN's private label credit
card. Although the credit promotion program was successful, its effect was not
enough to offset the decline in sales discussed above.
Additionally, $4 million of the restructuring charges for the year ended
December 31, 1995, represents HSN management's estimate of costs to be incurred
in connection with the closing of HSN's Reno, Nevada, distribution center, which
was accomplished in June 1995. The decision to close the Reno distribution
center
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was based on an evaluation of HSN's overall distribution strategy. Management of
HSN believes that consolidation of HSN's distribution facilities will result in
better operating efficiencies and improved service to customers.
HSN's cost of sales increased from $313 million to $702 million during
1995. As a percent of sales, cost of sales increased from 65% in 1994 to 69% in
1995. The increase in the cost of sales percentages primarily relate to
warehouse sales and other promotional events. Such events included price
discounts to (i) facilitate the restructuring of HSN's distribution center, (ii)
make room for new holiday merchandise and (iii) adjust inventory levels and
product mix. In addition, cost of sales for the year ended December 31, 1995
includes a $12 million increase in HSC's inventory carrying value adjustment
related to products which are inconsistent with HSN's new sales and merchandise
philosophy.
HSN believes that future levels of net sales of HSC will be dependent, in
large part, on program carriage, market penetration and merchandising
management. Program carriage is defined as the number of cable systems and
broadcast television stations that carry HSC programming. Market penetration
represents the level of active purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSC programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSC programming while evaluating the
expected profitability of each contract.
HSN believes that seasonality does impact its business, but not to the same
extent it impacts the retail industry in general.
On November 27, 1995, the Company announced that it had agreed to exchange
its controlling interest in HSN for shares of Silver King Communications, Inc.
("Silver King"). The Company will receive approximately 11 million newly issued
shares of Silver King in exchange for its 37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their respective
affiliates entered into an agreement in August 1995 pursuant to which an option
owned by Liberty Media Group to purchase 2 million shares of Silver King Class B
common stock (the "Option") (which shares would constitute voting control of
Silver King) would be transferred to Silver Management Company ("Silver
Company"), an entity in which Liberty Media Group would own all of the
non-voting equity interests (which would constitute substantially all of the
equity of such entity) and Mr. Diller would own all of the voting equity
interests. Silver Company would thereafter exercise the Option and hold the
shares of Silver King Class B Common Stock purchased thereunder. In an amendment
to such agreement entered into in November 1995, Liberty Media Group agreed to
contribute all of its shares of HSN (which shares constitute approximately 41%
of the equity of HSN and approximately 90% of the voting power of HSN) to Silver
Company in return for additional non-voting equity interests in Silver Company.
Following such contribution, Silver Company would exchange such HSN shares with
Silver King for additional shares of Silver King Common Stock and Class B Common
Stock (thereby increasing Silver Company's controlling interest in Silver King
to in excess of 80% of the voting power of Silver King). Each such transaction
is subject to the satisfaction of certain conditions, including the receipt of
all necessary regulatory consents and approvals. If consummated, HSN would cease
to be a subsidiary of the Company and therefore, the financial results of HSN
would not be consolidated with the financial results of Liberty Media Group.
Although the Company would cease to possess voting control over HSN, it would
continue to have an indirect equity interest in HSN through its ownership of the
equity securities of Silver Company. No assurance can be given that the
transaction will be consummated.
OTHER PROGRAMMING SERVICES
Revenue from the Company's Other Programming Services increased $281
million or 117% from 1994 to 1995, and operating costs and expenses before
depreciation and amortization increased $261 million or 113%. Such increases are
primarily due to the TCI/Liberty Combination.
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Revenue of TCI's consolidated entertainment and information programming
services represented $240 million of total consolidated revenue for 1994. This
revenue was attributable to subscription and advertising revenue at TCI's
consolidated sports programming businesses ($91 million), revenue from Netlink,
a marketer and distributor of programming to the United States home satellite
dish subscriber market ($132 million) and subscription revenue generated by
Southern Satellite Systems, Inc. ("Southern") and Encore Media Corporation
("Encore") ($17 million).
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures. In the United
States, Liberty Media Group and News Corp. formed a partnership (the
"Fox-Liberty Venture") into which Liberty Media Group contributed interests in
its national and regional sports networks and into which News Corp. contributed
its fx cable network and certain other assets. Liberty Media Group received a
50% interest in the Fox-Liberty Venture and $350 million in cash.
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly-owned subsidiary
of Liberty Media Group, and TINTA formed a venture (the "International Venture")
to operate previously existing sports services in Latin America and Australia
and a variety of new sports services throughout the world, except in Asia and in
the United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. The Liberty-TINTA LLC owns 50% of the International
Venture with News Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a Spanish language sports service distributed in
Latin American and in Hispanic markets in the United States; an interest in
Torneos y Competencias S.A., an Argentinean sports programming and production
business; various international sports and satellite transponder rights and
cash. The Liberty-TINTA LLC also contributed their 50% interest in Premiere
Sports and All-Star Sports. Both are Australian 24-hour sports services
available via multichannel, multipoint distribution systems ("MMDS") or cable
television.
As part of the formation of the International Venture, the Liberty-TINTA
LLC is entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to the Liberty-TINTA LLC, News
Corp. is entitled to receive from the Liberty-TINTA LLC $20 million and rights
under various Asian sports programming agreements. Star Television Limited
operates a satellite-delivered television platform in Asia.
OTHER INCOME AND EXPENSE
The Company's interest expense increased $225 million or 29% during 1995,
as compared to 1994 and $54 million or 7% during 1994, as compared to 1993. Such
increases are the result of higher interest rates and debt balances. The
Company's weighted average interest rate on borrowings was 8.1%, 7.5% and 7.2%
during 1995, 1994 and 1993, respectively.
The Company is a shareholder of TeleWest plc ("TeleWest"), a company that
is currently operating and constructing cable television and telephone systems
in the United Kingdom ("UK"). TeleWest, which is accounted for under the equity
method, had a carrying value at December 31, 1995 of $550 million and comprised
$70 million, $43 million and $28 million of the Company's share of its
affiliates' losses in 1995, 1994, and 1993, respectively. In addition, the
Company has other less significant equity method investments in video
distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $354
million at December 31, 1995 and accounted for $62 million and $50 million of
the Company's share of its affiliates' losses in 1995 and 1994, respectively.
TeleWest was formed during the fourth quarter of 1995 upon the merger (the
"TeleWest Merger") of TeleWest Communications plc (formerly TCI/US WEST Cable
Communications Group or "TeleWest UK") ("TeleWest Communications") with SBC
(CableComms)(UK). Prior to the TeleWest Merger, the
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Company had an effective ownership interest of approximately 36% in TeleWest
Communications, and subsequent to the TeleWest Merger the Company has an
effective ownership interest of approximately 27% in TeleWest. As a result of
the TeleWest Merger, the Company recognized a gain of $165 million (before
deducting the related tax expense of $58 million). Such gain represents the
difference between the Company's recorded cost for TeleWest Communications and
the Company's effective proportionate share of TeleWest's net assets. There is
no assurance that the Company will realize similar gains in future periods.
As a result of the TeleWest Communications November 1994 initial public
offering (the "TeleWest IPO") and the associated dilution of the Company's
ownership interest of TeleWest Communications, the Company recognized a gain
amounting to $161 million (before deducting the related tax expense of $57
million) in 1994.
TeleWest, which is currently constructing broadband cable television and
telephony networks in the UK, has incurred net losses since its inception.
Although there is no assurance, the Company believes (i) that the continued
expansion of TeleWest's networks ultimately will provide TeleWest with a revenue
base that will exceed its expenses and (ii) that TeleWest's present and future
sources of liquidity (including the net proceeds from the TeleWest IPO and
certain bank credit facilities) will be sufficient to meet TeleWest's liquidity
requirements for the foreseeable future. The Company has no present intention to
make significant loans to or investments in TeleWest.
During the year ended December 31, 1995, the Company recognized a gain
amounting to $123 million in connection with the sale to the public of 20
million shares of common stock (the "IPO") and the issuance of shares of common
stock for an investment in an Argentine programming entity (the "TYC
Acquisition") by TINTA. There is no assurance that the Company will realize
similar gains in future periods.
Effective February 9, 1995, QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation jointly owned by Comcast Corporation and the
Company, was merged (the "QVC Merger") with and into QVC, Inc. ("QVC") with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC. Upon consummation of the QVC Merger, the
Company was deemed to exercise significant influence over QVC and, accordingly,
adopted the equity method of accounting for its investment in QVC. The
accompanying 1994 financial statements have been restated to reflect such change
in accounting. Such restatement resulted in an increase in the Company's net
earnings of $5 million for the year ended December 31, 1994.
During 1995, BET Holdings, Inc. ("BET") repurchased a portion of its own
common stock. As a result of the repurchase, the Company's ownership of BET was
increased from 19% to 22%. Therefore, the Company is deemed to exercise
significant influence over BET and, has accordingly adopted the equity method of
accounting for its investment in BET. The accompanying 1994 and 1993 financial
statements have been restated to reflect such change in accounting. Such
restatement resulted in an increase in the Company's net earnings of $2 million
for each of 1994 and 1993.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9% of
Liberty's 50% general partnership interest in American Movie Classics Company
("AMC"). The gain recognized by Liberty in connection with the disposition of
AMC was $183 million and is included in the Company's share of Liberty's
earnings prior to the TCI/Liberty Combination.
NET EARNINGS (LOSS)
The Company's net loss (before preferred stock dividend requirements) of
$171 million for the year ended December 31, 1995 represented a decrease of $233
million as compared to the Company's net earnings (before preferred stock
dividend requirements) of $62 million for 1994. Such decrease is due primarily
to a decrease in operating income, a decrease in share of earnings of affiliates
(a significant portion of which results from the gain recognized in 1994 by
Liberty upon the sale of its investment in AMC), and an increase in interest
expense partially offset by the recognition of a gain resulting from the TINTA
IPO.
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The Company's net earnings (before preferred stock dividend requirements)
of $62 million for the year ended December 31, 1994 represented an increase of
$67 million as compared to the Company's net loss (before preferred stock
dividend requirements) of $5 million for the corresponding period of 1993. Such
increase is principally the result of the effect of improved share of earnings
from Liberty prior to the TCI/Liberty Combination (principally resulting from
the gain recognized by Liberty upon the sale of its investment in AMC), the
recognition of a gain resulting from the TeleWest IPO, and the reduction in
income tax expense (principally resulting from the required recognition in the
third quarter of 1993 of the cumulative effect of the change in the Federal
income tax rate from 34% to 35%), net of the effect of the aforementioned
reduction in rates charged for Regulated Services and the decrease in gain on
disposition of assets.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 effective January 1, 1996. The effect of such adoption was not
significant.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. The Company will include the disclosures required by Statement
No. 123 in the notes to future financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, subsidiaries of the Company, Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox" and together with the Company and Comcast, the
"Cable Partners") and Sprint Corporation ("Sprint") formed a partnership
("WirelessCo") to engage in the business of providing wireless communications
services on a nationwide basis. Through WirelessCo, in which the Company owns an
indirect 30% interest, the partners participated in auctions ("PCS Auctions") of
broadband personal communications services ("PCS") licenses conducted by the
FCC. In the first round auction, which concluded during the first quarter of
1995, WirelessCo was the winning bidder for PCS licenses for 29 markets,
including New York, San Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth,
Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale. The aggregate
license cost for these licenses was approximately $2.1 billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a PCS
license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and agreed to make capital contributions to APC
equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox (with a 51% interest) and
Sprint Spectrum (with a 49% interest) have formed a partnership to hold and
develop a PCS system using a pioneer preference PCS license for the Los
Angeles-San Diego market. APC and the Cox partnership have agreed to affiliate
their PCS systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under the "Sprint"
brand.
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During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may invest in, affiliate with or acquire licenses from other
successful bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
currently known as Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum"), to
which they contributed their respective interests in WirelessCo and through
which they formed another partnership, NewTelco, L.P. ("New Telco") to engage in
the business of providing local wireline communications services to residences
and businesses on a nationwide basis. The Cable Partners agreed to contribute
their interests in Teleport Communications Group, Inc. and TCG Partners
(collectively, "TCG") to NewTelco. TCG is one of the largest competitive local
exchange carriers in the United States in terms of route miles.
Effective January 31, 1996, the Partners amended the Sprint Spectrum
partnership agreement (the "Partnership Agreement") and certain other agreements
related thereto. Under the Partnership Agreement, the business of Sprint
Spectrum and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The Partners intend for
Sprint Spectrum and its subsidiary partnerships to be the exclusive vehicles
through which they engage in the wireless telephony service businesses, subject
to certain exceptions. Sprint Spectrum will no longer be authorized to engage in
the business of providing local wireline communications services to residences
and businesses. In connection with the amendment of the Partnership Agreement,
the Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint have
agreed to negotiate in good faith on a market-by-market basis for the provision
of local wireline telephony services over the cable television facilities of the
respective Cable Partner under the Sprint brand. Accordingly, local wireline
telephony offerings in each market would be the subject of individual agreements
to be negotiated with Sprint, rather than being provided by Sprint Spectrum, as
originally contemplated. The Cable Partners and Sprint also reaffirmed their
intention to continue to attempt to integrate the business of TCG with that of
Sprint Spectrum. In addition, each Cable Partner agreed to certain restrictions
on its ability to offer, promote, or package certain of its products or services
with certain products and services of other persons and agreed to make its
facilities available to Sprint for specified purposes to the extent and on the
terms that it has made such facilities available to others for such purposes.
Such agreements have a term of five years, but under certain circumstances may
terminate after three years.
Execution of the foregoing agreements was a condition to the effectiveness
of a previously approved business plan for the build out of Sprint Spectrum's
nationwide network for wireless personal communications services. Pursuant to
the business plan, the Partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
expects that Sprint Spectrum will require additional equity thereafter.
As of January 26, 1995, TCI, TCIC, and TeleCable Corporation ("TeleCable")
consummated a transaction whereby TeleCable was merged into TCIC (the "TeleCable
Merger"). The aggregate $1.6 billion purchase price was satisfied by TCIC's
assumption of approximately $300 million of TeleCable's net liabilities and the
issuance to TeleCable's shareholders of approximately 42 million shares of TCI
Class A common stock and 1 million shares of TCI Convertible Preferred Stock,
Series D (the "Series D Preferred Stock") with an aggregate initial liquidation
value of $300 million. The Series D Preferred Stock, which accrues
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dividends at a rate of 5.5% per annum, is convertible into 10 million shares of
Series A TCI Group Stock and 2.5 million shares of Series A Liberty Group Stock.
The Series D Preferred Stock is redeemable for cash at the option of TCI after
five years and at the option of either TCI or the holder after ten years.
On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision
S.A. and certain affiliated companies (collectively, "Cablevision") for a
purchase price of $282 million, before liabilities assumed. The purchase price
was paid with cash consideration of $195 million and TINTA's issuance of $87
million principal amount of secured negotiable promissory notes payable to the
selling shareholders. TINTA has an option during the two-year period ended April
25, 1997 to increase its ownership interest in Cablevision up to 80% at a cost
per subscriber similar to the initial purchase price, adjusted however for
certain fluctuations in applicable foreign currency exchange rates.
On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc., and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's
cable systems and related assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for shares of Class A
Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's obligations
under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred
Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The Exchangeable Preferred Stock is
exchangeable, at the option of the holder commencing after the fifth anniversary
of the date of issuance, for shares of Series A TCI Group Stock at an initial
exchange rate of 4.81 shares of Series A TCI Group Stock for each share of
Exchangeable Preferred Stock exchanged. The Exchangeable Preferred stock is
subject to redemption, at the option of Cable Sub, after the fifth anniversary
of the date of issuance, initially at a redemption price of $102.50 per share
and thereafter at prices declining ratably annually to $100 per share on and
after the eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock is also
subject to mandatory redemption on the tenth anniversary of the date of issuance
at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by Cable Sub in satisfaction of its optional or
mandatory redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of Cable Sub, in shares of Series
A TCI Group Stock, or in any combination of the foregoing.
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenue of $442 million and net earnings
of $34 million. The Company will account for such acquisition under the purchase
method of accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and the
estimated aggregate Stated Value of the Exchangeable Preferred Stock of $500
million) would be allocated to the assets and liabilities acquired according to
their respective fair values, with any excess being treated as intangible
assets. As such, the
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<PAGE> 176
Company will reflect additional interest expense, depreciation, amortization and
minority share of losses of consolidated subsidiaries. On a pro forma basis, if
the transaction had been consummated under its current terms on or before
January 1, 1995, Cable Sub would have reflected loss before taxes of
approximately $51 million for the year ended December 31, 1995. On a pro forma
basis, Cable Sub would reflect an approximate $21 million of preferred stock
dividend requirements on an annual basis assuming, solely for the purpose of
this presentation, a dividend rate of 4.25% per annum on the Exchangeable
Preferred Stock. On a pro forma basis, the Company would reflect the foregoing
financial impacts of Cable Sub in its consolidated results of operations except
that the preferred stock dividend requirement of Cable Sub would be reflected as
minority interest in the Company's statement of operations and the Company would
incur an additional approximately $28 million of interest expense per year
arising from the assumed borrowing by the Company for its $350 million capital
contribution to Cable Sub.
The Company owned shares of common stock and preferred stock of Turner
Broadcasting System, Inc. ("TBS").
On October 10, 1996, Time Warner, Inc. ("Time Warner") and TBS consummated
a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75
of a Time Warner common share for each TBS Class A and Class B common share, and
each holder of TBS Class C preferred stock received 0.80 of a Time Warner common
share for each of the 6 shares of TBS Class B common stock into which each share
of Class C preferred stock could have been converted. The Company received
approximately 50.6 million shares of Time Warner common stock in exchange for
its TBS holdings. As a result of this like-kind exchange, the Company will
recognize a pre-tax gain of approximately $1.5 billion in the fourth quarter of
1996.
On July 16, 1996, Time Warner, TBS, TCI, Liberty Media Group and the
Federal Trade Commission ("FTC") entered into an agreement in principle,
pursuant to which, among other things, Liberty Media Group agreed to receive
Time Warner securities with limited voting rights (the "TW Exchange Stock") in
exchange for its TBS common and preferred stock. In addition, subject to a
number of conditions, including receipt of a ruling from the Internal Revenue
Service that such dividend would be tax free to the Liberty Media Group
stockholders, TCI agreed that it would distribute in the form of a stock
dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a
new company ("Spinco") which would hold the TW Exchange Stock and the business
of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of
Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in
the United States and Canada. The level of Liberty Media Group's ownership
interest in Time Warner would be restricted until the Spin-Off occurs, at which
time, such restriction would be eased for Spinco.
If the Spin-Off occurs, certain control stockholders of TCI, the Estate of
Bob Magness, John C. Malone and Kearns-Tribune Corporation, would exchange the
Spinco common stock they receive for a Spinco convertible preferred security
which would only be entitled to vote on major corporate transactions involving
Spinco.
Pursuant to an underwritten public offering, the Company sold 19,550,000
shares of TCI Class A common stock in February of 1995. The Company received net
proceeds of approximately $401 million. Such proceeds were immediately used to
reduce outstanding indebtedness under credit facilities.
On July 18, 1995, TINTA completed the IPO in which it sold 20 million
shares of TINTA Series A common stock to the public for aggregate consideration
of $320 million, before deducting related expenses (approximately $19 million).
TINTA used the IPO proceeds to repay debt of the Company ($177 million) and fund
acquisitions, operations and capital contributions.
During the year ended December 31, 1995, TCIC sold approximately $1.5
billion of publicly-placed fixed rate senior and medium term notes with interest
rates ranging from 6.8% to 8.8% and maturity dates ranging through 2015. The
proceeds from the sale of these notes were used primarily to repay variable-rate
bank debt.
(Continued)
V-27
<PAGE> 177
Subsequent to December 31, 1995, TINTA issued $345 million (before
deducting offering costs of $9 million) of 4.5% convertible subordinated
debentures. TINTA anticipates that it will use the net proceeds to fund capital
contributions to certain of its equity investees.
Also, subsequent to December 31, 1995, the Company, through certain
subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable Preferred
Stock for net cash proceeds of $223 million, (ii) 20 million preferred
securities of 8.72% Trust Originated Preferred Securities for net cash proceeds
of $486 million (through a special purpose entity formed as a Delaware business
trust) and (iii) $1 billion of publicly-placed fixed rate senior and medium term
notes with interest rates ranging from 6.9% to 7.9% and maturity dates ranging
through 2026. The Company used the proceeds from the aforementioned debt and
equity securities to retire overnight commercial paper and to repay variable
rate indebtedness.
The Company has a credit facility which matures in September of 1997. The
outstanding balance of such facility was $602 million at December 31, 1995. The
Company currently anticipates that it will refinance such borrowings but there
can be no assurance that it can do so on terms acceptable to the Company.
The Company is a holding company and its assets consist almost entirely of
investments in its subsidiaries. As a holding company, the Company's ability to
pay dividends on any classes or series of preferred stock is dependent on the
earnings of, or other funds available to, the Company's subsidiaries and the
distribution or other payment of such earnings or other funds to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company. The Company's subsidiaries are separate and distinct legal entities and
have no obligation, contingent or otherwise, to pay the dividends on any class
or series of preferred stock of TCI or to make any funds available therefor,
whether by dividends, loans or other payments. The payment of dividends or the
making of loans and advances to the Company by its subsidiaries may be subject
to statutory or regulatory restrictions, are contingent upon the earnings of
those subsidiaries and are subject to various business considerations. Further,
certain of the Company's subsidiaries are subject to loan agreements that
prohibit or limit the transfer of funds by such subsidiaries to the Company in
the form of dividends, loans, or advances, and require that such subsidiaries'
indebtedness to the Company be subordinate to the indebtedness under such loan
agreements. The amount of net assets of subsidiaries subject to such
restrictions exceeds the Company's consolidated net assets. The Company's
subsidiaries currently have the ability to transfer funds to the Company in
amounts exceeding the Company's dividend requirement on any class or series of
preferred stock. Net cash provided by operating activities of subsidiaries which
are not restricted from making transfers to the parent company have been and are
expected to continue to be sufficient to enable the parent company to meet its
cash obligations.
Moreover, almost all of the consolidated liabilities of the Company have
been incurred by its subsidiaries. Therefore, the Company's rights, and the
extent to which the holders of the Company's preferred stocks will be able to
participate in the distribution of assets of any subsidiary upon the latter's
liquidation or reorganization, will be subject to prior claims of the
subsidiary's creditors, including trade creditors, except to the extent that the
Company may itself be a creditor with recognized claims against such subsidiary
(in which case the claims of the Company would still be subject to the prior
claims of any secured creditor of such subsidiary and of any holder of
indebtedness of such subsidiary that is senior to that held by the Company).
Subsidiaries of the Company had approximately $2.5 billion in unused lines
of credit at December 31, 1995 excluding amounts related to lines of credit
which provide availability to support commercial paper. Although subsidiaries of
the Company were in compliance with the restrictive covenants contained in their
credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with such
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings. See
note 9 to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.
(Continued)
V-28
<PAGE> 178
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash operating
credits or charges)($1,975 million, $1,798 million and $1,858 million in 1995,
1994 and 1993, respectively) to interest expense ($1,010 million, $785 million
and $731 million in 1995, 1994 and 1993, respectively), is determined by
reference to the consolidated statements of operations. The Company's interest
coverage ratio was 196%, 229% and 254% for 1995, 1994 and 1993, respectively.
The decrease in the Company's interest coverage in 1995 is caused by increased
interest expense due to higher interest rates and debt levels in 1995.
Management of the Company believes that the foregoing interest coverage ratio is
adequate in light of the consistency and nonseasonal nature of its cable
television operations and the relative predictability of the Company's interest
expense, almost half of which results from fixed rate indebtedness. Operating
Cash Flow is a measure of value and borrowing capacity within the cable
television industry and is not intended to be a substitute for cash flows
provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net cash
provided by operating activities ($957 million, $908 million and $1,247 million
in 1995, 1994 and 1993, respectively) reflects net cash from the operations of
the Company available for the Company's liquidity needs after taking into
consideration the aforementioned additional substantial costs of doing business
not reflected in Operating Cash Flow. Amounts expended by the Company for its
investing activities exceed net cash provided by operating activities. However,
management believes that net cash provided by operating activities, the ability
of the Company and its subsidiaries to obtain additional financing (including
the subsidiaries' available lines of credit and access to public debt markets),
issuances and sales of the Company's equity or equity of its subsidiaries, and
proceeds from disposition of assets will provide adequate sources of short-term
and long-term liquidity in the future. See the Company's consolidated statements
of cash flows included in the accompanying consolidated financial statements.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. At December 31, 1995, after considering the net effect of various
interest rate exchange agreements (see note 9 to the consolidated financial
statements) with notional amounts aggregating $1,918 million, the Company had
$6,002 million (or 45%) of fixed-rate debt with a weighted average interest rate
of 8.8% and $7,209 million (or 55%) of variable-rate debt with a weighted
average interest rate of 6.3%.
Pursuant to the interest rate exchange agreements, the Company pays (i)
fixed interest rates ranging from 6.1% to 9.9% on notional amounts of $602
million at December 31, 1995 and (ii) variable interest rates on notional
amounts of $2,520 million at December 31, 1995. During the years ended December
31, 1995, 1994 and 1993, the Company's net payments pursuant to its fixed rate
exchange agreements were $13 million, $26 million and $38 million, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company's net
receipts (payments) pursuant to its variable rate exchange agreements were (less
than $1 million), $36 million and $31 million, respectively. The Company is
exposed to credit losses for the periodic settlements of amounts due under the
interest rate exchange agreements in the event of nonperformance by the other
parties to the agreements. However, the Company does not anticipate that it will
incur any material credit losses because it does not anticipate nonperformance
by the counterparties.
In connection with its investments in certain foreign entities, the Company
is exposed to unfavorable and potentially volatile fluctuations of the U.S.
dollar against the UK pound sterling ("L"), the Japanese yen ("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
(Continued)
V-29
<PAGE> 179
or its foreign subsidiaries and affiliates enter into transactions denominated
in currencies other than their respective functional currencies. Because the
Company generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. With respect to funding
commitments that are denominated in currencies other than the U.S. dollar, the
Company historically has sought to reduce its exposure to short-term (generally
no more than 90 days) movements in the applicable exchange rates once the timing
and amount of such funding commitments becomes fixed. Although the Company
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, the Company believes that it
is not possible or practical to completely eliminate the Company's exposure to
unfavorable fluctuations in foreign currency exchange rates.
Approximately twenty-five percent of the franchises held by the Company,
involving approximately 4.4 million basic subscribers, expire within five years.
There can be no assurance that the franchises for the Company's systems will be
renewed as they expire, although the Company believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for
franchise renewal. However, in the event they are renewed, the Company cannot
predict the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with the renewals. To date they have
not varied significantly from the original terms.
A significant competitive impact is expected from medium power and higher
power direct broadcast satellites ("DBS") that use high frequencies to transmit
signals that can be received by dish antennas much smaller in size than
traditional home satellite dishes ("HSDs"). Primestar distributes a
multi-channel programming service via a medium power communications satellite to
HSDs of approximately 3 feet in diameter. At December 31, 1995, Primestar,
through its partners, served an estimated 940,000 HSDs in the United States. Two
other DBS operators, DirecTV, a subsidiary of GM Hughes Electronics, and United
States Satellite Broadcasting, a subsidiary of Hubbard Broadcasting, Inc., offer
video services that can be received by HSDs that measure approximately eighteen
inches in diameter. Such DBS operators have the right to distribute
substantially all of the significant cable television programming services
currently carried by cable television systems. The competition from DBS will
likely continue to grow. One DBS operator is preparing to launch a new DBS
satellite. AT&T Corp. recently made a large investment in DirecTV, and several
other major companies are preparing to develop and operate high-power DBS
systems, including MCI Communications Corp. ("MCI") and News Corp. MCI recently
acquired rights to satellite frequencies for DBS in an FCC auction.
The 1996 Telecom Act eliminated the statutory and regulatory restrictions
that prevented telephone companies from competing with cable operators for the
provision of video services by any means. The 1996 Telecom Act allows local
telephone companies, including the regional bell operating companies, to compete
with cable television operators both inside and outside their telephone service
areas. The Company expects that it will face substantial competition from
telephone companies for the provision of video services. The Company assumes
that all major telephone companies have already entered or soon will enter the
business of providing video services. Most major telephone companies have
greater financial resources than the Company, and the 1992 Cable Act ensures
that telephone company providers of video services will have access to all of
the significant cable television programming services. Additionally, the 1996
Telecom Act eliminates certain federal restrictions on utility holding companies
and thus frees all utility companies to provide cable television services. The
Company expects this could result in another source of significant competition
in the delivery of video services.
The Company is upgrading and installing optical fiber technology in its
cable systems at a rate such that in approximately two years TCI anticipates
that it will be serving the majority of its customers with this technology. The
systems, which facilitate digital transmission of voice, video and data signals,
will have optical fiber to neighborhood nodes with coaxial cable distribution
downstream from that point. The Company made capital expenditures of $1,782
million in 1995 and the Company expects to expend similar amounts in 1996 to
(Continued)
V-30
<PAGE> 180
provide for the continued rebuilding of its cable systems. However, such
proposed expenditures are subject to reevaluation based upon changes in the
Company's liquidity, including those resulting from rate regulation.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $222
million at December 31, 1995. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such guarantees, that they
will not be material to the Company.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios through February 28, 2009 (the "Film Licensing Obligations"). The
aggregate minimum liability under certain of the license agreements is
approximately $414 million. The aggregate amount of the Film Licensing
Obligations under other license agreements is not currently estimable because
such amount is dependent upon certain variable factors. Nevertheless, the
Company's aggregate payments under the Film Licensing Obligations could prove to
be significant. Additionally, the Company has guaranteed up to $67 million of
similar license fee obligations of an affiliate.
The Company has committed to provide additional debt or equity funding to
certain of its affiliates. At December 31, 1995, such commitments aggregated $95
million.
The Company intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. The Company's obligation for certain
sports program rights contracts as of December 31, 1995 was $448 million. Upon
the formation of the Fox-Liberty Venture, the Company anticipates that such
commitments will be transferred to the Fox-Liberty Venture. The continued
development of such services may require additional financing and it cannot be
predicted whether the Company will obtain such financing on terms acceptable to
the Company.
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
V-31
<PAGE> 181
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tele-Communications, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
----------------------------------------
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1996
V-32
<PAGE> 182
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994*
------- ------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash........................................................ $ 118 74
Trade and other receivables, net............................ 407 301
Inventories, net............................................ 104 121
Prepaid expenses............................................ 65 36
Prepaid program rights...................................... 47 24
Committed film inventory.................................... 122 58
Investments in affiliates, accounted for under the equity
method, and related receivables (notes 5 and 6)........... 2,372 1,299
Investment in Turner Broadcasting System, Inc. ("TBS") (note
7)........................................................ 955 660
Property and equipment, at cost:
Land...................................................... 88 91
Distribution systems...................................... 9,545 7,705
Support equipment and buildings........................... 1,429 1,146
------- ------
11,062 8,942
Less accumulated depreciation............................. 3,653 3,066
------- ------
7,409 5,876
------- ------
Franchise costs............................................. 14,322 11,152
Less accumulated amortization............................. 2,092 1,708
------- ------
12,230 9,444
------- ------
Other assets, net of amortization........................... 1,748 1,383
------- ------
$25,577 19,276
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 243 201
Accrued interest............................................ 233 183
Accrued programming expense................................. 318 248
Other accrued expenses...................................... 1,114 561
Debt (note 9)............................................... 13,211 11,162
Deferred income taxes (note 14)............................. 4,584 3,509
Other liabilities........................................... 195 160
------- ------
Total liabilities................................... 19,898 16,024
------- ------
Minority interests in equity of consolidated subsidiaries... 651 429
Redeemable preferred stocks (note 10)....................... 478 168
Stockholders' equity (note 11):
Series Preferred Stock, $.01 par value.................... -- --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value......................... -- --
Tele-Communications, Inc. Series A TCI Group common stock,
$1 par value Authorized 1,750,000,000 shares; issued
672,211,009 in 1995..................................... 672 --
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value Authorized 150,000,000 shares; issued
84,691,554 in 1995...................................... 85 --
Tele-Communications, Inc. Series A Liberty Media Group
common stock, $1 par value Authorized 750,000,000
shares; issued 142,896,264 in 1995...................... 143 --
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value Authorized 75,000,000 shares;
issued 21,196,868 in 1995............................... 21 --
Class A common stock, $1 par value Issued 576,979,498
shares in 1994.......................................... -- 577
Class B common stock, $1 par value Issued 89,287,429
shares in 1994.......................................... -- 89
Additional paid-in capital................................ 4,068 2,791
Cumulative foreign currency translation adjustment, net of
taxes................................................... (9) (4)
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 338 94
Accumulated deficit....................................... (454) (282)
------- ------
4,864 3,265
Treasury stock, at cost (100,524,364 shares of Series A
TCI Group common stock in 1995; and 86,030,992 shares of
Class A common stock and 4,172,629 shares of Class B
common stock in 1994)................................... (314) (610)
------- ------
Total stockholders' equity.......................... 4,550 2,655
------- ------
Commitments and contingencies (note 15)
$25,577 19,276
======= ======
</TABLE>
- ---------------
*Restated -- see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-33
<PAGE> 183
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994* 1993*
------- ----- -----
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue (note 16):
From cable and programming services
(notes 4 and 8)..................... $ 5,832 4,454 4,153
Net sales from electronic retailing
services............................ 1,019 482 --
------- ----- -----
6,851 4,936 4,153
------- ----- -----
Operating costs and expenses:
Operating (note 4).................... 2,097 1,445 1,190
Cost of sales from electronic
retailing services.................. 702 313 --
Selling, general and administrative... 2,066 1,380 1,105
Compensation relating to stock
appreciation rights................. 55 -- 31
Adjustment to compensation relating to
stock appreciation rights........... -- (8) --
Restructuring charges................. 17 -- --
Depreciation.......................... 899 700 622
Amortization.......................... 473 318 289
------- ----- -----
6,309 4,148 3,237
------- ----- -----
Operating income (note 16).......... 542 788 916
Other income (expense):
Interest expense...................... (1,010) (785) (731)
Interest and dividend income.......... 52 36 34
Share of earnings of Liberty Media
Corporation ("Liberty") (note 4).... -- 128 7
Share of losses of other affiliates,
net (notes 5 and 6)................. (193) (112) (76)
Gain on sale of subsidiary stock (note
13)................................. 123 -- --
Gain on sale of stock by equity
investee (note 5)................... 165 161 --
Gain (loss) on disposition of
assets.............................. 49 (10) 42
Other, net............................ (19) (24) (28)
------- ----- -----
(833) (606) (752)
------- ----- -----
Earnings (loss) before income
taxes.............................. (291) 182 164
Income tax benefit (expense) (note
14)................................... 120 (120) (169)
------- ----- -----
Net earnings (loss) (note 8)........ (171) 62 (5)
Dividend requirements on preferred
stocks................................ (34) (8) (2)
------- ----- -----
Net earnings (loss) attributable to
common stockholders (note 8)....... $ (205) 54 (7)
======= ===== =====
Net earnings (loss) attributable to
common stockholders (note 2):
TCI Class A and Class B common
stock.............................. $ (71) 54 (7)
TCI Group Series A and Series B
common stock....................... (107) -- --
Liberty Media Group Series A and
Series B common stock.............. (27) -- --
------- ----- -----
$ (205) 54 (7)
======= ===== =====
Primary and fully diluted net earnings
(loss) attributable to common
stockholders per common and common
equivalent share (notes 2 and 8):
TCI Class A and Class B common
stock.............................. $ (.11) .10 (.02)
TCI Group Series A and Series B
common stock....................... $ (.16) -- --
Liberty Media Group Series A and
Series B common stock.............. $ (.16) -- --
Pro forma net loss attributable to
common stockholders (note 2):
TCI Group Series A and Series B
common stock....................... $ (171)
Liberty Media Group Series A and
Series B common stock.............. (27)
Telephony Group Series A and Series
B common stock..................... (7)
-------
$ (205)
=======
Pro forma net loss attributable to
common stockholders per common share
(note 2):
TCI Group Series A and Series B
common stock....................... $ (.26)
Liberty Media Group Series A and
Series B common stock.............. $ (.16)
</TABLE>
- ---------------
*Restated -- see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-34
<PAGE> 184
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP
PREFERRED ----------------- ------------------- -------------------
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B
--------- ------- ------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993*................. $ -- 462 48 -- -- -- --
Net loss................................... -- -- -- -- -- -- --
Issuance of common stock upon conversion of
notes (note 9)............................ -- 20 -- -- -- -- --
Issuance of common stock upon exercise of
options................................... -- -- -- -- -- -- --
Dividends on redeemable preferred stocks... -- -- -- -- -- -- --
(2)
Foreign currency translation adjustment.... -- -- -- -- -- -- --
Acquisition and retirement of common
stock..................................... -- -- (1) -- -- -- --
--- ---- --- -- -- -- --
Balance at December 31, 1993*............... $ -- 482 47 -- -- -- --
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994........................... -- -- -- -- -- -- --
Net earnings............................... -- -- -- -- -- -- --
Conversion of redeemable preferred stock
(note 10)................................. -- 1 -- -- -- -- --
Issuance of common stock upon conversion of
notes (note 9)............................ -- 3 -- -- -- -- --
Issuance of common stock upon exercise of
stock option.............................. -- -- -- -- -- -- --
Acquisition and retirement of common
stock..................................... -- -- -- -- -- -- --
Consummation of the TCI/Liberty Combination
(note 4).................................. -- 85 42 -- -- -- --
Accreted dividends on all classes of
preferred stock........................... -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements................... -- -- -- -- -- -- --
Foreign currency translation adjustment.... -- -- -- -- -- -- --
Issuance of TCI Class A common stock to
subsidiaries of TCI in Reorganization..... -- -- -- -- -- -- --
Issuance of Class A common stock for
investment................................ -- 6 -- -- -- -- --
Repayment of note receivable from related
party..................................... -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities............. -- -- -- -- -- -- --
--- ---- --- -- -- -- --
Balance at December 31, 1994................ $ -- 577 89 -- -- -- --
--- ---- --- -- -- -- --
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING NOTE
FOREIGN GAINS FOR RECEIVABLE
ADDITIONAL CURRENCY AVAILABLE- FROM
PAID-IN TRANSLATION FOR-SALE RELATED ACCUMULATED TREASURY
CAPITAL ADJUSTMENT SECURITIES* PARTY DEFICIT* STOCK
---------- ----------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993*................. 1,909 (19) -- -- (339) (333)
Net loss................................... -- -- -- -- (5) --
Issuance of common stock upon conversion of
notes (note 9)............................ 383 -- -- -- -- --
Issuance of common stock upon exercise of
options................................... 7 -- -- -- -- --
Dividends on redeemable preferred stocks... (2) -- -- -- -- --
Foreign currency translation adjustment.... -- (10) -- -- -- --
Acquisition and retirement of common
stock..................................... (4) -- -- -- -- --
----- -- --- -- --- ---
Balance at December 31, 1993*............... 2,293 (29) -- -- (344) (333)
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994........................... -- -- 297 -- -- --
Net earnings............................... -- -- -- -- 62 --
Conversion of redeemable preferred stock
(note 10)................................. 17 -- -- -- -- --
Issuance of common stock upon conversion of
notes (note 9)............................ -- -- -- -- -- --
Issuance of common stock upon exercise of
stock option.............................. 3 -- -- -- -- --
Acquisition and retirement of common
stock..................................... (2) -- -- -- -- --
Consummation of the TCI/Liberty Combination
(note 4).................................. 383 -- 4 (15) -- (285)
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 -- -- -- --
Issuance of TCI Class A common stock to
subsidiaries of TCI in Reorganization..... (23) -- -- -- -- 23
Issuance of Class A common stock for
investment................................ 124 -- -- -- -- --
Repayment of note receivable from related
party..................................... -- -- -- 15 -- (15)
Change in unrealized holding gains for
available-for-sale securities............. -- -- (207) -- -- --
----- -- --- -- --- ---
Balance at December 31, 1994................ 2,791 (4) 94 -- (282) (610)
----- -- --- -- --- ---
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY*
-------------
<S> <C>
Balance at January 1, 1993*................. 1,728
Net loss................................... (5)
Issuance of common stock upon conversion of
notes (note 9)............................ 403
Issuance of common stock upon exercise of
options................................... 7
Dividends on redeemable preferred stocks...
