<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /x/
Filed by a Party other than the 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)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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 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:
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(2) Form, Schedule or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
Dear Stockholder: July 25, 1997
You are cordially invited to attend the annual meeting of stockholders of
Tele-Communications, Inc. (the "Company" or "TCI"), which will be held at the
TCI National Digital Television Center, 4100 East Dry Creek Road, Littleton,
Colorado, on August 28, 1997 starting at 10:00 a.m., local time. A notice of the
annual meeting, a proxy card, a Proxy Statement containing important information
about the matters to be acted upon at the annual meeting, and the Company's 1996
Annual Report to Stockholders are enclosed.
The election of directors will take place at the annual meeting. This year
three directors will be elected, who will hold office until the annual meeting
of stockholders in the year 2000 or until their successors are elected and
qualified. The Proxy Statement contains information with respect to the
nominees, as well as the other directors who continue in office.
In addition to the election of directors, you will be asked to consider and
vote upon a proposal (the "TCI Ventures Group Stock Proposal"), to amend the
terms of the series of the Company's Common Stock, par value $1.00 per share
(the "Common Stock") which has been designated as Tele-Communications, Inc.
Series A Telephony Group Common Stock (the "Series A Telephony Group Common
Stock") and 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"). The Telephony
Group Common Stock was authorized by the stockholders at a special meeting held
on March 12, 1997. No shares of Telephony Group Common Stock have been issued.
The Telephony Group Common Stock, if issued, would have been intended to reflect
the separate performance of the Telephony Group, which initially was to consist
of TCI's principal investments in the domestic wireless and wireline telephony
businesses (the "Telephony Business"). A total of 750 million shares of Series A
Telephony Group Common Stock and 75 million shares of Series B Telephony Common
Stock were authorized.
The TCI Ventures Group Stock Proposal would change the name of the
Telephony Group to the TCI Ventures Group and would redefine the Group to
include TCI's principal international assets and substantially all of TCI's
non-cable and non-programming domestic assets. The two authorized series of
Telephony Group Common Stock would be redesignated as Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock ("Series A TCI Ventures Group Common
Stock") and Tele-Communications, Inc. Series B TCI Ventures Group Common Stock
("Series B TCI Ventures Group Common Stock" and, together with the Series A TCI
Ventures Group Common Stock, the "TCI Ventures Group Common Stock").
The TCI Ventures Group Common Stock, when issued, would be intended to
reflect the separate performance of the TCI Ventures Group. The assets that will
be attributed to the TCI Ventures Group are comprised principally of (i) TCI's
85% equity interest (representing a 92% voting interest) in Tele-Communications
International, Inc. ("International"), which is the Company's primary vehicle
for the conduct of its international cable, telephony and programming businesses
(other than those international programming businesses attributed to the Liberty
Media Group), (ii) TCI's principal interests in the Telephony Business,
consisting primarily of the Company's investment in a series of partnerships
formed to engage in the business of providing wireless communications services,
using the radio spectrum for broadband personal communications services ("PCS"),
to residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.), the Company's 30%
equity interest (representing a 37% voting interest) in Teleport Communications
Group Inc. ("TCG"), a competitive local exchange carrier, and the Company's
wholly owned subsidiary Western Tele-Communications, Inc. ("WTCI"), which
provides long distance transport of video, voice and data traffic and other
telecommunications services to telecommunications carriers on a wholesale basis
using primarily a digital broadband microwave network located throughout a 12
state region, (iii) TCI's 40% equity interest (representing an 85% voting
interest) in United Video Satellite Group, Inc. ("UVSG"), which provides
<PAGE> 3
satellite-delivered video, audio, data and program promotion services to cable
television systems, satellite dish owners, radio stations and private network
users, primarily throughout North America, (iv) TCI's 39% equity interest
(representing a 72% voting interest) in At Home Corporation ("@Home"), a
provider of high speed multimedia Internet services, and the Company's interest
in other Internet-related assets, and (v) other assets, including the Company's
National Digital Television Center, which provides digital compression and
authorization services to programming suppliers and to video distribution
outlets, ETC w/tci, Inc., an 80% owned subsidiary of the Company that develops
and distributes for-profit education, training and communication services and
products, and TCI SUMMITrak of Texas, Inc. and TCI SUMMITrak L.L.C., wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand the service to include third parties. (Percentage equity and
voting interests provided above have been rounded to the nearest whole number
and calculated as of June 30, 1997, except for percentage interests in entities
that are not consolidated subsidiaries which have been calculated as of March
31, 1997 and except that the percentage equity and voting interests in @Home
have been adjusted to reflect the closing of its initial public offering on July
11, 1997.) The stocks of International, TCG, UVSG and @Home are traded on the
National Market tier of The Nasdaq Stock Market.
Unlike the Telephony Group, the TCI Ventures Group would include WTCI,
rather than an option to acquire WTCI, and would not include an option to
acquire TCI's developmental stage domestic cable telephony business nor would it
include any other business that uses TCI's domestic cable plant to distribute
services to customers (e.g., cable, telephony and Internet services). Such
domestic "distribution" businesses will continue to be attributed to the TCI
Group. By way of example, the business of distributing @Home's Internet service
to customers through TCI's cable systems would not be attributed to the TCI
Ventures Group, although the investment in @Home would be.
The TCI Ventures Group Stock Proposal and the issuance of the TCI Ventures
Group Common Stock are intended to result in greater market recognition of the
value of the TCI Ventures Group, thereby enhancing stockholder value over the
long term, while at the same time enabling the Company's businesses to preserve
the benefits of being part of a consolidated enterprise. In addition, the
businesses that would be attributed to the TCI Group after giving effect to the
creation of the TCI Ventures Group would largely be confined to the Company's
domestic distribution and communications businesses (i.e., the provision of
cable, telephony and Internet services over its domestic cable facilities),
thereby simplifying the market's analysis of the TCI Group Common Stock (as
defined below). The TCI Ventures Group Stock Proposal should provide the Company
with greater flexibility with regard to raising capital and making acquisitions
and investments, including strategic partnering transactions, with equity
securities specifically related to the TCI Ventures Group. Further, the TCI
Ventures Group Stock Proposal would provide security holders with the
opportunity to invest in separate securities intended specifically to reflect
the TCI Ventures Group and would enable the Company to more effectively tailor
employee benefits plans to provide incentives to the employees in the TCI
Ventures Group.
Currently the Company has four other 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 is intended to reflect the
separate performance of the TCI Group, which currently is comprised of the
Company's domestic cable and telephony distribution and communications
businesses (other than those attributed to the Telephony Group), international
cable, telephony and programming businesses, technology/venture capital
businesses, and any other businesses and assets of the Company not attributed to
either the Liberty Media Group or the Telephony Group. The TCI Group Common
Stock is also currently intended to reflect 100% of the common stockholders'
equity value of the Company attributable to the Telephony Group. The assets
attributed to the TCI Ventures Group are currently included in the TCI Group and
the Telephony Group. The Liberty Media Group Common Stock is intended to reflect
the separate performance of the Liberty Media
(ii)
<PAGE> 4
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. The composition of the
Liberty Media Group will not be affected by the TCI Ventures Group Stock
Proposal.
Upon effectiveness of the TCI Ventures Group Stock Proposal, the TCI
Ventures Group will replace the Telephony Group and the assets attributed to the
TCI Ventures Group will no longer be included in the TCI Group. Until shares of
TCI Ventures Group Common Stock are issued as described below, however, 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 TCI Ventures
Group, in addition to the separate performance of the Company's domestic
distribution and communications businesses (other than the investments
attributed to the TCI Ventures Group), and any other businesses and assets of
the Company not attributed to either the Liberty Media Group or the TCI Ventures
Group. The common stockholders' equity value of the Company attributable to the
TCI Ventures Group that, at any relevant time, is attributed to the TCI Group
and, accordingly, not represented by outstanding TCI Ventures Group Common Stock
is referred to as the "Inter-Group Interest" of the TCI Group in the TCI
Ventures Group.
Prior to the Annual Meeting, the Company will commence offers (the
"Exchange Offers") to exchange shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock for up to an aggregate of
188,661,300 shares of Series A TCI Group Common Stock and 16,266,400 shares of
Series B TCI Group Common Stock, respectively (representing approximately 30% of
the shares of each such series outstanding as of June 30, 1997, excluding shares
held by majority owned subsidiaries of the Company) in the ratio of one share of
the applicable series of TCI Ventures Group Common Stock in exchange for each
share of the corresponding series of TCI Group Common Stock properly tendered.
The Exchange Offers will be made on the terms and subject to the conditions to
be set forth in an Offering Circular and related Letter of Transmittal. The
Exchange Offers will be subject, among other conditions, to the approval by
stockholders of the TCI Ventures Group Stock Proposal. If such approval is
obtained and other conditions are satisfied, the Company would consummate the
Exchange Offers on or about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Common Stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers and thereafter would be payable annually.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Common Stock equal
to 30% of the number of shares of Series A TCI Group Common Stock currently
issuable upon exchange of such convertible notes, an equal number of shares of
TCI Ventures Group Common Stock would be issued upon such exchange. Similarly,
options to purchase shares of Series A TCI Group Common Stock that are
outstanding under the Company's various stock incentive plans will be adjusted
upon consummation of the Exchange Offers by dividing such options into options
to purchase shares of Series A TCI Ventures Group Common Stock and options to
purchase shares of Series A TCI
(iii)
<PAGE> 5
Group Common Stock, with 30% of the shares originally subject to the options
being allocated to the options to purchase TCI Ventures Group Common Stock and
70% of such shares being allocated to the options to purchase shares of TCI
Group Common Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
IT IS IMPORTANT TO NOTE THAT HOLDERS OF TCI GROUP COMMON STOCK, LIBERTY
MEDIA GROUP COMMON STOCK AND TCI VENTURES 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 TCI VENTURES GROUP COMMON STOCK WILL REFLECT THE SEPARATE PERFORMANCE OF
THE TCI VENTURES 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 TCI VENTURES 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.
In addition to the TCI Ventures Group Stock Proposal, you will also be
asked at the annual meeting to consider and vote upon the approval of an
amendment to the terms of the Liberty Media Group Common Stock to conform the
provision that permits the redemption of the Liberty Media Group Common Stock
for the stock of a subsidiary to the corresponding provision that currently
relates to the Telephony Group Common Stock and that will relate to the TCI
Ventures Group Common Stock if the TCI Ventures Group Common Stock Proposal is
approved (the "Liberty Media Group Amendment Proposal").
The terms of the Liberty Media Group Common Stock currently permit the
Liberty Media Group Common Stock to be redeemed for the stock of a wholly owned
subsidiary of TCI that holds, directly or indirectly, all the assets and
liabilities attributed to the Liberty Media Group. The Liberty Media Group
Amendment Proposal, if approved, would also permit the redemption of the Liberty
Media Group Common Stock for the stock of a less than wholly owned subsidiary
that holds, directly or indirectly, all the assets and liabilities attributed to
the Liberty Media Group, if the Company's ownership and voting interest in such
subsidiary is sufficient to satisfy the requirements of the Internal Revenue
Service for a distribution of the Company's interest in such subsidiary to the
holders of TCI Ventures Group Common Stock to be tax free to such holders.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TCI VENTURES GROUP
STOCK PROPOSAL AND THE LIBERTY MEDIA GROUP AMENDMENT PROPOSAL, BELIEVES THE
ADOPTION OF EACH SUCH PROPOSAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF EACH SUCH
PROPOSAL.
The proposal of two stockholders, which is expected to be presented at the
Annual Meeting, is also included in the Proxy Statement. The proposal relates to
a request that the Board of Directors take steps to eliminate the election of
directors by classes. For the reasons set forth in the Proxy Statement, if such
proposal is presented at the Annual Meeting, the Board of Directors recommends a
vote against this stockholder proposal.
Whether or not you are personally able to attend the annual 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 annual meeting and vote personally.
Sincerely yours,
/s/ JOHN C. MALONE
John C. Malone
Chairman of the Board and
Chief Executive Officer
(iv)
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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<S> <C>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS.................... (vii)
PROXY STATEMENT............................................. 1
THE ANNUAL MEETING.......................................... 1
Time and Place; Purposes.................................. 1
Voting Rights; Votes Required for Approval................ 2
Proxies................................................... 3
No Appraisal Rights....................................... 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 5
Security Ownership of Certain Beneficial Owners........... 5
Security Ownership of Management.......................... 12
Change of Control......................................... 20
PROPOSALS OF THE BOARD...................................... 21
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS..................... 21
General................................................... 21
Nominees For Election As Directors........................ 21
Directors Whose Term Expires in 1998...................... 21
Directors Whose Term Expires in 1999...................... 22
PROPOSAL NO. 2 -- TCI VENTURES GROUP STOCK PROPOSAL......... 22
General................................................... 22
The TCI Ventures Group.................................... 24
Background and Reasons for the TCI Ventures Group Stock
Proposal............................................... 26
Recommendation of the Board of Directors.................. 29
Summary Description of TCI Ventures Group Stock
Proposal............................................... 29
Factors to be Considered.................................. 36
</TABLE>
Management and Allocation Policies........................ 46
Description of TCI Ventures Group Common Stock and Effects
on Existing Common Stock............................... 53
No Initial Inter-Group Interest in the TCI Ventures
Group.................................................. 72
Dividend Policy........................................... 75
Stock Transfer Agent and Registrar........................ 75
Inclusion in Nasdaq National Market....................... 76
Certain Federal Income Tax Considerations................. 76
Existing Capital Stock.................................... 79
Anti-Takeover Considerations.............................. 80
PROPOSAL NO. 3 -- LIBERTY MEDIA GROUP AMENDMENT............. 83
General................................................... 83
Redemption for Stock of Subsidiary........................ 83
Recommendations of the Board of Directors................. 83
PROPOSAL OF STOCKHOLDER..................................... 84
PROPOSAL NO. 4.............................................. 84
Board of Directors Statement in Opposition to Proposal No.
4...................................................... 84
Recommendation of the Board of Directors.................. 85
CONCERNING MANAGEMENT....................................... 86
Executive Officers........................................ 86
Executive Compensation.................................... 87
(v)
<PAGE> 7
<TABLE>
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<S> <C>
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions................ 97
Report of the Compensation Committee on Executive
Compensation........................................... 97
Stock Performance Graphs.................................. 100
Compensation of Directors................................. 102
Board Meetings............................................ 102
Committees of the Board of Directors...................... 102
Certain Relationships and Related Transactions............ 103
INDEPENDENT AUDITORS........................................ 112
INCORPORATION BY REFERENCE.................................. 112
AVAILABLE INFORMATION....................................... 112
STOCKHOLDERS PROPOSALS...................................... 112
ANNEX I -- Index of Certain Defined Terms................... I-1
ANNEX II-A -- Proposed Amendments to the Restated
Certificate of Incorporation
(Implementing the TCI Ventures Group Stock Proposal)...... II-A-1
ANNEX II-B -- Proposed Amendments to the Restated
Certificate of Incorporation
(Implementing the Liberty Media Group Amendment
Proposal)................................................. II-B-1
ANNEX III -- Description of TCI Ventures 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
Tele-Communications, Inc. Condensed Pro Forma Combined
Financial Statements .................................. V-5
TCI Ventures Group Condensed Pro Forma Combined Financial
Statements............................................. V-12
TCI Group Condensed Pro Forma Combined Financial
Statements............................................. V-18
Tele-Communications, Inc. and Subsidiaries................ V-25
TCI Ventures Group........................................ V-98
</TABLE>
(vi)
<PAGE> 8
TELE-COMMUNICATIONS, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 28, 1997
------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (including
any adjournment or postponement thereof, the "Annual Meeting") of
Tele-Communications, Inc., a Delaware corporation (the "Company"), will be held
at the TCI National Digital Television Center, 4100 East Dry Creek Road,
Littleton, Colorado, starting at 10:00 a.m., local time, on August 28, 1997, for
the following purposes:
1. To elect three directors of the Company to hold office until the
2000 annual meeting of stockholders or until their successors are elected
and qualified ("Election of Directors Proposal").
2. To consider and vote upon a proposal ("TCI Ventures Group Stock
Proposal") to adopt an amendment to the Company's Restated Certificate of
Incorporation which would (a) redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock and the Tele-Communications, Inc.
Series B Telephony Group Common Stock (collectively, the "Telephony Group
Common Stock"), as Tele-Communications, Inc. Series A TCI Ventures Group
Common Stock and Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, respectively (collectively, the "TCI Ventures Group Common
Stock"), (b) change the name of the Telephony Group to the TCI Ventures
Group and redefine the assets and liabilities attributed to such Group, (c)
make corresponding changes to the terms of the other existing series of
Tele-Communications, Inc. Common Stock to reflect the redesignation of the
Telephony Group Common Stock as TCI Ventures Group Common Stock, and (d)
provide for the reservation of shares of Series A TCI Ventures Group Common
Stock for issuance upon conversion, exercise or exchange of certain
convertible notes and options.
3. To consider and vote upon a proposal ("Liberty Media Group
Amendment Proposal") to adopt an amendment to the Company's Restated
Certificate of Incorporation which would permit the Company to redeem the
Liberty Media Group Common Stock for stock of a less than wholly owned
subsidiary of the Company that holds, directly or indirectly, all the
assets and liabilities of the Liberty Media Group if the Company's
ownership of and voting interest in such subsidiary is sufficient to
satisfy the requirements of the Internal Revenue Service for a distribution
of the Company's interest in such subsidiary to the holders of Liberty
Media Group Common Stock to be tax free to such holders.
4. To consider and act upon a proposal of two stockholders of the
Company, if such proposal is brought before the Annual Meeting, with
respect to the elimination of election of directors by classes ("Proposal
No. 4"). The proposal is set forth on page 84 of the Proxy Statement.
5. To transact such other business as may properly come before the
Annual Meeting.
Holders of record of (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"), (v) Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock (the "Class B
Preferred Stock"), (vi) Convertible Preferred Stock, Series C (the "Series C
Preferred Stock"), (vii) Redeemable Convertible TCI Group Preferred Stock,
Series G (the "Series G Preferred Stock"), and (viii) Redeemable Convertible
Liberty Media Group Preferred Stock, Series H (the "Series H Preferred Stock"),
at the close of business on July 25, 1997, the record date for the Annual
Meeting, will be entitled to notice of the Annual Meeting. Holders of record of
the foregoing securities at the close of business on the record date will be
entitled to vote together as a single class on the Election of Directors
Proposal.
(vii)
<PAGE> 9
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
TCI Ventures Group Stock Proposal, the Liberty Media Group Amendment Proposal
and Proposal No. 4. In addition, holders of record of the Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock will be
entitled to vote as a separate class on the Liberty Media Group Amendment
Proposal. Accordingly, the vote of a holder of record on the record date of
shares of Liberty Media Group Common Stock with respect to the Liberty Media
Group Amendment Proposal 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 Liberty Media Group Common Stock
with respect to such proposal. The vote with respect to the Liberty Media Group
Amendment Proposal of a holder of record on the record date of shares of TCI
Group Common Stock or Series C Preferred Stock will only count for the single
class vote with respect to such proposal.
Each holder of record as of the record date of (i) shares of Series A TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Class B Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock is entitled to cast
one vote per share of such class or series held, (ii) shares of Series B TCI
Group Common Stock and Series B Liberty Media Group Common Stock is entitled to
cast ten votes per share of such series held, and (iii) shares of 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 Annual Meeting. In the single class vote, the affirmative vote (in
person or by proxy) of (x) a plurality of the votes cast by holders of the
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, Class B Preferred Stock, Series C Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock, represented in person or by proxy and
entitled to vote is required to approve the Election of Directors Proposal, (y)
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 TCI Ventures Group Stock Proposal
and the Liberty Media Group Amendment Proposal, and (z) a majority of the
combined voting power of the shares of TCI Group Common Stock, Liberty Media
Group Common Stock and Series C Preferred Stock, represented in person or by
proxy and entitled to vote at the Annual Meeting is required to approve Proposal
No. 4. In the separate class vote, the affirmative vote (in person or by proxy)
of a majority of the combined voting power of the shares of Liberty Media Group
Common Stock outstanding on the record date is required to approve the Liberty
Media Group Amendment Proposal.
To assure that your interests will be represented at the Annual 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 Annual
Meeting and vote personally.
By Order of the Board of Directors
/s/ STEPHEN M. BRETT
Stephen M. Brett
Secretary
Englewood, Colorado
July 25, 1997
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU INTEND
TO BE PRESENT AT THE ANNUAL MEETING.
(viii)
<PAGE> 10
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
------------------------
PROXY STATEMENT
------------------------
FOR ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished in connection with the solicitation
by the Board of Directors of Tele-Communications, Inc., a Delaware corporation
(the "Company" or "TCI") of proxies for use at the annual meeting of the
stockholders of the Company, or at any adjournment or postponement thereof (the
"Annual 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"), (v) Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock (the "Class B
Preferred Stock"), (vi) Convertible Preferred Stock, Series C (the "Series C
Preferred Stock"), (vii) Redeemable Convertible TCI Group Preferred Stock,
Series G (the "Series G Preferred Stock"), and (viii) Redeemable Convertible
Liberty Media Group Preferred Stock, Series H (the "Series H Preferred Stock").
THE ANNUAL MEETING
TIME AND PLACE; PURPOSES
The Annual Meeting will be held at the TCI National Digital Television
Center, 4100 East Dry Creek Road, Littleton, Colorado, on August 28, 1997,
starting at 10:00 a.m. local time. At the Annual Meeting, the stockholders of
the Company will be asked to consider and vote upon proposals (i) to elect three
directors of the Company to hold office until the annual meeting of stockholders
in the year 2000 or until their successors are elected and qualified ("Election
of Directors Proposal"); (ii) to adopt an amendment to the Company's Restated
Certificate of Incorporation (as heretofore amended the "Company Charter") which
would (a) change the designation of the series of the Company's Common Stock,
par value $1.00 per share (the "Common Stock"), which had been designated as
Tele-Communications, Inc. Series A Telephony Group Common Stock and
Tele-Communications, Inc. Series B Telephony Group Common Stock (collectively,
the "Telephony Group Common Stock"), to Tele-Communications, Inc. Series A TCI
Ventures Group Common Stock and Tele-Communications, Inc. Series B TCI Ventures
Group Common Stock, respectively (collectively, the "TCI Ventures Group Common
Stock"), (b) change the name of the Telephony Group to the TCI Ventures Group
and redefine the assets and liabilities attributed to such Group, (c) make
corresponding changes to the terms of the Series A TCI Group Common Stock, the
Series B TCI Group Common Stock, the Series A Liberty Media Group Common Stock,
and the Series B Liberty Media Group Common Stock to reflect the redesignation
of the Telephony Group Common Stock as TCI Ventures Group Common Stock, and (d)
provide for the reservation of shares of Series A TCI Ventures Group Common
Stock for issuance upon conversion, exercise or exchange of certain convertible
notes and options (the "TCI Ventures Group Stock Proposal"); (iii) to adopt an
amendment to the Company Charter which would expand the Company's right to
redeem the Liberty Media Group Common Stock for stock of a subsidiary that
holds, directly or indirectly, all the assets and liabilities of the Liberty
Media Group, by permitting redemption for the stock of a less than wholly owned
subsidiary of the Company if the Company's ownership of and voting interest in
such
<PAGE> 11
subsidiary is sufficient to satisfy the requirements of the Internal Revenue
Service for a distribution of the Company's interest in such subsidiary to the
holders of Liberty Media Group Common Stock to be tax free to such holders (the
"Liberty Media Group Amendment Proposal"); (iv) to consider and act upon a
proposal of two stockholders of the Company, if such proposal is brought before
the Annual Meeting, requesting the Board of Directors to take steps to eliminate
the election of directors by classes ("Proposal No. 4"); and (v) to transact
such other business as may properly come before the Annual Meeting.
This Proxy Statement and the accompanying form of proxy are first being
mailed to the stockholders of the Company on or about August 1, 1997.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on July 25, 1997
(the "Record Date") as the date for the determination of holders of shares of
TCI Group Common Stock, Liberty Media Group Common Stock, Class B Preferred
Stock, Series C Preferred Stock, Series G Preferred Stock and Series H Preferred
Stock entitled to notice of and to vote at the Annual 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 Annual Meeting.
Holders of record of TCI Group Common Stock, Liberty Media Group Common
Stock, Class B Preferred Stock, Series C Preferred Stock, Series G Preferred
Stock and Series H Preferred Stock at the close of business on the Record Date
will be entitled to vote together as a single class on the Election of Directors
Proposal.
Holders of record of TCI Group Common Stock, Liberty Media Group Common
Stock and Series C Preferred Stock at the close of business on the Record Date
will be entitled to vote together as a single class on the TCI Ventures Group
Stock Proposal, the Liberty Media Group Amendment Proposal and Proposal No. 4.
In addition, holders of record of Liberty Media Group Common Stock will be
entitled to vote as a separate class on the Liberty Media Group Amendment
Proposal. Accordingly, if, for example, you were a record holder of shares of
Liberty Media Group Common Stock on the Record Date, your vote of such shares
with respect to the Liberty Media Group Amendment Proposal 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
Liberty Media Group Common Stock. If you were a record holder of TCI Group
Common Stock or Series C Preferred Stock on the Record Date, your vote of such
shares with respect to the Liberty Media Group Amendment Proposal will only
count for the single class vote of the TCI Group Common Stock, Liberty Media
Group Common Stock and Series C Preferred Stock.
At the close of business on the Record Date, there were: (i) 621,724,731
shares of Series A TCI Group Common Stock outstanding and entitled to vote at
the Annual Meeting, (ii) 61,517,638 shares of Series B TCI Group Common Stock
outstanding and entitled to vote at the Annual Meeting, (iii) 227,495,519 shares
of Series A Liberty Media Group Common Stock outstanding and entitled to vote at
the Annual Meeting, (iv) 23,453,590 shares of Series B Liberty Media Group
Common Stock outstanding and entitled to vote at the Annual Meeting, (v)
1,620,026 shares of Class B Preferred Stock outstanding and entitled to vote at
the Annual Meeting, (vi) 70,575 shares of Series C Preferred Stock outstanding
and entitled to vote at the Annual Meeting, (vii) 6,693,027 shares of Series G
Preferred Stock outstanding and entitled to vote at the Annual Meeting, and
(viii) 6,693,127 shares of Series H Preferred Stock outstanding and entitled to
vote at the Annual Meeting. Each holder of record as of the Record Date of: (i)
Series A TCI Group Common Stock, Series A Liberty Media Group Common Stock,
Class B Preferred Stock, Series G Preferred Stock and Series H Preferred Stock
is entitled to cast one vote per share of such series held, (ii) Series B TCI
Group Common Stock and Series B Liberty Media Group Common Stock is entitled to
cast ten votes per share of such series held, and (iii) 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
Annual Meeting.
Subsequent to the Record Date and prior to the date of the Annual Meeting,
the Company expects to consummate its acquisition by merger (the "Kearns-Tribune
Merger") of the Kearns-Tribune Corporation ("Kearns-Tribune"), which on the
Record Date held 8,792,490 shares of Series A TCI Group Common Stock, 9,112,500
shares of Series B TCI Group Common Stock, 4,436,245 shares of Series A Liberty
Media
2
<PAGE> 12
Group Common Stock, 2,278,125 shares of Series B Liberty Media Group Common
Stock and 67,536 shares of Class B Preferred Stock. Accordingly, the number of
shares of each such series and class entitled to vote at the Annual Meeting and
deemed outstanding for that purpose on the Record Date will be reduced by the
number of shares of such series or class so acquired by the Company in the
Kearns-Tribune Merger.
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, Class B Preferred Stock, Series C Preferred
Stock, Series G Preferred Stock and Series H Preferred Stock entitled to vote is
necessary to constitute a quorum at the Annual Meeting. The Election of
Directors Proposal must be approved by a plurality of the votes cast at the
Annual Meeting with respect to the 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, Class B Preferred Stock, Series C
Preferred Stock, Series G Preferred Stock and Series H Preferred Stock, that are
represented in person or by proxy and entitled to vote at the Annual Meeting.
The affirmative vote, in person or by proxy, of 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, is required to approve the TCI
Ventures Group Stock Proposal. 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, and (ii) 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 Liberty Media Group
Amendment Proposal. The affirmative vote, in person or by proxy, of a majority
of the combined voting power of the shares of TCI Group Common Stock, Liberty
Media Group Common Stock and Series C Preferred Stock represented in person or
by proxy and entitled to vote at the Annual Meeting, voting as a single class,
is required to approve Proposal No. 4.
The shares of TCI Group Common Stock outstanding on the Record Date
represented an aggregate of 1,136,983,621 votes; the shares of Liberty Media
Group Common Stock outstanding on the Record Date represented an aggregate of
434,813,924 votes; the shares of Class B Preferred Stock outstanding on the
Record Date represented an aggregate of 1,552,490 votes; the shares of Series C
Preferred Stock outstanding on the Record Date represented an aggregate of
10,850,201 votes; the shares of Series G Preferred Stock outstanding on the
Record Date represented an aggregate of 6,693,027 votes, and the shares of
Series H Preferred Stock outstanding on the Record Date represented an aggregate
of 6,693,127 votes. For a quorum, shares representing 798,793,196 votes in the
aggregate will be required to be present at the meeting in person or by proxy.
For the TCI Ventures Group Stock Proposal to be approved, the Company needs
1,055,098,498 affirmative votes in the aggregate by holders of shares of TCI
Group Common Stock, Liberty Media Group Common Stock and Series C Preferred
Stock entitled to vote (voting together). For the Liberty Media Group Amendment
Proposal to be approved, the Company needs (i) 1,055,098,498 affirmative votes
in the aggregate by holders of shares of TCI Group Common Stock, Liberty Media
Group Common Stock and Series C Preferred Stock entitled to vote (voting
together) and (ii) 217,406,963 affirmative votes by the holders of shares of
Liberty Media Group Common Stock entitled to vote. The number of votes
represented by each series and class of the Company's stock and the number of
votes required to approve each proposal as set forth above in this paragraph
have been adjusted to reflect the effect that the consummation of the Kearns-
Tribune Merger will have on such votes.
PROXIES
All shares of TCI Group Common Stock, Liberty Media Group Common Stock,
Class B Preferred Stock, Series C Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock represented by properly executed proxies received prior
to or at the Annual Meeting, and not revoked, will be voted in accordance with
the instructions indicated in such proxies. If no instructions are indicated,
such proxies will be voted FOR the Election of Directors Proposal, FOR the TCI
Ventures Group Stock Proposal and FOR the Liberty Media Group Amendment
Proposal. If, with respect to Proposal No. 4, no instructions are indicated,
such proxies will be voted AGAINST Proposal No. 4 if presented at the Annual
Meeting. So far as the
3
<PAGE> 13
Company's Board of Directors is aware, the foregoing proposals and Proposal No.
4 are the only matters to be acted upon at the Annual Meeting. As to any other
matter which may properly come before the Annual 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 Annual Meeting, will not be voted and, therefore, except
with respect to the Election of Directors Proposal, 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 Annual Meeting but
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 a particular matter. Such shares will however be counted for
purposes of determining 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 and, accordingly, will have the same effect as a
vote cast against the TCI Ventures Group Stock Proposal and the Liberty Media
Group Amendment Proposal.
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 Annual Meeting and voting in
person. Attendance at the Annual 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 TCI Ventures Group Stock Proposal or the
Liberty Media Group Amendment Proposal.