Foreign currency translation adjustment.... (10)
Acquisition and retirement of common
stock..................................... (5)
-----
Balance at December 31, 1993*............... 2,116
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994........................... 297
Net earnings............................... 62
Conversion of redeemable preferred stock
(note 10)................................. 18
Issuance of common stock upon conversion of
notes (note 9)............................ 3
Issuance of common stock upon exercise of
stock option.............................. 3
Acquisition and retirement of common
stock..................................... (2)
Consummation of the TCI/Liberty Combination
(note 4).................................. 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
Issuance of TCI Class A common stock to
subsidiaries of TCI in Reorganization..... --
Issuance of Class A common stock for
investment................................ 130
Repayment of note receivable from related
party..................................... --
Change in unrealized holding gains for
available-for-sale securities............. (207)
-----
Balance at December 31, 1994................ 2,655
-----
</TABLE>
V-35
<PAGE> 185
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP
PREFERRED ----------------- ------------------- -------------------
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B
--------- ------- ------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994*............... $ -- 577 89 -- -- -- --
Net loss................................... -- -- -- -- -- -- --
Issuance of common stock in public
offering.................................. -- 20 -- -- -- -- --
Issuance of common stock in private
offering.................................. -- 1 -- -- -- -- --
Issuance of common stock for acquisitions
and investments (note 8).................. -- 59 -- -- -- -- --
Issuance of Class A common stock to
subsidiary of TCI in Reorganization....... -- -- -- -- -- -- --
Issuance of Class A common stock to
subsidiary in exchange for investment..... -- -- -- -- -- -- --
Retirement of Class A common stock
previously held by subsidiary............. -- -- -- -- -- -- --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock")
(note 1).................................. -- (86) (4) -- -- -- --
Conversion of Series F Preferred Stock held
by subsidiary for Series A TCI Group
common stock.............................. -- -- -- 101 -- -- --
Distribution of Series A and Series B
Liberty Media Group common stock to TCI
common stockholders (note 1).............. -- -- -- -- -- 143 21
Costs associated with Distribution to
stockholders.............................. -- -- -- -- -- -- --
Redesignation of TCI common stock into
Series A and Series B TCI Group common
stock (note 1)............................ -- (571) (85) 571 85 -- --
Accreted dividends on all classes of
preferred stock........................... -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to mandatory
redemption requirements................... -- -- -- -- -- -- --
Payment of preferred stock dividends....... -- -- -- -- -- -- --
Issuance of common stock by subsidiary
(note 13)................................. -- -- -- -- -- -- --
Foreign currency translation adjustment.... -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities............. -- -- -- -- -- -- --
Adjustment to reflect elimination of
reporting delay with respect to certain
foreign subsidiaries
(note 2).................................. -- -- -- -- -- -- --
--- ---- --- -- -- -- --
Balance at December 31, 1995................ $ -- -- -- 672 85 143 21
=== ==== === == == == ==
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING NOTE
FOREIGN GAINS FOR RECEIVABLE
ADDITIONAL CURRENCY AVAILABLE- FROM
PAID-IN TRANSLATION FOR-SALE RELATED ACCUMULATED TREASURY
CAPITAL ADJUSTMENT SECURITIES* PARTY DEFICIT* STOCK
---------- ----------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994*............... 2,791 (4) 94 -- (282) (610)
Net loss................................... -- -- -- -- (171) --
Issuance of common stock in public
offering.................................. 381 -- -- -- -- --
Issuance of common stock in private
offering.................................. 29 -- -- -- -- --
Issuance of common stock for acquisitions
and investments (note 8).................. 1,329 -- -- -- -- --
Issuance of Class A common stock to
subsidiary of TCI in Reorganization....... (6) -- -- -- -- 6
Issuance of Class A common stock to
subsidiary in exchange for investment..... (1) -- -- -- -- 1
Retirement of Class A common stock
previously held by subsidiary............. 29 -- -- -- -- (29)
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock")
(note 1).................................. (542) -- -- -- -- 632
Conversion of Series F Preferred Stock held
by subsidiary for Series A TCI Group
common stock.............................. 213 -- -- -- -- (314)
Distribution of Series A and Series B
Liberty Media Group common stock to TCI
common stockholders (note 1).............. (164) -- -- -- -- --
Costs associated with Distribution to
stockholders.............................. (8) -- -- -- -- --
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) -- -- -- --
Change in unrealized holding gains for
available-for-sale securities............. -- -- 244 -- -- --
Adjustment to reflect elimination of
reporting delay with respect to certain
foreign subsidiaries
(note 2).................................. -- -- -- -- (1) --
----- -- --- -- --- ---
Balance at December 31, 1995................ 4,068 (9) 338 -- (454) (314)
===== == === == === ===
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY*
-------------
<S> <C>
Balance at December 31, 1994*............... 2,655
Net loss................................... (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 8).................. 1,388
Issuance of Class A common stock to
subsidiary of TCI in Reorganization....... --
Issuance of Class A common stock to
subsidiary in exchange for investment..... --
Retirement of Class A common stock
previously held by subsidiary............. --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock")
(note 1).................................. --
Conversion of Series F Preferred Stock held
by subsidiary for Series A TCI Group
common stock.............................. --
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)
Change in unrealized holding gains for
available-for-sale securities............. 244
Adjustment to reflect elimination of
reporting delay with respect to certain
foreign subsidiaries
(note 2).................................. (1)
-----
Balance at December 31, 1995................ 4,550
=====
</TABLE>
- ---------------
*Restated -- see notes 5 and 6
See accompanying notes to consolidated financial statements.
V-36
<PAGE> 186
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994* 1993*
------- ------ ------
(AMOUNTS IN MILLIONS)
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ (171) 62 (5)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,372 1,018 911
Compensation relating to stock appreciation rights...... 55 -- 31
Adjustment to compensation relating to stock
appreciation rights.................................... -- (8) --
Share of earnings of Liberty............................ -- (128) (7)
Share of losses of other affiliates..................... 193 112 76
Gain on sale of subsidiary stock........................ (123) -- --
Gain on sale of stock by equity investee................ (165) (161) --
Deferred income tax expense (benefit)................... (153) 37 140
Loss (gain) on disposition of assets.................... (49) 10 (42)
Other noncash charges (credits)......................... (37) 5 48
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................. (70) 15 (32)
Change in inventories................................. 16 (26) --
Change in prepaids.................................... (86) (97) (4)
Change in accrued interest............................ 45 13 63
Change in other accruals and payables................. 132 56 68
Net cash used in Flextech plc's operating activities
during the month ended September 30, 1995 (note 2)..... (2) -- --
------- ------ ------
Net cash provided by operating activities.......... 957 908 1,247
------- ------ ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (477) (358) (158)
Capital expended for property and equipment............... (1,782) (1,264) (947)
Cash proceeds from disposition of assets.................. 166 39 149
Additional investments in and loans to affiliates and
others.................................................. (1,134) (445) (361)
Repayment of loans by affiliates and others............... 18 148 62
Other investing activities................................ (84) (15) 89
Net cash used in Flextech plc's investing activities
during the month ended September 30, 1995 (note 2)...... (51) -- --
------- ------ ------
Net cash used in investing activities.............. (3,344) (1,895) (1,166)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt........................................ 8,152 4,676 6,305
Repayments of debt........................................ (6,567) (3,607) (6,321)
Proceeds from sale of subsidiary stock.................... 445 -- --
Issuances of common stock................................. 431 1 6
Preferred stock dividends of subsidiaries................. (6) (6) (6)
Preferred stock dividends................................. (24) (4) (2)
Costs associated with Distribution to stockholders........ (8) -- --
Repurchases of preferred stock............................ -- -- (92)
Repurchases of common stock............................... -- -- (4)
Net cash provided by Flextech plc's financing activities
during the month ended September 30, 1995 (note 2)...... 8 -- --
------- ------ ------
Net cash provided (used) by financing activities... 2,431 1,060 (114)
------- ------ ------
Net increase (decrease) in cash.................... 44 73 (33)
Cash at beginning of year.......................... 74 1 34
------- ------ ------
Cash at end of year................................ $ 118 74 1
======= ====== ======
</TABLE>
- ---------------
*Restated -- see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-37
<PAGE> 187
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) ORGANIZATION
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reorganization
During the fourth quarter of 1994, the Company was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable and
Communications (the "Cable Unit"); Programming (the "Programming Unit");
International Cable and Programming ("TINTA"); and Technology/Venture Capital.
Upon Reorganization, certain of the assets of the Cable and Programming Units
were transferred to the other operating units. As consideration for such
transfer of assets, TCI issued 317,112 shares of TCI Class A common stock and
246,402 shares of Redeemable Convertible Preferred Stock, Series E ("Series E
Preferred Stock") (see note 10). Preferred stock of TCI which is owned by
subsidiaries of TCI eliminates in consolidation. Common stock of the Company
held by subsidiaries is treated as treasury stock in consolidation.
Liberty Group Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty Group
Stock") which is intended to reflect the separate performance of TCI's business
which produces and distributes cable television programming services ("Liberty
Media Group"). While the Liberty Group Stock constitutes common stock of TCI,
the issuance of the Liberty Group Stock did not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of holders
of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed
one hundred percent of the equity value attributable to the Liberty Media Group
(the "Distribution") to its security holders of record on August 4, 1995.
Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock ("TCI Group Stock").
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A and Series B
TCI Group Stock, the TCI Group Stock is intended to reflect the separate
performance of the subsidiaries and assets not attributed to Liberty Media
Group, including (i) TCI's Cable and Communication unit, (ii) TINTA and (iii)
TCI's Technology/Venture Capital unit. Such subsidiaries and assets are referred
to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group or to Liberty Media Group for purposes of
preparing their combined financial statements, the change in the capital
structure of TCI does not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries will each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of
common stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty Group Stock did not affect the rights of creditors of TCI.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for dividends and the
available dividend amount with respect to TCI Group, as defined. Determinations
to pay dividends on TCI Group Stock will be based primarily upon the financial
condition, results of operations and business requirements of TCI Group and TCI
as a whole.
V-38
<PAGE> 188
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the
TCI Group owned shares of Class A common stock and preferred stock of the
Company ("Subsidiary Shares"). Because the Distribution of the Liberty Group
Stock was made as a dividend to all holders of the Company's Class A common
stock and Class B common stock and, pursuant to the anti-dilution provisions set
forth therein, to the holders of securities convertible into Class A common
stock and Class B common stock upon the conversion thereof, shares of Liberty
Group Stock would have otherwise been issued and become issuable in respect of
the Subsidiary Shares held by these subsidiaries and would have been attributed
to TCI Group. The Liberty Group Stock issued in connection with the Distribution
was intended to constitute 100% of the equity value thereof to the holders of
the TCI Class A common stock and TCI Class B common stock and TCI Group did not
initially have any interest in Liberty Media Group represented by any
outstanding shares of Liberty Group Stock (an "Inter-Group Interest").
Therefore, the Company determined to exchange all of the outstanding Subsidiary
Shares for shares of a new series of Series Preferred Stock designated
Convertible Redeemable Participating Preferred Stock, Series F (the "Series F
Preferred Stock"). See note 10. The rights, privileges and preferences of the
Series F Preferred Stock did not entitle its holders to receive Liberty Group
Stock in the Distribution or upon conversion of the Series F Preferred Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1995 and 1994 was not material.
Inventories, Net
Merchandise inventories are valued at the lower of cost or market, cost
being determined using the first-in, first-out method. Cost includes freight,
certain warehousing costs and other allocable overhead. Market is determined on
the basis of net realizable value, giving consideration to obsolescence and
other factors. Inventories are presented net of an inventory carrying adjustment
of $33 million and $19 million at December 31, 1995 and 1994, respectively.
V-39
<PAGE> 189
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Program Rights
Prepaid program rights are amortized on a film-by-film basis (or
event-by-event basis for sports events) over the specific number of exhibitions.
Committed film inventory and program rights payable are recorded at the
estimated costs of the programs when the film is available for airing. These
amounts are amortized on a film-by-film basis over the specific number of
exhibitions.
Investments
All marketable equity securities held by the Company are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses on securities classified as available-for-sale are carried net of taxes
as a separate component of stockholders' equity.
Other investments in which the ownership interest is less than 20% and are
not considered marketable securities are generally carried at cost. For those
investments in affiliates in which the Company's voting interest is 20% to 50%,
the equity method of accounting is generally used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the Company's
share of the net earnings or losses of the affiliates as they occur rather than
as dividends or other distributions are received, limited to the extent of the
Company's investment in, advances to and commitments for the investee. The
Company's share of net earnings or losses of affiliates includes the
amortization of the difference between the Company's investment and its share of
the net assets of the investee. Recognition of gains on sales of properties to
affiliates accounted for under the equity method is deferred in proportion to
the Company's ownership interest in such affiliates.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, generally
are recognized as gains or losses in the Company's consolidated statements of
operations.
Long-Lived Assets
(a) Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. During 1995, 1994
and 1993, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems, 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
(b) Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts allocated to their tangible assets. Such amounts
are generally amortized on a straight-line basis over 40 years. Costs incurred
by the Company in obtaining franchises are being amortized on a straight-line
basis over the life of the franchise, generally 10 to 20 years.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations
V-40
<PAGE> 190
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
when indicators of impairment are present and either the undiscounted future
cash flows estimated to be generated by those assets or the fair market value
are less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement No. 121 effective January 1, 1996. The effect of
such adoption is not expected to be significant.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from the Company's financial liabilities
are recognized as interest expense. Gains and losses on early terminations of
derivatives are included in the carrying amount of the related debt and
amortized as yield adjustments over the remaining terms of the debt. The Company
does not use such instruments for trading purposes.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the common equity of those consolidated subsidiaries. Further, the
minority interests' share of losses is not recognized if the minority holders of
common equity of consolidated subsidiaries have the right to cause the Company
to repurchase such holders' common equity.
Included in minority interests in equity of consolidated subsidiaries is
$49 million and $50 million in 1995 and 1994, respectively, of preferred stocks
(and accumulated dividends thereon) of certain subsidiaries. The current
dividend requirements on these preferred stocks aggregate $6 million per annum
and such dividend requirements are reflected as minority interests in the
accompanying consolidated statements of operations.
Subsequent to December 31, 1995, TCI Communications, Inc. ("TCIC"), a
wholly-owned subsidiary of TCI, issued to the public 4.6 million shares of
Cumulative Exchangeable Preferred Stock with an initial liquidation value of
$230 million. Such issuance will be reflected as an increase in the Company's
minority interest in equity of consolidated subsidiaries.
Trust Originated Preferred Securities(SM)
Subsequent to December 31, 1995, TCI Communications Financing I (the
"Trust"), an indirect wholly-owned subsidiary of the Company, issued $16 million
in common securities and issued $500 million of 8.72% Trust Originated Preferred
Securities(SM) (the "Preferred Securities" and together with the common
securities, the "Trust Securities"). The Trust exists for the exclusive purposes
of issuing Trust Securities and investing the proceeds thereof into an aggregate
principal amount of $516 million of 8.72% Subordinated Deferrable Interest Notes
due January 31, 2045 (the "Subordinated Debt Securities") of the Company. The
Subordinated Debt Securities are unsecured obligations of the Company and are
subordinate and junior in right of payment to certain other indebtedness of the
Company. Upon redemption of such Subordinated Debt Securities, the Preferred
Securities will be mandatorily redeemable. The Company effectively provides a
full and unconditional guarantee of the Trust's obligations under the Preferred
Securities. The Company will present the Preferred Securities as a separate line
item in its balance sheet captioned "Company-obligated mandatorily redeemable
preferred securities of subsidiary trust."
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement of
operations items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity.
V-41
<PAGE> 191
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Sales from Electronic Retailing Services
Revenue includes merchandise sales and shipping and handling revenue, and
is reduced by incentive discounts and sales returns to arrive at net sales from
home shopping services. Revenue is recorded for credit card sales upon
transaction authorization, and for check sales upon receipt of customer payment,
which does not vary significantly from the time goods are shipped. The Company's
sales policy allows merchandise to be returned at the customer's discretion,
generally up to 30 days. An allowance for returned merchandise is provided based
upon past experience.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. The Company will include the disclosures required by Statement
No. 123 in the notes to future financial statements.
Earnings (Loss) Per Common and Common Equivalent Share
(a) TCI Class A and B Common Stock
Loss per common share attributable to common stockholders was computed by
dividing net loss attributable to common stockholders by the weighted average
number of common shares outstanding (648.2 million for the period from January
1, 1995 through the Distribution and 432.6 million for the year ended December
31, 1993). Common stock equivalents were not included in the computation of
weighted average shares outstanding because their inclusion would be
anti-dilutive.
Primary earnings per common and common equivalent share attributable to
common stockholders was computed by dividing net earnings attributable to common
stockholders by the weighted average number of common and common equivalent
shares outstanding (540.8 million for the year ended December 31, 1994).
Fully diluted earnings per common and common equivalent share attributable
to common stockholders was computed by dividing earnings attributable to common
stockholders by the weighted average number of common and common equivalent
shares outstanding (540.8 million for the year ended December 31, 1994). Shares
issuable upon conversion of the Convertible Preferred Stock, Series C ("Series C
Preferred Stock") (see note 10) have not been included in the computation of
weighted average shares because their effect would be anti-dilutive.
(b) TCI Group Stock
The loss attributable to common stockholders per common share for the
period from the Distribution to December 31, 1995 was computed by dividing net
loss attributable to TCI Group Series A and Series B common stockholders by the
weighted average number of common shares outstanding of TCI Group Stock during
the period (656.4 million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their inclusion would
be anti-dilutive.
(c) Liberty Group Stock
The loss per common share for the period from the Distribution to December
31, 1995 was computed by dividing net loss attributable to Liberty Media Group
Series A and Series B common stockholders by the weighted average number of
common shares outstanding of Liberty Group Stock during the period (164.1
million). Common stock equivalents were not included in the computation of
weighted average shares outstanding because their inclusion would be
anti-dilutive.
V-42
<PAGE> 192
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Pro Forma Loss Attributable to Common Stockholders
Pro forma loss attributable to common stockholders for the Telephony Group
and the TCI Group and pro forma loss attributable to common stockholders per
common share for TCI Group, both for the year ended December 31, 1995, assume,
solely for the purpose of these calculations, that the Company sold, on January
1, 1995, 10% of the equity value of the Telephony Group in an initial public
offering. Additionally, the pro forma calculations assume the conversion, on
January 1, 1995, of $500 million of TCI Group's interest in Telephony Group into
a preferred stock due from Telephony Group. The Company currently has not
determined, if and the extent to which, it would sell the equity value of
Telephony Group in an initial public offering.
Accounting for Foreign Subsidiaries
Through the third quarter of 1995, the Company included certain of its
foreign subsidiaries (Flextech plc ("Flextech") and Cablevision S.A.
("Cablevision")) in its financial statements on a one-month time delay. The
Company eliminated such time delay from its December 31, 1995 financial
statements. As a result, the Company's consolidated statements of operations for
the year ended December 31, 1995 include (i) Cablevision's result of operations
for the period from April 25, 1995 (the date Cablevision was acquired -- see
note 8) through December 31, 1995 and (ii) Flextech's results of operations for
the period from December 1, 1994 through December 31, 1995 (exclusive of the
one-month period ended September 30, 1995). The Company's consolidated statement
of cash flows for the year ended December 31, 1995 includes the cash flows of
Cablevision and Flextech for the same periods except that Flextech's cash flows
for the one-month period ended September 30, 1995 are included therein on a
summarized basis. In connection with the elimination of the above-described
reporting delays, the Company (i) restated certain of its quarterly financial
information in order to present Cablevision's 1995 results of operations on a
current basis (see note 17) and (ii) charged Flextech's net loss for the
one-month ended September 30, 1995 ($1 million) directly to the Company's
accumulated deficit so that the Company's consolidated statement of operations
for the year ended December 31, 1995 would not include more than 12 months of
Flextech's operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain amounts have been reclassified for comparability with the 1995
presentation.
V-43
<PAGE> 193
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 $965 million, $758 million and $641 million for
the years ended December 31, 1995, 1994 and 1993, respectively. Cash paid for
income taxes was $63 million in 1995 and was not material in 1994 or 1993.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1995 1994 1993
------- ----- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired............................ $ 3,571 1,921 172
Liabilities assumed, net of current assets............... (445) (648) (7)
Deferred tax liability recorded in acquisitions.......... (1,083) (190) (7)
Minority interests in equity of acquired entities........ 49 (35) --
Note receivable from related party assumed............... -- 15 --
Common stock and preferred stock issued in
acquisitions.......................................... (1,615) (808) --
Common stock issued to TCIC and Liberty in the
TCI/Liberty Combination reflected as treasury stock
(note 3).............................................. -- 285 --
Unrealized gains on available-for-sale securities of
acquired entities..................................... -- (182) --
------- ----- ---
Cash paid for acquisitions....................... $ 477 358 158
======= ===== ===
Conversion of debt into additional minority interest in
consolidated subsidiary.................................. $ 14 -- --
======= ===== ===
Assets contributed for interest in limited liability
company.................................................. $ 3 -- --
======= ===== ===
Issuance of subsidiary stock for equity investment......... $ 11 -- --
======= ===== ===
Receipt of notes receivable upon disposition of Liberty
common stock and preferred stock......................... $ -- -- 182
======= ===== ===
Noncash exchange of equity investment for consolidated
subsidiary and equity investment......................... $ -- -- 22
======= ===== ===
Noncash capital contribution to equity investee............ $ -- -- 22
======= ===== ===
</TABLE>
(4) INVESTMENT IN LIBERTY MEDIA CORPORATION
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty entered into a definitive
merger agreement to combine the two companies (the "TCI/Liberty Combination").
The transaction was consummated on August 4, 1994 and was structured as a tax
free exchange of Class A and Class B shares of both companies and preferred
stock of Liberty for like shares of a newly formed holding company, TCI/Liberty
Holding Company. In connection with the TCI/Liberty Combination, Old TCI changed
its name to TCI Communications, Inc. and TCI/Liberty Holding Company changed its
name to Tele-Communications, Inc.
Due to the significant economic interest held by TCIC through its ownership
of Liberty preferred stock and Liberty common stock and other related party
considerations, TCIC accounted for its investment in Liberty under the equity
method. Accordingly, TCIC had not recognized any income relating to dividends,
including preferred stock dividends, and TCIC recorded the earnings or losses
generated by Liberty (by
V-44
<PAGE> 194
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognizing 100% of Liberty's earnings or losses before deducting preferred
stock dividends) through the date the TCI/Liberty Combination was consummated.
Summarized unaudited financial information of Liberty for the period from
January 1, 1994 through August 4, 1994 and for the year ended December 31, 1993
is as follows:
<TABLE>
<CAPTION>
CONSOLIDATED OPERATIONS 1994 1993
----------------------- ----- ------
(AMOUNTS IN
MILLIONS)
<S> <C> <C>
Revenue..................................................... $ 790 1,153
Operating expenses.......................................... (726) (1,105)
Depreciation and amortization............................... (32) (49)
----- ------
Operating income (loss)................................... 32 (1)
Interest expense............................................ (22) (31)
Other, net.................................................. 118 39
----- ------
Net earnings...................................... $ 128 7
===== ======
</TABLE>
Prior to the TCI/Liberty Combination, TCIC purchased sports and other
programming from certain subsidiaries of Liberty. Charges to TCIC (which were
based upon customary rates charged to others) for such programming were $27
million and $44 million for the period from January 1, 1994 through August 4,
1994 and for the year ended December 31, 1993, respectively. Such amounts are
included in operating expenses in the accompanying consolidated statements of
operations. Certain subsidiaries of Liberty purchased from TCIC, at TCIC's cost
plus an administrative fee, certain pay television and other programming. In
addition, a consolidated subsidiary of Liberty paid a commission to TCIC for
merchandise sales to customers who were subscribers of TCIC's cable systems.
Aggregate commissions and charges for such programming were $9 million and $11
million for the period from January 1, 1994 through August 4, 1994 and for the
year ended December 31, 1993, respectively. Such amounts are recorded in revenue
in the accompanying consolidated statements of operations.
On July 11, 1994, Rainbow Program Enterprise purchased 49.9% of Liberty's
50% general partnership interest in American Movie Classics Company ("AMC"). The
gain recognized by Liberty in connection with the disposition of AMC was $183
million and is included in the Company's share of Liberty's earnings prior to
the TCI/Liberty Combination.
(5) INVESTMENTS IN AFFILIATES
The Company has various investments accounted for under the equity method.
Certain of the more significant investments held by the Company at December 31,
1995 were Sprint Spectrum, a partnership formed by the Company, Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation
("Sprint") (carrying value of $689 million) (see note 15), Teleport
Communications Group, Inc. and TCG Partners (collectively, "TCG") (carrying
value of $244 million), TeleWest plc ("New TeleWest") (carrying value of $550
million) and Discovery Communications, Inc. (carrying value of $117 million).
V-45
<PAGE> 195
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited financial information for affiliates other than
Liberty is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
COMBINED FINANCIAL POSITION 1995 1994
--------------------------- ------- -----
(AMOUNTS IN
MILLIONS)
<S> <C> <C>
Property and equipment, net................................. $ 3,863 2,450
Franchise costs, net........................................ 1,204 579
Other assets, net........................................... 5,347 3,050
------- -----
Total assets...................................... $10,414 6,079
======= =====
Debt........................................................ $ 5,336 2,333
Due to (from) TCI........................................... 45 (2)
Other liabilities........................................... 1,713 1,195
Owners' equity.............................................. 3,320 2,553
------- -----
Total liabilities and equity...................... $10,414 6,079
======= =====
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
COMBINED OPERATIONS 1995 1994 1993
------------------- ------- ------ ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Revenue................................................... $ 4,461 2,703 713
Operating expenses........................................ (3,807) (2,405) (648)
Depreciation and amortization............................. (532) (297) (127)
------- ------ ----
Operating income (loss)................................. 122 1 (62)
Interest expense.......................................... (337) (100) (37)
Other, net................................................ (123) 24 98
------- ------ ----
Net loss........................................ $ (338) (75) (1)
======= ====== ====
</TABLE>
In August 1995, the Company made an additional $29 million investment in
Courtroom Television Network ("Court") which represented the Company's pro rata
share of capital calls made in prior years by the other partners of Court that
the Company had no obligation to fund. Due to the additional investment in
Court, which restored its 33% ownership interest, the Company's share of losses
of Court for the year ended December 31, 1995 includes $18 million of previously
unrecognized losses of Court. These losses were not recognized in prior periods
due to the fact that the Company's investment in Court had been reduced to zero.
During 1995, BET Holdings, Inc. ("BET") repurchased a portion of its common
stock. As a result of the repurchase, the Company's ownership of BET was
increased from 19% to 22%. Therefore, the Company is deemed to exercise
significant influence over BET and, accordingly, has adopted the equity method
of accounting for its investment in BET. As a result, the Company restated its
financial statements, which resulted in a decrease to its investment in BET, its
unrealized holding gains on available-for-sale securities, its deferred taxes
and accumulated deficit of $44 million, $32 million, $18 million and $6 million,
respectively, at December 31, 1994. In addition, the Company increased its net
earnings by $2 million for each of 1994 and 1993.
At December 31, 1995, the Company had an effective ownership interest of
approximately 27% in New TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). New TeleWest was formed on October 3, 1995 upon the merger (the
"TeleWest Merger") of TeleWest Communications plc ("TeleWest Communications")
with SBC (CableComms) (UK). Prior to the TeleWest Merger, the Company had an
effective ownership interest of approximately 36% in TeleWest Communications. As
a result of the TeleWest Merger, the Company recognized a gain of approximately
$165 million (before deducting deferred income taxes of $58 million),
V-46
<PAGE> 196
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which gain represents the difference between the Company's recorded cost for
TeleWest Communications and the Company's 27% effective proportionate share of
New TeleWest's net assets.
New TeleWest contributed $70 million, $43 million and $28 million of the
Company's share of its affiliates' losses during the years ended December 31,
1995, 1994 and 1993, respectively. In addition, the Company has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments had a carrying value of $354 million at December 31, 1995 and
accounted for $62 million of the Company's share of its affiliates' losses in
1995.
As a result of TeleWest Communications' November 1994 initial public
offering and the associated dilution of the Company's ownership interest of
TeleWest Communications, the Company recognized a gain amounting to $161 million
(before deducting the related tax expense of $57 million).
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general partnership is,
as such, liable as a matter of partnership law for all debts (other than
non-recourse debts) of that partnership in the event liabilities of that
partnership were to exceed its assets.
(6) INVESTMENT IN QVC, INC.
Effective February 9, 1995 and pursuant to an Agreement and Plan of Merger,
QVC Programming Holdings, Inc. (the "Purchaser"), a corporation which is jointly
owned by Comcast and the Company, merged (the "QVC Merger") with and into QVC,
Inc. ("QVC") with QVC continuing as the surviving corporation. The Company owns
an approximate 43% interest of the post-merger QVC.
Liberty began accounting for its investment in QVC under the cost method in
May 1994, upon its determination to remain outside of the previous QVC
stockholders agreement. Prior to such determination, Liberty had accounted for
its investment in QVC under the equity method.
Upon consummation of the QVC Merger, the Company was deemed to exercise
significant influence over QVC and, as such, adopted the equity method of
accounting for its investment in QVC. As a result, TCI restated its financial
statements, which resulted in a decrease to its investment in QVC, its
unrealized gain from available-for-sale securities, its deferred tax liability
and accumulated deficit by $211 million, $127 million, $89 million and $5
million, respectively, at December 31, 1994. In addition, the restatement
resulted in an increase in the Company's share of earnings of Liberty and share
of losses of other affiliates by $1 million and $7 million, respectively, for
the year ended December 31, 1994.
A credit facility entered into by the Purchaser is secured by the common
stock of certain subsidiaries of QVC and by certain of QVC's carriage and
distribution agreements. In addition, Comcast and the Company have pledged their
shares of QVC pursuant to such credit facility.
(7) INVESTMENT IN TURNER BROADCASTING SYSTEM, INC.
The Company owns shares of TBS common stock and shares of a class of
preferred stock of TBS which have voting rights and are convertible into shares
of TBS common stock. The holders of those preferred shares, as a group, are
entitled to elect seven of fifteen members of the board of directors of TBS, and
the Company appoints three such representatives. However, voting control over
TBS continues to be held by its chairman of the board and chief executive
officer. The Company's total holdings of TBS common and preferred stocks
represent an approximate 7.5% voting interest for those matters for which
preferred and common stock vote as a single class.
V-47
<PAGE> 197
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1994, the Company's investment in TBS common stock
had an aggregate market value of $777 million and $487 million, respectively
(including unrealized holding gains of $451 million and $169 million,
respectively).