4
<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of March 1, 1997, 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 Preferred Stock, Series C Preferred Stock, Series G
Preferred Stock and Series H Preferred Stock, by each person known to the
Company to own beneficially more than 5% of any such class or series outstanding
on that date. Shares issuable upon exercise of options or conversion or exchange
of convertible or exchangeable securities are deemed to be outstanding for the
purpose of computing the percentage of ownership and overall voting power of
persons beneficially owning such options or convertible securities, but have not
been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power of any other person. Voting power in the table
is computed with respect to a general election of directors and, therefore, the
Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred
Stock are included in the calculation notwithstanding the fact that the Class B
Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock
do not generally vote with respect to matters submitted to a vote of
stockholders. The number of shares indicated as owned by John C. Malone,
Chairman of the Board and Chief Executive Officer of the Company, 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
NAME AND ADDRESS BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
TCI Group Donne F. Fisher,
Common Stock Director, individually and
Series A as personal co-representative 4,110,681(2)(3) * 20.8%
Series B of the Estate of Bob Magness 31,034,936(2) 36.7%
5619 DTC Parkway
Englewood, Colorado
Liberty Media Group
Common Stock
Series A 5,423,725(2)(3) 2.4%
Series B 7,758,734(2) 36.6%
Preferred Stock
Class B 129,299(2) 8.0%
Series C -- --
Series G -- --
Series H -- --
TCI Group Daniel Ritchie, as personal
Common Stock co-representative of the
Series A Estate of Bob Magness 3,524,315(2) * 20.6%
Series B 2199 South University 30,785,864(2) 36.4%
Denver, Colorado
Liberty Media Group
Common Stock
Series A 5,169,304(2) 2.3%
Series B 7,696,466(2) 36.3%
Preferred Stock
Class B 125,000(2) 7.7%
Series C -- --
Series G -- --
Series H -- --
</TABLE>
5
<PAGE> 15
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
TCI Group John C. Malone,
Common Stock Chief Executive Officer and
Series A Chairman of the Board 2,173,166(4) * 16.9%
Series B 5619 DTC Parkway 25,287,083(5)(6) 29.9%
Englewood, Colorado
Liberty Media Group
Common Stock
Series A 3,929,331(4)(5) 1.7%
Series B 6,349,270(5)(6) 30.0%
Preferred Stock
Class B 306,000(5) 18.9%
Series C -- --
Series G -- --
Series H -- --
TCI Group Kearns-Tribune Corporation
Common Stock 400 Tribune Building
Series A Salt Lake City, Utah 8,792,490(6) 1.5% 6.7%
Series B 9,112,500(6) 10.8%
Liberty Media Group
Common Stock
Series A 4,436,245(6) 1.9%
Series B 2,278,125(6) 10.8%
Preferred Stock
Class B 67,536 4.2%
Series C -- --
Series G -- --
Series H -- --
TCI Group Kim Magness,
Common Stock Director, individually and as
Series A personal representative of 2,155,332(7)(8) * 4.7%
Series B the Estate of Betsy Magness 6,864,212(7) 8.1%
5619 DTC Parkway
Englewood, Colorado
Liberty Media Group
Common Stock
Series A 1,666,275(7)(8) *
Series B 1,716,053(7) 8.1%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group The Associated Group, Inc.
Common Stock 200 Gateway Towers
Series A Pittsburgh, Pennsylvania 12,479,976(9) 2.1% 5.8%
Series B 7,071,852(9) 8.4%
Liberty Media Group
Common Stock
Series A 9,102,436(9) 4.0%
Series B 1,767,963(9) 8.3%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
</TABLE>
6
<PAGE> 16
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
-------------- ------------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
TCI Group The Equitable Companies
Common Stock Incorporated
Series A 787 Seventh Avenue 32,824,784(10) 5.5% 2.9%
Series B New York, New York; and -- --
The Mutuelles AXA and
AXA 101-100 Terrasse
Boieldieu 92042
Paris La Defense France
Liberty Media Group
Common Stock
Series A 23,303,041(11) 10.2%
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 34,799,410(12) 5.8% 3.3%
Series B Los Angeles, California -- --
Liberty Media Group
Common Stock
Series A 28,902,435(13) 12.6%
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group J.P. Morgan & Co.
Common Stock Incorporated
Series A 60 Wall Street 43,044,027(14) 7.2% 2.3%
Series B New York, New York -- --
Liberty Media Group
Common Stock
Series A -- --
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Oppenheimer Capital
Common Stock 200 Liberty Street
Series A New York, New York 41,545,872(15) 7.0% 2.2%
Series B -- --
Liberty Media Group
Common Stock
Series A -- --
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
</TABLE>
7
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS(1) POWER(1)
- ---------------------------------- -------------------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
TCI Group Bill Daniels
Common Stock c/o Daniels & Associates
Series A 3200 Cherry Creek Drive South 259(16) * *
Series B Denver, Colorado -- --
Liberty Media Group
Common Stock
Series A 96(16) *
Series B -- --
Preferred Stock
Class B -- --
Series C 70,575 100.0%
Series G -- --
Series H -- --
TCI Group Lawrence Flinn Jr.
Common Stock 209 Taconic Road
Series A Greenwich, Connecticut 1,102,344(16) * *
Series B 24,000(16) *
Liberty Media Group
Common Stock
Series A 416,416(16) *
Series B 6,000(16) *
Preferred Stock
Class B -- --
Series C -- --
Series G 6,186,647(16) 92.4%
Series H 6,186,647(16) 92.4%
</TABLE>
- ---------------
* Less than one percent
(1) Based on 598,055,198 shares of Series A TCI Group Common Stock, 84,647,065
shares of Series B TCI Group Common Stock, 228,721,426 shares of Series A
Liberty Media Group Common Stock, 21,187,969 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, 6,693,177 shares of Series G
Preferred Stock and 6,693,177 shares of Series H Preferred Stock
outstanding on March 1, 1997, in each case after elimination of shares then
held by the Company and its majority owned subsidiaries.
(2) Messrs. Fisher and Ritchie, as co-personal representatives of the Estate of
Bob Magness, are each deemed to be the beneficial owner of all 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
and Class B Preferred Stock held of record by the Estate of Bob Magness.
The number of shares reflected in the table as held by Messrs. Fisher and
Ritchie each includes 1,524,315 shares of Series A TCI Group Common Stock,
30,785,864 shares of Series B TCI Group Common Stock, 4,419,304 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 of which Mr. Fisher and Mr. Ritchie are each deemed to be the
beneficial owner as co-personal representative. Additionally, the number of
shares in the table assumes the exercise in full by the Estate of Bob
Magness of stock options granted in tandem with stock appreciation rights
to Mr. Bob Magness in November of 1992 to acquire 1,000,000 shares of
Series A TCI Group Common Stock and 375,000 shares of Series A Liberty
Media Group Common Stock, and the exercise in full by the Estate of Bob
Magness of stock options granted in tandem with stock appreciation rights
to Mr. Bob Magness in December of 1995 to acquire 1,000,000 shares of
Series A TCI Group Common Stock and 375,000 shares of Series A Liberty
Media Group Common Stock. All such options are currently exercisable and
may be exercised at any time on or prior to November 15, 1997. On June 16,
1997, the Estate of Bob Magness sold 30,545,864 shares of Series B TCI
Group Common Stock to the Company in exchange for an equal number of shares
of Series A TCI Group Common Stock (the "Estate Swap") and then sold an
aggregate of
8
<PAGE> 18
32,068,588 shares of Series A TCI Group Common Stock to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and LB I Group (an
affiliate of Lehman Brothers, Inc.) ("Lehman"), with each of Merrill Lynch
and Lehman purchasing an equal number of shares pursuant to separate stock
purchase agreements (the "Estate Sale" and, together with the Estate Swap,
the "Estate Transactions").
(3) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights to Mr. Fisher in November of 1994 to acquire 200,000
shares of Series A TCI Group Common Stock and 75,000 shares of Series A
Liberty Media Group Common Stock. Options to acquire 80,000 shares of
Series A TCI Group Common Stock and 30,000 shares of Series A Liberty Media
Group Common Stock are currently exercisable. Additionally assumes the
exercise in full of options granted to Mr. Fisher in January 1996, pursuant
to the Company's Director Stock Option Plan, to acquire 50,000 shares of
Series A TCI Group Common Stock and 18,750 shares of Series A Liberty Media
Group Common Stock. Options to acquire 10,000 shares of Series A TCI Group
Common Stock and 3,750 shares of Series A Liberty Media Group Common Stock
are currently exercisable.
(4) 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 375,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 800,000 and 300,000 shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common
Stock, respectively, are currently exercisable. 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 375,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 200,000 shares of Series A TCI Group
Common Stock and 75,000 shares of Series A Liberty Media Group Common Stock
are currently exercisable.
(5) Includes 1,173,000 shares of Series B TCI Group Common Stock, 146,625
shares of Series A Liberty Media 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.
(6) Pursuant to a letter agreement dated June 17, 1988 (the "1988 Agreement"),
the late Mr. Bob Magness and Kearns-Tribune each granted Dr. Malone certain
rights with respect to the then Class B Common Stock of the Company owned
by them. Dr. Malone agreed with the Company to forgo the exercise of such
rights in connection with the Estate Swap and, in consideration thereof,
the Company granted Dr. Malone the right to acquire, at any time and from
time to time prior to June 30, 1999, up to 30,545,864 shares of Series B
TCI Group Common Stock for either (or any combination of) (i) shares of
Series A TCI Group Common Stock on a one-for-one basis or (ii) cash based
on the closing sales price of the Series B TCI Group Common Stock on The
Nasdaq Stock Market for a specified period prior to the acquisition of
shares by Dr. Malone (the "TCI-Estates Agreement"). Similarly, Dr. Malone
has agreed to forgo exercising his rights under the 1988 Agreement and a
later agreement with Kearns-Tribune dated April 18, 1997 in connection with
the Kearns-Tribune Merger in consideration of the Company's agreement (the
"TCI-KT Agreement") that he may acquire directly from the Company, at any
time and from time to time prior to July 30, 1998, up to 9,112,500 shares
of Series B TCI Group Common Stock and 2,278,125 shares of Series B Liberty
Media Group Common Stock in exchange for equal numbers of shares of Series
A TCI Group Common Stock and Series A Liberty Media Group Common Stock,
respectively. Pursuant to the TCI-KT Agreement, on July 24, 1997, Dr.
Malone acquired 7,296,324 shares of Series B TCI Group Common Stock and
2,278,125 shares of Series B Liberty Media Group Common Stock from the
Company in exchange for a like number of shares of Series A TCI Group
Common Stock and Series A Liberty Media Group Common Stock held by Dr.
Malone on March 1, 1997, together with shares thereafter acquired. If the
number of shares held by Dr. Malone at March 1, 1997 were adjusted solely
for the transactions described in the preceding sentence, then the numbers
of shares of Common Stock held by Dr. Malone at that date (assuming the
exercise of his options) would have been 2,161,338 shares of Series A TCI
Group Common Stock, 32,583,407 shares of Series B TCI Group Common Stock,
1,519,206 shares of Series A Liberty Media Group Common Stock and 8,627,395
shares of Series B Liberty Media Group Common Stock.
9
<PAGE> 19
(7) Mr. Kim Magness, as personal representative of the Estate of Betsy Magness,
is the beneficial owner of all 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 held of record by the Estate
of Betsy Magness. The number of shares held by Mr. Kim Magness includes
2,105,332 shares of Series A TCI Group Common Stock, 6,346,212 shares of
Series B TCI Group Common Stock, 1,582,775 shares of Series A Liberty Media
Group Common Stock and 1,586,553 shares of Series B Liberty Media Group
Common Stock of which Mr. Magness is beneficial owner as personal
representative.
(8) Assumes the exercise in full of options granted to Mr. Kim Magness in
November of 1994, pursuant to the Company's Director Stock Option Plan, to
acquire 50,000 shares of Series A TCI Group Common Stock and 18,750 shares
of Series A Liberty Media Group Common Stock. Options to acquire 20,000
shares of Series A TCI Group Common Stock and 7,500 shares of Series A
Liberty Media Group Common Stock are currently exercisable.
(9) The number of shares of Series B TCI Group Common Stock and Series B
Liberty Media Group Common Stock in the table is based upon Amendment No. 2
to Schedule 13D, dated May 24, 1996, filed by The Associated Group, Inc.
Such Schedule 13D reflects that said corporation has shared voting power
over such shares. The number of shares of Series A TCI Group Common Stock
and Series A Liberty Media Group Common Stock in the table is based upon
disclosure made by The Associated Group, Inc. to the Company.
(10) The number of shares in the table is based upon a Schedule 13G, dated
February 12, 1997, filed by The Equitable Companies Incorporated, which
Schedule 13G reflects that said corporation has sole voting power over
27,983,325 shares and shared voting power over 986,125 shares of Series A
TCI Group Common Stock. No information is given with respect to voting
power over the remaining shares.
(11) The number of shares in the table is based upon a Schedule 13G, dated
February 12, 1997, filed by the Equitable Companies Incorporated, as
adjusted to reflect the stock dividend effective January 14, 1997 of one
share of Series A Liberty Media Group Common Stock for every two shares of
Series A Liberty Media Group Common Stock and one share of Series A Liberty
Media Group Common Stock for every two shares of Series B Liberty Media
Group Common Stock (the "Liberty Group Stock Dividend") then owned by
holders of Liberty Media Group Common Stock. The Schedule 13G reflects that
such corporation has sole voting power over 17,960,232 shares and shared
voting power over 515,709 shares of Series A Liberty Media Group Common
Stock, each as adjusted for the Liberty Group Stock Dividend. No
information is given with respect to voting power over the remaining
shares.
(12) The number of shares in the table is based upon a Schedule 13G, dated
February 14, 1997, filed by The Capital Group Companies, Inc. The Capital
Group Companies, Inc. is the parent holding company of a group of
investment management companies that hold investment power and, in some
cases, voting power over the securities reported in the Schedule 13G. The
investment management companies, which include a bank and several
investment advisers, provide investment advisory and management services
for their respective clients which include registered investment companies
and institutional accounts. The Capital Group Companies, Inc. does not have
investment power or voting power over any of the securities reported
herein; however, The Capital Group Companies, Inc., may be deemed to
beneficially own such securities. Capital Research and Management Company,
an investment adviser and wholly owned subsidiary of The Capital Group
Companies, Inc., is the beneficial owner of 29,960,700 shares of Series A
TCI Group Common Stock as a result of acting as investment adviser to
various investment companies. The remaining shares reported as being
beneficially owned by The Capital Group Companies, Inc. are beneficially
owned by other subsidiaries of The Capital Group Companies, Inc., none of
which by itself owns 5% or more of the outstanding securities.
(13) The number of shares in the table is based upon a Schedule 13G, dated
February 14, 1997, filed by The Capital Group Companies, Inc., as adjusted
to reflect the Liberty Group Stock Dividend. For a description of The
Capital Group Companies, Inc., see note 12 above. Capital Research and
Management Company, an investment adviser and wholly owned subsidiary of
The Capital Group
10
<PAGE> 20
Companies, Inc., is the beneficial owner of 22,612,005 shares of Series A
Liberty Media Group Common Stock as a result of acting as investment
adviser to various investment companies. The remaining shares reported as
being beneficially owned by The Capital Group Companies, Inc. are
beneficially owned by other subsidiaries of The Capital Group Companies,
Inc., none of which by itself owns 5% or more of the outstanding
securities.
(14) The number of shares in the table is based upon a Schedule 13G, dated as of
December 31, 1996, filed by J.P. Morgan & Co. Incorporated which Schedule
13G reflects that said corporation has sole voting power over 28,128,668
shares and shared voting power over 525,866 shares of Series A TCI Group
Common Stock. No information is given with respect to the voting power over
the remaining shares.
(15) Based upon disclosure made by Oppenheimer Capital to the Company.
(16) Based upon the Company's review of the record of shareholders provided by
the Company's transfer agent, The Bank of New York.
11
<PAGE> 21
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 1, 1997, information with
respect to the ownership of: (i) Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock, Class B Preferred Stock, Series C Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock and (ii) the voting
securities of Tele-Communications International, Inc., a majority owned
subsidiary of the Company ("International"), which consist of
Tele-Communications International, Inc. Series A Common Stock ("TINTA Series A
Stock") and Tele-Communications International, Inc. Series B Common Stock
("TINTA Series B Stock"), by all directors and each of the named executive
officers of TCI and by all executive officers and directors of TCI as a group.
Shares issuable upon exercise of options or conversion or exchange of
convertible or exchangeable 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 PERCENT
NATURE OF OF VOTING
NAME OF BENEFICIAL CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
-------------- ---------------- ---------- -------- ------
<S> <C> <C> <C> <C>
TCI Group Donne F. Fisher,
Common Stock individually and as co-
Series A personal representative 4,110,681(3) * 20.8%
Series B of the Estate of Bob Magness 31,034,936(3) 36.7%
Liberty Media Group
Common Stock
Series A 5,423,725(3) 2.4%
Series B 7,758,734(3) 36.6%
Preferred Stock
Class B 129,299(3) 8.0%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 450,000 * *
TINTA Series B Stock -- --
TCI Group John C. Malone
Common Stock
Series A 2,173,166(4) * 16.9%
Series B 25,287,083(4) 29.9%
Liberty Media Group
Common Stock
Series A 3,929,331(4) 1.7%
Series B 6,349,270(4) 30.0%
Preferred Stock
Class B 306,000(4) 18.9%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000(13) * *
TINTA Series B Stock -- --
</TABLE>
12
<PAGE> 22
<TABLE>
<CAPTION>
AMOUNT
AND PERCENT
NATURE OF OF VOTING
NAME OF BENEFICIAL CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
-------------- ---------------- ---------- -------- ------
<S> <C> <C> <C> <C>
TCI Group Kim Magness, individually
Common Stock and as personal
Series A representative of the 2,155,332(5) * 4.7%
Series B Estate of Betsy Magness 6,864,212(5) 8.1%
Liberty Media Group
Common Stock
Series A 1,666,275(5) *
Series B 1,716,053(5) 8.1%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- -- --
TINTA Series A Stock 2,000 * *
TINTA Series B Stock -- --
TCI Group John W. Gallivan
Common Stock
Series A 52,124(6)(7) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 19,546(6)(7) *
Series B -- --
Preferred Stock
Class B 14(6)(7) *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Jerome H. Kern
Common Stock
Series A 2,050,000(8) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 768,750(8) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000(13) * *
TINTA Series B Stock -- --
TCI Group Tony Coehlo
Common Stock
Series A 152,800(9) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 19,050(9) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,000 * *
TINTA Series B Stock -- --
</TABLE>
13
<PAGE> 23
<TABLE>
<CAPTION>
AMOUNT
AND PERCENT
NATURE OF OF VOTING
NAME OF BENEFICIAL CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
-------------- ---------------- ---------- -------- ------
<S> <C> <C> <C> <C>
TCI Group Robert A. Naify
Common Stock
Series A 23,688,859(10) 3.8% 1.7%
Series B -- --
Liberty Media Group
Common Stock
Series A 8,883,287(10) 3.7%
Series B -- --
Preferred Stock
Class B 1,000 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group J.C. Sparkman
Common Stock
Series A 279,472(11) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 112,001(11) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Paul A. Gould
Common Stock
Series A 127,330(12) * *
Series B 243,824 *
Liberty Media Group
Common Stock
Series A 102,538(12) *
Series B 39,081 *
Preferred Stock
Class B 19,558 1.2%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 95,000(13) * *
TINTA Series B Stock -- --
TCI Group Leo J. Hindery, Jr.
Common Stock
Series A 1,000,000(14) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 250,000(14) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000(14) * *
TINTA Series B Stock -- --
</TABLE>
14
<PAGE> 24
<TABLE>
<CAPTION>
AMOUNT
AND PERCENT
NATURE OF OF VOTING
NAME OF BENEFICIAL CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
-------------- ---------------- ---------- -------- ------
<S> <C> <C> <C> <C>
TCI Group Fred A. Vierra
Common Stock
Series A 581,474(15) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 211,889(15) *
Series B -- --
Preferred Stock
Class B 200 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 446,000(16) * *
TINTA Series B Stock -- --
TCI Group Brendan R. Clouston
Common Stock
Series A 1,986,498(17) * *
Series B 230 *
Liberty Media Group
Common Stock
Series A 332,463(17) *
Series B 57 *
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Common Stock Peter R. Barton
Series A 352,566(18) * *
Series B 42 *
Liberty Media Group
Common Stock
Series A 1,615,221(18)(19) *
Series B 10 *
Preferred Stock
Class B 1,374 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,000 * *
TINTA Series B Stock -- --
TCI Group Larry E. Romrell
Common Stock
Series A 773,529(20) * *
Series B 588 *
Liberty Media Group
Common Stock
Series A 293,884(20) *
Series B 147 *
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
</TABLE>
15
<PAGE> 25
<TABLE>
<CAPTION>
AMOUNT
AND PERCENT
NATURE OF OF VOTING
NAME OF BENEFICIAL CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
-------------- ---------------- ---------- -------- ------
<S> <C> <C> <C> <C>
TCI Group All directors and executive
Common Stock officers as a group
Series A (20 persons) 42,264,117(3)(4)(5)(6)(7)(10)(21) 6.7% 43.9%
Series B 63,435,631(3)(4)(5) 74.9%
Liberty Media Group
Common Stock
Series A 24,479,261(3)(4)(5)(6)(7)(10)(21) 10.1%
Series B 15,864,531(3)(4)(5) 74.9%
Preferred Stock
Class B 459,277(3)(4)(6) 28.4%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,252,200(22) 1.2% *
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 106,740,873 shares of TINTA Series A Stock and 11,700,000 shares
of TINTA Series B Stock outstanding on March 1, 1997.
(3) See notes (2) and (3) to the table in " -- Security Ownership of Certain
Beneficial Owners".
(4) See notes (4) through (6) to the table in " -- Security Ownership of
Certain Beneficial Owners".
(5) See notes (7) and (8) to the table in " -- Security Ownership of Certain
Beneficial Owners".
(6) Includes 1,524 shares of Series A TCI Group Common Stock, 571 shares of
Series A Liberty Media Group Common Stock and 14 shares of Class B
Preferred Stock held by Mr. Gallivan's wife. Also, assumes the exercise in
full of options granted pursuant to TCI's Director Stock Option Plan, to
acquire 50,000 shares of Series A TCI Group Common Stock and 18,750 shares
of Series A Liberty Media Group Common Stock. Options to acquire 20,000
shares of Series A TCI Group Common Stock and 7,500 shares of Series A
Liberty Media Group Common Stock are currently exercisable.
(7) The number of shares in the table does not include any shares held by
Kearns-Tribune, of which Mr. Gallivan is an officer and a stockholder.
(8) 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 562,500 shares of Series A Liberty Media Group Common
Stock. Options to acquire 1,100,000 shares and 412,500 shares of Series A
TCI Group Common Stock and Series A Liberty Media Group Common Stock,
respectively, are currently exercisable and the remainder vest and become
exercisable on November 12, 1997. The options expire on November 12, 1998.
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 187,500 shares of Series A Liberty Media Group
Common Stock. Options to acquire 100,000 shares of Series A TCI Group
Common Stock and 37,500 shares of Series A Liberty Media Group Common Stock
are currently exercisable. Also assumes the exercise in full of stock
options granted in November 1994, pursuant to TCI's Director Stock Option
Plan, to acquire 50,000 shares of Series A TCI Group Common Stock and
18,750 shares of Series A Liberty Media Group Common Stock. Options to
acquire 20,000 shares of Series A TCI Group Common Stock and 7,500 shares
of Series A Liberty Media Group Common Stock are currently exercisable.
(9) Assumes the exercise in full of stock options granted in November 1994,
pursuant to the Director Stock Option Plan, to acquire 50,000 shares of
Series A TCI Group Common Stock and 18,750 shares of Series A Liberty Media
Group Common Stock. Options to acquire 20,000 shares of Series A TCI Group
Common Stock and 7,500 shares of Series A Liberty Media Group Common Stock
are currently
16
<PAGE> 26
exercisable. Additionally, assumes the exercise in full of stock options
granted in tandem with stock appreciation rights 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 currently exercisable.
(10) Mr. Robert Naify received notes, which are currently convertible into
22,446,926 shares of Series A TCI Group Common Stock and 8,417,597 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. 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 128,102 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 in November 1994, pursuant to the Director Stock Option
Plan, to acquire 50,000 shares of Series A TCI Group Common Stock and
18,750 shares of Series A Liberty Media Group Common Stock. Options to
acquire 20,000 shares of Series A TCI Group Common Stock and 7,500 shares
of Series A Liberty Media Group Common Stock are currently exercisable.
(11) Assumes the exercise in full of options granted in tandem with stock
appreciation rights to acquire 100,000 shares of Series A TCI Group Common
Stock and 37,500 shares of Series A Liberty Media Group Common Stock. All
such options are currently exercisable. Also, assumes the exercise in full
of options granted in December 1996, pursuant to the Director Stock Option
Plan, to acquire 50,000 shares of Series A TCI Group Common Stock and
18,750 shares of Series A Liberty Media Group Common Stock. None of these
options are exercisable until December 13, 1997.
(12) Assumes the exercise in full of options granted in December 1996, pursuant
to the Director Stock Option Plan, to acquire 50,000 shares of Series A TCI
Group Common Stock and 18,750 shares of Series A Liberty Media Group Common
Stock. None of these options are exercisable until December 13, 1997.
(13) Assumes the exercise in full of options granted in April 1996, pursuant to
an option plan of International for its directors who are not employees, to
acquire 50,000 shares of TINTA Series A Stock. Options to acquire 10,000
shares of TINTA Series A Stock are currently exercisable.
(14) Assumes the exercise in full of options granted in tandem with stock
appreciation rights in February of 1997 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. None of the options are exercisable until
February of 1998. Assumes the exercise in full of options granted in tandem
with stock appreciation rights by TCI in February of 1997 to acquire 50,000
shares of TINTA Series A Stock owned by TCI. None of the options are
exercisable until February of 1998.
(15) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November 1992 to acquire 100,000 shares of Series A
TCI Group Common Stock and 37,500 shares of Series A Liberty Media Group
Common Stock. Options to acquire 80,000 shares of Series A TCI Group Common
Stock and 30,000 shares of Series A Liberty Media Group Common Stock are
currently exercisable. 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 37,500 shares
of Series A Liberty Media Group Common Stock. Options to acquire 75,000
shares of Series A TCI Group Common Stock and 28,125 shares of Series A
Liberty Media Group Common Stock are currently exercisable. 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 75,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 80,000 shares of Series A TCI Group Common
Stock and 30,000 shares of Series A Liberty Media Group Common Stock are
currently exercisable.
(16) 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 currently exercisable. Additionally assumes the vesting in full of
15,000 restricted shares of TINTA Series A Stock. None of the stock is
currently vested.
17
<PAGE> 27
(17) 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 112,500 shares of Series A Liberty Media Group
Common Stock. Options to acquire 200,000 shares of Series A TCI Group
Common Stock and 75,000 shares of Series A Liberty Media Group Common Stock
are currently exercisable. Additionally, assumes the exercise in full of
stock options granted in tandem with stock appreciation rights in November
of 1993 to acquire 375,000 shares of Series A TCI Group Common Stock and
140,625 shares of Series A Liberty Media Group Common Stock. Options to
acquire 250,000 shares of Series A TCI Group Common Stock and 93,750 shares
of Series A Liberty Media Group Common Stock are currently exercisable.
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 75,000 shares of Series A Liberty Media
Group Common Stock. Options to acquire 80,000 shares of Series A TCI Group
Common Stock and 30,000 shares of Series A Liberty Media Group Common Stock
are currently exercisable. 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 currently
exercisable. Additionally, assumes the vesting in full of 100,000
restricted shares of Series A TCI Group Stock. None of the stock is
currently vested.
(18) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1994 to purchase 200,000 shares of
Series A TCI Group Common Stock and 75,000 shares of Series A Liberty Media
Group Common Stock. Pursuant to an agreement between the Company and Mr.
Barton entered into in connection with his resignation as President of
Liberty Media Corporation, a wholly owned subsidiary of the Company
("Liberty"), the options granted to Mr. Barton and described in this note
18 and in note 19 have vested and are currently exercisable in full.
(19) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 1,500,000 shares of
Series A Liberty Media Group Common Stock. Such options have vested and are
currently exercisable in full. See note 18 above.
(20) 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 37,500 shares of Series A Liberty Media Group
Common Stock. Options to acquire 80,000 shares of Series A TCI Group Common
Stock and 30,000 shares of Series A Liberty Media Group Common Stock are
currently exercisable. Also assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in October of 1993 to
acquire 100,000 shares of Series A TCI Group Common Stock and 37,500 shares
of Series A Liberty Media Group Common Stock. Options to purchase 75,000
shares of Series A TCI Group Common Stock and 28,125 shares of Series A
Liberty Media Group Common Stock are currently exercisable. 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 75,000 shares of Series A Liberty Media Group
Common Stock. Options to purchase 80,000 shares of Series A TCI Group
Common Stock and 30,000 shares of Series A Liberty Media Group Common Stock
are currently exercisable. Further assumes the exercise in full of options
granted in tandem with stock appreciation rights in December of 1995 to
acquire 300,000 shares of Series A TCI Group Common Stock and 112,500
shares of Series A Liberty Media Group Common Stock. Options to purchase
60,000 shares of Series A TCI Group Common Stock and 22,500 shares of
Series A Liberty Media Group Common Stock are currently exercisable.
Additionally assumes the vesting in full of 40,000 shares of Series A TCI
Group Stock and 15,000 restricted shares of Series A Liberty Media Group
Stock. None of the stock is currently vested.
(21) Certain executive officers and directors of TCI (10 persons, including
Messrs. Malone, Vierra, Romrell, Clouston and Fisher (as co-personal
representative of the Estate of Bob Magness)) 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 1,134,375 shares of Series A Liberty Media Group Common
Stock at purchase prices of $10.75 per share and $11.16 per share,
respectively. Options to acquire 2,380,000 shares of Series A TCI Group
Common Stock and 892,500 shares of Series A Liberty Media Group Common
Stock are currently exercisable.
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Additionally, certain executive officers (8 persons including Messrs.
Vierra, Romrell 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 412,500 shares of Series A Liberty Media Group Common Stock at
purchase prices of $10.75 per share and $11.16 per share, respectively.
Options to acquire 793,750 shares of Series A TCI Group Common Stock and
297,656 shares of Series A Liberty Media Group Common Stock are currently
exercisable.
Also, certain executive officers and directors (10 persons including
Messrs. Barton, Romrell, 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 543,750 shares of Series A Liberty Media
Group Common Stock at purchase prices of $14.19 per share and $14.67 per
share, respectively. Options to acquire 580,000 shares of Series A TCI
Group Common Stock and 217,500 shares of Series A Liberty Media Group
Common Stock are currently exercisable.
Additionally, certain executive officers and directors (11 persons,
including Messrs. Malone, Kern, Clouston, Coelho, Romrell and Fisher (as
co-personal representative of the Estate of Bob Magness)) 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 $14.62 per share. Options to purchase 930,000
shares of Series A TCI Group Common Stock are currently exercisable.
Additionally, certain executive officers and directors (6 persons,
including Messrs. Fisher (as co-personal representative of the Estate of
Bob Magness), Malone, Kern, Barton and Romrell) hold stock options which
were granted in tandem with stock appreciation rights in December of 1995
to acquire an aggregate of 2,662,500 shares of Series A Liberty Media Group
Common Stock at a purchase price of $16.00 per share. Options to acquire
532,500 shares of Series A Liberty Media Group Common Stock are currently
exercisable.
Also, certain executive officers (7 persons, including Messrs. Clouston and
Romrell) hold an aggregate of 240,000 restricted shares of Series A TCI
Group Common Stock. None of the shares are currently vested. Certain
executive officers (2 persons, including Mr. Romrell) hold an aggregate of
30,000 restricted shares of Series A Liberty Media Group Common Stock. None
of the shares are currently vested.
Mr. Kern holds options to acquire 1,500,000 shares of Series A TCI Group
Common Stock and 562,500 shares of Series A Liberty Media Group Common
Stock as described in note 8 above. Mr. Sparkman holds options to acquire
100,000 shares of Series A TCI Group Common Stock and 37,500 shares of
Series A Liberty Media Group Common Stock as described in note 11 above.
Mr. Hindery holds options 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 as described in note 14 above.