At December 31, 1995 and 1994, the Company's investment in TBS preferred
stock, carried at cost, had an aggregate market value of $927 million and $579
million, respectively, based upon the market value of the common stock into
which it is convertible. Such market value exceeded cost by $749 million and
$406 million, respectively, for such periods.
On September 22, 1995, the boards of directors of Time Warner Inc. ("Time
Warner") and TBS approved plans to merge their respective companies (the
"TBS/Time Warner Merger"). Under the terms of the agreement, TBS shareholders
will receive 0.75 of a Time Warner common share for each TBS Class A and Class B
common share. Each holder of TBS Class C preferred stock will receive 0.80 of a
Time Warner common share for each of the 6 shares of TBS Class B common stock
into which each of the shares of Class C preferred stock may be converted.
Subject to certain conditions, the Company has agreed to vote its TBS
shares for the TBS/Time Warner Merger. The Time Warner shares of common stock
received by the Company will be exchanged immediately for a series of voting
common stock ("Time Warner Series Common Stock") economically equivalent to the
common stock and placed in a voting trust with Time Warner Chairman, Gerald M.
Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell its
interest in SportSouth Network, L.P., a regional sports cable network, to the
Company for approximately $60 million; and Time Warner has agreed to issue 5
million shares of Time Warner common stock to the Company in exchange for a
6-year option to purchase Southern Satellite Systems, Inc. ("Southern"). Time
Warner has also agreed to issue additional shares of Time Warner Series Common
Stock to the Company having a market value of $160 million in the event Time
Warner exercises such option. Any shares of Time Warner common stock issuable in
connection with the Southern option will be exchanged for Time Warner Preferred
Stock. Additionally, Time Warner will grant the Company an option to purchase
Time Warner's interest in Sunshine Network, a Florida based sports cable
network, for $14 million.
The transaction is subject to, among other things, approval by the Federal
Communications Commission ("FCC") and regulatory review by federal antitrust
authorities, and approval by the shareholders of TBS and Time Warner. It is
expected to be completed in 1996.
(8) ACQUISITIONS
As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable")
consummated a transaction, whereby TeleCable was merged into TCIC. The aggregate
$1.6 billion purchase price was satisfied by TCIC's assumption of approximately
$300 million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of approximately 42 million shares of TCI Class A common stock and
1 million shares of TCI Convertible Preferred Stock, Series D (the "Series D
Preferred Stock") with an aggregate initial liquidation value of $300 million
(see note 10).
On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision
for a purchase price of $282 million, before liabilities assumed. The purchase
price was paid with cash consideration of $195 million and TINTA's issuance of
$87 million principal amount of secured negotiable promissory notes payable (the
"Cablevision Notes") to the selling shareholders. TINTA has an option during the
two-year period ended April 25, 1997 to increase its ownership interest in
Cablevision up to 80% at a cost per subscriber similar to the initial purchase
price, adjusted however for certain fluctuations in applicable foreign currency
exchange rates.
The acquisitions of TeleCable and Cablevision were accounted for by the
purchase method. Accordingly, the results of operations of such acquired
entities have been consolidated with those of the Company since the
V-48
<PAGE> 198
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective dates of acquisition. On a pro forma basis, the Company's revenue
would have been increased by $77 million, and the Company's net loss, net loss
attributable to common stockholders and net loss per share would have been
decreased by $13 million, $12 million and $.02, respectively, for the year ended
December 31, 1995; and revenue, net earnings, net earnings attributable to
common stockholders and net earnings per share would have increased by $441
million, $17 million, less than $1 million and less than $0.01, respectively,
for 1994 had such acquired entities been consolidated with the Company on
January 1, 1994. The foregoing unaudited pro forma financial information was
based upon historical results of operations adjusted for acquisition costs and,
in the opinion of management, is not necessarily indicative of the results had
the Company operated the acquired entities since January 1, 1994.
Effective January 26, 1995, TCI purchased from Comcast the 19.9% minority
interest in Heritage Communications, Inc. owned by Comcast for aggregate
consideration of approximately $290 million, the majority of which was paid in
shares of TCI Class A common stock.
(9) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT ---------------------
DECEMBER 31, 1995 1995 1994
----------------- --------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Debt of subsidiaries:
Senior notes................................ 8.5% $ 6,713 5,412
Bank credit facilities...................... 6.9% 3,712 4,045
Commercial paper............................ 6.4% 1,469 445
Notes payable............................... 10.2% 934 1,024
Convertible notes (a)....................... 9.5% 45 45
Cablevision Notes (b)....................... 10.0% 65 --
Other debt.................................. 273 191
------- ------
$13,211 11,162
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$186 million at December 31, 1995 and 1994, mature on December 18, 2021. The
notes require (so long as conversion of the notes has not occurred) an
annual interest payment through 2003 equal to 1.85% of the face amount of
the notes. During the years ended December 31, 1995, 1994 and 1993, certain
of these notes were converted into 3,416 shares, 2,350,000 shares and
819,000 shares of TCI Class A common stock, respectively. At December 31,
1995, the notes were convertible, at the option of the holders, into an
aggregate of 38,707,574 shares of Series A TCI Group Stock and 9,676,893
shares of Series A Liberty Group Stock.
(b) The Cablevision Notes are secured by TINTA's pledge of stock representing
its 51% interest in Cablevision.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or dividend
payments.
As security for borrowings under one of its bank credit facilities, the
Company has pledged 100,524,364 shares of Series A TCI Group Stock held by a
subsidiary of the Company. As security for borrowings under another of its
credit facilities, TCI has pledged a portion of its TBS common stock (with a
quoted market value of $760 million at December 31, 1995).
V-49
<PAGE> 199
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed Rate
Agreements") ranging from 6.1% to 9.9% on notional amounts of $602 million at
December 31, 1995 and (ii) variable interest rates (the "Variable Rate
Agreements") on notional amounts of $2,520 million at December 31, 1995. During
the years ended December 31, 1995, 1994 and 1993, the Company's net payments
pursuant to the Fixed Rate Agreements were $13 million, $26 million and $38
million, respectively; and the Company's net receipts (payments) pursuant to the
Variable Rate Agreements were (less than $1 million), $36 million and $31
million, respectively. After giving effect to the Company's interest rate
exchange agreements, approximately 45% of the Company's indebtedness bears
interest at fixed rates.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
FIXED RATE AGREEMENTS
---------------------
EXPIRATION INTEREST RATE NOTIONAL
DATE TO BE PAID AMOUNT
---------- ------------- --------
<S> <C> <C>
April 1996............... 9.9% $ 30
May 1996................. 8.3% 50
June 1996................ 6.1% 42
July 1996................ 8.2% 10
August 1996.............. 8.2% 10
November 1996............ 8.9% 150
October 1997............. 7.2%-9.3% 80
December 1997............ 8.7% 230
----
$602
====
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE AGREEMENTS
------------------------
EXPIRATION INTEREST RATE NOTIONAL
DATE TO BE RECEIVED AMOUNT
---------- -------------- --------
<S> <C> <C>
April 1996............. 6.8% $ 50
July 1996.............. 8.2% 10
August 1996............ 8.2% 10
September 1996......... 4.6% 150
April 1997............. 7.0% 200
September 1998......... 4.8%-5.2% 300
April 1999............. 7.4% 100
September 1999......... 7.2%-7.4% 300
February 2000.......... 5.8%-6.6% 650
March 2000............. 5.8%-6.0% 675
September 2000......... 5.1% 75
------
$2,520
======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the Company does
not anticipate that it will incur any material credit losses because it does not
anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
December 31, 1995, taking into consideration current interest rates and assuming
the current creditworthiness of the counterparties. The Company would be
required to pay an estimated $25 million at December 31, 1995 to terminate the
agreements.
The fair value of the debt of the Company's subsidiaries is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of debt, which has a carrying value of $13,211 million, was $13,804
million at December 31, 1995.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per
annum on the average unborrowed portion of the total amount available for
borrowings under bank credit facilities.
V-50
<PAGE> 200
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1996................................................ $3,494*
1997................................................ 745
1998................................................ 846
1999................................................ 804
2000................................................ 920
</TABLE>
- ---------------
* Includes $1,469 million of commercial paper.
(10) REDEEMABLE PREFERRED STOCKS
4 1/2% Convertible Preferred Stock. The 4 1/2% Convertible Preferred Stock
was stated at its redemption value of $3,000 per share, and each share was
convertible into 204 shares of TCI Class A common stock. In February of 1994,
all of the shares of such convertible preferred stock were tendered to the
Company for conversion and, on March 3, 1994, 1,265,004 shares of TCI Class A
common stock were issued to the holders of such preferred stock.
Convertible Preferred Stock, Series C. TCI has issued 70,575 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred Stock,
Series C," par value $.01 per share, as partial consideration for an acquisition
by TCI.
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 100 shares of Series A TCI Group Stock and 25 shares of Series A
Liberty Group stock, subject to anti-dilution adjustments. The dividend,
liquidation and redemption features of the Series C Preferred Stock will be
determined by reference to the liquidation value of the Series C Preferred
Stock, which as of any date of determination is equal, on a per share basis, to
the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the
dividend payment date on or immediately preceding such date of determination to
the extent not paid on or before such date, plus (iii), for purposes of
determining liquidation and redemption payments, all unpaid dividends accrued on
the sum of clauses (i) and (ii) above, to such date of determination.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock ranking pari passu with the Series C Preferred Stock, the
holders of Series C Preferred Stock are entitled to receive and, subject to any
prohibition or restriction contained in any instrument evidencing indebtedness
of TCI, TCI is obligated to pay preferential cumulative cash dividends out of
funds legally available therefor. Dividends accrue cumulatively at an annual
rate of 5 1/2% of the liquidation value per share, whether or not such dividends
are declared or funds are legally or contractually available for payment of
dividends, except that if TCI fails to redeem shares of Series C Preferred Stock
required to be redeemed on a redemption date, dividends will thereafter accrue
cumulatively at an annual rate of 15% of the liquidation value per share.
Accrued dividends are payable quarterly on January 1, April 1, July 1 and
October 1 of each year, commencing on the first dividend payment date after the
issuance of the Series C Preferred Stock. Dividends not paid on any dividend
payment date will be added to the liquidation value on such date and remain a
part thereof until such dividends and all dividends accrued thereon are paid in
full. Dividends accrue on unpaid dividends at the rate of 5 1/2% per annum,
unless such dividends remain unpaid for two consecutive quarters in which event
such rate will increase to 15% per annum. The Series C Preferred Stock ranks
prior to the Series A TCI Group Stock, Series A Liberty Group Stock and Class B
Preferred Stock and pari passu with the Series F Preferred Stock with respect to
the declaration and payment of dividends.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets of TCI
available for distribution to stockholders an amount in cash, per
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and (ii) to create or designate any class
or series of TCI preferred stock that would rank prior to the Series C Preferred
Stock.
Convertible Preferred Stock, Series D. The Company issued 1,000,000 shares
of a series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series D", par value $.01 per share, as partial consideration for the
merger between TCIC and TeleCable (see note 8).
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the rate of 5 1/2% per annum of the liquidation value ($300 per share).
Dividends are cumulative, and in the event that dividends are not paid in full
on two consecutive dividend payment dates or in the event that TCI fails to
effect any required redemption of Series D Preferred Stock, accrue at the rate
of 10% per annum of the liquidation value. The Series D Preferred Stock ranks on
parity with the Series C Preferred Stock and the Series F Preferred Stock.
Prior to the Distribution, 431 shares of Series D Preferred Stock were
converted into 4,310 shares of TCI Class A common stock. Subsequent to the
Distribution, each share of Series D Preferred Stock is convertible into 10
shares of Series A TCI Group Stock and 2.5 shares of Series A Liberty Group
Stock, subject to adjustment upon certain events specified in the certificate of
designation establishing Series D Preferred Stock. To the extent any cash
dividends are not paid on any dividend payment date, the amount of such
dividends will be deemed converted into shares of TCI common stock at a
conversion rate equal to 95% of the then current market price of common stock,
and upon issuance of common stock to holders of Series D Preferred Stock in
respect of such deemed conversion, such dividend will be deemed paid for all
purposes. See note 1.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a price
equal to the liquidation value in effect as of the date of the redemption.
Shares of Series D Preferred Stock may also be redeemed for cash at the option
of TCI after the fifth anniversary of the issue date at such redemption price or
after the third anniversary of the issue date if the market value per share
exceeds certain defined levels for periods specified in the certificate of
designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series D
Preferred Stock into common stock at a conversion rate of 95% of the then
current market value of common stock, provided that such option may not be
exercised unless the failure to redeem continues for more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the stockholders of TCI.
Convertible Redeemable Participating Preferred Stock, Series F. Immediately
prior to the record date for the Distribution, the Company caused each of its
subsidiaries holding Subsidiary Shares to exchange such shares for shares of
Series F Preferred Stock having an aggregate value of not less than that of the
Subsidiary Shares so exchanged. The Company is authorized to issue 500,000
shares of Series F Preferred Stock, par value $.01 per share. Subsidiaries of
TCI hold all the issued and outstanding shares. Subsidiaries of TCI exchanged
all of the Subsidiary Shares for 355,141 shares of Series F Preferred Stock.
Subsequent to such exchange, a holder of 78,077 shares of Series F Preferred
Stock converted its holdings into 100,524,364 shares of Series A TCI Group
Stock. Such shares of Series A TCI Group Stock are reflected as treasury stock
in the accompanying consolidated financial statements. Such preferred stock of
TCI eliminates in consolidation.
Each share of Series F Preferred Stock was convertible into 1,000 shares of
Series A TCI Group Stock, subject to anti-dilution adjustments, at the option of
the holder at any time. The anti-dilution provisions of the Series F Preferred
Stock provide that the conversion rate of the Series F Preferred Stock will be
adjusted by increasing the number of shares of Series A TCI Group Stock issuable
upon conversion in the event of any non-cash dividend or distribution of the
Series A TCI Group Stock to give effect to the value of the securities, assets
or other property so distributed; however, no such adjustment shall entitle the
holder to receive the actual security, asset or other property so distributed
upon the conversion of shares of Series F Preferred Stock. Therefore, the
Distribution resulted in an adjustment to the conversion rate of the Series F
Preferred Stock such that each holder has the right to receive upon conversion
1,287.51 shares of Series A TCI Group Stock.
The holders of the Series F Preferred Stock are entitled to participate, on
an as-converted basis, with the holders of the Series A TCI Group Stock, with
respect to any cash dividends or distribution declared and paid
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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"). Subsequent to December 31, 1995,
TCI issued 7,259,380 shares of a series of TCI Series Preferred Stock designated
"Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380
shares of a series of TCI Series Preferred Stock designated "Redeemable
Convertible Liberty Media Group Preferred Stock, Series H" as consideration for
an acquisition.
The initial liquidation value for the Series G Preferred Stock and Series H
Preferred Stock is $21.60 per share and $5.40 per share, respectively, subject
in both cases, to increase in an amount equal to aggregate accrued but unpaid
dividends, if any. No dividends will accrue on the Series G or Series H
Preferred Stock if the sum of the last reported sale price of TCI Group Stock
plus one-fourth of the last reported sale price of the Liberty Group Stock
equals or exceeds $27 for any ten consecutive trading days during the 65 trading
days immediately prior to the first anniversary of issuance of the Series G and
Series H Preferred Stock. If the sum of the amounts specified in the preceding
sentence does not equal or exceed $27 for the specified period, dividends will
begin to accrue on the Series G and Series H Preferred Stock on the first
anniversary of issuance of the Series G and Series H Preferred Stock, and will
thereafter be payable semi-annually commencing August 1, 1997, at the rate of 4%
per annum on the liquidation value. Any dividends paid on the Series G and
Series H Preferred Stock may be paid, at TCI's election, in cash or shares of
TCI Group Stock. Additional dividends will accrue on unpaid dividends initially
at a rate of 4% per annum. The dividend rate on dividends that remain unpaid for
six months will increase to 8.625% per annum.
Each share of Series G Preferred Stock is convertible at the option of the
holder at any time prior to the close of business on the last business day prior
to redemption into 1.05 shares of Series A TCI Group Stock and each share of
Series H Preferred Stock is convertible at any time prior to the close of
business on the last business day prior to redemption into .2625 shares of
Series A Liberty Group Stock. The conversion rights of Series G and Series H
Preferred Stock are subject to adjustment in certain circumstances.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The rights of holders of the TCI Group Stock upon liquidation of TCI are
based upon the ratio of the aggregate market capitalization, as defined, of the
TCI Group Stock to the aggregate market capitalization, as defined, of the TCI
Group Stock and the Liberty Group Stock.
Similarly, the rights of holders of the Liberty Group Stock upon
liquidation of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the Liberty Group Stock to the aggregate market
capitalization, as defined, of the Liberty Group Stock and the TCI Group Stock.
Employee Benefit Plans
The Company has several employee stock purchase plans (the "Plans") to
provide employees an opportunity for ownership in the Company and to create a
retirement fund. Terms of the Plans generally provide for employees to
contribute up to 10% of their compensation to a trust for investment in TCI
Group Stock and Liberty Media Group Stock. The Company, by annual resolution of
the Board, generally contributes up to 100% of the amount contributed by
employees. Certain of the Company's subsidiaries have their own employee benefit
plans. Contributions to all plans aggregated $28 million, $21 million and $16
million for 1995, 1994 and 1993, respectively.
Preferred Stock
Class A Preferred Stock. The Company is authorized to issue 700,000 shares
of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI held
all of the issued and outstanding shares of such stock, amounting to 592,797
shares. Such preferred stock eliminated in consolidation. The holders of the
Class A Preferred Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the Distribution. See
note 1.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The
Company is authorized to issue 1,675,096 shares of Class B Preferred Stock and
1,620,026 of such shares are issued and outstanding.
Dividends accrue cumulatively (but without compounding) at an annual rate
of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation
Value"), whether or not such dividends are declared or funds are legally
available for payment of dividends. Accrued dividends will be payable annually
on March 1 of each year (or the next succeeding business day if March 1 does not
fall on a business day), and, in the sole discretion of the Board, may be
declared and paid in cash, in shares of Series A TCI Group Stock or in any
combination of the foregoing. Accrued dividends not paid as provided above on
any dividend payment date will accumulate and such accumulated unpaid dividends
may be declared and paid in cash, shares of Series A TCI Group Stock or any
combination thereof at any time (subject to the rights of any senior stock and,
if applicable, to the concurrent satisfaction of any dividend arrearages on any
class or series of TCI preferred stock ranking on a parity with the Class B
Preferred Stock with respect to dividend rights) with reference to any regular
dividend payment date, to holders of record of Class B Preferred Stock as of a
special record date fixed by the Board (which date may not be more than 45 days
nor less than 10 days prior to the date fixed for the payment of such
accumulated unpaid dividends). The Class B Preferred Stock ranks junior to the
Series F Preferred Stock with respect to the declaration and payment of
dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of Series A TCI Group Stock, the number of such
shares to be issued and delivered will be determined by dividing the amount of
the dividend to be paid in shares of Series A TCI Group Stock by the Average
Market Price of the Series A TCI Group Stock. For this purpose, "Average Market
Price" means the average of the daily last reported sale prices (or, if no sale
price is reported on any day, the average of the high and low bid prices on such
day) of a share of Series A TCI Group Stock for the period of 20 consecutive
trading days ending on the tenth trading day prior to the regular record date or
special record date, as the case may be, for the applicable dividend payment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to the Class
B Preferred Stock with respect to liquidating distributions, to receive from the
assets of TCI available for distribution to stockholders an amount in cash or
property or a combination thereof, per share, equal to the Stated Liquidation
Value thereof, plus all accumulated and accrued but unpaid dividends thereon to
and including the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option of the
holders or otherwise.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock, the Class B Preferred Stock will be exchangeable at the
option of TCI in whole but not in part at any time for junior subordinated debt
securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be
issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a
qualified trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal amount of
which will be equal to the aggregate Stated Liquidation Value of the shares of
Class B Preferred Stock so exchanged by such holder, plus all accumulated and
accrued but unpaid dividends thereon to and including the exchange date. The
Junior Exchange Notes will be issuable only in principal amounts of $100 or any
integral multiple thereof and a cash adjustment will be paid to the holder for
any excess principal that would otherwise be issuable. The Junior Exchange Notes
will mature on the fifteenth anniversary of the date of issuance and will be
subject to earlier redemption at the option of TCI, in whole or in part, for a
redemption price equal to the principal amount thereof plus accrued but unpaid
interest. Interest will accrue, and be payable annually, on the principal amount
of the Junior Exchange Notes at a rate per annum to be determined prior to
issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury
Rate" (as defined in the Indenture). Interest will accrue on overdue principal
at the same rate, but will not accrue on overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of
TCI and will be subordinated in right of payment to all Senior Debt (as defined
in the Indenture).
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Redeemable Convertible Preferred Stock, Series E. In connection with the
Reorganization, the Board created and authorized the issuance of the Redeemable
Convertible Preferred Stock, Series E, par value $.01 per share. The Company is
authorized to issue 400,000 shares of such preferred stock. Subsidiaries of TCI
held all of the issued and outstanding shares of such stock, amounting to
246,402 shares. All such preferred stock eliminated in consolidation. The
holders of the Series E Preferred Stock exchanged such Subsidiary Shares for
shares of Series F Preferred Stock immediately prior to the record date of the
Distribution.
Stock Options
In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock
Incentive Plan (the "1994 Plan"). The Plan provided for awards to be made in
respect of a maximum of 16 million shares of TCI Class A common stock. Awards
may be made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof. Pursuant to the TCI/Liberty
Merger Agreement and certain assumption agreements, stock options and/or stock
appreciation rights granted (or assumed) by Old TCI and stock options and/or
stock appreciation rights granted by Liberty were assumed by the Company and new
options and/or stock appreciation rights were substituted under the 1994 Plan.
The following descriptions represent the terms of the assumed options and/or
stock appreciation rights and additional awards under the 1994 Plan.
The 1994 Plan was adjusted to provide that the number and type of shares
subject to future awards consists of a number of shares of Series A TCI Group
Stock equal to the number of shares of Class A common stock subject to future
awards immediately prior to the Distribution and a number of shares of Series A
Liberty Group Stock equal to one-fourth of the number of shares of Class A
common stock subject to future awards immediately prior to Distribution.
Following the Distribution, the Compensation Committee of TCI may in its
discretion grant awards, including awards of options on, or stock appreciation
rights respecting, shares of Series A TCI Group Stock, Series A Liberty Group
Stock, or combinations thereof, in such amounts and types as it determines in
accordance with the terms of the 1994 Plan, as adjusted.
In 1995, the Company adopted the Tele-Communications, Inc. 1995 Employee
Stock Incentive Plan (the "1995 Plan"). In addition, the Company has established
the Tele-Communications, Inc. 1996 Stock Incentive Plan (the "1996 Plan") which
is subject to stockholder approval.
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
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
appreciation right would continue in effect as an option or stock appreciation
right covering the same number of shares of Series A TCI Group Stock (as
redesignated) that were theretofore subject to the option or stock appreciation
right. The aggregate pre-adjustment strike price of the outstanding options or
stock appreciation rights was allocated between the outstanding options or stock
appreciation rights and the newly issued options or stock appreciation rights in
a ratio determined by the Compensation Committee. The following descriptions of
stock options and/or stock appreciation rights have been adjusted to reflect
such change.
The following table presents information regarding certain options in
tandem with stock appreciation rights ("SARs") to purchase Class A, Series A TCI
Group Stock and Series A Liberty Group Stock pursuant to the 1994 Plan, the 1995
Plan and the 1996 Plan:
<TABLE>
<CAPTION>
SERIES A LIBERTY
CLASS A SERIES A TCI MEDIA GROUP
COMMON STOCK GROUP STOCK STOCK
------------ ------------ ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1993.............. 4,525,578 -- --
Granted................................... 3,955,000 -- --
Exercised................................. (96,242) -- --
Canceled.................................. (75,000) -- --
----------- ------------ ------------
Outstanding at December 31, 1993............ 8,309,336 -- --
Granted................................... 3,191,000 -- --
Assumed................................... 54,600 -- --
Exercised................................. (217,483) -- --
Canceled.................................. (16,625) -- --
----------- ------------ ------------
Outstanding at December 31, 1994............ 11,320,828 -- --
Converted from Class A options............ (11,218,866) 11,218,866 --
Adjustment for Distribution............... -- -- 2,804,715
Granted................................... -- 7,407,500 2,211,000
Exercised................................. (91,962) (933,516) (227,003)
Canceled.................................. (10,000) (90,500) (22,625)
----------- ------------ ------------
Outstanding at December 31, 1995............ -- 17,602,350 4,766,087
=========== ============ ============
Exercise Price.............................. $8.83-19.56 $ 6.60-17.00 $ 8.83-24.00
=========== ============ ============
Vesting Period.............................. 4-5 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 30,000
restricted shares of Series A Liberty Group Stock to certain officers and other
key employees of the Company. Such restricted shares vest as to 50% on December
13, 2000 and as to the remaining 50% on December 13, 2001.
SARs with respect to 1,423,500 shares of Series A TCI Group Stock and
355,875 shares of Series A Liberty Group Stock were outstanding at December 31,
1995. These rights have an adjusted strike price of $0.60 and $0.82 per share,
respectively, and become exercisable and vest evenly over seven years, beginning
March 28, 1992. The SARs expire on March 28, 2001. The Company has the option of
paying the holder in stock or cash.
On August 3, 1995, stockholders of the Company approved the Director Stock
Option Plan including the grant, effective as of November 16, 1994, to each
person that as of that date was a member of the Board and was not an employee of
the Company or any of its subsidiaries, of options to purchase 50,000 shares of
TCI Class A common stock. Pursuant to the Director Stock Option Plan, options to
purchase 300,000 shares of Series A TCI Group common stock were granted at an
exercise price of $16.50 per share and options to purchase 75,000 shares of
Series A Liberty Group Stock were granted at an exercise price of $22.00 per
share
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and will vest and become exercisable over a five-year period, commencing on
November 16, 1995 and will expire on November 16, 2004. During the year ended
December 31, 1995, options to purchase 50,000 shares of Series A TCI Group Stock
and options to purchase 12,500 shares of Series A Liberty Media Group Stock were
canceled.
Estimated compensation relating to restricted stock awards, options with
tandem SARs and SARs has been recorded through December 31, 1995, but is subject
to future adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised or the restricted
stock awards are vested.
Other
In connection with the exercise of a stock option by an officer/director of
Liberty, a note was given to Liberty as partial payment of the exercise price.
This note bore interest at 7.54% per annum. At the date of the TCI/Liberty
Combination, the Company recorded the net assumed note receivable, amounting to
approximately $15 million, from such officer as a reduction of stockholders'
equity. On October 27, 1994, such officer tendered to the Company 634,917 shares
of TCI Class B common stock in full payment of principal and interest amounting
to $15 million.
The shares issued by Liberty upon exercise of the aforementioned Liberty
option, together with all subsequent dividends and distributions thereon, were
subject to repurchase by Liberty under certain circumstances. Such shares were
exchanged for 15,600,000 shares of TCI Class A common stock and 200,000 shares
of Class B Preferred Stock in the TCI/Liberty Combination. The Company's
repurchase right terminates as to 20% of the Option Units per year, commencing
March 28, 1992, and will terminate as to all of the Option Units on March 28,
1996 or in the event of death, disability or under certain other circumstances.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1995, there were 75,466,614 shares of Series A TCI Group
Stock and 19,179,651 shares of Series A Liberty Group Stock reserved for
issuance under exercise privileges related to options, convertible debt
securities and convertible preferred stock and upon vesting of the restricted
stock awards described in this note 11 and in notes 9 and 10. Additionally, in
January of 1996, the Company issued 7,259,380 shares each of Series G Preferred
Stock and Series H Preferred Stock (see note 10). Such preferred stocks are
convertible into 7,622,349 shares of Series A TCI Group Stock and 1,905,587
shares of Series A Liberty Group Stock. In addition, one share of Series A TCI
Group Stock is reserved for each outstanding share of Series B TCI Group Stock
and one share of Series A Liberty Group Stock is reserved for each outstanding
share of Series B Liberty Group Stock. See note 1 for the effect of the
Distribution on the conversion rights of holders of convertible securities.
(12) TRANSACTIONS WITH OFFICERS AND DIRECTORS
Effective January 31, 1996, a director of the Company purchased one-third
of the Company's interest in two limited partnerships and obtained two ten-year
options to purchase the Company's remaining partnership interests. The purchase
price for the one-third partnership interests was 37.209 shares of WestMarc
Communications, Inc. (a wholly-owned subsidiary of the Company) Series C
Cumulative Compounding Preferred Stock owned by such director, and the purchase
price for the ten-year options was $100 for each option. All options are
exercisable for cash in the aggregate amount of $3,000,000.
(13) SALE OF SUBSIDIARY STOCK
On July 18, 1995, TINTA completed an initial public offering (the "IPO") in
which it sold 20 million shares of TINTA Series A common stock to the public for
consideration of $16.00 per share aggregating
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$320 million, before deducting related expenses (approximately $19 million). The
shares sold to the public represented 17% of TINTA's total issued and
outstanding common stock. Also in July 1995, TINTA issued 687,500 shares of
TINTA Series A common stock as partial consideration for a 35% ownership
interest in Torneos Y Competencias S.A., an Argentine sports programming company
(the "TYC Acquisition"). As a result of the IPO and the TYC Acquisition, the
Company has recognized a gain amounting to $123 million. Subsequent to the IPO
and the TYC Acquisition, TCI owns 82% of the issued and outstanding stock of
TINTA, representing in excess of 90% of the voting power of TINTA.
In June 1995, Flextech issued share capital for cash and preferred shares
of Thomson Directories Limited. In connection with such issuance, the Company
recorded a $51 million increase to stockholders' equity and a $93 million
increase to minority interests in equity of consolidated subsidiaries. No gain
was recognized in the Company's consolidated statement of operations due
primarily to the existence of the Company's contingent obligations to repurchase
certain of the Flextech share capital.
(14) INCOME TAXES
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which the Company owns
less than 80% each file a separate income tax return. TCI and such subsidiaries
calculate their respective tax liabilities on a separate return basis which are
combined in the accompanying consolidated financial statements.
Income tax benefit (expense) for the years ended December 31, 1995, 1994
and 1993 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal................................................. $(23) 130 107
State and local......................................... (10) 23 13
---- ---- ----
$(33) 153 120
==== ==== ====
Year ended December 31, 1994:
Federal................................................. $(69) (29) (98)
State and local......................................... (14) (8) (22)
---- ---- ----
$(83) (37) (120)
==== ==== ====
Year ended December 31, 1993:
Federal................................................. $(14) (120) (134)
State and local......................................... (15) (20) (35)
---- ---- ----
$(29) (140) (169)
==== ==== ====
</TABLE>
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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,
--------------------------
1995 1994 1993
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Computed "expected" tax benefit (expense)................... $102 (64) (57)
Adjustment to deferred tax assets and liabilities for
enacted change in Federal income tax rate................. -- -- (76)
Amortization not deductible for tax purposes................ (25) (13) (12)
Minority interest in losses (earnings) of consolidated
subsidiaries.............................................. 9 (3) (1)
Gain on sale of subsidiary stock............................ 43 -- --
Recognition of losses of consolidated partnership........... -- (10) (8)
State and local income taxes, net of Federal income tax
benefit................................................... (4) (20) (23)
Valuation allowance on foreign corporation.................. -- (10) --
Other....................................................... (5) -- 8
---- ---- ----
$120 (120) (169)
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- -------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 583 490
Less -- valuation allowance............................ (121) (100)
Investment tax credit carryforwards....................... 118 122
Less -- valuation allowance............................ (41) (36)
Alternative minimum tax credit carryforwards.............. 95 90
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes
in excess of losses recognized for income tax
purposes............................................... 176 294
Future deductible amounts principally due to
non-deductible accruals................................ 90 52
Other..................................................... 10 19
------ -----
Net deferred tax assets........................... 910 931
------ -----
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... 1,111 1,197
Franchise costs, principally due to differences in
amortization........................................... 3,569 2,600
Investment in affiliates, due principally to undistributed
earnings of affiliates................................. 499 452
Intangible assets, principally due to differences in
amortization........................................... 42 108
Leases capitalized for tax purposes....................... 53 --
Other..................................................... 166 83
------ -----
Total gross deferred tax liabilities.............. 5,440 4,440
------ -----
Net deferred tax liability........................ $4,530 3,509
====== =====
</TABLE>
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1995 was
$162 million. Such balance increased by $26 million from December 31, 1994.
At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $1,177 million of which, if not
utilized to reduce taxable income in future periods, $134 million expires in
2003, $116 million in 2004, $344 million in 2005, $325 million in 2006, $138
million in 2009 and $120 million in 2010. Certain subsidiaries of the Company
had additional net operating loss carryforwards for income tax purposes
aggregating approximately $245 million and these net operating losses are
subject to certain rules limiting their usage.
At December 31, 1995, the Company had remaining available investment tax
credits of approximately $63 million which, if not utilized to offset future
Federal income taxes payable, expire at various dates through 2005. Certain
subsidiaries of the Company had additional investment tax credit carryforwards
aggregating approximately $55 million and these investment tax credit
carryforwards are subject to certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the
Internal Revenue Service for the years 1981 through 1992. A subsidiary of the
Company has filed a petition in United States Tax Court protesting the
disallowance of certain Transitional Investment Tax Credits and such issue will
likely be litigated in 1996. In the opinion of management, any additional tax
liability, not previously provided for, resulting from these examinations,
ultimately determined to be payable, should not have a material adverse effect
on the consolidated financial position of the Company.
New tax legislation was enacted in the third quarter of 1993 which, among
other matters, increased the corporate Federal income tax rate from 34% to 35%.
The Company has reflected the tax rate change in its consolidated statements of
operations. Such tax rate change resulted in an increase of $76 million to
income tax expense and deferred income tax liability.
(15) COMMITMENTS AND CONTINGENCIES
During 1994, subsidiaries of the Company, Comcast, Cox (collectively, the
"Cable Partners") and Sprint formed a partnership ("WirelessCo") to engage in
the business of providing wireless communications services on a nationwide
basis. Through WirelessCo, in which the Company owns an indirect 30% interest,
the partners participated in auctions ("PCS Auctions") of broadband personal
communications services ("PCS") licenses conducted by the Federal Communications
Commission ("FCC"). In the first round auction, which concluded during the first
quarter of 1995, WirelessCo was the winning bidder for PCS licenses for 29
markets, including New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses was approximately $2.1
billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a PCS
license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and agreed to make capital contributions to APC
equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox, which holds a pioneer
preference PCS license for the Los Angeles-San Diego market, and the Company,
Comcast and Sprint have also agreed on the general terms and conditions upon
which Cox (with a 51% interest) and WirelessCo (with a 49% interest) would form
a partnership to hold and develop a PCS system using the Los Angeles-San Diego
license. APC and the Cox partnership would affiliate their PCS systems with
WirelessCo and be part of WirelessCo's nationwide integrated network, offering
wireless communications services under the "Sprint" brand.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may invest in, affiliate with or acquire licenses from other
successful bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
Sprint Spectrum, to which they contributed their respective interests in
WirelessCo and through which they formed another partnership, NewTelco, L.P.
("New Telco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis. The
Cable Partners agreed to contribute their interests in TCG to NewTelco. TCG is
one of the largest competitive local exchange carriers in the United States in
terms of route miles.