Pursuant to the Director Stock Option Plan, 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 93,750 shares
of Series A Liberty Media Group Common Stock at purchase prices of $14.19
per share and $14.67 per share, respectively. Options to purchase an
aggregate 100,000 shares of Series A TCI Group Common Stock and 37,500
shares of Series A Liberty Media Group Common Stock are currently
exercisable. Mr. Fisher holds an option to purchase 50,000 shares of Series
A TCI Group Common Stock and 18,750 shares of Series A Liberty Media Group
Common Stock at purchase prices of $16.99 and $16.83 per share,
respectively. Options to purchase 10,000 shares of Series A TCI Group
Common Stock and 3,750 shares of Series A Liberty Media Group Common Stock
are currently exercisable. Mr. Gould and Mr. Sparkman hold options to
purchase an aggregate of 100,000 shares of Series A TCI Group Common Stock
and 37,500 shares of Series A Liberty Media Group Common Stock at purchase
prices of $12.25 and $17.50 per share, respectively. None of these options
are exercisable until December 13, 1997.
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.
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(22) 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 currently exercisable.
Additionally, Mr. Vierra holds 15,000 restricted shares of TINTA Series A
Stock. None of the shares are currently vested. Additionally, one executive
officer holds options granted in tandem with stock appreciation rights in
December of 1995 by TCI to acquire 50,000 shares of its TINTA Series A
Stock. Options to acquire 10,000 shares of TINTA Series A Stock are
currently exercisable. Messrs. Malone, Kern and Gould hold options to
purchase an aggregate of 150,000 shares of TINTA Series A Stock. Options to
acquire an aggregate of 30,000 shares of TINTA Series A Stock are currently
exercisable. Mr. Hindery holds an option granted by TCI to acquire 50,000
shares of TINTA Series A Stock as described in note 14 above.
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; 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; 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; and Mr. Clouston, an executive officer of the Company,
pursuant to a restricted stock award, owns 62 shares of WestMarc Preferred
Stock. During 1996, Mr. Clouston was granted options to acquire 1% of the
Company's common equity in TCI Telephony Services, Inc. ("TTS-Delaware"), a
wholly owned subsidiary of the Company through which the Company holds its
telephony investments, 1% of the Company's common equity in TCI Wireline, Inc.
("TCI Wireline"), a wholly owned subsidiary of the Company through which the
Company operates its developmental stage cable telephony business, and 1% of the
Company's common equity in TCI Internet Services, Inc. ("TCI Internet"), through
which the Company owns certain of its Internet services investments and
businesses. Mr. Romrell was also granted an option to acquire 1% of the
Company's common equity in TCI Internet. The Company is in the process of
transferring the Internet services distribution business currently conducted
through subsidiaries of TCI Internet to TCI.NET, Inc. ("TCI.NET"), another
subsidiary of the Company. In anticipation of such transfer, the Company has
replaced the options to acquire stock of TCI Internet held by Messrs. Clouston
and Romrell and another executive with an option to acquire 1% of the Company's
common equity in TCI.NET and a stock appreciation right with respect to 1% of
the common equity of TCI Internet. Mr. Coelho owns 1,500 shares of ETC w/tci,
Inc. ("ETC"), a subsidiary of the Company through which it holds certain of the
Company's education-related investments and businesses, representing 15% of such
subsidiary's common equity, and under certain circumstances will be entitled to
increase his percentage ownership to up to 20%.
CHANGE OF CONTROL
The Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
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PROPOSALS OF THE BOARD
The following proposals will be presented to the Annual Meeting by the
Board of Directors.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
GENERAL
The persons named in the accompanying proxy will vote for the election of
three (3) directors, with the term of office of each to continue until the
annual meeting of stockholders in the year 2000 or until his successor shall
have been duly elected and qualified, unless authority to vote is withheld.
Donne F. Fisher, Kim Magness and J.C. Sparkman are the three (3) nominees for
election as directors of the Company, and the Company is informed that these
nominees are willing to serve as directors. However, if any such nominee should
decline or shall become unable to serve as a director for any reason, votes will
be cast for a substitute nominee, if any, designated by the Board of Directors,
or, if none is so designated prior to the election, votes will be cast according
to the judgment in such matters of the person or persons voting the proxy.
Messrs. Fisher, Magness and Sparkman are each incumbent directors.
The following lists the three nominees for election as directors of the
Company and the seven (7) directors of the Company whose term of office will
continue after the Annual Meeting, including the birth date of each person, the
positions with the Company or principal occupations of each person, certain
other directorships held and the year each person became a director of the
Company. The numbers 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, Class B Preferred Stock, Series C Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock, owned beneficially by
each such person as of March 1, 1997 are set forth in "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
NOMINEES FOR ELECTION AS DIRECTORS
DONNE F. FISHER: Born May 24, 1938; director of the Company since June of
1994; was Executive Vice President of TCI from January of 1994 through January
1, 1996; has been providing consulting services to TCI since resigning his
position as Executive Vice President on January 1, 1996; Executive Vice
President of TCI Communications, Inc., the predecessor company to TCI and now a
majority owned subsidiary of TCI ("TCIC") from December of 1991 to October of
1994; was previously Senior Vice President of TCIC since 1982 and Treasurer
since 1970; TCIC director since 1980; also a director of TCI Pacific
Communications, Inc. ("TPAC"), General Communication, Inc., TCI Music, Inc.
("TCI Music") and United Video Satellite Group, Inc. ("United Video" or "UVSG").
KIM MAGNESS: Born May 17, 1952; director of the Company since June of
1994; TCIC director from 1985 to August of 1994 and since January of 1996.
Manages numerous personal and business investments, and is Chairman and
President of a company developing liners for irrigation canals.
J.C. SPARKMAN: Born September 12, 1932; director of the Company since
December of 1996; was Executive Vice President of TCI from January of 1994
through March of 1995; has been providing consulting services to TCI since his
retirement in March of 1995; was previously Executive Vice President of TCIC
from 1987 to October of 1994; also a director of Shaw Communications, Inc., TCI
Music and United Video.
DIRECTORS WHOSE TERM EXPIRES IN 1998
JOHN W. GALLIVAN: Born June 28, 1915; director of the Company since June
of 1994; Chairman of the Board of Kearns-Tribune, a newspaper publishing
concern; also a director of Silver King Mining Company; TCIC director from 1980
to August of 1994 and since January of 1996.
PAUL A. GOULD: Born September 27, 1945; director of the Company since
December of 1996; Managing Director and Executive Vice President of Allen &
Company Incorporated for more than the last five years;
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also a director of National Patent Development Corporation, Choice
International, United Video and International.
JEROME H. KERN: Born June 1, 1937; director of the Company since June of
1994; TCIC director from December of 1993 to August of 1994; director of
International since May of 1995; also is Special Counsel with the law firm of
Baker & Botts, L.L.P., since July 1996; was a senior partner with Baker & Botts,
L.L.P. since September of 1992; prior to joining Baker & Botts, L.L.P., was
senior partner with the Law Office of Jerome H. Kern from January 1, 1992 to
September 1, 1992.
DIRECTORS WHOSE TERM EXPIRES IN 1999
JOHN C. MALONE: Born March 7, 1941; director of the Company since June of
1994; Chairman of the Board of TCI from November 1996; Chief Executive Officer
of TCI from January of 1994; President of TCI from January of 1994 through March
of 1997; Chief Executive Officer of TCIC from March of 1992 to October of 1994
and President of TCIC from 1973 to October of 1994; Chairman of the Board and
director of International since May of 1995; director of TPAC since July of
1996; is President and a director of many of the Company's subsidiaries;
director of BET Holdings, Inc., The Bank of New York and TCI Satellite
Entertainment, Inc. ("Satellite"); TCIC director since 1973.
TONY COELHO: Born June 15, 1942; director of the Company since June of
1994; TCIC director from March of 1994 to August of 1994; is Chairman of the
Board and Chief Executive Officer of ETC w/tci, since October 1995; Chairman and
Chief Executive Officer of Coelho Associates, L.L.C. since July of 1995;
President and Chief Executive Officer of Wertheim Schroder Investment Services
from 1990 to June of 1995 and Managing Director of Wertheim Schroder & Co.,
Incorporated from 1989 to June of 1995; also a director of AutoLend Group, Inc.,
Cyberonics, Inc., ICF Kaiser International, Inc., International Thoroughbred
Breeders, Inc., Service Corporation International and TEI, Inc.
LEO J. HINDERY, JR.: Born October 31, 1947; director of the Company since
May of 1997; President and Chief Operating Officer of TCI from March of 1997;
President, Chief Executive Officer and a director of TCIC since March of 1997;
was founder, Managing General Partner and Chief Executive Officer of InterMedia
Partners and its affiliated entities since 1988; also a director and Chairman of
the Board of TCI Music.
ROBERT A. NAIFY: Born February 17, 1922; director of the Company since
June of 1994; TCIC director from 1987 to August of 1994; also Co-Chairman and a
director of The Todd-AO Corporation.
PROPOSAL NO. 2 -- TCI VENTURES 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 TCI Ventures Group Stock Proposal, including adoption of the proposed
amendment to the Company Charter set forth in Annex II-A hereto. The amendment
would alter the terms of the series of the Company's Common Stock that had
previously been designated as 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"), to (i) redesignate the Series A Telephony Group Common Stock as
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock ("Series A
TCI Ventures Group Common Stock"), (ii) redesignate the Series B Telephony Group
Common Stock as Tele-Communications, Inc. Series B TCI Ventures Group Common
Stock ("Series B TCI Ventures Group Common Stock"), (iii) change the name of the
Telephony Group to the TCI Ventures Group and redefine the assets and
liabilities attributed to such Group and (iv) provide for the reservation of
shares of Series A TCI Ventures Group Common Stock for issuance upon conversion,
exercise or exchange of certain convertible notes issued by a subsidiary of the
Company and certain options. The amendment would also make corresponding changes
to the terms of the TCI Group Common Stock and Liberty Media Group Common
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Stock to reflect the redesignation of the Telephony Group Common Stock as TCI
Ventures Group Common Stock. Capitalized terms used in the following description
of the TCI Ventures 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.
The Telephony Group Common Stock was authorized by the stockholders at a
special meeting held on March 12, 1997. No shares of Telephony Group Common
Stock have been issued. The Telephony Group Common Stock, if issued, would have
been intended to reflect the separate performance of the Telephony Group, which
initially was to consist of TCI's principal investments in the domestic wireless
and wireline telephony businesses (the "Telephony Business"). A total of 750
million shares of Series A Telephony Group Common Stock and 75 million shares of
Series B Telephony Group Common Stock were authorized.
If the TCI Ventures 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-A hereto (the "Certificate of Amendment"). It is
currently anticipated that such filing will be made as promptly as practicable
after the Annual Meeting. The Company Charter as proposed to be amended to
reflect the TCI Ventures Group Stock Proposal is herein referred to as the
"Amended Charter." The Board of Directors may abandon the TCI Ventures Group
Stock Proposal in whole, but not in part, without further action by the
stockholders, at any time prior to such filing. If the TCI Ventures Group Stock
Proposal is not approved, the Certificate of Amendment will not be filed and no
shares of TCI Ventures Group Common Stock will be authorized or issued.
Prior to the Annual Meeting, the Company will commence (i) an offer to
exchange one share of Series A TCI Ventures Group Common Stock for each share of
Series A TCI Group Common Stock properly tendered (the "Series A TCI Group
Exchange Offer"), up to an aggregate of 188,661,300 shares of Series A TCI Group
Common Stock (the "Series A Maximum"), and (ii) an offer to exchange one share
of Series B TCI Ventures Group Common Stock for each share of Series B TCI Group
Common Stock properly tendered (the "Series B TCI Group Exchange Offer" and,
together with the Series A TCI Group Exchange Offer, the "Exchange Offers"), up
to an aggregate of 16,266,400 shares of Series B TCI Group Common Stock (the
"Series B Maximum" and, together with the Series A Maximum, the "Maximum"). The
Exchange Offers will be made on the terms and subject to the conditions to be
set forth in an Offering Circular and related Letter of Transmittal. The
Exchange Offers will be subject, among other conditions, to the approval of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The number of shares of Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock that would be issued upon closing of the
Exchange Offers, if shares of TCI Group Common Stock at least equal to the
Maximum are properly tendered, would be intended initially to represent 100% of
the common stockholders' equity value of the Company attributable to the TCI
Ventures Group. The common stockholders' equity value of the Company
attributable to the TCI Ventures Group that, at any relevant time, is attributed
to the TCI Group and, accordingly, not represented by outstanding TCI Ventures
Group Common Stock is referred to as the "Inter-Group Interest" of the TCI Group
in the TCI Ventures Group. If a number of shares of TCI Ventures Group Common
Stock equal to the Maximum is issued pursuant to the Exchange Offers, the
Inter-Group Interest of the TCI Group in the TCI Ventures Group would be reduced
to zero. If fewer shares than the Maximum are properly tendered (and,
accordingly, the TCI Group would continue to have an Inter-Group Interest in the
TCI Ventures Group immediately following consummation of the Exchange Offers),
the Company will extinguish such Inter-Group Interest in consideration of the
attribution to the TCI Group of a preferred equity interest in the TCI Ventures
Group (the "TCI Ventures Group Preferred Interest"). The TCI Ventures Group
Preferred Interest will have a stated liquidation value equal to the market
value of the shares of TCI Ventures Group Common Stock not issued in the
Exchange Offers (which shall be deemed to be the same, on a per share basis, as
the Market Value of the Series A TCI Group Common Stock as of the last trading
day preceding the closing of the Exchange Offers), a dividend rate of 5% per
annum and a mandatory redemption obligation on the 15th anniversary of issuance.
Accrued dividends on the TCI Ventures Group Preferred Interest would accumulate
and compound annually (but not be payable currently) until the fifth anniversary
of the closing of the Exchange Offers. On and after
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such fifth anniversary, accrued dividends would be payable annually on each
anniversary of the closing of the Exchange Offers and would accumulate and
compound to the extent not paid on any such anniversary. When dividends become
payable currently they could be paid (i) through the transfer of cash or other
assets from the TCI Ventures Group to the TCI Group, (ii) through the reduction
of amounts owed by the TCI Group to the TCI Ventures Group, (iii) through the
deemed transfer of taxable losses of the TCI Ventures Group to the TCI Group
pursuant to the new tax sharing agreement among the TCI Ventures Group, the TCI
Group and the Liberty Media Group that becomes effective as of October 1, 1997
(in an amount equal to the highest corporate tax rate in effect at the time of
the dividend multiplied by the amount of taxable losses deemed transferred), but
only if such taxable losses have not been utilized in any calculation under such
new tax sharing agreement or (iv) through the cancellation of amounts owed by
the TCI Group under such new tax sharing agreement with respect to utilized tax
benefits of the TCI Ventures Group. See "Management and Allocation Policies."
The TCI Ventures Group Preferred Interest will also be redeemable at the
discretion of the Board of Directors in whole or in part at any time.
Immediately after giving effect to the Exchange Offers and the attribution of
the TCI Ventures Group Preferred Interest, the TCI Group will have no
Inter-Group Interest in the TCI Ventures Group. In addition to the shares of TCI
Ventures Group Common Stock to be issued in the Exchange Offers, shares of
Series A TCI Ventures Group Common Stock are being reserved for issuance upon
conversion, exercise or exchange subsequent to the closing of the Exchange
Offers of certain outstanding convertible notes issued by a subsidiary of the
Company in 1986 and held by a director of the Company, members of his family and
trusts for their benefit (the "TCI-UA Notes"), and certain options to purchase
shares of Series A TCI Group Common Stock that are outstanding under the
Company's existing stock incentive plans for employees, consultants and advisors
immediately prior to the consummation of the Exchange Offers (the "Adjustable
Options"). In lieu of a number of shares of Series A TCI Group Common Stock
equal to 30% of the number of shares of Series A TCI Group Common Stock
currently issuable upon exchange of the TCI-UA Notes, an equal number of shares
of TCI Ventures Group Common Stock would be issued upon the exchange thereof.
Similarly, the Adjustable Options will be adjusted upon consummation of the
Exchange Offers by issuing to each holder of such an option, in substitution
therefor and cancellation thereof, two new options -- one for the purchase of a
number of shares of Series A TCI Ventures Group Common Stock equal to 30%
(rounded up to the nearest whole number) of the number of shares of Series A TCI
Group Common Stock that would have been issuable upon exercise of such holder's
Adjustable Option immediately prior to the consummation of the Exchange Offers
(the "Initial Ventures Options"), and the other for the purchase of a number of
shares of Series A TCI Group Common Stock equal to 70% (rounded down to the
nearest whole number) of the number of shares of Series A TCI Group Common Stock
that would have been issuable upon exercise of such Adjustable Option
immediately prior to the consummation of the Exchange Offers. The terms of each
of such options at the time of issuance will be the same as the terms of the
Adjustable Option that they replace, including the exercise price per share and
vesting schedule. The TCI-UA Notes and the Initial Ventures Options are referred
to in the Certificate of Amendment as the "Pre-Exchange Offer Securities."
The Company may from time to time, by action of its Board of Directors, (i)
offer shares of TCI Ventures Group Common Stock for cash in one or more public
offerings, (ii) issue shares of TCI Ventures Group Common Stock as consideration
for acquisitions or investments, (iii) issue shares of TCI Ventures Group Common
Stock to employees of the Company pursuant to employee benefit plans or
otherwise as compensation, (iv) issue shares as a distribution to holders of TCI
Group Common Stock (to the extent of any then existing Inter-Group Interest of
the TCI Group in the TCI Ventures Group) or (v) issue shares of TCI Ventures
Group Common Stock for any other proper corporate purpose. So long as sufficient
authorized shares are available, the timing, sequence, size and terms of such
transactions would be determined by the Board of Directors, without further
approval of the stockholders, unless deemed advisable by the Board of Directors
or required by applicable law, regulation or Nasdaq National Market
requirements. For an illustration of certain effects of the issuance of shares
of TCI Ventures Group Common Stock, see Annex IV -- Illustration of Certain
Terms.
THE TCI VENTURES GROUP
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International,
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which is the Company's primary vehicle for the conduct of its international
cable, telephony and programming businesses (other than those international
programming businesses attributed to the Liberty Media Group), (ii) TCI's
principal interests in the Telephony Business, owned through its indirect wholly
owned subsidiary TTS-Delaware (together with its consolidated subsidiaries, "TCI
Telephony") consisting primarily of the Company's investment in a series of
partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband personal
communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.) Reference is made to Annex III
for a further description of the TCI Ventures Group and to Annex V for the
combined financial statements of the TCI Ventures Group.
Unlike the Telephony Group, the TCI Ventures Group would include WTCI,
rather than an option to acquire WTCI, and would not include an option to
acquire TCI's developmental stage domestic cable telephony business, nor would
it include any other business that uses TCI's domestic cable plant to distribute
services to customers (e.g., cable, telephony and Internet services). Such
domestic "distribution" businesses will continue to be attributed to the TCI
Group. By way of example, the business of distributing @Home's Internet service
to customers through TCI's cable systems would not be attributed to the TCI
Ventures Group, although the investment in @Home would be.
The TCI Ventures 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 TCI Ventures Group and such other businesses, assets and
liabilities as the Company or any of its subsidiaries may in the future acquire
for the TCI Ventures Group, as determined by the Board of Directors. It is
currently the intention of the Company that any businesses, assets and
liabilities so attributed to the TCI Ventures Group in the future would not
include assets and liabilities of the Company's domestic programming businesses
and investments or its domestic cable operations (including its businesses which
utilize its cable plant to distribute telephony and Internet services).
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The assets attributed to the TCI Ventures Group are currently included in
the Telephony Group and in the TCI Group, which also includes the Company's
domestic cable and telephony distribution and communications businesses (other
than those currently attributed to the Telephony Group) and any other businesses
and assets of the Company not attributed to either the Liberty Media Group or
the Telephony Group. Because no shares of Telephony Group Common Stock have been
issued, the TCI Group also currently includes, and the TCI Group Common Stock
also is currently intended to reflect, 100% of the common stockholders' equity
value of the Company attributable to the Telephony Group. The following table
presents selected financial data as of December 31, 1996 and for the year then
ended of the TCI Group (inclusive of the assets constituting the TCI Ventures
Group as if none of such assets had ever been attributed to the Telephony Group)
and of the TCI Ventures Group, and the percentage of such TCI Group amounts
represented by those of the TCI Ventures Group. The table should be read
together with the more detailed information and financial statements included in
Annexes III and V.
<TABLE>
<CAPTION>
TCI
VENTURES
GROUP AS A
TELE- TCI VENTURES PERCENTAGE OF
COMMUNICATIONS, INC. TCI GROUP GROUP TCI GROUP
-------------------- --------- ------------ -------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Revenue............................... $ 8,022 $ 6,790 $ 926 13.6%
Operating income(loss)................ $ 632 $ 546 $ (51) n/a
Share of losses of affiliates......... $ (473) $ (469) $ (368) 78.5%
Net earnings (loss)................... $ 278 $ (778) $ (258) 33.2%
DECEMBER 31, 1996:
Investment in equity affiliates....... $ 3,012 $ 2,457 $2,069 84.2%
Total assets.......................... $30,244 $27,154 $4,260 15.7%
Total liabilities..................... $22,840 $22,179 $1,337 6.0%
</TABLE>
Upon effectiveness of the TCI Ventures Group Stock Proposal, if approved,
the TCI Ventures Group will replace the Telephony Group and the assets and
liabilities attributed to the TCI Ventures Group will no longer be attributed to
the TCI Group; however, pending the issuance of shares of TCI Ventures Group
Common Stock in the Exchange Offers, 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 TCI Ventures Group, in addition to the separate
performance of the Company's domestic distribution and communications businesses
(other than the investments attributed to the TCI Ventures Group), and any other
businesses and assets of the Company not attributed to either the Liberty Media
Group or the TCI Ventures Group.
BACKGROUND AND REASONS FOR THE TCI VENTURES GROUP STOCK PROPOSAL
In late 1994, the Board of Directors of the Company determined to
restructure the Company's businesses into four separate business lines: Domestic
Cable and Communications; Programming; International Cable and Programming; and
Technology/Venture Capital (the "Business Line Restructuring"). The Board of
Directors believed that the division of the Company's business into four
distinct units would enable the Company to benefit from the focused and
entrepreneurial behavior which is more typical of a small company, while also
maintaining the benefits of scale which a large corporation such as the Company
is ordinarily able to achieve; would facilitate increased investor understanding
of the different lines of business; would enhance opportunities to finance the
operations of each division separately, where appropriate, through financing
tailored specifically to the capital needs of the division in question; and
could encourage strategic partnering with other companies in the same line of
business.
The Board of Directors also directed management to study various methods of
enhancing stockholder value. This directive resulted from the Board of
Directors' belief that the Company was undervalued by the capital markets, in
part because the market focused primarily upon the Company's dominant cable
television system business and did not give full value to the other diverse
assets held by the Company. The Board of
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<PAGE> 36
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 currently 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, International, which 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 also considered 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 Satellite, 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.
Management then proposed to the Board of Directors that the Company issue a
"tracking stock" or "targeted stock," the economic attributes of which would be
defined by reference to the performance of the Telephony Group, which would
initially be comprised of certain investments of the telephony SBU, including
the Company's interests in the PCS Ventures and in TCG. At a special meeting of
TCI's stockholders held on March 12, 1997, the creation of the Telephony Group
Common Stock was approved. The Board of Directors had proposed offering shares
of Telephony Group Common Stock for cash in an initial public offering, and the
Company filed a registration statement with the Securities and Exchange
Commission (the "SEC") with respect to the shares to be offered. The Board
subsequently determined, however, that market and other conditions were not
favorable to an offering of stock that the market would largely identify with
the wireless PCS business. The PCS business generally was in an early stage of
network construction and service launch and could not yet demonstrate customer
acceptance.
The Board of Directors decided to reevaluate its strategy with respect to
enhancing the market's recognition of the value of its diverse assets. Rather
than creating a tracking stock or selling a minority interest or spinning off
individual lines of business, the Board determined to refine the TCI Group so
that the TCI
27
<PAGE> 37
Group Common Stock would reflect primarily the Company's dominant cable
television system business and other distribution and communications businesses
(such as telephony and Internet services) that use the Company's domestic cable
plant (just as the Liberty Media Group Common Stock reflects primarily the
Company's domestic programming assets), and to create a new tracking stock that
would be intended to reflect the performance of TCI's international assets and
its domestic non-cable and non-programming assets, many of which businesses are
at an early stage of development.
On May 14, 1997, the Board of Directors determined that the TCI Ventures
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 TCI Ventures Group Stock Proposal.
The Board of Directors believes that adoption of the TCI Ventures Group Stock
Proposal is in the best interests of the Company and all of its stockholders for
the following reasons:
- The issuance and sale of TCI Ventures Group Common Stock would result in
greater market recognition of the value of the TCI Ventures Group,
thereby enhancing stockholder value over the long term.
- The TCI Group would be easier for the market to understand and value once
its businesses and assets were largely confined to the distribution and
communications businesses using the Company's domestic cable plant.
- It would provide the Company greater flexibility with regard to raising
capital for the TCI Ventures Group's businesses and with regard to making
acquisitions and investments for the TCI Ventures Group, including
strategic partnering transactions, independent of the TCI Group, by using
equity securities specifically related to the TCI Ventures Group.
- The issuance and sale of TCI Ventures Group Common Stock would also
provide investors with the opportunity to invest in separate securities
intended specifically to reflect the TCI Ventures Group and would enable
the Company to more effectively tailor employee benefit plans to provide
incentives to the employees in the TCI Ventures Group. Although a
substantial portion of the value of the assets of the TCI Ventures Group
is represented by the Company's investments in International, TCG, UVSG
and @Home and shares of the common stock of such companies are traded on
the Nasdaq National Market, the issuance and sale of shares of the TCI
Ventures Group Common Stock would offer investors the opportunity to
participate in the Company's substantial equity investment in such
companies (which primarily is represented by high vote stock that is not
publicly traded) and its investments in the PCS Ventures and other
companies that do not have publicly traded equity securities.
- It would permit the Company to obtain the foregoing benefits while
preserving the advantages of continued ownership of the businesses of the
TCI Ventures 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, the
advantages of tax consolidation and economies of scale, and preserving
certain restructuring options for the Company in the future. Unlike the
case with separate, publicly held corporations, however, holders of TCI
Ventures Group Common Stock will continue to be subject to all the risks
associated with an investment in the Company and all of its businesses,
assets and liabilities. See "Factors to be Considered -- Stockholders of
One Company; Financial Effects on One Business Could Affect Other
Businesses."
In connection with its approval of the TCI Ventures 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 TCI Ventures Group Common Stock will reflect the separate
performance of the TCI Ventures 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 TCI
Ventures Group Stock Proposal will, to an extent, make the capital structure of
the Company more complex than if the Company's Common Stock consisted solely of
TCI Group Common Stock and Liberty Media Group Common Stock, and may give rise
to occasions when the interests of the holders of TCI Group
28
<PAGE> 38
Common Stock, the holders of Liberty Media Group Common Stock and the holders of
TCI Ventures 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 TCI Ventures 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 assets attributed
to the TCI Ventures Group. 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
TCI Ventures Group (each, a "Group" and, collectively, the "Groups") and on the
holders of the TCI Group Common Stock, the Liberty Media Group Common Stock and
TCI Ventures 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 TCI VENTURES 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 TCI VENTURES GROUP STOCK
PROPOSAL.
SUMMARY DESCRIPTION OF TCI VENTURES GROUP STOCK PROPOSAL
The following summarizes certain selected terms of the TCI Ventures 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 TCI Ventures Group Common Stock and Effects on Existing
Common Stock" and the text of the Certificate of Amendment set forth in Annex
II-A.
TCI VENTURES GROUP COMMON STOCK
Businesses................. The TCI Ventures Group consists primarily of the
following assets and their related liabilities: (i)
TCI's 85% equity interest (representing a 92%
voting interest) in International, (ii) TCI's
principal interests in the Telephony Business,
consisting primarily of the Company's investments
in the PCS Ventures, TCG and WTCI, (iii) TCI's 40%
equity interest (representing an 85% voting
interest) in UVSG, (iv) TCI's 39% equity interest
(representing a 72% voting interest) in @Home, and
(v) other assets, including TCI's interests in
NDTC, ETC and SUMMMITrak. See Annex
III -- Description of TCI Ventures 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 TCI Ventures Group Common Stock is intended to
reflect the separate performance of the TCI
Ventures Group. However, holders of TCI Ventures
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 TCI Ventures Group Common Stock
will reflect the separate performance of the TCI
Ventures Group.
29
<PAGE> 39
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 TCI Ventures Group Common Stock, if
authorized.
Dividends on the TCI Ventures Group Common Stock
would be payable out of the lesser of assets of the
Company legally available therefor and the TCI
Ventures Group Available Dividend Amount. If
dividends on the TCI Ventures Group Common Stock
are paid, equivalent per share dividends will be
concurrently paid on both the Series A TCI Ventures
Group Common Stock and the Series B TCI Ventures
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 TCI Ventures Group Common
Stock), not greater than the corresponding
differences between the Series A TCI Ventures Group
Common Stock and the Series B TCI Ventures 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 TCI
Ventures 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 TCI
Ventures 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 TCI
Ventures 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 TCI Ventures 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 TCI Ventures Group
Assets................... If the Company disposes of all or substantially all
of the assets of the TCI Ventures 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 TCI
Ventures Group Common Stock an amount in cash
and/or securities or other property equal to their
proportionate interest in the TCI Ventures Group
Net Proceeds of such disposition, either by special
dividend or by redemption of all or part of the
outstanding shares of TCI Ventures Group Common
Stock, or (ii) convert each outstanding share of
Series A TCI Ventures Group Common Stock and Series
B TCI
30
<PAGE> 40
Ventures 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 TCI Ventures Group Common
Stock to the Market Value of one share of Series A
TCI Group Common Stock. The Company will not be
required to take any of the foregoing actions if
the disposition of all or substantially all of the
assets of the TCI Ventures Group occurs in a
transaction in which the Company receives primarily
equity securities of an entity engaged or proposing
to engage primarily in a similar or complementary
business or occurs in connection with the
disposition of all of the assets of the Company.
The proportionate interest in the TCI Ventures
Group Net Proceeds of a disposition that would be
distributed to holders of TCI Ventures Group Common
Stock would be based on (a) in the case of a
special dividend or partial redemption following
the disposition of less than all the properties and
assets of the TCI Ventures Group, the TCI Ventures
Group Outstanding Interest Fraction (a measure of
the percentage interest in the TCI Ventures Group
represented by outstanding shares of TCI Ventures
Group Common Stock), or (b) in the case of a
complete redemption following the disposition of
all of the properties and assets of the TCI
Ventures Group, the Adjusted TCI Ventures Group
Outstanding Interest Fraction (a similar measure
that differs in that it takes into account the
dilutive effect of the Pre-Exchange Offer
Securities). Such a partial redemption could be
effected pro rata among the holders of such shares
or by such other method as may be determined by the
Board of Directors to be equitable.
Conversion at Option of
Holder..................... Shares of Series B TCI Ventures 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 TCI Ventures Group Common Stock. Shares of
Series A TCI Ventures Group Common Stock will not
be convertible into shares of Series B TCI Ventures
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 TCI Ventures 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 TCI
Ventures Group Common Stock to the average Market
Value over a 20-Trading Day period prior to the
date such appraisal process is initiated of one
share of Series A TCI Group Common Stock. In such a
case, shares of Series A TCI Ventures Group Common
Stock would be converted into Series A TCI Group
Common Stock and shares of Series B TCI Ventures
Group Common Stock would be converted into Series B
TCI Group Common Stock.
Redemption in Exchange for
Stock of Subsidiary...... Subject to certain restrictions, the Company could
at any time, in the sole discretion of the Board of
Directors, redeem (without premium) all outstanding
shares of TCI Ventures Group Common Stock in
exchange for a proportionate interest in the
outstanding shares of any one or more Qualifying
Subsidiaries that hold all of the assets and
liabilities attrib-
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<PAGE> 41
uted to the TCI Ventures Group. The percentage of
the stock of the Qualifying Subsidiary or
Qualifying Subsidiaries owned by the Company that
is distributable in the redemption would be based
on the Adjusted TCI Ventures Group Outstanding
Interest Fraction. In such a case, the Board 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 TCI
Ventures Group Common Stock and the Series B TCI
Ventures 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 TCI Ventures Group Common
Stock to be tax free to such holders.