Effective January 31, 1996, the Partners amended the Sprint Spectrum
partnership agreement (the "Partnership Agreement") and certain other agreements
related thereto. Under the Partnership Agreement, the business of Sprint
Spectrum and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The Partners intend for
Sprint Spectrum and its subsidiary partnerships to be the exclusive vehicles
through which they engage in the wireless telephony service businesses, subject
to certain exceptions. Sprint Spectrum will no longer be authorized to engage in
the business of providing local wireline communications services to residences
and businesses. In connection with the amendment of the Partnership Agreement,
the Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint have
agreed to negotiate in good faith on a market-by-market basis for the provision
of local wireline telephony services over the cable television facilities of the
respective Cable Partner under the Sprint brand. Accordingly, local wireline
telephony offerings in each market would be the subject of individual agreements
to be negotiated with Sprint, rather than being provided by Sprint Spectrum, as
originally contemplated. The Cable Partners and Sprint also reaffirmed their
intention to continue to attempt to integrate the business of TCG with that of
Sprint Spectrum. In addition, each Cable Partner agreed to certain restrictions
on its ability to offer, promote, or package certain of its products or services
with certain products and services of other persons and agreed to make its
facilities available to Sprint for specified purposes to the extent and on the
terms that it has made such facilities available to others for such purposes.
Such agreements have a term of five years, but under certain circumstances may
terminate after three years.
Execution of the foregoing agreements was a condition to the effectiveness
of a previously approved business plan for the build out of Sprint Spectrum's
nationwide network for wireless personal communications services. Pursuant to
the business plan, the Partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
expects that Sprint Spectrum will require additional equity thereafter.
In July 1995, TCIC and TCI entered into certain agreements with Viacom Inc.
("Viacom") and certain subsidiaries of Viacom regarding the purchase by TCIC of
all of the common stock of a subsidiary of Viacom ("Cable Sub") which, at the
time of purchase, will own Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in which
Cable Sub will initially transfer all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of Viacom
("New Viacom Sub"). Cable Sub will also transfer to New Viacom Sub the proceeds
(the "Loan
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") to be arranged
by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub will retain
cable assets with an estimated value at closing of approximately $2.2 billion
and the obligation to repay the Loan Proceeds borrowed under the Loan Facility.
Repayment of the Loan Proceeds will be non-recourse to Viacom and New Viacom
Sub.
Viacom will offer to the holders of shares of Viacom Class A Common Stock
and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the
opportunity to exchange (the "Exchange Offer") a portion of their shares of
Viacom Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). The Exchange Offer will be
subject to a number of conditions, including a condition (the "Minimum
Condition") that sufficient tenders are made of Viacom Common Stock that permit
the number of shares of Cable Sub Class A Stock issued pursuant to the Exchange
Offer to equal the total number of shares of Cable Sub Class A Stock issuable in
the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B common stock for $350 million
(which will be used to reduce Cable Sub's obligations under the Loan Facility).
At the time of such acquisition, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer will automatically convert into a
series of senior cumulative exchangeable preferred stock (the "Exchangeable
Preferred Stock") of Cable Sub with a stated value of $100 per share (the
"Stated Value"). The terms of the Exchangeable Preferred Stock, including its
dividend, redemption and exchange features, will be designed to cause the
Exchangeable Preferred Stock, in the opinion of two investment banks, to
initially trade at the Stated Value. The Exchangeable Preferred Stock will be
exchangeable, at the option of the holder commencing after the fifth anniversary
of the date of issuance, for shares of Series A TCI Group Stock. The
Exchangeable Preferred Stock will also be redeemable, at the option of Cable
Sub, after the fifth anniversary of the date of issuance, and will be subject to
mandatory redemption on the tenth anniversary of the date of issuance at a price
equal to the Stated Value per share plus accrued and unpaid dividends, payable
in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock,
or in any combination of the foregoing. If insufficient tenders are made by
Viacom stockholders in the Exchange Offer to permit the Minimum Condition to be
satisfied, Viacom will extend the Exchange Offer for up to 15 business days and,
during such extension, TCI and Viacom are to negotiate in good faith to
determine mutually acceptable changes to the terms and conditions for the
Exchangeable Preferred Stock and the Exchange Offer that each believes in good
faith will cause the Minimum Condition to be fulfilled and that would cause the
Exchangeable Preferred Stock to trade at a price equal to the Stated Value
immediately following the expiration of the Exchange Offer. In the event the
Minimum Condition is not thereafter met, TCI and Viacom will each have the right
to terminate the transaction. In addition, either party may terminate the
transaction if the exchange offer has not commenced by June 24, 1996 or been
consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue Service
that the transaction qualifies as a tax-free transaction and the satisfaction or
waiver of all of the conditions of the Exchange Offer. A request for a letter
ruling from the Internal Revenue Service has been filed by Viacom. The Company
believes that, based upon the unique and complex structure of the transaction,
there exists significant uncertainty as to whether a favorable ruling will be
obtained. In light of the foregoing, management of the Company has concluded
that consummation of the transaction is not yet probable. No assurance can be
given that the transaction will be consummated.
On October 31, 1995, Liberty Media Group announced that it had entered into
a binding agreement in principle with The News Corporation Limited ("News
Corp.") and TINTA. In the United States, Liberty Media Group and News Corp.
agreed to form a partnership (the "Fox-Liberty Venture") into which Liberty
Media Group will contribute interests in its national and regional sports
networks and into which News Corp. will contribute its fox cable network and
certain other assets. Upon consummation. Liberty Media Group will
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receive a 50% interest in the Fox-Liberty Venture and $350 million in cash. The
fox network will be transformed into a nationally distributed, general
entertainment and sports network. The regional sports networks currently
operated under the Prime Sports name will be relaunched under the Fox Sports
banner.
Internationally, News Corp., and a 50/50 partnership forms by Liberty
Sports, Inc., a wholly-owned subsidiary of Liberty Media Group, and TINTA (the
"Liberty-TINTA Partnership") have agreed to form a venture to operate currently
existing sports services in Asia, Latin American and Australia and a variety of
new sports services throughout the world except in the United Kingdom, Japan and
New Zealand where prior arrangements preclude an immediate collaboration. The
Liberty-TINTA Partnership will own 50% of the international venture with News
Corp. owning the other 50%. News Corp. is contributing various international
sports rights, including the Star Sports channel which is broadcast throughout
Asia as part of the Star package of services. The Liberty-TINTA Partnership is
contributing Prime Deportiva, a Spanish language sports service distributed in
Latin American and in Hispanic markets in the United States, an interest in
Torneos y Competencias S.A., an Argentinean sports programming and production
business, various international sports and satellite transponder rights and
cash. The Liberty-TINTA Partnership will also contribute their 50% interest in
Premiere Sports and All-Star Sports in Australia. Both are 24-hour sports
services available via MMDS or cable television in Australia.
The transactions contemplated by the above agreements are expected to close
during 1996.
On November 27, 1995, the Company announced that it had agreed to exchange
its controlling interest in Home Shopping Network, Inc. ("HSN") for shares of
Silver King Communications, Inc. ("Silver King"). The Company will receive
approximately 11 million newly issued shares of Silver King in exchange for it
37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their respective
affiliates entered into an agreement in August 1995 pursuant to which an option
owned by Liberty Media Group to purchase 2 million shares of Silver King Class B
common stock (the "Option") (which shares would constitute voting control of
Silver King) would be transferred to Silver Management Company ("Silver
Company"), an entity in which Liberty Media Group would own all of the
non-voting equity interests (which would constitute substantially all of the
equity of such entity) and Mr. Diller would own all of the voting equity
interests. Silver Company would thereafter exercise the Option and hold the
shares of Silver King Class B Common Stock purchased thereunder. In an amendment
to such agreement entered into in November 1995, Liberty Media Group agreed to
contribute all of its shares of HSN (which shares constitute approximately 41%
of the equity of HSN and approximately 80% of the voting power of HSN) to Silver
Company in return for additional non-voting equity interests in Silver Company.
Following such contribution Silver Company would exchange such HSN shares with
Silver King for additional shares of Silver King Common Stock and Class B Common
Stock (thereby increasing Silver Company's controlling interest in Silver King
to in excess of 80% of the voting power of Silver King). Each such transaction
is subject to the satisfaction of certain conditions, including the receipt of
all necessary regulatory consents and approvals. If consummated, HSN would cease
to be a subsidiary of the Company and therefore, the financial results of HSN
would not be consolidated with the financial results of Liberty Media Group.
Although the Company would cease to possess voting control over HSN, it would
continue to have an indirect equity interest in HSN through its ownership of the
equity securities of Silver Company. No assurance can be given that the
transaction will be consummated.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions, the
Company's basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. Basic and tier service rates are evaluated
against competitive benchmark rates as published by the FCC, and equipment and
installation charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On October 30, 1995, the FCC accepted for comment a proposed resolution of
all complaints against the cable programming services tier ("CPST") currently
pending against cable systems owned by the Company. If the proposed resolution
is accepted by the FCC, the Company will settle all pending complaints by a one-
time credit to each subscriber in CPST regulated franchises. The aggregate
amount of such credits is approximately $9 million and had previously been
accrued by the Company. In addition, the FCC will find that the CPST rates in
CPST regulated franchises on September 15, 1995 comply with federal regulations.
The Company has committed not to file any additional cost-of-service filings
until May 15, 1996 in franchises that were subject to CPST regulation prior to
September 15, 1995. However, the Company will be able to avail itself of the
other mechanisms under FCC rules to recover costs, including abbreviated
cost-of-service filings covering system rebuilds and upgrades. In the proposed
resolution, the Company does not admit any violation of, or any failure to
conform to, the 1992 Cable Act or the rules promulgated thereunder. The comment
period has ended and the Company is awaiting action by the FCC.
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios through February 28, 2009 (the "Film Licensing Obligations"). The
aggregate minimum liability under certain of the license agreements is
approximately $414 million. The aggregate amount of the Film Licensing
Obligations under other license agreements is not currently estimable because
such amount is dependent upon certain variable factors. Nevertheless, the
Company's aggregate payments under the Film License Obligations could prove to
be significant. Additionally, the Company has guaranteed up to $67 million of
similar license fee obligations of an affiliate.
The Company has long-term sports program rights contracts which require
payments through 2006. Future payments for each of the next five years as
follows (amounts in millions):
<TABLE>
<S> <C>
1996................................................... $84
1997................................................... 73
1998................................................... 62
1999................................................... 55
2000................................................... 46
</TABLE>
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $222
million at December 31, 1995. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to fulfill any of such guarantees, that
they will not be material to the Company.
The Company has also committed to provide additional debt or equity funding
to certain of its affiliates. At December 31, 1995, such commitments aggregated
$95 million.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases business offices, has entered into pole rental
agreements and transponder lease agreements and uses certain equipment under
lease arrangements. Rental expense under such arrangements amounted to $142
million, $82 million and $70 million in 1995, 1994 and 1993, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in millions):
<TABLE>
<S> <C>
1996.................................................. $104
1997.................................................. 101
1998.................................................. 89
1999.................................................. 86
2000.................................................. 73
</TABLE>
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is anticipated
that future minimum lease commitments will not be less than the amount shown for
1996.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries' common
stock. Estimates of the compensation related to the restricted stock awards and
options and/or SARs have been recorded in the accompanying consolidated
financial statement, but are subject to future adjustment based upon the market
value of the respective common stock and, ultimately, on the final market value
when the rights are exercised or the restricted stock awards are vested.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) INFORMATION ABOUT THE COMPANY'S OPERATIONS
Subsequent to the consummation of the TCI/Liberty Combination, the Company
operates primarily in two industry segments: cable and communications services
("Cable") and programming services ("Programming"). Programming includes the
production, acquisition and distribution of globally branded entertainment,
education and information programming services and software for distribution
through all available formats and media; and home shopping via television and
other interactive media, direct marketing, advertising sales, infomercials and
transaction processing. Home shopping is a programming service which includes a
retail function. Separate amounts of the aforementioned home shopping service
have been provided to enhance the readers understanding of the Company. The
Company has investments, accounted for under the equity method and the cost
method, which also operate in the Cable and Programming industries. The
following is selected information about the Company's operations for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
PROGRAMMING
------------------------
ELECTRONIC OTHER INTERSEGMENT
CABLE RETAILING PROGRAMMING ELIMINATIONS TOTAL
------- ---------- ----------- ------------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C>
1995:
Revenue.................................... $ 5,384 1,019 521 (73) 6,851
======= ===== ===== === ======
Operating income (loss).................... $ 653 (85) (26) -- 542
======= ===== ===== === ======
Depreciation and amortization.............. $ 1,274 43 55 -- 1,372
======= ===== ===== === ======
Capital expenditures....................... $ 1,733 13 36 -- 1,782
======= ===== ===== === ======
Identifiable assets........................ $22,612 725 1,793 -- 25,130
======= ===== ===== === ======
1994:
Revenue.................................... $ 4,247 482 240 (33) 4,936
======= ===== ===== === ======
Operating income (loss).................... $ 781 9 (2) -- 788
======= ===== ===== === ======
Depreciation and amortization.............. $ 992 15 11 -- 1,018
======= ===== ===== === ======
Capital expenditures....................... $ 1,239 19 6 -- 1,264
======= ===== ===== === ======
Identifiable assets........................ $17,121 739 1,448 (32) 19,276
======= ===== ===== === ======
</TABLE>
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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>
1995:
Revenue:
As previously reported.................................. $1,524 1,660 1,761
Adjustment to reflect Cablevision operations on a
current basis......................................... -- 14 --
------ ------ ------
As adjusted............................................. $1,524 1,674 1,761 1,892
====== ====== ====== ======
Operating income:
As previously reported.................................. $ 180 151 182
Adjustment to restate amortization of intangibles upon
reallocation of purchase price........................ -- (20) (4)
Adjustment to reflect Cablevision operations on a
current basis
As adjusted............................................. -- 4 (2)
------ ------ ------
$ 180 135 176 51
====== ====== ====== ======
Income tax benefit:
As previously reported.................................. $ 19 48 37
Adjustment for effect of adopting equity method of
accounting for BET.................................... -- -- (1)
Adjustment to restate amortization of intangibles upon
reallocation of purchase price........................ -- 8 1
Adjustment to reflect Cablevision operations on a
current basis......................................... -- 3 (1)
------ ------ ------
As adjusted............................................. $ 19 59 36 6
====== ====== ====== ======
Net earnings (loss):
As previously reported.................................. $ (45) (83) 36
Adjustment for effect of adopting equity method of
accounting for BET.................................... 1 -- --
Adjustment to restate amortization of intangibles upon
reallocation of purchase price........................ -- (12) (3)
Adjustment to reflect Cablevision operations on a
current basis......................................... -- -- (1)
------ ------ ------
As adjusted............................................. $ (44) (95) 32 (64)
====== ====== ====== ======
Primary and fully diluted earnings (loss) attributable to
common stockholders per common and common equivalent
share:
TCI Class A and Class B common stock
As previously reported............................. $ (.08) (.14) .12
Adjustment for effect of adopting equity method of
accounting for BET............................... -- -- --
Adjustment to restate amortization of intangibles
upon reallocation of purchase price.............. -- (.02) --
Adjustment to reflect Cablevision operations on a
current basis.................................... -- -- --
------ ------ ------
As adjusted........................................ $ (.08) (.16) .12 N/A
====== ====== ====== ======
Series A and Series B TCI Group Stock As previously
reported........................................... $ (.09)
Adjustment to reflect Cablevision operations on a
current basis.................................... --
------
As adjusted........................................ N/A N/A $ (.09) (.07)
====== ======
Series A and Series B Liberty Group Stock As
previously reported................................ $ (.02)
Adjustment for effect of adopting equity method of
accounting for BET............................... --
Adjustment to restate amortization of intangibles
upon reallocation of purchase price.............. (.01)
------
As adjusted........................................ N/A N/A $ (.03) (.13)
====== ======
</TABLE>
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994:
Revenue................................................... $1,060 1,081 1,286 1,509
Operating income.......................................... $ 234 205 186 163
Income tax expense:
As previously reported.................................. $ (31) (21) (33) (31)
Adjustment for effect of adopting equity method of
accounting for investments:
QVC................................................ -- (1) -- (2)
BET................................................ -- -- -- (1)
------ ------ ------ ------
As adjusted............................................. $ (31) (22) (33) (34)
====== ====== ====== ======
Net earnings (loss):
As previously reported.................................. $ 32 6 25 (8)
Adjustment for effect of adopting equity method of
accounting for investments:
QVC................................................ -- -- 2 3
BET................................................ -- 1 -- 1
------ ------ ------ ------
As adjusted............................................... $ 32 7 27 (4)
====== ====== ====== ======
Primary and fully diluted earnings (loss) attributable to
common stockholders per common and common equivalent
share:
As previously reported................................ $ .07 .01 .04 (.02)
Adjustment for effect of adopting equity method of
accounting for investments:
QVC................................................ -- -- -- .01
BET................................................ -- -- -- --
------ ------ ------ ------
As adjusted........................................... $ .07 .01 .04 (.01)
====== ====== ====== ======
</TABLE>
(18) SUBSEQUENT EVENT (UNAUDITED)
On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's
cable systems and related assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for shares of Class A
Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's obligations
under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A
V-71
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred
Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value").
The Exchangeable Preferred Stock is exchangeable, at the option of the holder
commencing after the fifth anniversary of the date of issuance, for shares of
Series A TCI Group Stock at an initial exchange rate of 4.81 shares of Series A
TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option of Cable
Sub, after the fifth anniversary of the date of issuance, initially at a
redemption price of $102.50 per share and thereafter at prices declining ratably
annually to $100 per share on and after the eighth anniversary of the date of
issuance, plus accrued and unpaid dividends to the date of redemption. The
Exchangeable Preferred Stock is also subject to mandatory redemption on the
tenth anniversary of the date of issuance at a price equal to the Stated Value
per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in
satisfaction of its optional or mandatory redemption obligations with respect to
the Exchangeable Preferred Stock may be made in cash or, at the election of
Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the
foregoing.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1995 included herein. The
following discussion focuses on material changes in the trends, risks and
uncertainties affecting the Company's results of operations and financial
condition.
(1) Material changes in financial condition:
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; TINTA; and Technology/Venture Capital. Such
organization provides for financial and operational independence in the four
operating units, each under the direction of its own chief executive officer,
while maintaining the synergies and scale economies provided by a common
corporate parent. While neither TINTA nor the Technology/Venture Capital unit is
currently significant to the Company as a whole, the Company believes each unit
has growth potential and each unit is unique enough in nature to warrant
separate operational focus.
On August 10, 1995, TCI distributed to its security holders of record one
hundred percent of the equity value of TCI attributable to Liberty Media Group.
The Liberty Group Stock is intended to reflect the separate performance of
Liberty Media Group. While the Liberty Group Stock constitutes common stock of
TCI, the issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. The TCI Group Stock is
intended to reflect the performance of TCI Group.
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in Sprint
Spectrum which was formed to engage in the business of providing wireless
communications services on a nationwide basis. The Company owns an indirect 30%
interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for PCS
licenses for 29 markets in an auction conducted by the FCC that ended in March
1995. The aggregate license cost for these licenses was approximately $2.1
billion, all of which has been paid. Sprint Spectrum may elect to bid in
subsequent auctions of PCS licenses and/or acquire PCS licenses from other
holders, has invested in APC which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that will hold
the PCS license for the Los Angeles-San Diego market, and may invest in other
entities that hold PCS licenses. Subsidiaries of Cox, Sprint and the Company are
also partners in PhillieCo which holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. The Company has an indirect
35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
has agreed to contribute approximately $0.6 billion of such aggregate amount,
$0.2 billion of which was contributed during the nine months ended September 30,
1996. The Company expects that Sprint Spectrum will require additional equity
thereafter.
On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC
acquired all of the common stock of Cable Sub which owned Viacom's cable systems
and related assets.
The transaction was structured as a tax-free reorganization in which Cable
Sub initially transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to New Viacom Sub. Cable Sub also
transferred to New Viacom Sub the proceeds of the Loan Facility. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom
Sub has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of Viacom Common Stock the opportunity to exchange a portion of their
shares of Viacom Common Stock for shares of Cable Sub Class A Stock. Immediately
following the completion of the Exchange Offer, TCIC acquired from Cable Sub
shares of Cable Sub Class B common stock for $350 million. At the time of the
Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders
pursuant to the Exchange Offer automatically converted into Exchangeable
Preferred Stock. For additional discussion of the Viacom Acquisition, see note 7
to the accompanying consolidated financial statements.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $9 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
Additionally, during the nine months ended September 30, 1996, the Company,
through certain subsidiaries, issued (i) 4.6 million shares of Cumulative
Exchangeable Preferred Stock for net cash proceeds of $223 million, (ii) 20
million preferred securities of 8.72% Trust Originated Preferred Securities(SM)
for net cash proceeds of $486 million (through a special purpose entity formed
as a Delaware business trust) (iii) 20 million preferred securities of 10% Trust
Preferred Securities for net cash proceeds of $485 million (through a special
purpose entity formed as a Delaware business trust) and (iv) $2.06 billion of
publicly-placed senior and medium term notes with interest rates ranging from
6.2% to 7.9% and maturity dates ranging through 2026. The Company used the
proceeds from the aforementioned debt and equity issuances to retire commercial
paper and to repay certain variable and fixed-rate indebtedness. In connection
with the prepayment of certain fixed-rate indebtedness, the Company recognized a
loss on early extinguishment of debt of $62 million. Such loss related to
prepayment penalties amounting to $60 million and the retirement of deferred
loan costs.
The Company has a credit facility which matures in September of 1997. The
outstanding balance of such facility was $387 million at September 30, 1996. The
Company currently anticipates that it will refinance such borrowings, but there
can be no assurance that it can do so on terms acceptable to the Company.
During the second quarter of 1996, certain subsidiaries of the Company
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. The Company
does not believe that such terminations will adversely affect its future
liquidity. At September 30, 1996, subsidiaries of the Company had approximately
$2.2 billion of availability under lines of credit, excluding amounts related to
lines of credit which provide availability to support commercial paper. Although
such subsidiaries of the Company were in compliance with the restrictive
covenants contained in their credit facilities at said date, additional
borrowings under the credit facilities are subject to the subsidiaries'
continuing compliance with the restrictive covenants (which relate primarily to
the maintenance of certain ratios of cash flow to total debt and cash flow to
debt service, as defined in the credit facilities) after giving effect to such
additional borrowings. See note 8 to the accompanying consolidated financial
statements for additional information regarding the material terms of the
subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash operating
credits or charges) ($1,706 million and $1,510 million for the nine months ended
September 30, 1996 and 1995, respectively) to interest expense ($803 million and
$746 million for the nine months ended September 30, 1996 and 1995,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 212% and 202% for the nine
months ended September 30, 1996 and 1995, respectively. Management of the
Company believes that the foregoing interest coverage ratio is adequate in light
of the consistent and nonseasonal nature of its cable television operations and
the relative predictability of the Company's interest expense, almost half of
which results from
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
fixed rate indebtedness. Operating Cash Flow is a measure of value and borrowing
capacity within the cable television industry and is not intended to be a
substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net cash
provided by operating activities ($844 million and $670 million for the nine
months ended September 30, 1996 and 1995, respectively) reflects net cash from
the operations of the Company available for the Company's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by the
Company for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of the Company and its subsidiaries to obtain additional
financing (including the subsidiaries available lines of credit and access to
public debt markets), issuances and sales of the Company's equity or equity of
its subsidiaries, and proceeds from disposition of assets will provide adequate
sources of short-term and long-term liquidity in the future. See the Company's
consolidated statements of cash flows included in the accompanying consolidated
financial statements.
In late April, 1996, TCIC was notified by Moody's Investors Service, Inc.
and Duff & Phelps Credit Rating Co. that those rating agencies had downgraded by
one level their respective ratings of TCIC's senior debt to the first level
below investment grade. Fitch Investors Service, L.P. reaffirmed its rating for
TCIC's senior debt at the last level of investment grade. On October 18, 1996,
Standard and Poor's Securities, Inc. ("Standard & Poor's) issued a press release
stating that TCIC's senior debt would be placed on CreditWatch with negative
implications. TCIC's senior debt is currently rated BBB- by Standard & Poor's
(the last level of investment grade). A downgrade by Standard & Poor's of TCIC's
senior debt would lower such debt to the first level below investment grade.
These actions are expected to marginally increase TCIC's cost of borrowings
under certain bank credit facilities, and may adversely affect TCIC's access to
the public debt market and its overall cost of future borrowings.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company pays
(i) fixed interest rates ranging from 7.2% to 9.3% on notional amounts of $460
million at September 30, 1996 and (ii) variable interest rates on notional
amounts of $2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, the Company's net payments pursuant to the Fixed
Rate Agreements were $3 million and $1 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $11 million and less
than $1 million, respectively. The Company is exposed to credit losses for the
periodic settlements of amounts due under the interest rate exchange agreements
in the event of nonperformance by the other parties to the agreements. However,
the Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $307
million at September 30, 1996. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such obligations, that they
will not be material to the Company.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009. Based on subscriber
levels at September 30, 1996, these agreements require minimum payments
aggregating approximately $624 million. The aggregate amount of the Film
Licensing Obligations under other license agreements is not currently estimable
because such amount is dependent upon
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
certain variable factors. Nevertheless, the Company's aggregate payments under
the Film Licensing Obligations could prove to be significant.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
(2) Material changes in results of operations:
Communications and Programming Services Revenue
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions, the
Company's basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. The regulations established benchmark rates
in 1993 which were further reduced in 1994, to which the rates charged by cable
operators for Regulated Services were required to conform.
The Company reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 and 1996 in response to FCC regulations. The Company believes
that it has complied in all material respects with the provisions of the 1992
Cable Act, including its rate setting provisions. However, the Company's rates
for Regulated Services are subject to review by the FCC, if a complaint has been
filed, or by the appropriate franchise authority, if such authority has been
certified. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom
Act") was signed into law. Because the 1996 Telecom Act does not deregulate
cable programming service tier rates until 1999 (and basic service tier rates
will remain regulated thereafter), the Company believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect on
its results of operations.
Revenue from communications and programming services increased 25% and 27%
for the three months and nine months ended September 30, 1996, respectively, as
compared to the corresponding periods of 1995. In the Company's regulated cable
systems, the Company implemented rate increases for its Regulated Services in
June 1996. As allowed by FCC regulations, such rate increases include amounts
intended to recover increased programming costs incurred during the first five
months of 1996 and not previously recovered, as well as interest on said
amounts.
The increase in revenue for the three months ended September 30, 1996 is
due to the net effect of certain acquisitions (including the Viacom Acquisition)
(14%), increases in rates charged to the Company's subscribers due to inflation,
programming cost increases as previously discussed and channel additions (5%),
growth in the Company's satellite subscribers (3%), growth in subscriber levels
within the Company's cable television systems (3%) and increases in the
Company's domestic and international programming and other
V-76
<PAGE> 226
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
revenue (4%) offset by a 4% decrease due to the deconsolidation of the Company's
sports programming businesses (see discussion below). The increase in revenue
for the nine months ended September 30, 1996 is due to the effect of certain
acquisitions (including the Viacom Acquisition) (12%), growth in the Company's
satellite subscribers (5%), increases in rates charged to the Company's
subscribers as noted above (5%), growth in subscriber levels within the
Company's cable television systems (2%) and increases in the Company's domestic
and international programming and other revenue (4%) offset by a 1% decrease due
to the deconsolidation of the Company's sports programming businesses (see
discussion below).
TCI's domestic programming services contributed $298 million and $371
million of revenue for the nine months ended September 30, 1996 and 1995,
respectively. This revenue was attributable to subscription and advertising
revenue at TCI's sports programming businesses through April 29, 1996 (see
related discussion below), revenue from Netlink USA, a marketer and distributor
of programming to the United States home satellite dish subscriber market and
subscription revenue generated by Southern and Encore Media Corporation.
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed two
sports programming ventures. In the United States, Liberty Media Group and News
Corp. formed the Fox-Liberty Venture into which Liberty Media Group contributed
interests in its national and regional sports networks and into which News Corp.
contributed its fx cable network and certain other assets. Liberty Media Group
received a 50% interest in the Fox-Liberty Venture and $350 million in cash.
Internationally, News Corp. and the Liberty-TINTA LLC formed the
International Venture to operate currently existing sports services in Latin
American and Australia and a variety of new sports services throughout the world
except in Asia and in the United Kingdom, Japan and New Zealand where prior
arrangements preclude an immediate collaboration. The Liberty-TINTA LLC owns 50%
of the International Venture with News Corp. owning the other 50%. News Corp.
contributed various international sports rights and certain trademark rights.
The Liberty-TINTA LLC contributed Prime Deportiva, a Spanish language sports
service distributed in Latin America and in Hispanic markets in the United
States; an interest in Torneos y Competencias S.A., an Argentinean sports
programming and production business; various international sports and satellite
transponder rights and cash. The Liberty-TINTA LLC also contributed their 50%
interest in Premiere Sports and All-Star Sports. Both are Australian 24-hour
sports services available via MMDS or cable television.
As part of the formation of the International Venture, the Liberty-TINTA
LLC is entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to the Liberty-TINTA LLC, News
Corp. is entitled to receive from the Liberty-TINTA LLC $20 million and rights
under various Asian sports programming agreements. Star Television Limited
operates a satellite-delivered television platform in Asia.
Net Sales From Electronic Retailing Services
HSN's net sales from electronic retailing services increased 8% and 11% for
the three months and nine months ended September 30, 1996, respectively, as
compared to the corresponding periods in 1995. Such increases are due primarily
to 22% and 13% increases in the number of packages shipped and a decrease of 14%
and an increase of 1% in the average price per unit sold.
HSN believes that seasonality does impact its business, but not to the same
extent it impacts the retail industry in general.
In August 1996, the Company, HSN and Silver King entered into a series of
agreements which provided for a merger of HSN with a subsidiary and an exchange
by the Company of the Silver King shares it would receive in such merger for
additional shares of BDTV. Upon consummation, HSN would cease to be a subsidiary
of the Company and therefore, the financial results of HSN would not be
consolidated with the
V-77
<PAGE> 227
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
financial results of the Company. Although the Company would cease to possess
voting control over HSN, it would continue to have an indirect equity interest
in HSN through its ownership of the equity securities of BDTV, as well as a
direct interest in HSN which would be exchangeable into shares of Silver King.
Such transactions were consummated in December of 1996.
Operating Costs and Expenses
Operating expenses increased 33% and 35% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (10% and 13%) and
Primestar (2% and 3%) (see discussion below), such expenses increased 21% and
19%. Programming and salary expenses accounted for the majority of such
increases. The Company cannot determine whether and to what extent increases in
the cost of programming will affect its future operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue of Regulated Services.
For the three months and nine months ended September 30, 1996, cost of
sales decreased $3 million or 2% and increased $33 million or 8%, respectively,
as compared to the same periods in 1995. As a percentage of net sales, cost of
sales decreased from 65% to 59% and from 64% to 62% for the three months and
nine months ended September 30, 1996, as compared to the corresponding periods
in 1995. Such decrease are due to promotional events in 1995 which had the
effect of lowering revenue but not cost of sales and to a change in product
sales mix in 1996.
Selling general and administrative expenses ("SG&A") increased 27% and 30%
for the three months and nine months ended September 30, 1996, respectively, as
compared to the corresponding periods of 1995. Exclusive of the effects of
acquisitions (6% and 7%) and Primestar (7% and 9%) (see discussion below), SG&A
increased 14% and 14%. Such increases are due primarily to salaries, related
payroll expenses and those expenses that vary with revenue and/or subscribers.
Additionally, during the nine months ended September 30, 1996 and 1995, the
Company incurred $34 million and $14 million, respectively, of costs related to
newly created material support centers, initiatives to improve its customer
service and the continued redesign of its computer and accounting systems.
The Company had an interest in Primestar, which provides programming and
marketing support to its partners who distribute a multi-channel programming
service via a medium power communications satellite to home satellite dish
owners. During the three months and nine months ended September 30, 1996, the
Company's revenue and expenses related to its Primestar satellite service
increased significantly over the corresponding periods in 1995 as the number of
the Company's Primestar subscribers increased from approximately 370,000
subscribers at September 30, 1995 to approximately 735,000 subscribers at
September 30, 1996. During the three months ended September 30, 1996, revenue
increased from $59 million to $110 million and operating, selling, general and
administrative expenses increased from $54 million to $108 million, as compared
to the three months ended September 30, 1995. During the nine months ended
September 30, 1996, revenue increased from $120 million to $304 million and
operating, selling, general and administrative expenses increased from $111
million to $295 million, as compared to the nine months ended September 30,
1995.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off of SatCo to the holders of TCI Group Stock. At the time of the
Satellite Spin-Off, SatCo's assets and operations will include the Company's
interest in Primestar and the Company's business of distributing Primestar
programming. The Satellite Spin-Off was completed in the fourth quarter of 1996.
SatCo's operations will no longer be consolidated with the Company's.
The increase in the Company's depreciation expense in 1996 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems. The
increase in amortization expense in 1996 is due to acquisitions.
V-78
<PAGE> 228
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 -- (CONTINUED)
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 (Expense) and Net Loss
At September 30, 1996, the Company had an effective ownership interest of
approximately 27% in TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). TeleWest, which is accounted for under the equity method, had a carrying
value at September 30, 1996 of $459 million and comprised $99 million and $43
million of the Company's share of its affiliates' losses during the nine months
ended September 30, 1996 and 1995, respectively. The increase in the Company's
share of losses of TeleWest is due, in part, to an increase in TeleWest's
interest expense and foreign currency translation losses related to the issuance
of dollar denominated debentures by TeleWest. In addition, the Company has other
less significant investments accounted for under the equity method in video
distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $407
million at September 30, 1996 and accounted for $55 million and $38 million of
the Company's share of its affiliates' losses for the nine months ended
September 30, 1996 and 1995, respectively. Additionally, included in share of
losses of affiliates for the nine months ended September 30, 1996 is $112
million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.
The Company is reflecting minority interests in earnings of consolidated
subsidiaries of $28 million and $32 million for the three months and nine months
ended September 30, 1996, respectively, as compared to minority interests in
losses of consolidated subsidiaries for the corresponding periods in 1995. Such
changes are due primarily to the accrual of dividends on the Trust Securities in
1996. See note 9 to the accompanying consolidated financial statements.
As a result of the TCG IPO, the Company recognized a gain of $12 million
during the third quarter of 1996. As a result of the TINTA IPO and the TYC
Acquisition, the Company recognized a gain of $123 million during the third
quarter of 1995. There is no assurance that the Company will realize similar
gains in future periods. See notes 5 and 11 to the accompanying consolidated
financial statements.
As a result of the consummation of the TBS/Time Warner Merger, the Company
will recognize a gain of approximately $1.5 billion in the fourth quarter of
1996. See note 6 to the accompanying consolidated financial statements.
The Company's net loss (before preferred stock dividend requirements) of
$136 million for the three months ended September 30, 1996 represents a change
of $168 million, as compared to the Company's net earnings (before preferred
stock dividend requirements) of $32 million for the three months ended September
30, 1995. The Company's net loss (before preferred stock dividend requirements)
of $438 million for the nine months ended September 30, 1996 represents an
increase of $331 million, as compared to the Company's net loss (before
preferred stock dividend requirements) of $107 million for the nine months ended
September 30, 1995. Such changes are primarily the result of the gain recognized
in 1995 related to the TINTA IPO, an increase in share of losses of affiliates,
including the aforementioned share of losses from TeleWest and Sprint Spectrum,
loss on early extinguishment of debt resulting primarily from the prepayment of
certain fixed-rate indebtedness and the change in minority interests in losses
(earnings) of consolidated subsidiaries discussed above.