A Qualifying Subsidiary may include an existing
subsidiary of the Company that may in the future
hold all of the assets and liabilities attributed
to the TCI Ventures Group or any future subsidiary
of the Company that meets the definition of
Qualifying Subsidiary and holds such assets and
liabilities, whether or not created exclusively for
such purpose. To the extent that any such
Qualifying Subsidiary held assets and/or
liabilities in addition to those attributed to the
TCI Ventures Group, it is expected that in
connection with any such redemption such additional
assets or liabilities would either be attributed to
the TCI Ventures Group or transferred by such
Qualifying Subsidiary to the Company or to another
subsidiary of the Company attributed to a Group
other than the TCI Ventures Group. In each case,
either any then existing Inter-Group Interest of
the TCI Group in the TCI Ventures 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." The Company currently holds
the assets that would be attributed to the TCI
Ventures Group through several direct and indirect
subsidiaries, a number of which own other
subsidiaries that are attributed to the TCI Group.
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 and
the Telephony Group Common Stock. Although the
Board of Directors determined that it was
appropriate for the Company to have the same
flexibility to redeem the TCI Ventures Group Common
Stock, the Company does not currently have any
plans or proposals to effect any such redemption if
the TCI Ventures 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 TCI Ventures Group Common
Stock in exchange for a proportionate interest in
shares of one or more Qualifying Subsidiaries may
be limited by the tax consequences to the Company
in recognizing certain deferred gains as a result
of such
32
<PAGE> 42
redemption and by certain agreements relating to
its interests in the PCS Ventures and to its equity
interest in TCG, which agreements generally require
that any entity which holds all or part of such
interests remain a subsidiary of the Company,
subject to certain exceptions.
The Company believes that under current law a
holder of TCI Ventures Group Common Stock generally
would not be entitled to money damages or other
remedies against the Company or the Board of
Directors based on a decision by the Board of
Directors to redeem the outstanding shares of TCI
Ventures 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 TCI Ventures Group Common Stock will
be entitled to one vote per share and the Series B
TCI Ventures 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 TCI Ventures 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 TCI Ventures Group
Common Stock and Series B TCI Ventures 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, dissolution or
winding up of the Company of the aggregate Market
Capitalization of the TCI Ventures Group Common
Stock to the aggregate Market Capitalization of the
TCI Group Common Stock, the Liberty Media Group
Common Stock and the TCI Ventures Group Common
Stock.
Inclusion in Nasdaq
National Market............ The Company has applied for inclusion of the Series
A TCI Ventures Group Common Stock and the Series B
TCI Ventures Group Common Stock in the National
Market tier of The Nasdaq Stock Market under the
symbols "TCIVA" and "TCIVB".
EFFECTS ON TCI GROUP COMMON STOCK AND LIBERTY MEDIA GROUP COMMON STOCK
Businesses................. Under the TCI Ventures 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 TCI Ventures Group, including
currently the Company's domestic distribution and
communications businesses (other than the
investments attributed to the TCI Ventures Group).
The TCI Group will also include any Inter-Group
Interest that may hereafter be created in the
Liberty Media Group or the TCI Ventures Group. The
businesses included in the Liberty Media Group will
not change under the TCI Ventures Group Stock
Proposal.
Dividends and Share
Distributions............ Because the businesses included in the TCI Ventures
Group are currently included in the TCI Group, the
TCI Ventures Group Stock
33
<PAGE> 43
Proposal will affect the determination of, and
could reduce the amount available for dividends
under, the TCI Group Available Dividend Amount.
Under the TCI Ventures Group Stock Proposal, share
distributions on the TCI Group Common Stock
consisting of TCI Ventures Group Common Stock are
permitted to the extent of the Number of Shares
Issuable with Respect to the TCI Ventures Group
Inter-Group Interest, if any, while share
distributions on the Liberty Media Group Common
Stock consisting of TCI Ventures 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, dissolution or
winding up of the Company 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 TCI Ventures Group Stock Proposal is
approved and shares of TCI Ventures 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 TCI Ventures 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, dissolution
or winding up of the Company 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 TCI Ventures Group
Common Stock. If the sum of the Market
Capitalization of the TCI Group Common Stock and
the Market Capitalization of the TCI Ventures 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
TCI Ventures 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.
NO INITIAL INTER-GROUP INTEREST
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent all of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares are issued in the Exchange
Offers, the TCI Group will not have any Inter-Group Interest in the TCI Ventures
Group. If fewer than all of the shares offered are issued, the remaining
Inter-Group Interest would be extinguished in consideration of the attribution
to the TCI Group of the TCI Ventures Group Preferred Interest.
An Inter-Group Interest in the TCI Ventures Group would be created only if
a subsequent transfer of cash or other property from the TCI Group to the TCI
Ventures Group is specifically designated by the Board
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<PAGE> 44
of Directors as being made to create an Inter-Group Interest in the TCI Ventures
Group (in contrast to transfers made for other consideration such as transfers
as loans or in purchase and sale transactions) or if outstanding shares of TCI
Ventures Group Common Stock are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TCI Group. In structuring
the terms of the TCI Ventures Group Stock Proposal, the Board of Directors
determined that the TCI Ventures 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. The Company Charter does not permit the Liberty Media
Group to create an interest in the TCI Group or the Telephony Group, and the
Amended Charter would not permit the Liberty Media Group to create an interest
in the TCI Ventures 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 TCI Ventures Group in
either the TCI Group or the Liberty Media Group could influence adversely the
ability of the TCI Ventures Group Common Stock to reflect the separate
performance of the TCI Ventures Group, and that an interest corresponding to the
Inter-Group Interest held by the Liberty Media Group in the TCI Ventures Group
could influence adversely the ability of the Liberty Media Group Common Stock to
reflect the separate performance of the Liberty Media Group.
The amount of any Inter-Group Interest of the TCI Group in the TCI Ventures
Group at any point in time would be expressed in terms of the "Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest," which is
intended to provide a measure of any Inter-Group Interest of the TCI Group in
the TCI Ventures Group on a basis comparable to an investment in shares of TCI
Ventures Group Common Stock. In general, if an Inter-Group Interest in the TCI
Ventures Group is created by a transfer of funds or other assets from the TCI
Group to the TCI Ventures Group, the Number of Shares Issuable with Respect to
the TCI Ventures Group Inter-Group Interest would be increased by an amount
determined by dividing the amount of funds or value of assets transferred by the
Market Value of a share of Series A TCI Ventures Group Common Stock as of the
date of such transfer. In the event a subsequent transfer of funds or other
assets from the TCI Group to the TCI Ventures Group is determined by the Board
of Directors to be made in respect of an increase in the Inter-Group Interest,
the Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest would be increased by an amount determined by dividing the amount of
the additional funds or value of the additional assets transferred by the Market
Value of a share of Series A TCI Ventures Group Common Stock as of the date of
such transfer. Any decrease in the Number of Shares Issuable with Respect to the
TCI Ventures Group Inter-Group Interest resulting from a transfer of funds or
other assets from the TCI Ventures Group to the TCI Group determined by the
Board of Directors to be made in respect of such a decrease would be similarly
calculated. To the extent outstanding shares of TCI Ventures Group Common Stock
are retired or otherwise cease to be outstanding following their purchase with
funds attributed to the TCI Group, the Number of Shares Issuable with Respect to
the TCI Ventures Group Inter-Group Interest would increase on a share-for-share
basis. Shares of TCI Ventures Group Common Stock purchased with funds attributed
to the TCI Group which remain outstanding (as a result of being held by a
subsidiary included in the TCI Group) would not create an Inter-Group Interest
or increase any then existing Inter-Group Interest in the TCI Ventures Group but
would represent an outstanding interest in the common stockholders' equity value
of the Company attributable to the TCI Ventures Group. Similarly, shares of TCI
Ventures Group Common Stock purchased with funds attributed to the Liberty Media
Group which remain outstanding would not create an interest in the TCI Ventures
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 TCI Ventures Group. The Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest, if any, would also (a)
be adjusted from time to time as appropriate to reflect (i) subdivisions (by
stock split or otherwise) and combinations (by reverse stock split or otherwise)
of the TCI Ventures Group Common Stock, (ii) dividends or distributions payable
in shares of TCI Ventures Group Common Stock to holders of TCI Ventures Group
Common Stock and (iii) reclassifications of TCI Ventures Group Common Stock and
(b) be decreased by the number of shares of TCI Ventures Group Common Stock (i)
issued upon conversion, exercise or exchange of Convertible Securities (other
than Pre-Exchange Offer Securities) that are not attributed to the TCI Ventures
Group or (ii) issued by the Company as a dividend or distribution or by
reclassification or exchange to holders of TCI Group Common Stock. The
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Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest, if any, would not be represented by outstanding shares of TCI Ventures
Group Common Stock and would have no voting rights.
Issuances or sales of shares of TCI Ventures Group Common Stock designated
by the Board of Directors as being made in reduction of any Inter-Group Interest
then existing would reduce the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest on a share-for-share basis and the net
proceeds of such sale would be reflected in the combined financial statements of
the TCI Group. At the discretion of the Board of Directors, shares of TCI
Ventures Group Common Stock issued in respect of any Inter-Group Interest in the
TCI Ventures Group may be issued in the form of shares of Series A TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock (subject to there
being a sufficient number of authorized and unissued shares of the applicable
series of TCI Ventures Group Common Stock). In addition to the net proceeds from
a sale of the number of shares of TCI Ventures Group Common Stock deemed to
constitute all or part of the Inter-Group Interest, if any, the TCI Group
combined financial statements would be credited, and the TCI Ventures Group
combined financial statements would 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 TCI Ventures Group Common Stock, which will result in
the adjustment to the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest described above) or distributed in respect of
outstanding TCI Ventures Group Common Stock, times (ii) a fraction, the
numerator of which is the TCI Ventures Group Inter-Group Interest Fraction and
the denominator of which is the TCI Ventures Group Outstanding Interest
Fraction. For illustrations of the effects of the issuance of shares of TCI
Ventures Group Common Stock, see Annex IV -- Illustration of Certain Terms.
The "TCI Ventures Group Outstanding Interest Fraction" represents the
percentage interest in the common stockholders' equity value of the Company
attributable to the TCI Ventures Group that is represented at any time by the
outstanding shares of TCI Ventures Group Common Stock, and the "TCI Ventures
Group Inter-Group Interest Fraction" represents any remaining percentage
interest in the common stockholders' equity value of the Company attributable to
the TCI Ventures Group that is attributed to the TCI Group by virtue of an
Inter-Group Interest. The sum of the TCI Ventures Group Outstanding Interest
Fraction and the TCI Ventures Group Inter-Group Interest Fraction would always
equal 100%. The "Adjusted TCI Ventures Group Outstanding Interest Fraction"
means a fraction the numerator of which is the number of outstanding shares of
TCI Ventures Group Common Stock and the denominator of which is the sum of (a)
such number of outstanding shares, (b) the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest, if any, and (c) the
number of shares of TCI Ventures Group Common Stock issuable upon conversion,
exercise or exchange of Pre-Exchange Offer Securities. See "Factors to be
Considered -- Potential Dilution from Issuances of TCI Ventures Group Common
Stock upon Conversion, Exercise or Exchange of Certain Outstanding Securities."
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 TCI Ventures Group Stock Proposal.
STOCKHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE BUSINESS COULD AFFECT
OTHER BUSINESSES
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the Groups for the purpose of preparing the combined
financial statements of the TCI Group, the Liberty Media Group and the TCI
Ventures Group, the change in the capital structure of the Company contemplated
by the TCI Ventures Group Stock Proposal will not affect legal title to such
assets or responsibility for such liabilities of the Company or any of its
subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group Common
Stock and TCI Ventures Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
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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 TCI
Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock.
The combined financial statements of the TCI Group, the Liberty Media Group and
the TCI Ventures Group should be read in conjunction with the consolidated
financial statements of the Company. The combined financial statements of each
Group will principally reflect the combined financial position, results of
operations and cash flows of the businesses and investments included therein.
However, each Group's financial information could also include allocated
portions of the individual assets and liabilities that are not separately
identified with the operations of a specific Group.
LIMITED SEPARATE STOCKHOLDER RIGHTS; EFFECTS ON VOTING POWER
Under the TCI Ventures Group Stock Proposal, holders of TCI Ventures Group
Common Stock would not have any legal rights specifically related to the assets
attributed to the TCI Ventures Group or have any right to vote on matters as a
separate class, other than (i) as set forth in the provisions relating to
dividend and liquidation rights and requirements for mandatory dividend,
redemption or conversion of TCI Ventures Group Common Stock upon the disposition
of all or substantially all of the properties and assets of the TCI Ventures
Group as described under "Description of TCI Ventures 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
TCI Ventures Group Common Stock would not be held.
Under the TCI Ventures Group Stock Proposal, holders of TCI Group Common
Stock, Liberty Media Group Common Stock, TCI Ventures 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 special rights of any
series of Common Stock does not differ from its adverse effect on the powers,
preferences or special rights of any other series of Common Stock would not
entitle such series to vote as a class separately from the other series of
Common Stock.
Certain matters on which holders of TCI Group Common Stock, Liberty Media
Group Common Stock and TCI Ventures Group Common Stock would vote together as a
single class could involve a divergence or the appearance of a divergence of
interests among the holders of such series of Common Stock. For example, the
Amended Charter does not require that a merger or consolidation of the Company
requiring the approval of the Company's stockholders be approved by a separate
vote of holders of any series of Common Stock, and Delaware law requires such
approval only in certain circumstances. As a result, if holders of any one or
more series of Common Stock that possess the requisite voting power vote to
approve the merger or consolidation, then the merger or consolidation could be
consummated even if the holders of a majority of some other series of Common
Stock vote against the merger or consolidation. See "-- Potential Divergence of
Interests; No Specific Procedures for Resolution." Immediately following the
issuance of shares of TCI Ventures Group Common Stock upon the closing of the
Exchange Offers, assuming all shares of Series A TCI Ventures Group Common Stock
and Series B TCI Ventures Group Common Stock offered are issued, the combined
voting
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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 TCI Ventures Group Stock Proposal is approved by stockholders, the
Series A TCI Ventures Group Common Stock will have one vote per share and the
Series B TCI Ventures 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 TCI Ventures Group Common Stock and Effects on
Existing Common Stock -- Voting Rights."
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
The existence of the TCI Ventures Group Common Stock may give rise to
occasions when the interests of the holders of TCI Ventures Group Common Stock
and the holders of either TCI Group Common Stock or Liberty Media Group Common
Stock, or both, may diverge or appear to diverge. As further discussed below,
examples include, among others, determinations by the Board of Directors to (i)
convert each outstanding share of TCI Ventures Group Common Stock into shares of
TCI Group Common Stock, (ii) approve the disposition of all or substantially all
of the properties and assets of the TCI Ventures Group, (iii) allocate
consideration to be received by holders of Common Stock in connection with a
merger or consolidation involving the Company among holders of different series
of Common Stock, (iv) allocate resources and financial support to or pursue
business opportunities or operational strategies through one Group instead of
one or more of the other Groups, (v) if and to the extent there is an
Inter-Group Interest, allocate the proceeds of issuances of TCI Ventures Group
Common Stock either to the TCI Group in respect of a reduction in its
Inter-Group Interest in the TCI Ventures Group or to the equity of the TCI
Ventures Group, (vi) pay or omit dividends on the TCI Group Common Stock, the
Liberty Media Group Common Stock or the TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock into TCI Group
Common Stock. The Board of Directors may determine to convert each outstanding
share of Series A TCI Ventures Group Common Stock into shares of Series A TCI
Group Common Stock and each outstanding share of Series B TCI Ventures Group
Common Stock into shares of Series B TCI Group Common Stock, in each case
determined based upon the ratio of the value (as determined on the basis of
appraisals performed by investment banking firms) of one share of TCI Ventures
Group Common Stock to the average Market Value over a 20-Trading Day period
prior to the date such appraisal process is initiated of one share of Series A
TCI Group Common Stock. Such a conversion could be effected at any time,
including at a time when the value of one share of TCI Ventures Group Common
Stock determined by appraisal differs significantly from the market value of the
TCI Ventures Group Common Stock reflected in the trading markets, or at a time
when the Market Value of the TCI Group Common Stock used in the determination of
the conversion ratio reflects what might be considered an overvaluation or
undervaluation. Basing the conversion ratio on an appraised value determination
for the TCI Ventures Group Common Stock and a trading market valuation for the
TCI Group Common Stock could result in the conversion ratio being significantly
different from that which would have resulted if the same measure were used for
the valuation of both the TCI Group Common Stock and the
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TCI Ventures 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 TCI Ventures Group Common
Stock were used. Such a conversion would also have the effect of precluding
holders of TCI Ventures Group Common Stock from retaining their investment in a
security intended to reflect separately the businesses and assets attributed to
the TCI Ventures Group.