V-79
<PAGE> 229
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash........................................................ $ 465 118
Trade and other receivables, net............................ 430 407
Inventories, net............................................ 91 104
Prepaid expenses............................................ 95 65
Prepaid program rights...................................... 47 47
Committed film inventory.................................... 136 122
Investments in affiliates, accounted for under the equity
method, and related receivables (note 5).................. 2,714 2,372
Investment in Turner Broadcasting System, Inc. ("TBS") (note
6)........................................................ 1,022 955
Property and equipment, at cost:
Land...................................................... 94 88
Distribution systems...................................... 11,286 9,545
Support equipment and buildings........................... 1,753 1,429
------- ------
13,133 11,062
Less accumulated depreciation............................. 4,366 3,653
------- ------
8,767 7,409
------- ------
Franchise costs............................................. 17,486 14,322
Less accumulated amortization............................. 2,349 2,092
------- ------
15,137 12,230
------- ------
Other assets, at cost, net of amortization.................. 1,671 1,748
------- ------
$30,575 25,577
======= ======
</TABLE>
(continued)
V-80
<PAGE> 230
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Accounts payable............................................ $ 200 243
Accrued interest............................................ 170 233
Accrued programming expense................................. 394 318
Other accrued expenses...................................... 1,178 1,114
Debt (note 8)............................................... 15,118 13,211
Deferred income taxes....................................... 5,731 4,584
Other liabilities........................................... 183 195
------- ------
Total liabilities................................. 22,974 19,898
------- ------
Minority interests in equity of consolidated subsidiaries... 1,585 651
Redeemable preferred stock.................................. 654 478
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Securities")
holding solely subordinated debt securities of TCI
Communications, Inc. ("TCIC") (note 9).................... 1,000 --
Stockholders' equity (notes 2 and 9):
Series Preferred Stock, $.01 par value Class B 6%
Cumulative Redeemable Exchangeable Junior Preferred
Stock, $.01 par value.................................. -- --
Tele-Communications, Inc. Series A TCI Group common stock,
$1 par value. Authorized 1,750,000,000 shares; issued
684,974,998 shares in 1996 and 672,211,009 shares in
1995................................................... 685 672
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value. Authorized 150,000,000 shares; issued
84,663,501 shares in 1996 and 84,691,554 shares in
1995................................................... 85 85
Tele-Communications, Inc. Series A Liberty Media Group
common stock, $1 par value. Authorized 750,000,000
shares; issued 146,078,965 shares in 1996 and
142,896,264 shares in 1995............................. 146 143
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value. Authorized 75,000,000
shares; issued 21,192,269 shares in 1996 and 21,196,868
shares in 1995......................................... 21 21
Additional paid-in capital................................ 4,308 4,068
Cumulative foreign currency translation adjustment........ (12) (9)
Unrealized holding gains for available-for-sale
securities, net of taxes.............................. 335 338
Accumulated deficit....................................... (892) (454)
------- ------
4,676 4,864
Treasury stock, at cost (100,524,365 shares and
100,524,364 shares of Series A TCI Group common stock
in 1996 and 1995)...................................... (314) (314)
------- ------
Total stockholders' equity........................ 4,362 4,550
------- ------
Commitments and contingencies (note 12)..................... $30,575 25,577
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-81
<PAGE> 231
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1996 1995 1996 1995
------ ----- ------ -----
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue (note 7):
Communications and programming services................... $1,901 1,521 5,355 4,229
Net sales from electronic retailing services.............. 234 217 734 659
------ ----- ------ -----
2,135 1,738 6,089 4,888
------ ----- ------ -----
Operating costs and expenses:
Operating................................................. 723 544 2,056 1,524
Cost of sales from electronic retailing services.......... 137 140 453 420
Selling, general and administrative....................... 669 521 1,874 1,434
Compensation relating to stock appreciation rights........ -- 8 -- 26
Adjustment to compensation relating to stock appreciation
rights.................................................. (11) -- (16) --
Restructuring charges..................................... -- 6 -- 8
Depreciation.............................................. 258 228 769 660
Amortization.............................................. 136 115 381 325
------ ----- ------ -----
1,912 1,562 5,517 4,397
------ ----- ------ -----
Operating income........................................ 223 176 572 491
Other income (expense):
Interest expense.......................................... (277) (262) (803) (746)
Interest and dividend income.............................. 18 18 42 36
Share of losses of affiliates, net (note 5)............... (97) (63) (308) (134)
Loss on early extinguishment of debt (note 8)............. (7) -- (73) --
Minority interests in losses (earnings) of consolidated
subsidiaries, net....................................... (28) 19 (32) 40
Gain on sale of subsidiary stock (note 11)................ -- 123 -- 123
Gain on sale of stock by equity investee (note 5)......... 12 -- 12 --
Other, net................................................ (13) (17) (8) (27)
------ ----- ------ -----
(392) (182) (1,170) (708)
------ ----- ------ -----
Loss before income taxes................................ (169) (6) (598) (217)
Income tax benefit.......................................... 33 38 160 110
------ ----- ------ -----
Net earnings (loss) (note 7)............................ (136) 32 (438) (107)
Dividend requirements on preferred stocks................... (9) (9) (27) (26)
------ ----- ------ -----
Net earnings (loss) attributable to common
stockholders.......................................... $ (145) 23 (465) (133)
====== ===== ====== =====
Net earnings (loss) attributable to common stockholders:
TCI Class A and Class B common stock...................... $ -- 85 -- (71)
TCI Group Series A and Series B common stock.............. (162) (57) (501) (57)
Liberty Media Group Series A and Series B common stock.... 17 (5) 36 (5)
------ ----- ------ -----
$ (145) 23 (465) (133)
====== ===== ====== =====
Net earnings (loss) attributable to common stockholders per
common share (notes 3 and 7):
TCI Class A and Class B common stock...................... $ -- .12 -- (.11)
TCI Group Series A and Series B common stock.............. $ (.24) (.09) (.75) (.09)
Liberty Media Group Series A and Series B common stock.... $ .10 (.03) .22 (.03)
Pro forma net loss attributable to common stockholders (note
2):
TCI Group Series A and Series B common stock............ $ (492)
Liberty Media Group Series A and Series B common
stock................................................. 36
Telephony Group Series A and Series B common stock...... (9)
------
$ (465)
======
Pro forma net loss attributable to common stockholders per
common share (note 3):
TCI Group Series A and Series B common stock............ $ (.74)
Liberty Media Group Series A and Series B common
stock................................................. $ .22
</TABLE>
See accompanying notes to consolidated financial statements.
V-82
<PAGE> 232
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------- CUMULATIVE
LIBERTY MEDIA FOREIGN
CLASS B TCI GROUP GROUP ADDITIONAL CURRENCY
PREFERRED ------------------- ------------------- PAID-IN TRANSLATION
STOCK SERIES A SERIES B SERIES A SERIES B CAPITAL ADJUSTMENT
--------- -------- -------- -------- -------- ---------- -----------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.......... $-- 672 85 143 21 4,068 (9)
Net loss.......................... -- -- -- -- -- -- --
Issuance of common stock for
acquisition.................... -- 11 -- 3 -- 255 --
Issuance of common stock upon
conversion of notes............ -- 1 -- -- -- -- --
Issuance of common stock upon
conversion of preferred
stock.......................... -- 1 -- -- -- 15 --
Accreted dividends on all classes
of preferred stock............. -- -- -- -- -- (27) --
Accreted dividends on all classes
of preferred stock not subject
to mandatory redemption
requirements................... -- -- -- -- -- 7 --
Payment of preferred stock
dividends...................... -- -- -- -- -- (10) --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (3)
Change in unrealized holding gains
for available-for-sale
securities..................... -- -- -- -- -- -- --
--- --- -- --- -- ----- ---
Balance at September 30, 1996....... $-- 685 85 146 21 4,308 (12)
=== === == === == ===== ===
<CAPTION>
UNREALIZED
HOLDING
GAINS FOR
AVAILABLE-
FOR-SALE
SECURITIES, TOTAL
NET OF ACCUMULATED TREASURY STOCKHOLDERS'
TAXES DEFICIT STOCK EQUITY
----------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996.......... 338 (454) (314) 4,550
Net loss.......................... -- (438) -- (438)
Issuance of common stock for
acquisition.................... -- -- -- 269
Issuance of common stock upon
conversion of notes............ -- -- -- 1
Issuance of common stock upon
conversion of preferred
stock.......................... -- -- -- 16
Accreted dividends on all classes
of preferred stock............. -- -- -- (27)
Accreted dividends on all classes
of preferred stock not subject
to mandatory redemption
requirements................... -- -- -- 7
Payment of preferred stock
dividends...................... -- -- -- (10)
Foreign currency translation
adjustment..................... -- -- -- (3)
Change in unrealized holding gains
for available-for-sale
securities..................... (3) -- -- (3)
--- ---- ---- -----
Balance at September 30, 1996....... 335 (892) (314) 4,362
=== ==== ==== =====
</TABLE>
See accompanying notes to consolidated financial statements.
V-83
<PAGE> 233
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
(AMOUNTS IN MILLIONS)
(SEE NOTE 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (438) (107)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 1,150 985
Compensation relating to appreciation rights........... -- 26
Adjustment to compensation relating to stock
appreciation rights................................... (16) --
Share of losses of affiliates.......................... 308 134
Loss on early extinguishment of debt................... 73 --
Minority interests in earnings (losses)................ 32 (40)
Gain on sale of subsidiary stock....................... -- (123)
Gain on sale of stock by equity investee............... (12) --
Deferred income tax benefit............................ (178) (152)
Other noncash charges.................................. 3 2
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................ (20) 14
Change in inventories................................ 11 (18)
Change in prepaids................................... (32) (86)
Change in accrued interest........................... (64) (18)
Change in other accruals and payables................ 27 53
------- ------
Net cash provided by operating activities......... 844 670
------- ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (62) (251)
Capital expended for property and equipment............... (1,526) (1,205)
Additional investments in and loans to affiliates and
others................................................. (677) (958)
Repayments of loans to affiliates......................... 329 20
Proceeds from disposition of assets....................... 255 29
Other investing activities................................ (148) (209)
------- ------
Net cash used in investing activities............. (1,829) (2,574)
------- ------
Cash flows from financing activities:
Borrowings of debt........................................ 7,449 7,088
Repayments of debt........................................ (7,476) (5,970)
Prepayment penalties...................................... (60) --
Issuance of Trust Securities.............................. 971 --
Issuance of subsidiary preferred stock.................... 223 --
Contributions by minority shareholders of subsidiaries.... 315 --
Issuance of common stock.................................. -- 431
Proceeds from sale of subsidiary stock.................... -- 445
Payment of preferred stock dividends...................... (34) (22)
Payment of dividends on subsidiary preferred stock and
Trust Securities....................................... (56) --
------- ------
Net cash provided by financing activities......... 1,332 1,972
------- ------
Net increase in cash.............................. 347 68
Cash at beginning of period....................... 118 74
------- ------
Cash at end of period............................. $ 465 142
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-84
<PAGE> 234
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) GENERAL
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in TCI's Annual Report on Form 10-K for the year ended
December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off (the "Satellite Spin-Off") of its direct broadcast satellite
subsidiary, TCI Satellite Entertainment, Inc. ("SatCo"), to the holders of TCI
Group Stock. At the time of the Satellite Spin-Off, SatCo's assets and
operations will include the Company's interest in PRIMESTAR Partners, L.P.
("Primestar") and the Company's business of distributing Primestar programming.
Although there is no assurance, the Satellite Spin-Off is anticipated to be
completed in the fourth quarter of 1996. Upon completion of the Satellite
Spin-Off, SatCo's operations will no longer be consolidated with the Company's.
In March of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No.
121"), effective for fiscal years beginning after December 15, 1995. Statement
No. 121 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement No.
121 effective January 1, 1996. Such adoption did not have a significant effect
on the financial position or results of operations of the Company.
Pursuant to Statement No. 121, the Company periodically reviews the
carrying amount of its long-lived assets, franchise costs and certain other
assets to determine whether current events or circumstances warrant adjustments
to such carrying amounts. The Company considers historical and expected future
net operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets ("Assets"). The Company deems Assets to be impaired if
the Company is unable to recover the carrying value of such Assets over their
expected remaining useful life through a forecast of undiscounted future
operating cash flows directly related to the Assets. If Assets are deemed to be
impaired, the loss is measured as the amount by which the carrying amount of the
Assets exceeds their fair value. The Company generally measures fair value by
considering sales prices for similar assets or by discounting estimated future
cash flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.
V-85
<PAGE> 235
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) LIBERTY GROUP STOCK
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (the "Board") to issue a new class of stock ("Liberty Group Stock")
which is intended to reflect the separate performance of TCI's business which
produces and distributes cable television programming services ("Liberty Media
Group"). While the Liberty Group Stock constitutes common stock of TCI, the
issuance of the Liberty Group Stock did not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of holders of
TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed one
hundred percent of the equity value attributable to Liberty Media Group (the
"Distribution") to its security holders of record on August 4, 1995.
Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock ("TCI Group Stock").
Upon the Distribution and subsequent to the redesignation of TCI Class A
and Class B common stock into Series A and Series B TCI Group Stock, the TCI
Group Stock is intended to reflect the separate performance of the subsidiaries
and assets not attributed to Liberty Media Group, including (i) TCI's Cable and
Communications unit, (ii) TCI's International Cable and Programming Unit
("TINTA") and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and
assets are referred to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group or to Liberty Media Group for purposes of
preparing their combined financial statements, the change in the capital
structure of TCI does not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries will each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of
common stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty Group Stock did not affect the rights of creditors of TCI.
(3) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
TCI Class A and Class B Common Stock
Primary earnings per common and common equivalent share attributable to
common stockholders for the period from July 1, 1995 through the Distribution
was computed by dividing net earnings attributable to common stockholders by the
weighted average number of common and common equivalent shares outstanding
(703.9 million).
Fully diluted earnings per common and common equivalent share attributable
to common stockholders for the period from July 1, 1995 through the Distribution
was computed by dividing earnings attributable to common stockholders by the
weighted average number of common and common equivalent shares outstanding
(704.0 million).
The loss attributable to common stockholders per common share for the
period from January 1, 1995 through the Distribution was computed by dividing
net loss attributable to common stockholders by the weighted average number of
common shares outstanding during the period (648.2 million). Common stock
equivalents were not included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
TCI Group Series A and Series B Common Stock
The loss attributable to TCI Group stockholders per common share for the
three months and nine months ended September 30, 1996 and for the period from
the Distribution through September 30, 1995 was computed by dividing net loss
attributable to TCI Group Series A and Series B common stockholders by the
weighted average number of common shares outstanding of TCI Group Series A and
Series B common stock
V-86
<PAGE> 236
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
during the period (669.1 million, 665.0 million and 656.4 million,
respectively). Common stock equivalents were not included in the computation of
weighted average shares outstanding because their inclusion would be
anti-dilutive.
Liberty Media Group Series A and Series B Common Stock
Earnings attributable to Liberty Media Group stockholders per common share
for the three months and nine months ended September 30, 1996 was computed by
dividing net earnings attributable to Liberty Media Group Series A and Series B
common stockholders by the weighted average number of common shares outstanding
of Liberty Media Group Series A and Series B common stock during the period
(167.3 million and 166.2 million, respectively). Common stock equivalents were
not included in the computation because their inclusion would be anti-dilutive
to TCI.
The loss attributable to Liberty Media Group stockholders per common share
for the period from the Distribution through September 30, 1995 was computed by
dividing net loss attributable to Liberty Media Group Series A and Series B
common stockholders by the weighted average number of common shares outstanding
of Liberty Media Group Series A and Series B common stock during the period
(164.1 million). Common stock equivalents were not included in the computation
of weighted average shares outstanding because their inclusion would be
anti-dilutive.
Pro Forma Loss Attributable to Common Stockholders
Pro forma loss attributable to common stockholders for the Telephony Group
and the TCI Group and pro forma loss attributable to common stockholders per
common share for TCI Group, both for the nine months ended September 30, 1996,
assume, solely for the purpose of these calculations, that the Company sold, on
January 1, 1996, 10% of the equity value of the Telephony Group in an initial
public offering. Additionally, the pro forma calculations assume the conversion,
on January 1, 1996, of $500 million of TCI Group's interest in Telephony Group
into a preferred stock due from Telephony Group. The Company currently has not
determined, if and the extent to which, it would sell the equity value of
Telephony Group in an initial public offering.
(4) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $867 million and $763 million for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for income
taxes was $8 million and $62 million for the nine months ended September 30,
1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired......... $ 4,661 3,394
Liabilities assumed, net of current
assets............................. (2,095) (495)
Deferred tax liability recorded in
acquisitions....................... (1,310) (1,095)
Minority interests in equity of
acquired entities.................. (733) 62
Common stock and preferred stock
issued in acquisitions............. (461) (1,615)
------- ------
Cash paid for acquisitions.... $ 62 251
======= ======
Exchange of consolidated subsidiaries
for note receivable and equity
investments........................... $ 560 --
======= ======
</TABLE>
V-87
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Effect of foreign currency translation
adjustment on book value of foreign
equity investments.................... $ 3 1
======= ======
Change in unrealized gains, net of
deferred income taxes, on
available-for-sale securities......... $ 3 294
======= ======
Accrued preferred stock dividends....... $ 20 4
======= ======
Exchange of common stock held by
subsidiaries for Series F Preferred
Stock................................. $ -- 632
======= ======
Distribution of Series A and Series B
Liberty Group Stock to TCI common
stockholders.......................... $ -- 164
======= ======
Redesignation of TCI common stock into
Series A and Series B TCI Group
Stock................................. $ -- 656
======= ======
Conversion of Series F Preferred Stock
by subsidiary of TCI into Series A TCI
Group Stock........................... $ -- 314
======= ======
Conversion of debt into additional
minority interest in consolidated
subsidiary............................ $ -- 14
======= ======
Common stock issued to subsidiaries in
Reorganization reflected as treasury
stock................................. $ -- 6
======= ======
Common stock issued in exchange for cost
investment............................ $ -- 73
======= ======
Retirement of Class A common stock
previously held by subsidiary......... $ -- 29
======= ======
Issuance of subsidiary stock for equity
investment............................ $ -- 11
======= ======
</TABLE>
(5) INVESTMENTS IN AFFILIATES
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
COMBINED OPERATIONS 1996 1995
------------------- -------- -------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Revenue................................. $ 3,989 3,123
Operating expenses...................... (3,570) (2,664)
Depreciation and amortization........... (501) (375)
------- ------
Operating income (loss)....... (82) 84
Interest expense........................ (359) (230)
Other, net.............................. (202) (94)
------- ------
Net loss...................... $ (643) (240)
======= ======
</TABLE>
The Company has various investments accounted for under the equity method.
Some of the more significant investments held by the Company at September 30,
1996 were a partnership ("Sprint Spectrum") formed by the Company, Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and Sprint Corporation
("Sprint") (carrying value of $783 million) (see note 12), Teleport
Communications Group, Inc. ("TCG")(carrying value of $277 million), TeleWest
Communications plc ("TeleWest") (carrying value of $459 million), various other
foreign equity investments (cumulative carrying value of $407 million),
Intermedia Capital Partners IV L.P. (carrying value of $287 million) and
Discovery Communications, Inc. (carrying value of $119 million).
V-88
<PAGE> 238
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of
Class A common stock at 16.00 per share to the public for aggregate net proceeds
of approximately 410,000,000. As a result of the TCG IPO, the Company's
ownership interest in TCG was reduced from approximately 35% to approximately
31%. Accordingly, the Company recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures. In the United
States, Liberty Media Group and News Corp. formed a partnership (the
"Fox-Liberty Venture") into which Liberty Media Group contributed interests in
its national and regional sports networks and into which News Corp. contributed
its fx cable network and certain other assets. Liberty Media Group received a
50% interest in the Fox-Liberty Venture and $350 million in cash.
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly-owned subsidiary
of Liberty Media Group, and TINTA formed a venture (the "International Venture")
to operate previously existing sports services in Latin America and Australia
and a variety of new sports services throughout the world, except in Asia and in
the United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. The Liberty-TINTA LLC owns 50% of the International
Venture with News Corp. owning the other 50%. News Corp. contributed various
international sports rights and certain trademark rights. The Liberty-TINTA LLC
contributed Prime Deportiva, a Spanish language sports service distributed in
Latin American and in Hispanic markets in the United States; an interest in
Torneos y Competencias S.A., an Argentinean sports programming and production
business; various international sports and satellite transponder rights and
cash. The Liberty-TINTA LLC also contributed their 50% interest in Premiere
Sports and All-Star Sports. Both are Australian 24-hour sports services
available via multichannel, multipoint distribution systems ("MMDS") or cable
television.
As part of the formation of the International Venture, the Liberty-TINTA
LLC is entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to the Liberty-TINTA LLC, News
Corp. is entitled to receive from the Liberty-TINTA LLC $20 million and rights
under various Asian sports programming agreements. Star Television Limited
operates a satellite-delivered television platform in Asia.
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general partnership is,
as such, liable as a matter of partnership law for all debts of that partnership
in the event liabilities of that partnership were to exceed its assets.
(6) INVESTMENT IN TURNER BROADCASTING SYSTEM, INC.
At September 30, 1996, the Company owned shares of TBS common stock with an
aggregate market value of $844 million (including unrealized holding gains of
$520 million) and shares of a class of TBS preferred stock that were convertible
into TBS common stock with an aggregate market value of $1,007 million (which
exceeded cost by $829 million). The Company's total holdings represented an
approximate 7.5% voting interest for those matters which preferred and common
stock voted as a single class.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and TBS consummated
a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75
of a Time Warner common share for each TBS Class A and Class B common share, and
each holder of TBS Class C preferred stock received 0.80 of a Time Warner common
share for each of the 6 shares of TBS Class B common stock into which each share
of Class C preferred stock could have been converted. The Company received
approximately 50.6 million shares of Time Warner common stock in exchange for
its TBS holdings. As a result of this like-
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
kind exchange, the Company will recognize a pre-tax gain of approximately $1.5
billion in the fourth quarter of 1996.
On July 16, 1996, Time Warner, TBS, TCI, Liberty Media Group and the
Federal Trade Commission ("FTC") entered into an agreement in principle,
pursuant to which, among other things, Liberty Media Group agreed to receive
Time Warner securities with limited voting rights (the "TW Exchange Stock") in
exchange for its TBS common and preferred stock. In addition, subject to a
number of conditions, including receipt of a ruling from the Internal Revenue
Service that such dividend would be tax free to the Liberty Media Group
stockholders, TCI agreed that it would distribute in the form of a stock
dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a
new company ("Spinco") which would hold the TW Exchange Stock and the business
of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of
Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in
the United States and Canada. The level of Liberty Media Group's ownership
interest in Time Warner would be restricted until the Spin-Off occurs, at which
time, such restriction would be eased for Spinco.
If the Spin-Off occurs, certain control stockholders of TCI, Bob Magness,
John C. Malone and Kearns-Tribune Corporation, would exchange the Spinco common
stock they receive for a Spinco convertible preferred security which would only
be entitled to vote on major corporate transactions involving Spinco.
(7) ACQUISITION
On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's
cable systems and related assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for shares of Class A
Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's obligations
under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred
Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The Exchangeable Preferred Stock is
exchangeable, at the option of the holder commencing after the fifth anniversary
of the date of issuance, for shares of Series A TCI Group Stock at an initial
exchange rate of 4.81 shares of Series A TCI Group Stock for each share of
Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is
subject to redemption, at the option of Cable Sub, after the fifth anniversary
of the date of issuance, initially at a redemption price of $102.50 per share
and thereafter at prices declining ratably annually to $100 per share on and
after the eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock is also
subject to mandatory redemption on the tenth anniversary of the date of issuance
at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by Cable Sub in satisfaction of its optional or
mandatory redemption obligations with respect to the
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<PAGE> 240
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. On a pro forma basis, the
Company's revenue, net loss, and net loss per share of TCI Group Stock would
have been increased by $276 million, $57 million and $.09, respectively, for the
nine months ended September 30, 1996; and revenue, net loss, net loss per share
of TCI Group Stock and net loss per share of TCI Class A Common Stock would have
been increased by $327 million, $90 million, $.03 and $.11, respectively, for
the nine months ended September 30, 1995 had Cable Sub been consolidated with
the Company on January 1, 1995. The foregoing unaudited pro forma financial
information is based upon historical results of operations adjusted for
acquisition costs and, in the opinion of management, is not necessarily
indicative of the results had the Company operated Cable Sub since January 1,
1995.
(8) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Notes payable.............................................. $ 9,405 7,713
Bank credit facilities..................................... 4,338 3,854
Commercial paper........................................... 1,179 1,469
Convertible notes (a)...................................... 43 45
Other debt................................................. 153 130
------- ------
$15,118 13,211
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$181 million at September 30, 1996 and $186 million at December 31, 1995,
mature on December 18, 2021. The notes require, so long as conversion of the
notes has not occurred, an annual interest payment through 2003 equal to
1.85% of the face amount of the notes. During the nine months ended
September 30, 1996, certain of these notes were converted into 1,063,800
shares of Series A TCI Group Stock and 265,950 shares of Series A Liberty
Group Stock. At September 30, 1996, the notes were convertible, at the
option of the holders, into an aggregate of 37,643,774 shares of Series A
TCI Group Stock and 9,410,937 shares of Series A Liberty Group Stock.
During the nine months ended September 30, 1996, the Company redeemed
certain notes payable which had an aggregate principle balance of $809 million
and fixed interest rates ranging from 8.67% to 10.44% (the "Redemption"). In
connection with the Redemption, the Company recognized a loss on early
extinguishment of debt of $62 million. Such loss related to prepayment penalties
amounting to $60 million and the retirement of deferred loan costs.
During the nine months ended September 30, 1996, certain subsidiaries of
the Company terminated, at such subsidiaries' option, certain revolving bank
credit facilities with aggregate commitments of approximately $2 billion and
refinanced certain other bank credit facilities. In connection with such
termination and refinancings, the Company recognized a loss on early
extinguishment of debt of $11 million related to the retirement of deferred loan
costs.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and cash flow
to debt service, as
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<PAGE> 241
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined), and include certain limitations on indebtedness, investments,
guarantees, dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 100,524,364 shares of Series A TCI Group
Stock held by a subsidiary of the Company. Also, as security for borrowings
under another of the Company's credit facilities, the Company has pledged a
portion of the Time Warner common stock received in the TBS/Time Warner Merger.
Additionally, as security for one of the Company's notes payable (with a balance
of $26 million at September 30, 1996), the Company has pledged the stock of one
of its majority-owned subsidiaries.
The fair value of the debt of the Company's subsidiaries is estimated based
on the current market prices for the same or similar issues or on the current
rates offered to the subsidiaries of the Company for debt of the same remaining
maturities. The fair value of debt, which has a carrying value of $15,118
million, was $15,452 million at September 30, 1996.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.2% to 9.3% on notional amounts of $460 million at
September 30, 1996 and (ii) variable interest rates (the "Variable Rate
Agreements") on notional amounts of $2,450 million at September 30, 1996. During
the nine months ended September 30, 1996 and 1995, the Company's net payments
pursuant to the Fixed Rate Agreements were $3 million and $1 million,
respectively; and the Company's net receipts pursuant to the Variable Rate
Agreements were $11 million and less than $1 million, respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (dollar amounts in millions):
<TABLE>
<CAPTION>
FIXED RATE AGREEMENTS
---------------------
EXPIRATION INTEREST RATE NOTIONAL
DATE TO BE PAID AMOUNT
---------- ------------- --------
<S> <C> <C>
November 1996.......... 8.9% $150
October 1997........... 7.2% - 9.3% 80
December 1997.......... 8.7% 230
----
$460
====
</TABLE>
<TABLE>
<CAPTION>
VARIABLE RATE AGREEMENTS
------------------------
EXPIRATION INTEREST RATE NOTIONAL
DATE TO BE PAID AMOUNT
---------- -------------- --------
<S> <C> <C>
April 1997........... 7.0% $ 200
September 1998....... 4.8% - 5.4% 450
April 1999........... 7.4% 100
September 1999....... 7.2% - 7.4% 300
February 2000........ 5.8% - 6.6% 650
March 2000........... 5.8% - 6.0% 675
September 2000....... 5.1% 75
------
$2,450
======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the Company does
not anticipate that it will incur any material credit losses because it does not
anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
September 30, 1996, taking into consideration current interest rates and the
current creditworthiness of the counterparties. The Company would be required to
pay $33 million at September 30, 1996 to terminate the agreements.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per
annum on the average unborrowed portion of the total amount available for
borrowings under bank credit facilities.
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<PAGE> 242
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common securities
to TCIC, a subsidiary of the Company, and issued $500 million of 8.72% Trust
Originated Preferred Securities(SM) (the "Trust I Preferred Securities" and
together with the common securities, the "Trust I Securities") to the public.
Trust I exists for the exclusive purposes of issuing Trust I Securities and
investing the proceeds thereof into an aggregate principal amount of $516
million of 8.72% Subordinated Deferrable Interest Notes due January 31, 2045
(the "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated Debt
Securities are unsecured obligations of TCIC and are subordinate and junior in
right of payment to certain other indebtedness of the Company. Upon redemption
of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will
be mandatorily redeemable. TCIC effectively provides a full and unconditional
guarantee of Trust I's obligations under the Trust I Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common securities
to TCIC, and issued $500 million of 10% Trust Preferred Securities (the "Trust
II Preferred Securities" and together with the common securities, the "Trust II
Securities") to the public. Trust II exists for the exclusive purposes of
issuing Trust II Securities and investing the proceeds thereof into an aggregate
principal amount of $516 million of 10% Subordinated Deferrable Interest Notes
due May 31, 2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other indebtedness of the
Company. Upon redemption of the 10% Subordinated Debt Securities, the Trust II
Preferred Securities will be mandatorily redeemable. TCIC effectively provides a
full and unconditional guarantee of Trust II's obligations under the Trust II
Preferred Securities.
The Trust I and Trust II Preferred Securities are presented together in a
separate line item in the accompanying consolidated balance sheet captioned
"Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely subordinated debt securities of TCI Communications, Inc."
Dividends accrued on the Trust I and Trust II Preferred Securities are included
in minority interests in losses (earnings) of consolidated subsidiaries in the
accompanying consolidated financial statements.
(10) STOCKHOLDERS' EQUITY
Stock Options
Estimated compensation relating to restricted stock awards, stock
appreciation rights ("SARs") and options with tandem SARs awarded by the Company
has been recorded through September 30, 1996, but is subject to future
adjustment based upon market value, and ultimately, on the final determination
of market value when the rights are exercised or the restricted stock awards are
vested.
Other
At September 30, 1996, there were 119,821,579 shares of Series A TCI Group
Stock and 20,967,181 shares of Series A Liberty Group Stock reserved for
issuance under exercise privileges related to options, convertible debt
securities and convertible preferred stock. Also, one share of Series A TCI
Group Stock is reserved for each share of Series B TCI Group Stock, and one
share of Series A Liberty Group Stock is reserved for each share of Series B
Liberty Group Stock. Additionally, subsidiaries of TCI own an aggregate of
278,307 shares of TCI Convertible Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock"). Each share of Series F Preferred Stock is
convertible into 1,287.51 shares of Series A TCI Group Stock.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to September 30, 1996, a subsidiary of the Company issued 2,000
shares of exchangeable preferred stock, which shares are exchangeable into
957,341 shares of Series A TCI Group Stock.
(11) SALE OF SUBSIDIARY STOCK
On July 18, 1995, TINTA completed an initial public offering (the "TINTA
IPO") in which it sold 20 million shares of TINTA Series A common stock to the
public for consideration of $16.00 per share aggregating $320 million, before
deducting related expenses (approximately $19 million). The shares sold to the
public represented 17% of TINTA's total issued and outstanding common stock and
9% of the aggregate voting interest represented by such issued and outstanding
common stock. Also in July 1995, TINTA issued 687,500 shares of TINTA Series A
common stock as partial consideration for a 35% ownership interest in Torneos Y
Competencias S.A., an Argentine sports programming company (the "TYC
Acquisition"). As a result of the TINTA IPO and the TYC Acquisition, the Company
recognized a gain amounting to $123 million.
(12) COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in Sprint
Spectrum which was formed to engage in the business of providing wireless
communications services on a nationwide basis. The Company owns an indirect 30%
interest in Sprint Spectrum. Sprint Spectrum was the successful bidder for
personal communications services ("PCS") licenses for 29 markets in an auction
conducted by the FCC that ended in March 1995. The aggregate license cost for
these licenses was approximately $2.1 billion, all of which has been paid.
Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or
acquire PCS licenses from other holders, has invested in an entity ("APC") which
holds the PCS license for the Washington-Baltimore market, has agreed to invest
in the entity that will hold the PCS license for the Los Angeles-San Diego
market, and may invest in other entities that hold PCS licenses. Subsidiaries of
Cox, Sprint and the Company are also partners in a partnership ("PhillieCo")
that holds a PCS license for the Philadelphia market which was acquired at a
license cost of $85 million. The Company has an indirect 35.3% interest in
PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
has agreed to contribute approximately $0.6 billion of such aggregate amount,
$0.2 billion of which was contributed during the nine months ended September 30,
1996. The Company expects that Sprint Spectrum will require additional equity
thereafter.
On November 27, 1995, the Company announced that it had agreed to exchange
its controlling interest in Home Shopping Network, Inc. ("HSN") for shares of
Silver King Communications, Inc. ("Silver King"). The Company would receive
approximately 11 million newly issued shares of Silver King in exchange for its
37.5 million shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their respective
affiliates entered into an agreement in August 1995 pursuant to which an option
owned by Liberty Media Group to purchase 2 million shares of Silver King Class B
common stock (the "Option") (which shares would constitute voting control of
Silver King) would be transferred to BDTV, Inc. ("BDTV") (formerly referred to
as "Silver Management Company"), an entity in which Liberty Media Group would
own all of the non-voting equity interests (which would constitute substantially
all of the equity of such entity) and Mr. Diller would own all of the voting
equity interests and have the right to control such entity (subject to certain
exceptions relating to fundamental corporate actions). BDTV would thereafter
exercise the Option and hold the shares of Silver King Class B
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock purchased thereunder. In an amendment to such agreement entered
into in November 1995, Liberty Media Group agreed to contribute all of its
shares of HSN (which shares constitute approximately 41% of the equity of HSN
and approximately 80% of the voting power of HSN) to BDTV in return for
additional non-voting equity interests in BDTV. Following such contribution,
BDTV would exchange such HSN shares with Silver King for additional shares of
Silver King Common Stock and Class B Common Stock (thereby increasing BDTV's
controlling interest in Silver King to in excess of 80% of the voting power of
Silver King). In June 1996, the FCC granted its approval to the change in
control of Silver King resulting from such exercise of the Option. Thereafter,
in August 1996, the Option was exercised and BDTV became the controlling
stockholder of Silver King. The FCC approval, received in connection with the
exercise of the Option, however, included a condition that any increase in TCI's
equity interest in Silver King (which would result from the proposed transfer of
HSN shares to Silver King), as well as any material amendment to the August 1995
agreement with Mr. Diller, would require the prior approval of the FCC.
In light of these restrictions, Liberty Media Group and Mr. Diller began to
discuss a restructuring of the November transaction, as well as certain other
alternative structures. On August 25, 1996, Silver King, HSN and Liberty Media
Group entered into a merger agreement and related transaction agreements
pursuant to which (i) Liberty Media Group agreed to exchange all of its shares
of HSN common stock and approximately 739,000 shares of its HSN Class B Common
Stock with the wholly owned subsidiary of Silver King which was to be merged
into HSN ("SK Sub") for shares of stock of SK Sub, (ii) SK Sub would be merged
into HSN (the "HSN Merger"), with HSN being the surviving corporation owned
80.1% by Silver King and 19.9% by Liberty Media Group, (iii) Liberty Media Group
would receive in the HSN Merger, in exchange for its remaining 19.3 million
shares of HSN Class B Common Stock, approximately 7.8 million shares of Silver
King Class B Common Stock and the contingent right to receive from time to time
approximately 2.6 million additional shares of Silver King Class B Common Stock
as permitted under applicable FCC regulations, and (iv) Liberty Media Group and
Silver King would enter into an exchange agreement providing for the terms upon
which Liberty Media Group's remaining shares of HSN, as the surviving
corporation in the HSN Merger, would be exchanged from time to time for stock of
Silver King as permitted under applicable FCC regulations. All of the shares of
Silver King Class B Common Stock actually received by Liberty Media Group at the
time of the HSN Merger would be immediately contributed to an entity ("BDTV II")
in which Mr. Diller owns all of the voting equity interests and Liberty Media
Group owns a nonvoting equity interest (which non-voting interest constitutes
substantially all the equity of BDTV II) and which (other than with respect to
certain fundamental corporate actions) is controlled by Mr. Diller.
The HSN Merger is subject to the satisfaction of certain conditions,
including the receipt of all necessary regulatory consents and approvals,
consummation of the merger of Savoy Pictures Entertainment, Inc. and a
subsidiary of Silver King, and approval of such transactions by the stockholders
of Silver King and HSN. Liberty Media Group has entered into agreements with
both Silver King and HSN pursuant to which Liberty Media Group has agreed to
vote or cause to be voted shares of Silver King and HSN owned by it in favor of
the HSN Merger and the other related transactions to be voted upon by the
stockholders of HSN and Silver King. In addition, such voting agreements
prohibit Liberty Media Group from disposing of shares of HSN or Silver King
except pursuant to the HSN Merger or following a termination of the HSN merger
agreement. If consummated, HSN would cease to be a subsidiary of the Company and
therefore, the financial results of HSN would not be consolidated with the
Company's financial results. Although the Company would cease to possess voting
control over HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of BDTV, as well as a direct
interest in HSN. No assurance can be given that the HSN Merger and related
transactions will be consummated or if such transactions are consummated, when
such additional shares may be received by Liberty media Group or that any or all
such shares are ultimately issued to Liberty Media Group
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film Licensing
Obligations"). Based on subscriber levels at September 30,
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, these agreements require minimum payments aggregating approximately $624
million. The aggregate amount of the Film Licensing Obligations under other
license agreements is not currently estimable because such amount is dependent
upon certain variable factors. Nevertheless, the Company's aggregate payments
under the Film Licensing Obligations could prove to be significant.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $307
million at September 30, 1996. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such obligations, that they
will not be material to the Company.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries' common
stock. Estimates of the compensation related to the restricted stock awards and
options and/or SARs have been recorded in the accompanying consolidated
financial statements, but are subject to future adjustment based upon the market
value of the respective common stock and, ultimately, on the final market value
when the rights are exercised or the restricted stock awards are vested.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
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"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
On December 4, 1996, the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholder approval (the "Telephony Stock
Proposal"), the issuance of a new class of stock ("Telephony Group Stock") which
is intended to reflect the separate performance of the Telephony Group. The
Telephony Group would initially consist of TCI Group's interest in TCI Telephony
Services, Inc., an indirect wholly owned subsidiary of Tele-Communications, Inc.
("TCI" or the "Company"), its subsidiaries, their respective assets, and all
assets and liabilities of the TCI Group (as defined below) to the extent
attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TCI Telephony Services, Inc. (together
with its consolidated subsidiaries (unless the context indicates otherwise),
"TCI Telephony"). The principal assets of TCI Telephony are its
non-consolidating investments in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide under the "Sprint" brand (the "PCS Ventures"),
and its investment in Teleport Communications Group, Inc., a Delaware
corporation ("TCG" or "Teleport"). The PCS Ventures include Sprint Spectrum
Holding Company, L.P. and MinorCo, L.P. (collectively, "Sprint Spectrum"), the
partners of each of which are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI, and
PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries of Sprint,
Cox and TCI. TCI, through subsidiaries, has a 30% interest as a partner in
Sprint Spectrum and a 35.3% interest as a partner in PhillieCo. TCG is a
competitive local exchange carrier that offers a wide range of local
telecommunications services in major metropolitan markets nationwide, primarily
to businesses, long distance carriers and resellers, and wireless communications
companies. The Company has a 31.1% equity interest (which represents a 36.4%
voting interest) in TCG. The Telephony Group also includes a 50% partnership
interest in Kansas City Fiber Network, L.P. and a 40% partnership interest in
NHT Partnership, which are competitive access providers serving the Kansas City
and Buffalo metropolitan areas, respectively. The Telephony Group would also
include such other assets of the TCI Group as the Board may in the future
determine to attribute to the Telephony Group and such other businesses, assets
and liabilities as TCI may in the future acquire for the Telephony Group, as
determined by the Board. It is currently the intention of TCI that any
businesses, assets and liabilities so attributed to the Telephony Group in the
future would be businesses, assets and liabilities of, or related to, the
interests of the TCI Group in the domestic wireless and wireline telephony
businesses (the "Telephony Business").
The TCI Group is intended to reflect the performance of those businesses of
the Company not attributed to the Liberty Media Group (which is intended to
reflect the performance of TCI's business which produces and distributes cable
television programming services) and the Telephony Group. Collectively, the TCI
Group, the Liberty Media Group and the Telephony Group are referred to as the
"Groups" and individually may be referred to herein as a "Group".
As of the date of these financial statements, the only interests of the TCI
Group in the Telephony Business that are not attributed to the Telephony Group
are the businesses currently being conducted by a subsidiary of the TCI Group
which provides long-distance transport of video, voice, data traffic and other
telecommunications services primarily to inter-exchange carriers on a wholesale
basis using a digital broadband microwave network located throughout a 14-state
region in the western United States (the "Microwave Business"), and the
Company's business, which is in the development stage, of providing wireline
residential telephony services via TCI's cable plant to residential and small
business customers in certain of the geographic areas served by the Company's
cable television systems (the "ResTel Business"). The Company began offering
residential telephone service commercially in October 1996 in Hartford,
Connecticut and in January of 1997 in Arlington Heights, Illinois. Telephony
Group has the right, but not the obligation, to
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"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
acquire the ResTel Business from the Company in whole or in part (by geographic
area), at any time or from time to time, as applicable, provided that Telephony
Group is at the time of exercise a subsidiary of the Company and the Company is
then conducting such business.
The method of determining the purchase price for the ResTel Business, and
the arrangements between the Telephony Group and the TCI Group for the use by
TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined. In making such determinations, the Board
will consider, among other things, the TCI Group's aggregate investment
(historically and through any upgrade for two-way service) in the cable plant
that TCI Telephony would use to conduct the ResTel Business; the use of such
plant by TCI's various subsidiaries or Groups (e.g., for cable, telephony and
Internet services), including the use by the Telephony Group of the underlying
plant for the ResTel Business and the use by the TCI Group of the upgraded plant
for other two-way services (such as Internet services and, if developed in the
future, interactive television services), and the ongoing costs to maintain the
plant. The purchase price and other arrangements between the Groups determined
by the Board may or may not reflect the terms and conditions that either Group
might have obtained in an arms'-length negotiation with a third party. It is
currently anticipated that TCI Telephony, if it exercises its right to acquire
the ResTel Business, will enter into a long-term agreement with TCI for the use
of the cable plant via which it would conduct the ResTel Business and for the
payment by TCI Telephony of an allocated share of the costs to maintain such
plant. The portion of TCI's investment in the plant that the Board determines to
allocate to the Telephony Group may be included in the purchase price for the
ResTel Business or as a usage fee pursuant to such long-term agreement.
If TCI Telephony exercises its right to acquire the ResTel Business in
whole or in part, payment of the purchase price may be in funds generated by the
Telephony Group (whether through external financings, future operations or sales
of assets), in funds borrowed from TCI or through the issuance of debt or
preferred equity securities by TCI Telephony to TCI or other potential financing
opportunities; provided, however, that the Board has determined that the payment
of such purchase price will not be made through an increase in the Inter-Group
Interest (as defined below) of the TCI Group in the Telephony Group. Whether or
not TCI Telephony will exercise its rights to acquire the ResTel Business (in
whole or in part) will depend upon a number of factors, including the
penetration rates for the service in the geographic area or areas in which the
service has been commercially launched, the cost of providing the service at the
penetration rate achieved in that area, the price paid by TCI Telephony to
acquire such business from the TCI Group, and pursuant to its arrangement with
the TCI Group regarding the use of the cable plant, and the ability of TCI
Telephony to fund the continued development and ongoing operation of the ResTel
Business in that area.
TCI Telephony also has the right to acquire TCI's interests in the
Microwave Business at a price based on the fair market value of such business
(as determined by the Board). Such right may be exercised at any time provided
that at the time of exercise TCI Telephony is then a subsidiary of TCI and TCI
is then conducting such business.
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred to
as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group is
100%. As any shares of Telephony Group Stock are issued and distributed or sold,
the TCI Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of holders
of TCI's or any of its subsidiaries' debt.
Holders of 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
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"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
Telephony Group Stock (when issued) will be common stockholders of TCI and will
be subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities.
Summary of Operations
Certain corporate general and administrative costs are charged to Telephony
Group at rates set at the beginning of the year based on projected utilization
for that year. The utilization-based charges are set at levels that management
believes to be reasonable and that would approximate the costs Telephony Group
would incur for comparable services on a stand alone basis. During 1995 and
1994, Telephony Group was allocated $358,000 and $50,000, respectively, in
corporate general and administrative costs by TCI Group.
Telephony Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees involved with Telephony
Group matters by TCI. Such compensation is subject to future adjustment based
upon market value, and ultimately, on the final determination of market value
when the rights are exercised or the restricted stock awards are vested.
Other Income and Expenses
Telephony Group's share of losses of affiliates of $65.3 million for the
year ended December 31, 1995 represents an increase of $44.9 million or 220%,
when compared to the Telephony Group's share of losses of $20.4 million for the
year ended December 31, 1994. The increase is directly attributable to the
Telephony Group's share of losses in the PCS Ventures, TCG and other affiliates
accounted for under the equity method.
The share of losses from the Telephony Group's investment in the PCS
Ventures was $33.9 million for the year ended December 31, 1995 which represents
an increase of $32.9 million, as compared to the share of losses of $1 million
for the year ended December 31, 1994. The increase in the share of losses is
attributed primarily to general and administrative costs associated with the
start-up of operations and Sprint Spectrum's share of losses in American PCS
L.P. ("APC"). The PCS Ventures are in the development stage of operations and
generated no revenue during 1995.
The share of losses from the Telephony Group's investment in TCG was $30.0
million for the year ended December 31, 1995 which represents an increase of
$10.6 million, as compared to the share of losses of $19.4 million for the year
ended December 31, 1994. The increase in the share of losses is largely
attributed to costs incurred by TCG in the expansion of their local
telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets
and the growth of TCG's customer base.
Telephony Group's share of losses of affiliates was $20.4 million for the
year ended December 31, 1994, which represents an increase of $12.2 million over
the corresponding period in 1993. Such increase is principally the result of the
Telephony Group's share of losses from TCG.
Interest income increased to $5.8 million in 1995 from $1.7 million in
1994, representing an increase of $4.1 million or 240%. The increase is largely
attributed to an increase in the note receivable from TCG from $61.3 million at
December 31, 1994 to $83.4 million at December 31, 1995.
Net Earnings (Loss)
Telephony Group's net loss of $39.0 million for the year ended December 31,
1995 represents an increase of $27.2 million, as compared to Telephony Group's
net loss of $11.8 million for 1994. Telephony Group's net loss of $11.8 million
for 1994 represents an increase of $7.0 million, as compared to Telephony
Group's net loss of $4.8 million for 1993. Such increases in the net loss of
Telephony Group are primarily the result of the aforementioned increases in
share of losses of affiliates.
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"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
Inflation has not had a significant impact on Telephony Group's results of
operations during the three-year period ended December 31, 1995.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the Financial
Accounting Standards Board in October 1995. Statement No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Telephony Group
will include the disclosures required by Statement No. 123 in the notes to
future financial statements.
Liquidity and Capital Resources
Following approval by shareholders of the Telephony Stock Proposal, subject
to prevailing market and other conditions, the Company currently proposes to
offer shares of Series A Telephony Group Stock for cash in an initial public
offering, in which event the proceeds of such offering would be allocated to the
Telephony Group to be used to fund a portion of its anticipated capital
requirements and for general corporate purposes. The timing and the size of any
such public offering and the price at which such shares would be sold will be
determined by the Board, without further approval of stockholders, prior to such
offering based upon the prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the
Telephony Group for the purpose of preparing the combined financial statements
of the Liberty Media Group and the Telephony Group, the change in the capital
structure of the Company contemplated by the Telephony Group Stock Proposal will
not affect legal title to such assets or responsibility for such liabilities of
the Company or any of its subsidiaries. Holders of TCI Group Stock, Liberty
Media Group Stock and Telephony 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
Telephony 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 Telephony 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 Telephony Group Stock. The combined financial statements of
the Liberty Media Group and the Telephony Group should be read in conjunction
with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available for
dividends and the available dividend amount with respect to Telephony Group, as
defined. Determinations to pay dividends on Telephony Group Stock will be based
primarily upon the financial condition, results of operations and business
requirements of Telephony Group and TCI as a whole.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Telephony Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Telephony Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to the Telephony Group.
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"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale of Telephony Group Stock would (unless the Board otherwise
provides) be specifically attributed to and, in the case of the Liberty Media
Group and the Telephony Group, reflected on the combined financial statements of
the Group that includes the entity which incurred the debt or issued the
preferred stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board could,
however, determine from time to time that debt incurred or preferred stock
issued by entities included in a Group should be specifically attributed to and
reflected on the combined financial statement of one of the other Groups to the
extent that the debt is incurred or the preferred stock is issued for the
benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be reflected
as a borrowing or as an increase or reduction in an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs of
the Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the Liberty
Media Group will seek their own long-term debt financing, whereas the Telephony
Group is expected to require additional advances from the TCI Group for some
period of time. To satisfy this need, TCI has agreed to provide a revolving
credit facility (the "Revolving Credit Facility") to the Telephony Group for a
period commencing December 1, 1996 and ending December 31, 2001. Such facility
would permit aggregate borrowings at any one time outstanding of up to $500
million (subject to reduction or increase as described 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 will be payable by the Telephony 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
(i) by the amount of the first $300 million of net proceeds of any external debt
or equity financings attributed to the Telephony Group resulting in the
reduction of the maximum amount of such borrowings under the Revolving Credit
Facility to an amount not less than $200 million and (ii) below $200 million, if
(but only to the extent that) the net proceeds of any such external financings
attributed to the Telephony Group which are completed on or prior to December 1,
1998 exceed $600 million (including the first $300 million of such proceeds
referred to above). The maximum amount of the borrowings permitted under the
Revolving Credit Facility will be increased on a dollar-for-dollar basis by the
dollar amount of any borrowings thereunder, the proceeds of which are used by
the Telephony Group to pay a portion, if any, of the exercise price for the
purchase of all or part of the ResTel Business from the TCI Group.
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. 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
V-101
<PAGE> 251
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
use of proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the date of
such financial statements, a portion of such net borrowings was converted into a
$500 million investment in Telephony preferred stock as described below. The
balance of such net borrowings up to November 30, 1996 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group on or subsequent to December
1, 1996, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its interest
in the Telephony Group into a 6% cumulative compounding redeemable preferred
stock due from the Telephony Group. Such preferred stock is due December 1,
2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the market value of the Series A Telephony Group 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 Telephony Group Stock the
proceeds of which are attributed to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group and all
financial impacts of issuances of shares of Telephony Group Common Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the Telephony Group will be to such
extent attributed to the TCI Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Stock will be attributed entirely
to the TCI Group, and financial impacts of dividends or other distributions on
Telephony Group Stock will be attributed entirely to the Telephony Group, except
that dividends or other distributions on the Telephony Group Stock will (if at
the time there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in addition to
the charge for the dividend or other distribution paid), with an amount equal to
the product of the aggregate amount of such dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Stock and a
fraction the numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group Outstanding
Interest Fraction (both as defined). Financial impacts of repurchases of
Telephony Group Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Stock the consideration for which is charged to the TCI Group will be to such
extent
V-102
<PAGE> 252
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
attributed to the TCI Group and will result in an increase in the TCI Group's
Inter-Group Interest in the Telephony Group.
During 1994, Telephony Group, Comcast, Cox (together with the Company and
Comcast, the "Cable Partners") and Sprint formed the predecessor to Sprint
Spectrum ("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, in which
Telephony Group owns an indirect 30% interest, the partners participated in
auctions ("PCS Auctions") of broadband PCS licenses conducted by the Federal
Communications Commission ("FCC"). In the first round auction, which concluded
during the first quarter of 1995, WirelessCo was the winning bidder for PCS
licenses for 29 markets, including New York, San Francisco-Oakland-San Jose,
Detroit, Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and
Miami-Fort Lauderdale. The aggregate license cost for these licenses was
approximately $2.1 billion.
WirelessCo also invested in APC, which holds a PCS license granted under
the FCC's pioneer preference program for the Washington-Baltimore market.
WirelessCo acquired its 49% limited partnership interest in APC for $23 million
and agreed to make capital contributions to APC equal to 49/51 of the cost of
APC's PCS license. Additional capital contributions may be required in the event
APC is unable to finance the full cost of its PCS license. WirelessCo may also
be required to finance the build-out expenditures for APC's PCS system. Cox
(with a 51% interest) and Sprint Spectrum (with a 49% interest) have formed a
partnership to hold and develop a PCS system using a pioneer preference PCS
license for the Los Angeles-San Diego market. APC and the Cox partnership have
agreed to affiliate their PCS systems with WirelessCo and be part of
WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand.
During 1994, subsidiaries of Cox, Sprint and Telephony Group also formed
PhillieCo, in which the Telephony Group owns a 35.3% interest. PhillieCo was the
winning bidder in the first round auction for a PCS license for the Philadelphia
market at a license cost of $85 million. To the extent permitted by law, the PCS
system to be constructed by PhillieCo would also be affiliated with WirelessCo's
nationwide network.
WirelessCo may invest in, affiliate with or acquire licenses from other
successful bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
currently known as Sprint Spectrum Holding Company, L.P., to which they
contributed their respective interests in WirelessCo and through which they
formed another partnership, NewTelco, L.P. ("NewTelco") to engage in the
business of providing local wireline communications services to residences and
businesses on a nationwide basis. The Cable Partners agreed to contribute their
interests in TCG to NewTelco. TCG is one of the largest competitive local
exchange carriers in the United States in terms of route miles.
Effective January 31, 1996, the Partners amended the Sprint Spectrum
partnership agreement (the "Partnership Agreement") and certain other agreements
related thereto. Under the Partnership Agreement, the business of Sprint
Spectrum and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The partners intend for
Sprint Spectrum and its subsidiary partnerships to be the exclusive vehicles
through which they engage in the wireless telephony service businesses, subject
to certain exceptions. Sprint Spectrum will no longer be authorized to engage in
the businesses of providing local wireline communications services to residences
and businesses. In connection with the amendment of the Partnership Agreement,
the Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Execution of the foregoing agreements was a condition to the effectiveness
of a previously approved business plan for the build out of Sprint Spectrum's
nationwide network for wireless personal communications
V-103
<PAGE> 253
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
services. Pursuant to the business plan, the Partners are obligated to make
additional cash capital contributions to Sprint Spectrum in the aggregate amount
of approximately $1.9 billion during the two-year period that commenced January
1, 1996. The Company expects that Sprint Spectrum will require additional equity
thereafter.
If TCI Telephony fails to make any portion of its required additional
capital contributions to Sprint Spectrum and did not cure such failure within
the time periods specified in the Partnership Agreement, such failure would
constitute an Adverse Act and TCI Telephony would become an Adverse Partner
(each such term as defined in the Partnership Agreement). If TCI Telephony were
to become an Adverse Partner, it would lose its right to appoint a
representative to the Partnership Board and the Partnership Board, by action of
the representatives of the other Partners that are not Adverse Partners, would
be entitled to elect (i) to commence procedures to allow such other Partners to
purchase TCI Telephony's interest in Sprint Spectrum at a discount (which
purchase price in the case of a failure to make a required capital contribution
would be the lesser of 90% of the net equity of TCI Telephony's interest in
Sprint Spectrum and 80% of TCI Telephony's prior capital contribution (less any
distributions paid to TCI Telephony)) and/or (ii) to cause Sprint Spectrum 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 Spectrum other than in
accordance with the Partnership Agreement or a material breach of a material
covenant in the 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 Spectrum (whether
or not required under the applicable provisions of the Partnership Agreement)
would result in a decrease in TCI Telephony's current 30% percentage interest in
Sprint Spectrum. Such dilution would be calculated on the basis of the relative
amount of capital contributions made by the 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 Partner's interest in Sprint Spectrum. In
the event TCI Telephony's percentage interest were to decrease below the 8%
minimum ownership requirement set forth in the Partnership Agreement, TCI
Telephony's interest in Sprint Spectrum would convert into that of an "Exclusive
Limited Partner" and TCI Telephony would lose the right to designate a
representative to the Partnership Board.
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of 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.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to Sprint Spectrum) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1996...................................................... $237,000
1997...................................................... 370,000
1998...................................................... 70,000
--------
$677,000
========
</TABLE>
TCG has substantial business relationships with a few large customers,
including the major long distance carriers. During 1995, TCG's top 10 customers
accounted for approximately 57% of TCG's total revenues on a pro forma basis
after giving effect to a reorganization described more fully in note 5 to the
combined financial statements of Telephony Group. AT&T Corp. and Sprint each
accounted for more than 10% of such revenues, although 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 TCG's customer
arrangements are subject to termination on short
V-104
<PAGE> 254
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
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 alternative to
their current practices with regard to obtaining local telecommunications
services, including construction of their own facilities.
TCI Telephony's ability to obtain sufficient equity or debt financing in
order for the Telephony Group to make its expected additional capital
contributions to the PCS Ventures and other entities in which it has investments
will be limited because TCI Telephony does not conduct any operations directly
and does not have any current source of revenues or cash flow for debt service.
TCI could raise capital for the Telephony Group by, among other things, engaging
in public offerings or private placements of Series A Telephony Group Stock or
through issuance of debt securities or preferred equity securities attributed to
the Telephony Group. The Telephony Group anticipates that for the foreseeable
future it will continue to be dependent upon funding from the TCI Group and, to
the extent available, from external sources. If the available borrowings under
the Revolving Credit Facility that TCI has provided to TCI Telephony is not
sufficient to fund the Telephony Group's capital requirements, no assurance can
be given that TCI Telephony will be able to obtain any required additional
financing on terms acceptable to it, or at all.
V-105
<PAGE> 255
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated
financial statements of Tele-Communications, Inc. and subsidiaries as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995.
We have also audited the accompanying combined balance sheets of Telephony
Group (a combination of certain assets of Tele-Communications, Inc., as defined
in note 1) as of December 31, 1995 and 1994, and the related combined statements
of operations, equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of Telephony Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Telephony Group include the businesses of
Tele-Communications, Inc. consisting of certain entities engaged in the domestic
wireline and wireless telephony distribution and communications businesses. The
combined financial statements of Telephony Group should be read in conjunction
with the consolidated financial statements of Tele-Communications, Inc. and
subsidiaries.
In our opinion, the combined financial statements referred to in the second
paragraph above present fairly, in all material respects, the financial position
of Telephony Group as of December 31, 1995 and 1994, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1996
V-106
<PAGE> 256
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------- -------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Investments in Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (and their respective predecessor) and
PhillieCo (collectively, the "PCS Ventures"), accounted
for under the equity method (note 4)...................... $689,062 37,930
Investments in Teleport Communications Group, Inc., TCG
Partners and certain local market partnerships
(collectively, "TCG" or "Teleport"), accounted for under
the equity method, and related receivables (note 5)....... 244,012 197,424
Other investments in affiliates, accounted for under the
equity method, and related receivables (note 6)........... 5,722 1,368
Deferred tax asset (note 7)................................. 4,857 3,612
-------- -------
$943,653 240,334
======== =======
COMBINED EQUITY
Combined equity (note 8).................................... $943,653 240,334
======== =======
Commitments and contingencies (notes 4 and 9)
</TABLE>
See accompanying notes to combined financial statements.
V-107
<PAGE> 257
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating costs and expenses:
Charges from TCI Group (note 8)........................... $ 358 50 --
Compensation relating to stock appreciation rights (note
8)..................................................... 119 -- --
-------- ------- ------
477 50 --
-------- ------- ------
Operating loss.................................... (477) (50) --
Other income (expense):
Share of losses of the PCS Ventures (note 4).............. (33,890) (992) --
Share of losses of TCG (note 5)........................... (29,975) (19,366) (8,182)
Share of losses of other equity affiliates (note 6)....... (1,468) -- --
Interest income from affiliates (note 5).................. 5,854 1,718 531
-------- ------- ------
(59,479) (18,640) (7,651)
-------- ------- ------
Loss before income taxes.......................... (59,956) (18,690) (7,651)
Income tax benefit (note 7)................................. 21,002 6,919 2,883
-------- ------- ------
Net loss.......................................... $(38,954) (11,771) (4,768)
======== ======= ======
Pro forma loss attributable to common shareholders
(note 2)........................................ $ (6,895)
========
</TABLE>
See accompanying notes to combined financial statements.
V-108
<PAGE> 258
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMBINED
EQUITY
-------------
(AMOUNTS
IN THOUSANDS)
<S> <C>
Balance at January 1, 1993.................................. $103,873
Net loss.................................................. (4,768)
Intergroup tax allocation................................. (676)
Net cash transfers from TCI Group......................... 19,222
--------
Balance at December 31, 1993................................ 117,651
Net loss.................................................. (11,771)
Cost allocations from TCI Group........................... 50
Intergroup tax allocation................................. (2,657)
Transfers of assets from TCI Group, net of deferred
taxes.................................................. 7,584
Net cash transfers from TCI Group......................... 129,477
--------
Balance at December 31, 1994................................ 240,334
Net loss.................................................. (38,954)
Cost allocations from TCI Group........................... 358
Allocation to Telephony Group of compensation relating to
stock appreciation rights.............................. 119
Intergroup tax allocation................................. (17,513)
Transfers of assets from TCI Group, net of deferred
taxes.................................................. 15,926
Net cash transfers from TCI Group......................... 743,383
--------
Balance at December 31, 1995................................ $943,653
========
</TABLE>
See accompanying notes to combined financial statements.
V-109
<PAGE> 259
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -------
(AMOUNTS IN THOUSANDS)
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (38,954) (11,771) (4,768)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Compensation relating to stock appreciation rights..... 119 -- --
Share of losses of affiliates.......................... 65,333 20,358 8,182
Intergroup tax allocation.............................. (17,513) (2,657) (676)
Deferred income tax benefit............................ (3,489) (4,262) (2,207)
--------- -------- -------
Net cash provided by operating activities......... 5,496 1,668 531
--------- -------- -------
Cash flows from investing activities:
Additional investments in and loans to affiliates......... (750,861) (132,835) (60,173)
Repayments of receivables from affiliates................. 1,624 1,640 40,420
--------- -------- -------
Net cash used by investing activities............. (749,237) (131,195) (19,753)
--------- -------- -------
Cash flows from financing activities --
Cash transfers to Telephony Group......................... 743,741 129,527 19,222
--------- -------- -------
Net change in cash................................ -- -- --
Cash at beginning of year....................... -- -- --
--------- -------- -------
Cash at end of year............................. $ -- -- --
========= ======== =======
</TABLE>
See accompanying notes to combined financial statements.
V-110
<PAGE> 260
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) BASIS OF PRESENTATION
On December 4, 1996 the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholder approval (the "Telephony Stock
Proposal"), the issuance of a new class of stock ("Telephony Group Stock") which
is intended to reflect the separate performance of the Telephony Group. The
Telephony Group would initially consist of TCI Group's interest in TCI Telephony
Services, Inc., an indirect wholly owned subsidiary of Tele-Communications, Inc.
("TCI" or the "Company"), its subsidiaries, their respective assets, and all
assets and liabilities of the TCI Group (as defined below) to the extent
attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TCI Telephony Services, Inc. (together
with its consolidated subsidiaries (unless the context indicates otherwise),
"TCI Telephony"). The principal assets of TCI Telephony are its
non-consolidating investments in a series of partnerships, the PCS Ventures,
formed to engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services ("PCS"),
to residential and business customers nationwide under the "Sprint" brand, and
its investment in TCG. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint Spectrum"), the partners of each
of which are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and TCI, and PhillieCo, L.P.
("PhillieCo"), the partners of which are subsidiaries of Sprint, Cox and TCI.
TCI, through subsidiaries, has a 30% interest as a partner in Sprint Spectrum
and a 35.3% interest as a partner in PhillieCo. TCG is a competitive local
exchange carrier that offers a wide range of local telecommunications services
in major metropolitan markets nationwide, primarily to businesses, long distance
carriers and resellers, and wireless communications companies. The Company has a
31.1% equity interest (which represents a 36.4% voting interest) in TCG. The
Telephony Group also includes a 50% partnership interest in Kansas City Fiber
Network, L.P. and a 40% partnership interest in NHT Partnership, which are
competitive access providers serving the Kansas City and Buffalo metropolitan
areas, respectively. The Telephony Group would also include such other assets of
the TCI Group as the Board may in the future determine to attribute to the
Telephony Group and such other businesses, assets and liabilities as TCI may in
the future acquire for the Telephony Group, as determined by the Board. It is
currently the intention of TCI that any businesses, assets and liabilities so
attributed to the Telephony Group in the future would be businesses, assets and
liabilities of, or related to, the interests of the TCI Group in the domestic
wireless and wireline telephony businesses (the "Telephony Business").
The TCI Group is intended to reflect the performance of those businesses of
the Company not attributed to the Liberty Media Group (which is intended to
reflect the performance of TCI's business which produces and distributes cable
television programming services) and the Telephony Group. Collectively, the TCI
Group, the Liberty Media Group and the Telephony Group are referred to as the
"Groups" and individually may be referred to herein as a "Group".
As of the date of these financial statements, the only interests of the TCI
Group in the Telephony Business that are not attributed to the Telephony Group
are the businesses currently being conducted by a subsidiary of the TCI Group
which provides long-distance transport of video, voice, data traffic and other
telecommunications services primarily to inter-exchange carriers on a wholesale
basis using a digital broadband microwave network located throughout a 14-state
region in the western United States (the "Microwave Business"), and the
Company's business, which is in the development stage, of providing wireline
residential telephony services via TCI's cable plant to residential and small
business customers in certain of the geographic areas served by the Company's
cable television systems (the "ResTel Business"). The Company began offering
residential telephone service commercially in October 1996 in Hartford,
Connecticut and in January of 1997 in Arlington Heights, Illinois. Telephony
Group has the right, but not the obligation, to acquire the ResTel Business from
the Company in whole or in part (by geographic area) at any time or from
V-111
<PAGE> 261
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
time to time, as applicable, provided that Telephony Group is at the time a
subsidiary of the Company and the Company is then conducting such business.
The method of determining the purchase price for the ResTel Business, and
the arrangements between the Telephony Group and the TCI Group for the use by
TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined. In making such determinations, the Board
will consider, among other things, the TCI Group's aggregate investment
(historically and through any upgrade for two-way service) in the cable plant
that TCI Telephony would use to conduct the ResTel Business; the use of such
plant by TCI's various subsidiaries or Groups (e.g., for cable, telephony and
Internet services), including the use by the Telephony Group of the underlying
plant for the ResTel Business and the use by the TCI Group of the upgraded plant
for other two-way services (such as Internet services and, if developed in the
future, interactive television services), and the ongoing costs to maintain the
plant. The purchase price and other arrangements between the Groups determined
by the Board may or may not reflect the terms and conditions that either Group
might have obtained in an arms'-length negotiation with a third party. It is
currently anticipated that TCI Telephony, if it exercises its right to acquire
the ResTel Business, will enter into a long-term agreement with TCI for the use
of the cable plant via which it would conduct the ResTel Business and for the
payment by TCI Telephony of an allocated share of the costs to maintain such
plant. The portion of TCI's investment in the plant that the Board determines to
allocate to the Telephony Group may be included in the purchase price for the
ResTel Business or as a usage fee pursuant to such long-term agreement.
If TCI Telephony exercises its right to acquire the ResTel Business in
whole or in part, payment of the purchase price may be in funds generated by the
Telephony Group (whether through external financings, future operations or sales
of assets), in funds borrowed from TCI or through the issuance of debt or
preferred equity securities by TCI Telephony to TCI or other potential financing
opportunities; provided, however, that the Board has determined that the payment
of such purchase price will not be made through an increase in the Inter-Group
Interest (as defined below) of the TCI Group in the Telephony Group. Whether or
not TCI Telephony will exercise its rights to acquire the ResTel Business (in
whole or in part) will depend upon a number of factors, including the
penetration rates for the service in the geographic area or areas in which the
service has been commercially launched, the cost of providing the service at the
penetration rate achieved in that area, the price paid by TCI Telephony to
acquire such business from the TCI Group, and pursuant to its arrangement with
the TCI Group regarding the use of the cable plant, and the ability of TCI
Telephony to fund the continued development and ongoing operation of the ResTel
Business in that area.
TCI Telephony also has the right to acquire TCI's interests in the
Microwave Business at a price based on the fair market value of such business
(as determined by the Board). Such right may be exercised at any time provided
that at the time of exercise TCI Telephony is then a subsidiary of TCI and TCI
is then conducting such business.
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred to
as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group is
100%. As any shares of Telephony Group Stock are issued and distributed or sold,
the TCI Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
While the Telephony Group Stock constitutes common stock of TCI, issuance
of the Telephony Group Stock will not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of holders of
TCI's or any of its subsidiaries' debt.
V-112
<PAGE> 262
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Telephony Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Following approval by shareholders of the Telephony Stock Proposal, subject
to prevailing market and other conditions, the Company currently proposes to
offer shares of Series A Telephony Group Stock for cash in an initial public
offering, in which event the proceeds of such offering would be allocated to the
Telephony Group to be used to fund a portion of its anticipated capital
requirements and for general corporate purposes. The timing and the size of any
such public offering and the price at which such shares would be sold will be
determined by the Board, without further approval of stockholders, prior to such
offering based upon the prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the
Telephony Group for the purpose of preparing the combined financial statements
of the Liberty Media Group and the Telephony Group, the change in the capital
structure of the Company contemplated by the Telephony Group Stock Proposal will
not affect legal title to such assets or responsibility for such liabilities of
the Company or any of its subsidiaries. Holders of TCI Group Stock, Liberty
Media Group Stock and Telephony 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
Telephony 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 Telephony 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 Telephony Group Stock. The combined financial statements of
the Liberty Media Group and the Telephony Group should be read in conjunction
with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available for
dividends and the available dividend amount with respect to Telephony Group, as
defined. Determinations to pay dividends on Telephony Group Stock are based
primarily upon the financial condition, results of operations and business
requirements of Telephony Group and TCI as a whole.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Investments in affiliates in which Telephony Group's voting interest is 20%
to 50%, the equity method of accounting is generally used. Under this method,
the investment, originally recorded at cost, is adjusted to recognize Telephony
Group's share of the net earnings or losses of the affiliates as they occur
rather than as dividends or other distributions are received, limited to the
extent of Telephony Group's investment in, advances to and commitments for the
investee. Telephony Group's share of net earnings or losses of affiliates
includes the amortization of the difference between Telephony Group's investment
and its share of the net assets of the investee. Recognition of gains on sales
of properties to affiliates accounted for under the equity method is deferred in
proportion to Telephony Group's ownership interest in such affiliates.
V-113
<PAGE> 263
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in Telephony Group's proportionate share of the underlying equity
of a subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, generally
are recognized as gains or losses in Telephony Group's combined statements of
operations.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the Financial
Accounting Standards Board in October 1995. Statement No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Telephony Group
will include the disclosures required by Statement No. 123 in the notes to
future financial statements.
Pro Forma Loss Attributable to Common Shareholders (Unaudited)
Pro forma loss attributable to common shareholders for the year ended
December 31, 1995 assumes, solely for the purpose of this calculation, that the
Company sold, on January 1, 1995, 10% of the equity value of Telephony Group in
an initial public offering. Additionally, the pro forma calculation assumes the
conversion, on January 1, 1995, of $500 million of TCI Group's interest in
Telephony Group into a preferred stock due from Telephony Group (see note 8).
The Company currently has not determined, if and the extent, to which it would
sell the equity value of Telephony Group in an initial public offering.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
There was no cash paid for interest for the years ended December 31, 1995,
1994 and 1993, respectively. Cash paid for income taxes was not material in any
of the years presented.
Noncash transfers of assets to the Telephony Group aggregated $18,170,000
and $10,668,000, with associated deferred income taxes of $2,244,000 and
$3,084,000 for the years ended December 31, 1995 and 1994, respectively.
V-114
<PAGE> 264
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENTS IN THE PCS VENTURES
Summarized unaudited results of operations for the PCS Ventures, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
COMBINED FINANCIAL POSITION 1995 1994
--------------------------- ---------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 1,149 5,024
Investments and related receivables......................... 2,296,130 123,794
Other assets, net........................................... 31,972 423
---------- -------
Total assets...................................... $2,329,251 129,241
========== =======
Other liabilities........................................... $ 53,436 3,755
Owners' equity.............................................. 2,275,815 125,486
---------- -------
Total liabilities and equity...................... $2,329,251 129,241
========== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
COMBINED OPERATIONS 1995 1994 1993
------------------- --------- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Operating expenses.................................... $ (66,720) (3,295) --
Depreciation and amortization......................... (211) (38) --
--------- ------ ------
Operating loss.............................. (66,931) (3,333) --
Other, net............................................ (45,749) 24 --
--------- ------ ------
Net loss.................................... $(112,680) (3,309) --
========= ====== ======
</TABLE>
During 1994, Telephony Group, Comcast, Cox (together with the Company and
Comcast, the "Cable Partners") and Sprint formed a predecessor partnership to
Sprint Spectrum ("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, in which
Telephony Group owns an indirect 30% interest, the partners participated in
auctions ("PCS Auctions") of broadband PCS licenses conducted by the Federal
Communications Commission ("FCC"). In the first round auction, which concluded
during the first quarter of 1995, WirelessCo was the winning bidder for PCS
licenses for 29 markets, including New York, San Francisco-Oakland-San Jose,
Detroit, Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and
Miami-Fort Lauderdale. The aggregate license cost for these licenses was
approximately $2.1 billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a PCS
license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and agreed to make capital contributions to APC
equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox (with a 51% interest) and
Sprint Spectrum (with a 49% interest) (the "Cox Partnership") have formed a
partnership to hold and develop a PCS system using a pioneer preference PCS
license for the Los Angeles-San Diego market. APC and the Cox partnership have
agreed to affiliate their PCS systems with WirelessCo and be part of
WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand.
During 1994, subsidiaries of Cox, Sprint and Telephony Group also formed
PhillieCo, in which Telephony Group owns a 35.3% interest. PhillieCo was the
winning bidder in the first round auction for a PCS
V-115
<PAGE> 265
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
license for the Philadelphia market at a license cost of $85 million. To the
extent permitted by law, the PCS system to be constructed by PhillieCo would
also be affiliated with WirelessCo's nationwide network.
WirelessCo may invest in, affiliate with or acquire licenses from other
successful bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
currently known as Sprint Spectrum Holding Company, L.P., to which they
contributed their respective interests in WirelessCo and through which they
formed another partnership, NewTelco, L.P. ("New Telco") to engage in the
business of providing local wireline communications services to residences and
businesses on a nationwide basis. The Cable Partners agreed to contribute their
interests in TCG to NewTelco. TCG is one of the largest competitive local
exchange carriers in the United States in terms of route miles.
Effective January 31, 1996, the Partners amended the Sprint Spectrum
partnership agreement (the "Partnership Agreement") and certain other agreements
related thereto. Under the Partnership Agreement, the business of Sprint
Spectrum and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The Partners intend for
Sprint Spectrum and its subsidiary partnerships to be the exclusive vehicles
through which they engage in the wireless telephony service businesses, subject
to certain exceptions. Sprint Spectrum will no longer be authorized to engage in
the business of providing local wireline communications services to residences
and businesses. In connection with the amendment of the Partnership Agreement,
the Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Execution of the foregoing agreements was a condition to the effectiveness
of a previously approved business plan for the build out of Sprint Spectrum's
nationwide network for wireless personal communications services. Pursuant to
the business plan, the Partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
expects that Sprint Spectrum will require additional equity thereafter.
(5) INVESTMENT IN TCG
TCG is a competitive local exchange carrier which provides integrated local
telecommunications services in major metropolitan markets nationwide. TCG's
customers are principally telecommunications intensive businesses, long distance
carriers and resellers of wireless communications companies.
During 1992, the Telephony Group acquired a 30% ownership interest in
Teleport Communications Group, Inc., ("TCGI"). Subsequent to the acquisition,
the Telephony Group advanced funds to TCGI in the form of notes receivable. Such
notes receivable bore interest at a variable rate (which approximated 7% at
December 31, 1995) and amounted to (including accrued interest) $87,511,000 and
$61,372,000 at December 31, 1995 and 1994, respectively. In conjunction with the
Reorganization (as defined below), $57.8 million of such receivables were
converted to equity of TCGI. The remaining note receivable of $26 million was
exchanged for a new note which bears interest at 7.5% and is due in 2001.
Also during 1992, TCGI, with Cox, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG Partners to
invest, with TCGI, the Cable Stockholders and other cable operators, in 14
partnerships (the "Local Market Partnership") to develop and operate local
telecommunications networks.
The Telephony Group's investment in TCG is accounted for under the equity
method of accounting.
V-116
<PAGE> 266
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited combined results of operations for TCG, accounted for
under the equity method, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- -------
(AMOUNTS IN
COMBINED FINANCIAL POSITION THOUSANDS)
- ----------------------------------------
<S> <C> <C>
Cash.................................. $ 32,835 48,987
Investments and related receivables... 99,299 53,958
Other assets, net..................... 931,297 707,936
---------- -------
Total assets.................. $1,063,431 810,881
========== =======
Debt.................................. $ 356,500 197,500
Other liabilities..................... 236,421 205,267
Minority interest..................... 4,409 2,903
Owners' equity........................ 466,101 405,211
---------- -------
Total liabilities and
equity...................... $1,063,431 810,881
========== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- -------- -------
COMBINED FINANCIAL POSITION (AMOUNTS IN THOUSANDS)
- ----------------------------------------
<S> <C> <C> <C>
Revenue............................... $ 216,445 144,426 84,872
Operating expenses.................... (215,861) (160,233) (90,637)
Depreciation and amortization......... (61,482) (30,149) (16,382)
--------- -------- -------
Operating loss..................... (60,898) (45,956) (22,147)
Interest expense...................... (28,953) (9,862) (1,601)
Other, net............................ (12,819) (7,182) 3,971
--------- -------- -------
Net loss........................... $(102,670) (63,000) (19,777)
========= ======== =======
</TABLE>
In June 1996, TCGI and the Cable Stockholders agreed to simplify the TCG
capital structure by consolidating the ownership of TCG Partners and the Local
Market Partnerships as wholly owned subsidiaries of TCGI. As part of this
process, certain of the other cable operators agreed to exchange their interests
in the Local Market Partnerships with TCGI directly or through a Cable
Stockholder for TCGI common stock.
TCGI and the Cable Stockholders entered into a reorganization agreement
pursuant to which TCGI, TCG Partners and the Local Market Partnerships were
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization include:
The acquisition by TCGI of TCG Partners in exchange for TCGI Class B
Common Stock issued to the Cable Stockholders.
The acquisition by TCGI of all interests in 12 of the 14 Local Market
Partnerships in exchange for TCGI Class B Common Stock issued to the Cable
Stockholders and Class A Common Stock issued to other cable operators.
The contribution to TCGI of $269 million in aggregate principal amount
of indebtedness, plus accrued interest from May 1995, owed by TCGI to the
Cable Stockholders (except that the Telephony Group retained a $26 million
subordinated note due from TCGI) in exchange for Class B Common Stock
issued to the Cable Stockholders.
V-117
<PAGE> 267
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Also in July, 1996, TCGI issued approximately 27 million shares
representing approximately 15.4% of Class A Common Stock and $300 million of
Senior Notes and $1,073 million of Senior Discount Notes as part of an initial
public offering (the "Offering").
In consideration of the transfer by each of the Cable Stockholders of its
respective interests in TCG Partners and the Local Market Partnerships and the
contribution to TCGI of the indebtedness described above, the Company issued
immediately prior to the Offerings approximately 69 million additional shares of
Class B Common Stock to the Cable Stockholders.
In connection with Continental's announced merger with U S WEST, Inc., TCGI
purchased approximately 8 million shares (out of approximately 25.8 million
shares) of Class B Common Stock owned by Continental for $121 million. On
November 5, 1996, the U.S. Department of Justice announced a settlement with U S
WEST, Inc., and Continental pursuant to which Continental will be required to
reduce its ownership percentage in TCGI to below 10% by June 30, 1997 and to
eliminate such ownership entirely by December 31, 1998.
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local Market
Partnerships have become wholly owned subsidiaries of TCGI. Subsequently as part
of the Reorganization, the remaining minority interests related to another cable
operator's interests in TCG San Francisco and TCG Seattle were acquired by the
Company. Subsequent to this acquisition, the ownership interest in these
entities were acquired by the Telephony Group. The issuance of shares received
by the Telephony Group in the Reorganization assumes that subsequent to the
Offerings, the Telephony Group will contribute its current such acquired
partnership interests in TCG San Francisco and TCG Seattle to TCG. The transfer
of such interests occurred in the fourth quarter of 1996.
Additionally as part of the Reorganization, the Telephony Group was issued
638,862 shares of TCGI Class A Common Stock in consideration for the transfer to
TCGI of the partnership interest which the Telephony Group acquired from
MicroNet, Inc. in TCG San Francisco. The Telephony Group also has acquired a
4.2% interest in TCG San Francisco from InterMedia Partners. The Telephony Group
was issued 372,666 shares of Class A Common Stock for the transfer to TCGI of
such acquired partnership interest. These transfers also occurred in the fourth
quarter of 1996.
(6) INVESTMENT IN OTHER AFFILIATES
Summarized unaudited results of operations for other affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -----
(AMOUNTS IN
COMBINED FINANCIAL POSITION THOUSANDS)
- ----------------------------------------
<S> <C> <C>
Cash.................................... $ 177 417
Other assets, net....................... 14,735 3,126
------- -----
Total assets.................. $14,912 3,543
======= =====
Other liabilities....................... $ 9,856 121
Owners' equity.......................... 5,056 3,422
------- -----
Total liabilities and
equity...................... $14,912 3,543
======= =====
</TABLE>
V-118
<PAGE> 268
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
COMBINED OPERATIONS 1995 1994 1993
------------------- -------- ---- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue................................. $ 3,204 12 --
Operating expenses...................... (4,578) (5) --
Depreciation and amortization........... (1,599) (12) --
------- --- ----
Operating loss..................... (2,973) (5) --
Interest expense........................ (342) -- --
Other, net.............................. (14) -- --
------- --- ----
Net loss........................... $(3,329) (5) --
======= === ====
</TABLE>
(7) INCOME TAXES
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than
80% each file a separate income tax return. TCI and such subsidiaries calculate
their respective tax liabilities on a separate return basis which are combined
in the accompanying combined financial statements.
Federal income taxes and certain state and local taxes would be paid on a
consolidated basis. However, pursuant to a tax sharing agreement, federal income
taxes are calculated, with certain adjustments, on a separate return basis for
each Group (applying provisions of the Internal Revenue Code of 1986, as
amended, and related regulations as if such Group filed a separate consolidated
return for federal income tax purposes). Based upon these separate calculations,
an allocation of tax liabilities is made such that each separate Group is
responsible to the Company for its gross share of the Company's consolidated
federal income tax liabilities, such gross share being determined without regard
to (a) tax benefits that are attributable to the Company or the other Groups or
(b) certain tax benefits that are attributable to a Group but that are taken
into account in determining the Company's consolidated federal income tax
benefit carryovers. Similarly, the Company is responsible to each Group for tax
benefits attributable to such Group and actually used by the Company in
determining its consolidated federal income tax liability. Notwithstanding the
foregoing, the Company and Telephony Group have agreed that the Company may use
up to $500 million of tax benefits generated by the Telephony Group in
determining its consolidated federal income tax liability without providing a
credit to the Telephony Group in such amount. Tax attributes, including but not
limited to net operating losses, investment tax credits, alternative minimum tax
net operating losses, alternative minimum tax credits, deferred intercompany
gains and tax basis in assets, would be inventoried and tracked for each Group.
In addition, pursuant to such tax sharing agreement, state and local income
taxes are calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the Group
were a separate unitary or combined group for tax purposes), and the Company's
combined or unitary tax liability is allocated between the Groups based upon
such separate calculation. The Company has retained the right to file all
returns, make all elections and control all audits and contests. The Company
anticipates that the assets and entities comprising the Telephony Group will be
transferred to a direct subsidiary of TCI. At such time, the Telephony Group
will become party to the Tax Sharing Agreement. Such transfers will be recorded
at carryover basis for financial reporting purposes.
V-119
<PAGE> 269
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit for the years ended December 31, 1995, 1994 and 1993
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal............................... $17,513 3,463 20,976
State and local....................... -- 26 26
------- ----- ------
$17,513 3,489 21,002
======= ===== ======
Year ended December 31, 1994:
Federal............................... $ 2,657 3,654 6,311
State and local....................... -- 608 608
------- ----- ------
$ 2,657 4,262 6,919
======= ===== ======
Year ended December 31, 1993:
Federal............................... $ 676 1,892 2,568
State and local....................... -- 315 315
------- ----- ------
$ 676 2,207 2,883
======= ===== ======
</TABLE>
Income tax benefit differs from the amounts computed by applying the
Federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- ----- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax benefit......... $20,985 6,542 2,678
State and local income taxes, net of
Federal income tax benefit............ 17 377 205
------- ----- -----
$21,002 6,919 2,883
======= ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------ -----
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...... $3,307 --
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax
purposes........................... 1,504 3,612
Future deductible amounts principally
due to non-deductible accruals..... 46 --
------ -----
Net deferred tax assets....... $4,857 3,612
====== =====
</TABLE>
At December 31, 1995, Telephony Group had net operating loss carryforwards
for income tax purposes aggregating approximately $9.5 million, the entire
amount of which, if not utilized to reduce taxable income in future periods,
expires in 2010.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the
Internal Revenue Service for the years 1981 through 1992. In
V-120
<PAGE> 270
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the opinion of management, any additional tax liability, not previously provided
for, resulting from these examinations, ultimately determined to be payable,
should not have a material adverse effect on the combined financial position of
Telephony Group.
New tax legislation was enacted in the third quarter of 1993 which, among
other matters, increased the corporate Federal income tax rate from 34% to 35%.
Telephony Group has reflected the tax rate change in its combined statements of
operations. Such tax rate change resulted in an immaterial change to income tax
expense and deferred income tax liability.
(8) COMBINED EQUITY
General
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Stock will have one vote per share and the Series B
Telephony Group Stock will have ten votes per share.
Shares of Series B Telephony Group Stock will be convertible at any time at
the option of the holder only into the same number of shares of Series A
Telephony Group Stock.
The rights of holders of the Telephony Group Stock upon liquidation of TCI
will be based upon the ratio of the aggregate market capitalization, as defined,
of the Telephony Group Stock to the aggregate market capitalization, as defined,
of the TCI Group Stock, the Telephony Group Stock and the Liberty Media Group
Stock.
Stock Options and Stock Appreciation Rights
Certain key employees of TCI involved with Telephony Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock and Series A Liberty Media Group Stock as well as restricted stock awards
of Series A TCI Group Stock. Estimates of the compensation relating to the
options and/or stock appreciation rights as well as restricted stock awards
granted to such employees have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
value of Series A TCI Group Stock and Series A Liberty Media Group Stock (see
note 1) and, ultimately, on the final determination of market value when the
rights are exercised or the restricted shares are vested.
On December 1, 1996, two executive officers of TCI Communications, Inc., a
subsidiary of TCI, were each granted options representing 1.0% of the equity
value of the Telephony Group. Upon the approval of the Telephony Group Stock
Proposal, each of such options will convert to options to purchase shares of
Series A Telephony Group Stock representing 1.0% of the number of shares of
Series A Telephony Group Stock issuable with respect to the Telephony Group
Inter-Group Interest. The aggregate exercise price for each option is equal to
1.0% of TCI's cumulative investment in the Telephony Group as of December 1,
1996 less $500 million representing preferred stock of the Telephony Group due
to the TCI Group and further reduced by tax benefits generated by the Telephony
Group (up to $500 million) as and when used by the TCI Group. Such exercise
price shall be adjusted to reflect an assumed interest cost of 6% per annum on
TCI's cumulative investment reduced by the foregoing amounts through the date of
exercise. Such executive officers were also granted options representing 1.0% of
the equity value of the ResTel Business. The exercise of the Telephony Group
options is inseparable from the ResTel Business options. Such options vest 20%
per annum, first become exercisable on February 1, 1997 and expire February 1,
2006.
V-121
<PAGE> 271
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions with TCI Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs Telephony
Group would incur for comparable services on a stand alone basis. During the
years ended December 31, 1995 and 1994, Telephony Group was allocated $358,000
and $50,000, respectively, in corporate general and administrative costs by TCI
Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Telephony Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Telephony Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale of Telephony Group Stock would (unless the Board otherwise
provides) be specifically attributed to and, in the case of the Liberty Media
Group and the Telephony Group, 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 Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be reflected
as a borrowing or as an increase or reduction in an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs of
the Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the Liberty
Media Group will seek their own long-term debt financing, whereas the Telephony
Group is expected to require additional advances from the TCI Group for some
period of time. To satisfy this need, TCI has agreed to provide a revolving
credit facility (the "Revolving Credit Facility") to the Telephony Group for a
period commencing December 1, 1996 and ending December 31, 2001. Such facility
would permit aggregate borrowings at any one time outstanding of up to $500
million (subject to reduction or increase as described 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 will be payable by
V-122
<PAGE> 272
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Telephony 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 (i) by the amount of the first $300 million of net
proceeds of any external debt or equity financings attributed to the Telephony
Group resulting in the reduction of the maximum amount of such borrowings under
the Revolving Credit Facility to an amount not less than $200 million and (ii)
below $200 million, if (but only to the extent that) the net proceeds of any
such external financings attributed to the Telephony Group which are completed
on or prior to December 1, 1998 exceed $600 million (including the first $300
million of such proceeds referred to above). The maximum amount of the
borrowings permitted under the Revolving Credit Facility will be increased on a
dollar-for-dollar basis by the dollar amount of any borrowings thereunder, the
proceeds of which are used by the Telephony Group to pay a portion, if any, of
the exercise price for the purchase of all or part of the ResTel Business from
the TCI Group.
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 polices from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the date of
such financial statements, a portion of such net borrowings was converted into a
$500 million investment in Telephony preferred stock as described below. The
balance of such net borrowings up to November 30, 1996 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group on or subsequent to December
1, 1996, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its interest
in the Telephony Group into a 6% cumulative compounding redeemable preferred
stock due from the Telephony Group. Such preferred stock is due December 1,
2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million of preferred stock and
a contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the market value of the Series A Telephony Group 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.
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<PAGE> 273
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
All financial impacts of issuances of shares of Telephony Group Stock the
proceeds of which are attributed to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group and all
financial impacts of issuances of shares of Telephony Group Common Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the Telephony Group will be to such
extent attributed to the TCI Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Stock will be attributed entirely
to the TCI Group, and financial impacts of dividends or other distributions on
Telephony Group Stock will be attributed entirely to the Telephony Group, except
that dividends or other distributions on the Telephony Group Stock will (if at
the time there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in addition to
the charge for the dividend or other distribution paid), with an amount equal to
the product of the aggregate amount of such dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Stock and a
fraction the numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group Outstanding
Interest Fraction (both as defined). Financial impacts of repurchases of
Telephony Group Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Stock the consideration for which is charged to the TCI Group will be to such
extent attributed to the TCI Group and will result in an increase in the TCI
Group's Inter-Group Interest in the Telephony Group.
(9) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of 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.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to Sprint Spectrum) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1996........................................................ $237,000
1997........................................................ 370,000
1998........................................................ 70,000
--------
$677,000
========
</TABLE>
Certain of Telephony Group's affiliates are general partnerships and any
subsidiary of Telephony Group that is a general partner in a general partnership
is, as such, liable as a matter of partnership law for all debts of that
partnership in the event liabilities of that partnership were to exceed its
assets.
V-124
<PAGE> 274
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS)
SEPTEMBER 30, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
Telephony Group's Management's Discussion and Analysis of Financial Condition
and Results of Operations for the year ended December 31, 1995 included herein.
The following discussion focuses on material changes in trends, risks and
uncertainties affecting Telephony Group's results of operations and financial
condition.
(1) MATERIAL CHANGES IN FINANCIAL CONDITION:
On December 4, 1996, the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholder approval (the "Telephony Stock
Proposal"), the issuance of a new class of stock ("Telephony Group Stock") which
is intended to reflect the separate performance of the Telephony Group. The
Telephony Group would initially consist of TCI Group's interest in TCI Telephony
Services, Inc., an indirect wholly owned subsidiary of TeleCommunications, Inc.
("TCI" or the "Company"), its subsidiaries, their respective assets, and all
assets and liabilities of the TCI Group (as defined below) to the extent
attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TCI Telephony Services, Inc. (together
with its consolidated subsidiaries (unless the context indicates otherwise),
"TCI Telephony"). The principal assets of TCI Telephony are its nonconsolidating
investments in a series of partnerships formed to engage in the business of
providing wireless communications services, using the radio spectrum for
broadband personal communications services ("PCS"), to residential and business
customers nationwide under the "Sprint" brand (the "PCS Ventures"), and its
investment in Teleport Communications Group, Inc., a Delaware corporation ("TCG"
or "Teleport"). The PCS Ventures include Sprint Spectrum Holding Company, L.P.
and MinorCo, L.P. (collectively, "Sprint Spectrum"), the partners of each of
which are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox") and TCI, and PhillieCo, L.P.
("PhillieCo"), the partners of which are subsidiaries of Sprint, Cox and TCI.
TCI, through subsidiaries, has a 30% interest as a partner in the Sprint
Spectrum and a 35.3% interest as a partner in PhillieCo. TCG is a competitive
local exchange carrier that offers a wide range of local telecommunications
services in major metropolitan markets nationwide, primarily to businesses, long
distance carriers and resellers, and wireless communications companies. The
Company has a 31.1% equity interest (which represents a 36.4% voting interest)
in TCG. The Telephony Group also includes a 50% partnership interest in Kansas
City Fiber Network, L.P. and a 40% partnership interest in NHT Partnership,
which are competitive access providers serving the Kansas City and Buffalo
metropolitan areas, respectively. The Telephony Group would also include such
other assets of the TCI Group as the Board may in the future determine to
attribute to the Telephony Group and such other businesses, assets and
liabilities as TCI may in the future acquire for the Telephony Group, as
determined by the Board. It is currently the intention of TCI that any
businesses, assets and liabilities so attributed to the Telephony Group in the
future would be businesses, assets and liabilities of, or related to, the
interests of the TCI Group in the domestic wireless and wireline telephony
businesses (the "Telephony Business").
The TCI Group is intended to reflect the performance of those businesses of
the Company not attributed to the Liberty Media Group (which is intended to
reflect the performance of TCI's business which produces and distributes cable
television programming services) and the Telephony Group. Collectively, the TCI
Group, the Liberty Media Group and the Telephony Group are referred to as the
"Groups" and individually may be referred to herein as a "Group".
As of the date of these financial statements, the only interests of the TCI
Group in the Telephony Business that are not attributed to the Telephony Group
are the businesses currently being conducted by a subsidiary of the TCI Group
which provides long-distance transport of video, voice, data traffic and other
telecommunications services primarily to inter-exchange carriers on a wholesale
basis using a digital broadband microwave network located throughout a 14-state
region in the western United States (the
V-125
<PAGE> 275
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
"Microwave Business"), and the Company's business, which is in the development
stage, of providing wireline residential telephony services via TCI's cable
plant to residential and small business customers in certain of the geographic
areas served by the Company's cable television systems (the "ResTel Business").
The Company began offering residential telephone service commercially in October
1996 in Hartford, Connecticut and in January of 1997 in Arlington Heights,
Illinois. Telephony Group has the right, but not the obligation, to acquire the
ResTel Business from the Company in whole or in part (by geographic area), at
any time or from time to time, as applicable, provided that Telephony Group is
at the time a subsidiary of the Company and the Company is then conducting such
business.
The method of determining the purchase price for the ResTel Business, and
the arrangements between the Telephony Group and the TCI Group for the use by
TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined. In making such determinations, the Board
will consider, among other things, the TCI Group's aggregate investment
(historically and through any upgrade for two-way service) in the cable plant
that TCI Telephony would use to conduct the ResTel Business; the use of such
plant by TCI's various subsidiaries or Groups (e.g., for cable, telephony and
Internet services), including the use by the Telephony Group of the underlying
plant for the ResTel Business and the use by the TCI Group of the upgraded plant
for other two-way services and, if developed in the future, interactive
television services), and the ongoing costs to maintain the plant. The purchase
price and other arrangements between the Groups determined by the Board may or
may not reflect the terms and conditions that either Group might have obtained
in an arms'-length negotiation with a third party. It is currently anticipated
that TCI Telephony, if it exercises its right to acquire the ResTel Business,
will enter into a long-term agreement with TCI for the use of the cable plant
via which it would conduct the ResTel Business and for the payment by TCI
Telephony of an allocated share of the costs to maintain such plant. The portion
of TCI's investment in the plant that the Board determines to allocate to the
Telephony Group may be included in the purchase price for the ResTel Business or
as a usage fee pursuant to such long-term agreement.
If TCI Telephony exercises its right to acquire the ResTel Business in
whole or in part, payment of the purchase price may be in funds generated by the
Telephony Group (whether through external financings, future operations or sales
of assets), in funds borrowed from TCI or through the issuance of debt or
preferred equity securities by TCI Telephony to TCI or other potential financing
opportunities; provided, however, that the Board has determined that the payment
of such purchase price will not be made through an increase in the Inter-Group
Interest (as defined below) of the TCI Group in the Telephony Group. Whether or
not TCI Telephony will exercise its rights to acquire the ResTel Business (in
whole or in part) will depend upon a number of factors, including the
penetration rates for the service in the geographic area or areas in which the
service has been commercially launched, the cost of providing the service at the
penetration rate achieved in that area, the price paid by TCI Telephony to
acquire such business from the TCI Group, and pursuant to its arrangement with
the TCI Group regarding the use of the cable plant, and the ability of TCI
Telephony to fund the continued development and ongoing operation of the ResTel
Business in that area.
TCI Telephony also has the right to acquire TCI's interests in the
Microwave Business at a price based on the fair market value of such business
(as determined by the Board). Such right may be exercised at any time provided
that at the time of exercise TCI Telephony is then a subsidiary of TCI and TCI
is then conducting such business.
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred to
as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group is
100%. As any shares of Telephony Group Stock are issued and distributed or sold,
the TCI Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
V-126
<PAGE> 276
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of holders
of TCI's or any of its subsidiaries' debt.
Holders of 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 Telephony Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Following approval by shareholders of the Telephony Stock Proposal, subject
to prevailing market and other conditions, the Company currently proposes to
offer shares of Series A Telephony Group Stock for cash in an initial public
offering, in which event the proceeds of such offering would be allocated to the
Telephony Group to be used to fund a portion of its anticipated capital
requirements and for general corporate purposes. The timing and the size of any
such public offering and the price at which such shares would be sold will be
determined by the Board, without further approval of stockholders, prior to such
offering based upon the prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the
Telephony Group for the purpose of preparing the combined financial statements
of the Liberty Media Group and the Telephony Group, the change in the capital
structure of the Company contemplated by the Telephony Group Stock Proposal will
not affect legal title to such assets or responsibility for such liabilities of
the Company or any of its subsidiaries. Holders of TCI Group Stock, Liberty
Media Group Stock and Telephony 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
Telephony 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 Telephony 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 Telephony Group Stock. The combined financial statements of
the Liberty Media Group and the Telephony Group should be read in conjunction
with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available for
dividends and the available dividend amount with respect to Telephony Group, as
defined. Determinations to pay dividends on Telephony Group Stock will be based
primarily upon the financial condition, results of operations and business
requirements of Telephony Group and TCI as a whole.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal the
net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Liberty Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale of Telephony Group Stock would (unless the Board otherwise
provides) be specifically attributed to and, in the case of the Liberty Media
Group and the Telephony Group, reflected on the combined financial statements of
the Group that includes
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<PAGE> 277
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
the entity which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is Tele-Communications,
Inc., the TCI Group. The Board could, however, determine from time to time that
debt incurred or preferred stock issued by entities included in a Group should
be specifically attributed to and reflected on the combined financial statement
of one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be reflected
as a borrowing or as an increase or reduction in an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs of
the Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the Liberty
Media Group will seek their own long-term debt financing, whereas the Telephony
Group is expected to require additional advances from the TCI Group for some
period of time. To satisfy this need, TCI has agreed to provide a revolving
credit facility (the "Revolving Credit Facility") to the Telephony Group for a
period commencing December 1, 1996 and ending December 31, 2001. Such facility
would permit aggregate borrowings at any one time outstanding of up to $500
million (subject to reduction or increase as described 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 will be payable by the Telephony 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
(i) by the amount of the first $300 million of net proceeds of any external debt
or equity financings attributed to the Telephony Group resulting in the
reduction of the maximum amount of such borrowings under the Revolving Credit
Facility to an amount not less than $200 million and (ii) below $200 million, if
(but only to the extent that) the net proceeds of any such external financings
attributed to the Telephony Group which are completed on or prior to December 1,
1998 exceed $600 million (including the first $300 million of such proceeds
referred to above). The maximum amount of the borrowings permitted under the
Revolving Credit Facility will be increased on a dollar-for-dollar basis by the
dollar amount of any borrowings thereunder, the proceeds of which are used by
the Telephony Group to pay a portion, if any, of the exercise price for the
purchase of all or part of the ResTel Business from the TCI Group.
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. 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.
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<PAGE> 278
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the date of
such financial statements, a portion of such net borrowings was converted into a
$500 million investment in Telephony preferred stock as described below. The
balance of such net borrowings up to November 30, 1996 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group on or subsequent to December
1, 1996, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its interest
in the Telephony Group into a 6% cumulative compounding redeemable preferred
stock due from the Telephony Group. Such preferred stock is due December 1,
2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the market value of the Series A Telephony Group 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 Telephony Group Stock the
proceeds of which are attributed to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group and all
financial impacts of issuances of shares of Telephony Group Common Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the Telephony Group will be to such
extent attributed to the TCI Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Stock will be attributed entirely
to the TCI Group, and financial impacts of dividends or other distributions on
Telephony Group Stock will be attributed entirely to the Telephony Group, except
that dividends or other distributions on the Telephony Group Stock will (if at
the time there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in addition to
the charge for the dividend or other distribution paid), with an amount equal to
the product of the aggregate amount of such dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Stock and a
fraction the numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group Outstanding
Interest Fraction (both as defined). Financial impacts of repurchases of
Telephony Group Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Stock the consideration for which is charged to the TCI Group will be to such
extent attributed to the TCI Group and will result in an increase in the TCI
Group's Inter-Group Interest in the Telephony Group.
Subsidiaries of Telephony Group, Comcast, Cox and Sprint are partners in
Sprint Spectrum Holding Company, L.P. which was formed to engage in the business
of providing wireless communications services on
V-129
<PAGE> 279
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
a nationwide basis. Telephony Group owns an indirect 30% interest in Sprint
Spectrum. Sprint Spectrum was the successful bidder for PCS licenses for 29
markets in an auction conducted by the Federal Communications Commission that
ended in March 1995. The aggregate license cost for these licenses was
approximately $2.1 billion, all of which has been paid. Sprint Spectrum may
elect to bid in subsequent auctions of PCS licenses and/or acquire PCS licenses
from other holders, has invested in American PSC, L.P. ("APC") which holds the
PCS license for the Washington-Baltimore market, has agreed to invest in the
entity that will hold the PCS license for the Los Angeles-San Diego market, and
may invest in other entities that hold PCS licenses. Subsidiaries of Cox, Sprint
and Telephony Group are also partners in PhillieCo which holds a PCS license for
the Philadelphia market which was acquired at a license cost of $85 million.
Telephony Group has an indirect 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. Telephony
Group has agreed to contribute approximately $0.6 billion of such aggregate
amount, $0.2 billion of which was contributed during the nine months ended
September 30, 1996. The Company expects that Sprint Spectrum will require
additional equity thereafter.
If TCI Telephony fails to make any portion of its required additional
capital contributions to Sprint Spectrum and did not cure such failure within
the time periods specified in the Partnership Agreement, such failure would
constitute an Adverse Act and TCI Telephony would become and Adverse Partner
(each such term as defined in the Partnership Agreement). If TCI Telephony were
to become an Adverse Partner, it would lose its right to appoint a
representative to the Partnership Board and the Partnership Board, by action of
the representatives of the other Partners that are not Adverse Partners, would
be entitled to elect (i) to commence procedures to allow such other Partners to
purchase TCI Telephony's interest in Sprint Spectrum at a discount (which
purchase price in the case of a failure to make a required capital contribution
would be the lesser of 90% of the net equity of TCI Telephony's interest in
Sprint Spectrum and 80% of TCI Telephony's prior capital contribution (less any
distributions paid to TCI Telephony)) and/or (ii) to cause Sprint Spectrum 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 Spectrum other than in
accordance with the Partnership Agreement or a material breach of a material
covenant in the 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 Spectrum (whether
or not required under the applicable provisions of the Partnership Agreement)
would result in a decrease in TCI Telephony's current 30% percentage interest in
Sprint Spectrum. Such dilution would be calculated on the basis of the relative
amount of capital contributions made by the 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 Partner's interest in Sprint Spectrum. In
the event TCI Telephony's percentage interest were to decrease below the 8%
minimum ownership requirement set forth in the Partnership Agreement, TCI
Telephony's interest in Sprint Spectrum would convert into that of an "Exclusive
Limited Partner" and TCI Telephony would lose the right to designate a
representative to the Partnership Board.
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of 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.
V-130
<PAGE> 280
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to Sprint Spectrum) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1997...................................................... $370,000
1998...................................................... 70,000
--------
$440,000
========
</TABLE>
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 Company
currently believes that such agreement will not result in the Company's being
required to make any incremental capital contributions in addition to its pro
rata portion of such $1.9 billion amount.
TCG has substantial business relationships with a few large customers,
including the major long distance carriers. During 1995, TCG's top 10 customers
accounted for approximately 57% of TCG's total revenues on a pro forma basis
after giving effect to a reorganization described more fully in note 4 to the
combined financial statements of Telephony Group. AT&T Corp. and Sprint each
accounted for more than 10% of such revenues, although 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 TCG'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 alternative to their current practices with
regard to obtaining local telecommunications services, including construction of
their own facilities.
TCI Telephony's ability to obtain sufficient equity or debt financing in
order for the Telephony Group to make its expected additional capital
contributions to the PCS Ventures and other entities in which it has investments
will be limited because TCI Telephony does not conduct any operations directly
and does not have any current source of revenues or cash flow for debt service.
TCI could raise capital for the Telephony Group by, among other things, engaging
in public offerings or private placements of Series A Telephony Group Stock or
through issuance of debt securities or preferred equity securities attributed to
the Telephony Group. The Telephony Group anticipates that for the foreseeable
future it will continue to be dependent upon funding from the TCI Group and, to
the extent available, from external sources. If the available borrowings under
the Revolving Credit Facility that TCI has provided to TCI Telephony is not
sufficient to fund the Telephony Group's capital requirements, no assurance can
be given that TCI Telephony will be able to obtain any required additional
financing on terms acceptable to it, or at all.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS:
Certain corporate general and administrative costs are charged to Telephony
Group at rates set at the beginning of the year based on projected utilization
for that year. The utilization-based charges are set at levels that management
believes to be reasonable and that would approximate the costs Telephony Group
would incur for comparable services on a stand alone basis. During the nine
months ended September 30, 1996 and 1995, Telephony Group was allocated $548,000
and $211,000, respectively, in corporate general and administrative costs by TCI
Group.
Telephony Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees involved in Telephony
Group matters by TCI. Such compensation is subject to
V-131
<PAGE> 281
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS) -- (CONTINUED)
future adjustment based upon market value, and ultimately, on the final
determination of market value when the rights are exercised or the restricted
stock awards are vested.
Telephony Group's share of losses of affiliates of $111.3 million for the
nine months ended September 30, 1996 represents an increase of $79.5 million or
250%, when compared to the Telephony Group's share of losses of $31.8 million
for the nine months ended September 30, 1995. The increase is directly
attributable to the Telephony Group's share of losses in the PCS Ventures, TCG
and other affiliates accounted for under the equity method.
The share of losses from the Telephony Group's investment in the PCS
Ventures was $78.4 million for the nine months ended September 30, 1996 which
represents an increase of $67.6 million, as compared to the share of losses of
$10.8 million for the nine months ended September 30, 1995. The increase in the
share of losses is attributed primarily to general and administrative costs
associated with the start-up of operations and the PCS Ventures' share of losses
in American PCS L.P. The PCS Ventures are in the development start of operations
and generated no revenue during 1995.
The share of losses from the Telephony Group's investment in TCG was $31.6
million for the nine months ended September 30, 1996 which represents an
increase of $11.7 million, as compared to the share of losses of $19.9 million
for the nine months ended September 30, 1995. The increase in the share of
losses is largely attributed to costs incurred by TCG in the expansion of their
local telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets
and the growth of TCG's customer base.
Interest income decreased to $3.5 million from $4.3 million for the nine
months ended September 30, 1996 and 1995, respectively. The decrease is largely
attributable to the absence of interest for the three months ended September 30,
1996 associated with the conversion of a portion of the note receivable from
TCG.
TCG conducted an initial public offering on July 2, 1996 in which it sold
27 million shares of Class A common stock with net proceeds of approximately
$410 million. As a result of the initial public offering, Telephony Group's
ownership interest in TCG was reduced from approximately 35% to 31%.
Accordingly, Telephony Group recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
Telephony Group's net loss of $63.5 million for the nine months ended
September 30, 1996 represents an increase of $45.2 million, as compared to
Telephony Group's net loss of $18.3 million for the nine months ended September
30, 1995. Such increase is principally the result of the aforementioned increase
in share of losses from affiliates.
V-132
<PAGE> 282
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Investments in Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (and their respective predecessor) and
PhillieCo (collectively, the "PCS Ventures"), accounted
for under the equity method (note 3)...................... $ 816,355 689,062
Investments in Teleport Communications Group, Inc., TCG
Partners and certain local market partnerships
(collectively, "TCG" or "Teleport"), accounted for under
the equity method, and related receivables (note 4)....... 294,148 244,012
Other investments in affiliates, accounted for under the
equity method, and related receivables (note 5)........... 9,042 5,722
Deferred tax asset.......................................... -- 4,857
---------- -------
$1,119,545 943,653
========== =======
DEFERRED TAX LIABILITY AND COMBINED EQUITY
Deferred tax liability...................................... $ 21,251 --
Combined equity (note 6).................................... 1,098,294 943,653
---------- -------
Commitments and contingencies (notes 3 and 7)............... $1,119,545 943,653
========== =======
</TABLE>
See accompanying notes to combined financial statements.
V-133
<PAGE> 283
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
-------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating costs and expenses:
Charges from TCI Group (note 6)...................... $ 183 84 548 211
Compensation relating to stock appreciation rights
(note 6).......................................... -- 12 -- 22
Adjustment to compensation relating to stock
appreciation rights (note 6)...................... (69) -- (84) --
-------- ------- ------- -------
114 96 464 233
-------- ------- ------- -------
Operating loss............................... (114) (96) (464) (233)
Other income (expense):
Share of losses of the PCS Ventures (note 3)......... (31,154) (8,039) (78,358) (10,841)
Share of losses of TCG (note 4)...................... (11,011) (6,833) (31,591) (19,884)
Share of losses of other affiliates (note 5)......... (362) (412) (1,396) (1,062)
Interest income from affiliates (note 4)............. 626 1,546 3,527 4,293
Gain on sale of stock by TCG (note 4)................ 12,410 -- 12,410 --
-------- ------- ------- -------
(29,491) (13,738) (95,408) (27,494)
-------- ------- ------- -------
Loss before income taxes..................... (29,605) (13,834) (95,872) (27,727)
Income tax benefit..................................... 9,956 4,766 32,338 9,477
-------- ------- ------- -------
Net loss..................................... $(19,649) (9,068) (63,534) (18,250)
======== ======= ======= =======
Pro forma loss attributable to common
shareholders (note 1)...................... $(8,603)
=======
</TABLE>
See accompanying notes to combined financial statements.
V-134
<PAGE> 284
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENT OF EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMBINED
EQUITY
----------
(AMOUNTS
IN
THOUSANDS)
<S> <C>
Balance at January 1, 1996.................................. $ 943,653
Net loss.................................................. (63,534)
Cost allocations from TCI Group........................... 548
Adjustment to allocation of compensation relating to stock
appreciation rights.................................... (84)
Intergroup tax allocation from TCI Group.................. (45,474)
Transfer of assets from TCI Group, net of deferred
taxes.................................................. 45,253
Net cash transfers from TCI Group......................... 217,932
----------
Balance at September 30, 1996............................... $1,098,294
==========
</TABLE>
See accompanying notes to combined financial statements.
V-135
<PAGE> 285
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- --------
(AMOUNTS IN
THOUSANDS)
(SEE NOTE 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (63,534) (18,250)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Compensation relating to stock appreciation rights..... -- 22
Adjustment to compensation relating to stock
appreciation rights................................... (84) --
Share of losses of affiliates.......................... 111,345 31,787
Gain on sale of stock by TCG........................... (12,410) --
Intergroup tax allocation.............................. (45,474) (13,146)
Deferred income tax expense............................ 13,136 3,794
--------- --------
Net cash provided by operating activities......... 2,979 4,207
--------- --------
Cash flows from investing activities:
Additional investments in and loans to affiliates......... (221,459) (726,698)
Repayments of receivables from affiliates................. -- 1,642
--------- --------
Net cash used in investing activities............. (221,459) (725,056)
--------- --------
Cash flows from financing activities --
Cash transfers to Telephony Group......................... 218,480 720,849
--------- --------
Net change in cash................................ -- --
Cash at beginning of period....................... -- --
--------- --------
Cash at end of period............................. $ -- --
========= ========
</TABLE>
See accompanying notes to combined financial statements.
V-136
<PAGE> 286
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
On December 4, 1996 the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholders approval (the "Telephony Stock
Proposal"), a new class of stock ("Telephony Group Stock") which is intended to
reflect the separate performance of the Telephony Group. The Telephony Group
would initially consist of TCI Group's interest in TCI Telephony Services, Inc.,
an indirect wholly owned subsidiary of Tele-Communications, Inc. ("TCI" or the
"Company"), its subsidiaries, their respective assets, and all assets and
liabilities of the TCI Group (as defined below) to the extent attributed to any
of the foregoing assets, whether or not such assets or liabilities are assets
and liabilities of TCI Telephony Services, Inc. (together with its consolidated
subsidiaries (unless the context indicates otherwise), "TCI Telephony"). The
principal assets of TCI Telephony are its non-consolidating investments in a
series of partnerships, the PCS Ventures, formed to engage in the business of
providing wireless communications services, using the radio spectrum for
broadband personal communications services ("PCS"), to residential and business
customers nationwide under the "Sprint" brand, and its investment in TCG. The
PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P.
(collectively, "Sprint Spectrum"), the partners of each of which are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox") and TCI, and PhillieCo, L.P. ("PhillieCo"), the
partners of which are subsidiaries of Sprint, Cox and TCI. TCI, through
subsidiaries, has a 30% interest as a partner in Sprint Spectrum and a 35.3%
interest as a partner in PhillieCo. TCG is a competitive local exchange carrier
that offers a wide range of local telecommunications services in major
metropolitan markets nationwide, primarily to businesses, long distance carriers
and resellers, and wireless communications companies. The Company has a 31.1%
equity interest (which represents a 36.4% voting interest) in TCG. The Telephony
Group also includes a 50% partnership interest in Kansas City Fiber Network,
L.P. and a 40% partnership interest in NHT Partnership, which are competitive
access providers serving the Kansas City and Buffalo metropolitan areas,
respectively. The Telephony Group would also include such other assets of the
TCI Group as the Board may in the future determine to attribute to the Telephony
Group and such other businesses, assets and liabilities as TCI may in the future
acquire for the Telephony Group, as determined by the Board. It is currently the
intention of TCI that any businesses, assets and liabilities so attributed to
the Telephony Group in the future would be businesses, assets and liabilities
of, or related to, the interests of the TCI Group in the domestic wireless and
wireline telephony businesses (the "Telephony Business").
The TCI Group is intended to reflect the performance of those businesses of
the Company not attributed to the Liberty Media Group (which is intended to
reflect the performance of TCI's business which produces and distributes cable
television programming services) and the Telephony Group. Collectively, the TCI
Group, the Liberty Media Group and the Telephony Group are referred to as the
"Groups" and individually may be referred to herein as a "Group".
As of the date of these financial statements, the only interests of the TCI
Group in the Telephony Business that are not attributed to the Telephony Group
are the businesses currently being conducted by a subsidiary of the TCI Group
which provides long-distance transport of video, voice, data traffic and other
telecommunications services primarily to inter-exchange carriers on a wholesale
basis using a digital broadband microwave network located throughout a 14-state
region in the western United States (the "Microwave Business"), and the
Company's business, which is in the development stage, of providing wireline
residential telephony services via TCI's cable plant to residential and small
business customers in certain of the geographic areas served by the Company's
cable television systems (the "ResTel Business"). The Company began offering
residential telephone service commercially in October 1996 in Hartford,
Connecticut and in January of 1997 in Arlington Heights, Illinois. Telephony
Group has the right, but not the obligation, to acquire the ResTel Business from
the Company in whole or in part (by geographic area) at any time or from
V-137
<PAGE> 287
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
time to time, as applicable, provided that Telephony Group is at the time a
subsidiary of the Company and the Company is then conducting such business.
The method of determining the purchase price for the ResTel Business, and
the arrangements between the Telephony Group and the TCI Group for the use by
TCI Telephony of the TCI Group's underlying cable plant to conduct the ResTel
Business, have not yet been determined. In making such determinations, the Board
will consider, among other things, the TCI Group's aggregate investment
(historically and through any upgrade for two-way service) in the cable plant
that TCI Telephony would use to conduct the ResTel Business; the use of such
plant by TCI's various subsidiaries or Groups (e.g., for cable, telephony and
Internet services), including the use by the Telephony Group of the underlying
plant for the ResTel Business and the use by the TCI Group of the upgraded plant
for other two-way services (such as Internet services and, if developed in the
future, interactive television services), and the ongoing costs to maintain the
plant. The purchase price and other arrangements between the Groups determined
by the Board may or may not reflect the terms and conditions that either Group
might have obtained in an arms'-length negotiation with a third party. It is
currently anticipated that TCI Telephony, if it exercises its right to acquire
the ResTel Business, will enter into a long-term agreement with TCI for the use
of the cable plant via which it would conduct the ResTel Business and for the
payment by TCI Telephony of an allocated share of the costs to maintain such
plant. The portion of TCI's investment in the plant that the Board determines to
allocate to the Telephony Group may be included in the purchase price for the
ResTel Business or as a usage fee pursuant to such long-term agreement.
If TCI Telephony exercises its right to acquire the ResTel Business in
whole or in part, payment of the purchase price may be in funds generated by the
Telephony Group (whether through external financings, future operations or sales
of assets), in funds borrowed from TCI or through the issuance of debt or
preferred equity securities by TCI Telephony to TCI or other potential financing
opportunities; provided, however, that the Board has determined that the payment
of such purchase price will not be made through an increase in the Inter-Group
Interest (as defined below) of the TCI Group in the Telephony Group. Whether or
not TCI Telephony will exercise its rights to acquire the ResTel Business (in
whole or in part) will depend upon a number of factors, including the
penetration rates for the service in the geographic area or areas in which the
service has been commercially launched, the cost of providing the service at the
penetration rate achieved in that area, the price paid by TCI Telephony to
acquire such business from the TCI Group, and pursuant to its arrangement with
the TCI Group regarding the use of the cable plant, and the ability of TCI
Telephony to fund the continued development and ongoing operation of the ResTel
Business in that area.
TCI Telephony also has the right to acquire TCI's interests in the
Microwave Business at a price based on the fair market value of such business
(as determined by the Board). Such right may be exercised at any time provided
that at the time of exercise TCI Telephony is then a subsidiary of TCI and TCI
is then conducting such business.
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred to
as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group is
100%. As any shares of Telephony Group Stock are issued and distributed or sold,
the TCI Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
While the Telephony Group Stock constitutes common stock of TCI, issuance
of the Telephony Group Stock will not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of holders of
TCI's or any of its subsidiaries' debt.
V-138
<PAGE> 288
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Telephony Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Following approval by shareholders of the Telephony Stock Proposal, subject
to prevailing market and other conditions, the Company currently proposes to
offer shares of Series A Telephony Group Stock for cash in an initial public
offering, in which event the proceeds of such offering would be allocated to the
Telephony Group to be used to fund a portion of its anticipated capital
requirements and for general corporate purposes. The timing and the size of any
such public offering and the price at which such shares would be sold will be
determined by the Board, without further approval of stockholders, prior to such
offering based upon the prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the Groups for the purpose of preparing the combined
financial statements of the Liberty Media Group and the Telephony Group, the
change in the capital structure of the Company contemplated by the Telephony
Group Stock Proposal will not affect legal title to such assets or
responsibility for such liabilities of the Company or any of its subsidiaries.
Holders of TCI Group Stock, Liberty Media Group Stock and Telephony 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
Telephony 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 Telephony 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 Telephony Group Stock. The combined financial statements of
the Liberty Media Group and the Telephony Group should be read in conjunction
with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available for
dividends and the available dividend amount with respect to Telephony Group, as
defined. Determinations to pay dividends on Telephony Group Stock are based
primarily upon the financial condition, results of operations and business
requirements of Telephony Group and TCI as a whole.
Pro forma loss attributable to common shareholders for the nine months
ended September 30, 1996 assumes, solely for the purpose of this calculation,
that the Company sold, on January 1, 1996, 10% of the equity value of Telephony
Group in an initial public offering. Additionally, the pro forma calculation
assumes the conversion, on January 1, 1996, of $500 million of TCI Group's
interest in Telephony Group into a preferred stock due from Telephony Group (see
note 6). The Company currently has not determined, if and the extent to which,
it would sell the equity value of Telephony Group in an initial public offering.
The accompanying interim combined financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These combined financial statements
should be read in conjunction with the audited combined financial statements of
Telephony Group for the year ended December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
V-139
<PAGE> 289
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
(2) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
There was no cash paid for interest for the nine months ended September 30,
1996 and 1995, respectively. Cash paid for income taxes was not material for the
periods presented.
Noncash transfers of assets to the Telephony Group aggregated $58,225,000
with associated deferred taxes of $12,972,000 for the nine months ended
September 30, 1996.
(3) INVESTMENTS IN THE PCS VENTURES
Summarized unaudited results of operations for the PCS Ventures accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
COMBINED OPERATIONS 1996 1995
------------------- --------- -------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenue..................................................... $ 71 --
Operating expenses.......................................... (164,028) (19,930)
Depreciation and amortization............................... (1,847) (161)
--------- -------
Operating loss.................................... (165,804) (20,091)
Interest expense............................................ (297) --
Other, net.................................................. (94,644) (15,892)
--------- -------
Net loss.......................................... $(260,745) (35,983)
========= =======
</TABLE>
Subsidiaries of Telephony Group, Comcast, Cox (together with the Company
and Comcast, the "Cable Partners") and Sprint are partners in Sprint Spectrum
Holding Company, L.P. which was formed to engage in the business of providing
wireless communications services on a nationwide basis. Telephony Group owns an
indirect 30% interest in Sprint Spectrum. Sprint Spectrum was the successful
bidder for PCS licenses for 29 markets in an auction conducted by the Federal
Communications Commission that ended in March 1995. The aggregate license cost
for these licenses was approximately $2.1 billion, all of which has been paid.
Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or
acquire PCS licenses from other holders, has invested in American PSC, L.P.
("APC") which holds the PCS license for the Washington-Baltimore market, has
agreed to invest in the entity that will hold the PCS license for the Los
Angeles-San Diego market, and may invest in other entities that hold PCS
licenses. Subsidiaries of Cox, Sprint and Telephony Group are also partners in a
partnership ("PhillieCo") that holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. Telephony Group has an
indirect 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction of
the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. Telephony
Group has agreed to contribute approximately $0.6 billion of such aggregate
amount, $0.2 billion of which was contributed during the nine months ended
September 30, 1996. The Company expects that Sprint Spectrum will require
additional equity thereafter.
V-140
<PAGE> 290
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN TCG
TCG is a competitive local exchange carrier which provides integrated local
telecommunications services in major metropolitan markets nationwide. TCG's
customers are principally telecommunications intensive businesses, long distance
carriers and resellers of wireless communications companies.
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of
Class A common stock at $16.00 per share to the public for aggregate net
proceeds of approximately $410,000,000. As a result of the TCG IPO, Telephony
Group's ownership interest in TCG was reduced from approximately 35% to
approximately 31%. Accordingly, Telephony Group recognized a gain amounting to
$12.4 million (before deducting deferred income tax expense of approximately $5
million).
During 1992, the Telephony Group acquired a 30% ownership interest in
Teleport Communications Group, Inc., ("TCGI"). Subsequent to the acquisition,
the Telephony Group advanced funds to TCGI in the form of notes receivable. Such
notes receivable bore interest at a variable rate (which approximated 7.0% at
December 31, 1995). In conjunction with the Reorganization (as defined below),
$57.8 million of such receivables were converted to equity of TCGI. The
remaining note receivables of $26 million was exchanged for a new note which
bears interest at 7.5% and is due in 2001. At September 30, 1996, the amount
outstanding (including accrued interest) was $26.3 million.
Also during 1992, TCGI, with Cox, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG Partners to
invest, with TCGI, the Cable Stockholders and other cable operators, in 14
partnerships (the "Local Market Partnership") to develop and operate local
telecommunications networks.
Summarized unaudited combined results of operations for TCG as of and for
the period ended September 30, 1996 and TCGI and TCG Partners as of and for the
period ended September 30, 1995 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
COMBINED OPERATIONS 1996 1995
------------------- --------- --------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenue..................................................... $ 180,271 150,498
Operating expenses.......................................... (161,403) (150,550)
Depreciation and amortization............................... (51,984) (37,520)
--------- --------
Operating loss.................................... (33,116) (37,572)
Interest expense............................................ (44,451) (22,223)
Other, net.................................................. 5,428 (8,803)
--------- --------
Net loss.......................................... $ (72,139) (68,598)
========= ========
</TABLE>
In June 1996, TCGI and the Cable Stockholders agreed to simplify the TCG
capital structure by consolidating the ownership of TCG Partners and the Local
Market Partnerships as wholly owned subsidiaries of TCGI. As part of this
process, certain of the other cable operators agreed to exchange their interests
in the Local Market Partnerships with TCGI directly or through a Cable
Stockholder for TCGI common stock.
V-141
<PAGE> 291
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TCGI and the Cable Stockholders entered into a reorganization agreement
pursuant to which TCGI, TCG Partners and the Local Market Partnerships were
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization include:
The acquisition by TCGI of TCG Partners in exchange for TCGI Class B
Common Stock issued to the Cable Stockholders.
The acquisition by TCGI of all interests in 12 of the 14 Local Market
Partnerships in exchange for TCGI Class B Common Stock issued to the Cable
Stockholders and Class A Common Stock issued to the cable operators.
The contribution to TCGI of $269 million in aggregate principal amount
of indebtedness, plus accrued interest from May 1995, owed by TCGI to the
Cable Stockholders in exchange for Class B Common Stock issued to the Cable
Stockholders.
Also in July, 1996, TCGI issued approximately 27 million shares
representing approximately 15.4% of Class A Common Stock and $300 million of
Senior Notes and $1,073 million of Senior Discount Notes as part of an initial
public offering (the "Offering").
In consideration of the transfer by each of the Cable Stockholders of its
respective interests in TCG Partners and the Local Market Partnerships and the
contribution to TCGI of the indebtedness described above, the Company issued
immediately prior to the Offerings approximately 69 million additional shares of
Class B Common Stock to the Cable Stockholders.
In connection with Continental's announced merger with U S WEST, Inc., TCGI
purchased approximately 8 million shares (out of approximately 25.8 million
shares) of Class B Common Stock owned by Continental for $121 million. On
November 5, 1996, the U.S. Department of Justice announced a settlement with U S
WEST, Inc., and Continental pursuant to which Continental will be required to
reduce its ownership percentage in TCGI to below 10% by June 30, 1997 and to
eliminate such ownership entirely by December 31, 1998.
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local Market
Partnerships have become wholly owned subsidiaries of TCGI. Subsequently, as
part of the Reorganization, the remaining minority interests related to another
cable operator's interests in TCG San Francisco and TCG Seattle were acquired by
the Company. Subsequent to this acquisition, the ownership interest in these
entities were acquired by the Telephony Group. The issuance of shares received
by the Telephony Group in the Reorganization assumes that subsequent to the
Offerings, the Telephony Group will contribute its current such acquired
partnership interests in TCG San Francisco and TCG Seattle to TCG. The transfer
of such interests occurred in the fourth quarter of 1996.
Additionally as part of the Reorganization, the Telephony Group was issued
638,862 shares of TCGI Class A Common Stock in consideration for the transfer to
TCGI of the partnership interest which the Telephony Group acquired from
MicroNet, Inc. in TCG San Francisco. The Telephony Group also has acquired a
4.2% interest in TCG San Francisco from InterMedia Partners. The Telephony Group
was issued 372,666 shares of Class A Common Stock for the transfer to TCGI of
such acquired partnership interest. These transfers also occurred in the fourth
quarter of 1996.
V-142
<PAGE> 292
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVESTMENT IN OTHER AFFILIATES
Summarized unaudited results of operations for other affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
COMBINED OPERATIONS 1996 1995
------------------- ------- ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenue..................................................... $ 4,534 2,165
Operating expenses.......................................... (3,807) (3,230)
Depreciation and amortization............................... (2,494) (1,070)
------- ------
Operating loss.................................... (1,767) (2,135)
Interest expense............................................ (1,156) (275)
Other, net.................................................. (85) (53)
------- ------
Net loss.......................................... $(3,008) (2,463)
======= ======
</TABLE>
(6) COMBINED EQUITY
General
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Stock will have one vote per share and the Series B
Telephony Group Stock will have ten votes per share.
Shares of Series B Telephony Group Stock will be convertible at any time at
the option of the holder only into the same number of shares of Series A
Telephony Group Stock.
The rights of holders of the Telephony Group Stock upon liquidation of TCI
will be based upon the ratio of the aggregate market capitalization, as defined,
of the Telephony Group Stock to the aggregate market capitalization, as defined,
of the TCI Group Stock, the Telephony Group Stock and the Liberty Media Group
Stock.
Stock Options and Stock Appreciation Rights
Certain key employees of TCI involved with Telephony Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock and Series A Liberty Media Group Stock as well as restricted stock awards
of Series A TCI Group Stock. Estimates of the compensation relating to the
options and/or stock appreciation rights as well as restricted stock awards
granted to such employees have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
value of Series A TCI Group Stock and Series A Liberty Media Group Stock (see
note 1) and, ultimately, on the final determination of market value when the
rights are exercised or the restricted shares are vested.
On December 1, 1996, two executive officers of TCI Communications, Inc., a
subsidiary of TCI, were each granted options representing 1.0% of the equity
value of the Telephony Group. Upon the approval of the Telephony Group Stock
Proposal, each of such options will convert to options to purchase shares of
Series A Telephony Group Stock representing 1.0% of the number of shares of
Series A Telephony Group Stock issuable with respect to the Telephony Group
Inter-Group Interest. The aggregate exercise price for each option is equal to
1.0% of TCI's cumulative investment in the Telephony Group as of December 1,
1996 less $500 million representing preferred stock of the Telephony Group due
to the TCI Group and further reduced by tax benefits generated by the Telephony
Group (up to $500 million) as and when used by the TCI Group. Such exercise
price shall be adjusted to reflect an assumed interest cost of 6% per annum on
TCI's cumulative
V-143
<PAGE> 293
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
investment reduced by the foregoing amounts through the date of exercise. Such
executive officers were also granted options representing 1.0% of the equity
value of the ResTel Business. The exercise of the Telephony Group options is
inseparable from the ResTel Business options. Such options vest 20% per annum,
first become exercisable on February 1, 1997 and expire February 1, 2006.
Transactions with TCI Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs Telephony
Group would incur for comparable services on a stand alone basis. During the
nine months ended September 30, 1996 and 1995, Telephony Group was allocated
$548,000 and $211,000, respectively, in corporate general and administrative
costs by TCI Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal the
net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Liberty Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale of Telephony Group Stock would (unless the Board otherwise
provides) be specifically attributed to and, in the case of the Liberty Media
Group and the Telephony Group, reflected on the combined financial statements of
the Group that includes the entity which incurred the debt or issued the
preferred stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board could,
however, determine from time to time that debt incurred or preferred stock
issued by entities included in a Group should be specifically attributed to and
reflected on the combined financial statement of one of the other Groups to the
extent that the debt is incurred or the preferred stock is issued for the
benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be reflected
as a borrowing or as an increase or reduction in an Inter-Group Interest. The
Board expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs of
the Company, the financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated with
alternative financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the Liberty
Media Group will seek their own long-term debt financing, whereas the Telephony
Group is expected to require additional advances from the TCI Group for some
period of time. To satisfy this need, TCI has agreed to provide a revolving
credit facility (the "Revolving Credit Facility") to the Telephony
V-144
<PAGE> 294
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Group for a period commencing December 1, 1996 and ending December 31, 2001.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction or increase as described 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 will be payable by the
Telephony 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 (i) by the amount of the first $300 million of net
proceeds of any external debt or equity financings attributed to the Telephony
Group resulting in the reduction of the maximum amount of such borrowings under
the Revolving Credit Facility to an amount not less than $200 million and (ii)
below $200 million, if (but only to the extent that) the net proceeds of any
such external financings attributed to the Telephony Group which are completed
on or prior to December 1, 1998 exceed $600 million (including the first $300
million of such proceeds referred to above). The maximum amount of the
borrowings permitted under the Revolving Credit Facility will be increased on a
dollar-for-dollar basis by the dollar amount of any borrowings thereunder, the
proceeds of which are used by the Telephony Group to pay a portion, if any, of
the exercise price for the purchase of all or part of the ResTel Business from
the TCI Group.
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. The Board expects to
make such determinations, either in specific instances or by setting generally
applicable polices from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the use
of proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the date of
such financial statements, a portion of such net borrowings was converted into a
$500 million investment in Telephony preferred stock as described below. The
balance of such net borrowings up to November 30, 1996 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group on or subsequent to December
1, 1996, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of it's interest
in the Telephony Group into a 6% cumulative compounding redeemable preferred
stock due from the Telephony Group. Such preferred stock is due December 1,
2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group
V-145
<PAGE> 295
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Interest resulting from a transfer of funds from the Telephony Group to the TCI
Group would be determined by reference to the market value of the Series A
Telephony Group 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 Telephony Group Stock the
proceeds of which are attributed to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group and all
financial impacts of issuances of shares of Telephony Group Common Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the Telephony Group will be to such
extent attributed to the TCI Group. Financial impacts of dividends or other
distributions on, and purchases of, TCI Group Stock will be attributed entirely
to the TCI Group, and financial impacts of dividends or other distributions on
Telephony Group Stock will be attributed entirely to the Telephony Group, except
that dividends or other distributions on the Telephony Group Stock will (if at
the time there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in addition to
the charge for the dividend or other distribution paid), with an amount equal to
the product of the aggregate amount of such dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Stock and a
fraction the numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group Outstanding
Interest Fraction (both as defined). Financial impacts of repurchases of
Telephony Group Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Stock the consideration for which is charged to the TCI Group will be to such
extent attributed to the TCI Group and will result in an increase in the TCI
Group's Inter-Group Interest in the Telephony Group.
Federal income taxes and certain state and local taxes would be paid on a
consolidated basis. However, pursuant to a tax sharing agreement, federal income
taxes are calculated, with certain adjustments, on a separate return basis for
each Group (applying provisions of the Internal Revenue Code of 1986, as
amended, and related regulations as if such Group filed a separate consolidated
return for federal income tax purposes). Based upon these separate calculations,
an allocation of tax liabilities is made such that each separate Group is
responsible to the Company for its gross share of the Company's consolidated
federal income tax liabilities, such gross share being determined without regard
to (a) tax benefits that are attributable to the Company or the other Groups or
(b) certain tax benefits that are attributable to a Group but that are taken
into account in determining the Company's consolidated federal income tax
benefit carryovers. Similarly, the Company is responsible to each Group for tax
benefits attributable to such Group and actually used by the Company in
determining its consolidated federal income tax liability. Notwithstanding the
foregoing, the Company and Telephony Group have agreed that the Company may use
up to $500 million of tax benefits generated by the Telephony Group in
determining its consolidated federal income tax liability without providing a
credit to the Telephony Group in such amount. Tax attributes, including but not
limited to net operating losses, investment tax credits, alternative minimum tax
net operating losses, alternative minimum tax credits, deferred intercompany
gains and tax basis in assets, would be inventoried and tracked for each Group.
In addition, pursuant to such tax sharing agreement, state and local income
taxes are calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the Group
were a separate unitary or combined group for tax purposes), and the Company's
combined or unitary tax liability is allocated between the Groups based upon
such separate calculation. The Company has retained the right to file all
returns, make all elections and control all audits and contests. The Company
anticipates that the assets and entities comprising the Telephony Group will be
transferred to a direct subsidiary of TCI. At such time, the Telephony Group
will become party to the Tax Sharing Agreement. Such transfers will be recorded
at carryover basis for financial reporting purposes.
V-146
<PAGE> 296
"TELEPHONY GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of 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.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to Sprint Spectrum) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1997...................................................... $370,000
1998...................................................... 70,000
--------
$440,000
========
</TABLE>
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 Company
currently believes that such agreement will not result in the Company's being
required to make any incremental capital contributions in addition to its pro
rata portion of such $1.9 billion amount.
Certain of Telephony Group's affiliates are general partnerships and any
subsidiary of Telephony Group that is a general partner in a general partnership
is, as such, liable as a matter of partnership law for all debts of that
partnership in the event liabilities of that partnership were to exceed its
assets.
V-147
<PAGE> 297
Definitive Copy, dated February 5, 1997
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote,
as designated on the reverse side hereof, all shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on February 4, 1997 at the Special Meeting of
stockholders to be held on March 12, 1997 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and
a corresponding increase in the total number of authorized shares
of Common Stock, (b) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and
(c) change certain rights and powers of the Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, the
Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share, the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, par value $1.00 per share, and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share, and the qualifications, limitations or
restrictions thereof, in order to implement such proposal and to
reflect the authorization of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Special Meeting.
Address Change and/or
---------------------------------- Comments Mark Here [ ]
Series A TCI Group Common Stock
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: ,1997
---------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
<PAGE> 298
Definitive Copy, dated February 5, 1997
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote,
as designated on the reverse side hereof, all shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on February 4, 1997 at the Special Meeting of
stockholders to be held on March 12, 1997 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and
a corresponding increase in the total number of authorized shares
of Common Stock, (b) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and
(c) change certain rights and powers of the Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, the
Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share, the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, par value $1.00 per share, and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share, and the qualifications, limitations or
restrictions thereof, in order to implement such proposal and to
reflect the authorization of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Special Meeting.
Address Change and/or
---------------------------------- Comments Mark Here [ ]
Series B TCI Group Common Stock
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: ,1997
---------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
<PAGE> 299
Definitive Copy, dated February 5, 1997
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote,
as designated on the reverse side hereof, all shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on February 4, 1997 at the Special Meeting of
stockholders to be held on March 12, 1997 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and
a corresponding increase in the total number of authorized shares
of Common Stock, (b) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and
(c) change certain rights and powers of the Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, the
Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share, the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, par value $1.00 per share, and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share, and the qualifications, limitations or
restrictions thereof, in order to implement such proposal and to
reflect the authorization of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Special Meeting.
Address Change and/or
----------------------------------------- Comments Mark Here [ ]
Series A Liberty Media Group Common Stock
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: ,1997
---------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
<PAGE> 300
Definitive Copy, dated February 5, 1997
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote,
as designated on the reverse side hereof, all shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on February 4, 1997 at the Special Meeting of
stockholders to be held on March 12, 1997 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and
a corresponding increase in the total number of authorized shares
of Common Stock, (b) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and
(c) change certain rights and powers of the Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, the
Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share, the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, par value $1.00 per share, and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share, and the qualifications, limitations or
restrictions thereof, in order to implement such proposal and to
reflect the authorization of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Special Meeting.
Address Change and/or
----------------------------------------- Comments Mark Here [ ]
Series B Liberty Media Group Common Stock
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: ,1997
---------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
<PAGE> 301
Definitive Copy, dated February 5, 1997
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote,
as designated on the reverse side hereof, all shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on February 4, 1997 at the Special Meeting of
stockholders to be held on March 12, 1997 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele-Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and
a corresponding increase in the total number of authorized shares
of Common Stock, (b) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and
(c) change certain rights and powers of the Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, the
Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share, the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, par value $1.00 per share, and the
Tele-Communications, Inc. Series B Liberty Media Group Common Stock,
par value $1.00 per share, and the qualifications, limitations or
restrictions thereof, in order to implement such proposal and to
reflect the authorization of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Special Meeting.
Address Change and/or
---------------------------------- Comments Mark Here [ ]
Series C Preferred Stock
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
Dated: ,1997
---------------------
--------------------------------
Signature
--------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