Disposition of Group Assets. As long as the assets 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 TCI Ventures Group in one transaction or
a series of related transactions, other than in certain specified transactions,
including a transaction in which the Company receives primarily equity
securities of an entity engaged or proposing to engage primarily in a similar or
complementary business, and other than in connection with the disposition of all
of the assets of the entire Company, require the Company, at its option, either
to (i) distribute by dividend or redemption to the holders of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock an
amount in cash and/or securities or other property equal to their proportionate
interest in the TCI Ventures Group Net Proceeds of such Disposition or (ii)
convert outstanding shares of Series A TCI Ventures Group Common Stock into a
number (or fraction) of shares of Series A TCI Group Common Stock and convert
outstanding shares of Series B TCI Ventures Group Common Stock into a number (or
fraction) of shares of Series B TCI Group Common Stock, equal in each case to
110% of the average daily ratio of the Market Value of a share of Series A TCI
Ventures Group Common Stock to the Market Value of a share of Series A TCI Group
Common Stock over a specified period following such Disposition. The provisions
of the Amended Charter do not require the Board of Directors to select the
option which would result in the distribution with the highest value to the
holders of the TCI Ventures Group Common Stock or with the smallest effect on
the TCI Group Common Stock. The Amended Charter does not require the Company to
take such actions upon sales or other dispositions of less than substantially
all of the properties and assets of the TCI Ventures Group or upon two or more
unrelated sales or other dispositions which together constitute the sale of
substantially all of the properties and assets of the TCI Ventures Group. In
addition, although the 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 TCI Ventures 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."
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 TCI Ventures 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
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Groups to obtain funds sufficient to implement their business strategies.
Because both the Liberty Media Group and the TCI Ventures Group (through
International) have significant interests in entities which provide programming
services to markets outside the United States, and also have business strategies
which anticipate further expansion into international markets, the Board of
Directors has been and likely will continue to be presented with opportunities
that could be pursued through either the TCI Ventures Group (through
International) or the Liberty Media Group, or jointly through both Groups. See
"Management and Allocation Policies."
Allocation of Proceeds Upon Issuance of TCI Ventures Group Common
Stock. If and to the extent that the TCI Group has an Inter-Group Interest in
the TCI Ventures Group at the time of any sale of shares of TCI Ventures Group
Common Stock, the Board of Directors would determine the allocation of the
proceeds of such sale between the TCI Group and the TCI Ventures Group. In such
case, the Board of Directors could allocate up to 100% of the net proceeds of
the sale of TCI Ventures Group Common Stock to the TCI Group or to the TCI
Ventures Group, and such net proceeds would be reflected entirely on the
combined financial statements of the Group to which such proceeds were
allocated. Any such allocation of net proceeds to the TCI Group would reduce any
then existing Inter-Group Interest in the TCI Ventures Group.
No Assurance of Payment of Dividends. The Company has never paid cash
dividends on its Common Stock. The Board of Directors does not currently intend
to pay cash dividends on the TCI Group Common Stock, the Liberty Media Group
Common Stock or, if the TCI Ventures Group Stock Proposal is approved, the TCI
Ventures Group Common Stock. Any dividends on the TCI Ventures Group Common
Stock which may be declared by the Board of Directors will be payable out of the
lesser of (i) the funds of the Company legally available for such purpose, which
are determined on the basis of the entire Company, and (ii) the TCI Ventures
Group Available Dividend Amount. Such dividends are further subject to the prior
payment of dividends on outstanding shares of any class or series of capital
stock of the Company with preferential dividend provisions. Any net losses of
the Company (without regard to whether such losses arose from any specific
Group), and any dividends or distributions on, or repurchases of, the TCI Group
Common Stock, the Liberty Media Group Common Stock or the TCI Ventures 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 TCI
Ventures 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 TCI Ventures 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 TCI
Ventures 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 TCI Ventures Group Common Stock or any
other factor. See "Description of TCI Ventures 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 TCI
Ventures Group Common Stock. The existence of the TCI Group Common Stock, the
Liberty Media Group Common Stock and the TCI Ventures Group Common Stock may
give rise to
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occasions when the interests of the holders of one or more series of Common
Stock and the holders of the other series of Common Stock may diverge or appear
to diverge. See "-- Potential Divergence of Interests; No Specific Procedures
for Resolution." The Board of Directors will address and resolve any issues
involving a material divergence of interests among the holders of the separate
series of Common Stock.
Although the Company is not aware of any precedent concerning the manner in
which principles of Delaware law would be applied in the context of a capital
structure involving multiple classes or series of capital stock the rights of
which include terms designed to reflect the separate performance of specified
businesses, principles of Delaware law provide that a board of directors must
act in accordance with its good faith business judgment of the corporation's
best interests, taking into consideration the interests of all stockholders
regardless of class or series. Under these principles of Delaware law and the
"business judgment rule," a good faith determination made by a disinterested and
adequately informed Board of Directors with respect to any matter having a
disparate impact upon the holders of TCI Group Common Stock, the holders of
Liberty Media Group Common Stock and the holders of TCI Ventures 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 TCI Ventures 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 TCI
Ventures Group Common Stock or disparate values of the TCI Group Common Stock,
the Liberty Media Group Common Stock and the TCI Ventures 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 TCI
Ventures Group Common Stock were disproportionate or had disparate values.
TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS FROM THE TCI GROUP
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of the TCI Ventures Group Common Stock
would be (unless the Board of Directors otherwise provides) specifically
attributed to and reflected in the combined financial statements of the Group
that includes the entity which incurred the debt or issued the preferred stock
or, in case the entity incurring the debt or issuing the preferred stock is
Tele-Communications, Inc., the TCI Group. The Board of Directors could, however,
determine from time to time that debt incurred or preferred stock issued by
entities included in a Group should be specifically attributed to and reflected
in the combined financial statements of one of the other Groups to the extent
that the debt is incurred or the preferred stock is issued for the benefit of
such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the TCI Ventures Group, reflected as the creation of an,
or an increase in any then existing, Inter-Group Interest of the TCI Group in
such Group or, in the case of a transfer from either the Liberty Media Group or
the TCI
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Ventures Group to the TCI Group, reflected as a reduction in any then existing
Inter-Group Interest of the TCI Group in such Group. There are no specific
criteria for determining when a transfer will be reflected as a borrowing or as
an increase or reduction in an Inter-Group Interest. The Board 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 TCI Ventures Group is
expected to require additional advances from the TCI Group for some period of
time. To satisfy this need, the Company has agreed to provide a revolving loan
facility (the "Revolving Credit Facility") to the TCI Ventures Group for a
five-year period commencing on the closing of the Exchange Offers. Such facility
would permit aggregate borrowings at any one time outstanding of up to $500
million (subject to reduction as provided below), which borrowings would bear
interest at a rate per annum equal to The Bank of New York's prime rate (as in
effect from time to time) plus 1% per annum, payable quarterly. A commitment fee
equal to 3/8% per annum of the average unborrowed availability under the
Revolving Credit Facility would be payable by the TCI Ventures Group to the TCI
Group on a quarterly basis. The maximum amount of borrowings permitted under the
Revolving Credit Facility will be reduced on a dollar-for-dollar basis by up to
$300 million if and to the extent that the aggregate amount of any additional
capital that TCI Telephony contributes or is required to contribute to the
Sprint PCS Partnerships subsequent to the closing of the Exchange Offers is less
than $300 million.
Except as described above with respect to the Revolving Credit Facility,
loans from one Group to another Group would bear interest at such rates and have
such repayment schedules and other terms as are established from time to time
by, or pursuant to procedures established by, the Board of Directors. The Board
of Directors expects to make such determinations, either in specific instances
or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
Although the creation of or any increase in an Inter-Group Interest of the
TCI Group in the TCI Ventures Group resulting from an equity contribution by the
TCI Group to the TCI Ventures Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the TCI Ventures Group to the TCI Group
would be determined by reference to the Market Value of the Series A TCI
Ventures Group 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 TCI Ventures 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."
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NO ASSURANCE AS TO MARKET PRICE
Because there has been no prior market for the TCI Ventures Group Common
Stock, there can be no assurance as to the market price of the TCI Ventures
Group Common Stock following the closing of the Exchange Offers. If a relatively
small number of shares of either or both of the Series A TCI Ventures Group
Common Stock or the Series B TCI Ventures Group Common Stock are issued, there
would only be a limited market, if any, for such shares, and holders could have
difficulty selling such shares. Further, if an active trading market does
develop, there can be no assurance that it will be maintained. Moreover, it is
not possible to predict the impact of the issuance of the TCI Ventures Group
Common Stock on the market price of the TCI Group Common Stock.
The market prices of the TCI Ventures Group Common Stock would be
determined in the trading markets and could be influenced by many factors,
including the combined results of the TCI Ventures Group and the consolidated
results of the Company and of the various companies attributed to the TCI
Ventures Group, as well as the performance of the TCI Ventures Group and such
companies relative to investors' expectations, trading volumes, regulatory
environment and general economic and market conditions. There can be no
assurance as to the extent to which investors would assign values to the TCI
Ventures Group Common Stock based on the reported financial results or other
measures of performance or prospects of the TCI Ventures Group or such other
companies. Financial effects of the Groups that affect the Company's
consolidated results of operations or financial condition could affect the
market prices of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the TCI Ventures Group Common Stock. In addition, the Company cannot
predict the impact on the market price of the TCI Ventures Group Common Stock of
certain terms of such securities, such as basing the consideration to be paid if
all or substantially all of the properties and assets of the TCI Ventures Group
are sold in a Disposition on the TCI Ventures Group Net Proceeds of such
Disposition, the ability of the Company to convert shares of TCI Ventures Group
Common Stock into TCI Group Common Stock at a conversion ratio based on an
appraised value determination for the TCI Ventures Group Common Stock and a
trading market valuation for the TCI Group Common Stock or the discretion of the
Board of Directors to make various other determinations with respect to the
Groups and the separate series of Common Stock. There is no assurance that the
TCI Ventures Group Common Stock will be included in any stock market index in
which the TCI Group Common Stock is now included, or that the TCI Group Common
Stock will continue to be included in such index. Not being included in an index
could adversely affect demand for the TCI Ventures Group Common Stock or the TCI
Group Common Stock and, consequently, the market price thereof.
POTENTIAL CONVERSION OF TCI VENTURES GROUP COMMON STOCK
The TCI Ventures Group Stock Proposal will permit the conversion, solely at
the Company's option, of all of the outstanding shares of TCI Ventures Group
Common Stock into TCI Group Common Stock upon the terms described under
"Description of TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock
prevailing at such time. See "-- Potential Divergence of Interests; No Specific
Procedures for Resolution."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS OF THE TCI VENTURES GROUP
The terms of the TCI Ventures Group Common Stock provide that if the
Company were to dispose of all or substantially all of the properties and assets
of the TCI Ventures Group, other than in a transaction in which the Company
receives primarily equity securities of an entity engaged or proposing to engage
primarily in a similar or complementary business and other than in connection
with the disposition of all of the assets of the Company, the Company would be
required, at its option, either to (i) distribute to holders of TCI Ventures
Group Common Stock an amount equal to their proportionate interest in the TCI
Ventures Group Net Proceeds of such Disposition, either by special dividend or
by redemption of all or part of the outstanding shares of TCI Ventures Group
Common Stock or (ii) convert outstanding shares of TCI Ventures Group
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Common Stock into shares of the corresponding series of TCI Group Common Stock
at a conversion ratio based on 110% of the average daily ratio of the Market
Value of a share of Series A TCI Ventures Group Common Stock to the Market Value
of a share of Series A TCI Group Common Stock over a specified period following
such Disposition. "TCI Ventures Group Net Proceeds" means the proceeds of such
Disposition after payment of or provision for certain specified costs, including
taxes to be paid by the Company in respect of the Disposition or such dividend
or redemption, transaction costs and liabilities and other obligations
(contingent or otherwise, including obligations in respect of Preferred Stock
and in respect of the TCI Ventures Group Preferred Interest) attributed to the
TCI Ventures Group. If the TCI Ventures Group were a separate independent
company and its shares were acquired by another person, certain of those costs,
including corporate and shareholder level taxes, might not be payable in
connection with such an acquisition. As a result, the consideration that would
be received by stockholders of such a separate independent company in connection
with such a stock acquisition might be greater than the TCI Ventures Group Net
Proceeds that would be received by holders of TCI Ventures Group Common Stock if
all or substantially all of the properties and assets of the TCI Ventures Group
were sold. In addition, no assurance can be given that the TCI Ventures Group
Net Proceeds per share of TCI Ventures Group Common Stock to be received in
connection with a Disposition of all or substantially all of the properties and
assets of the TCI Ventures Group will be equal to or more than the market value
per share of TCI Ventures Group Common Stock prior to or after announcement of
such Disposition. See "-- Potential Conversion of TCI Ventures Group Common
Stock" and "-- No Assurance as to Market Price" above and "Description of TCI
Ventures Group Common Stock and Effects on Existing Common Stock -- Conversion
and Redemption."
POTENTIAL DILUTION FROM ISSUANCES OF TCI VENTURES GROUP COMMON STOCK UPON
CONVERSION, EXERCISE OR EXCHANGE OF CERTAIN OUTSTANDING SECURITIES
After the consummation of the Exchange Offers, the TCI-UA Notes that remain
outstanding will be adjusted, in accordance with their terms, so that if such
TCI-UA Notes were exchanged immediately following the closing of the Exchange
Offers there would be delivered upon such exchange a number of shares of Series
A TCI Ventures Group Common Stock equal to 30% of the number of shares of Series
A TCI Group Common Stock that would have been deliverable upon such exchange if
effected immediately prior to the closing of the Exchange Offers. Further, the
shares of Series A TCI Group Common Stock that would have been issuable upon
such exchange if effected immediately prior to the closing of the Exchange
Offers will be reduced by the number of shares of TCI Ventures Group Common
Stock so issuable. Similarly, the Adjustable Options will be divided into
options to purchase shares of Series A TCI Ventures Group Common Stock and
options to purchase shares of Series A TCI Group Common Stock, with 30% of the
shares originally subject to the option being allocated to the option to
purchase shares of TCI Ventures Group Common Stock. The issuance of shares of
Series A TCI Ventures Group Common Stock upon such conversion, exercise or
exchange of Pre-Exchange Offer Securities will not result in any transfer of
funds or other assets from the TCI Group to the TCI Ventures Group, or a
reduction in any Inter-Group Interest that then may exist, in consideration of
such issuance. The proceeds received upon the exercise of options that are
Pre-Exchange Offer Securities will be attributed to the TCI Ventures Group, as
will the liability for amounts payable upon the exercise of any related stock
appreciation rights.
If Pre-Exchange Offer Securities remain outstanding at the time of any
redemption of all outstanding shares of TCI Ventures Group Common Stock
following the Disposition of all (not merely substantially all) of the
properties and assets of the TCI Ventures Group (see "Description of TCI Group
Common Stock and Effects on Existing Common Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock"), the proportionate interest in the TCI Ventures Group Net
Proceeds of the Disposition to be distributed to the holders of TCI Ventures
Group Common Stock will be determined on the basis of the Adjusted TCI Ventures
Group Outstanding Interest Fraction. Such determination will result in the
allocation to the TCI Group of a portion of such TCI Ventures Group Net
Proceeds, in addition to the portion attributable to any Inter-Group Interest,
sufficient to provide for the delivery of the portion of the consideration (if
any) deliverable by the Company on any post-redemption conversion, exercise or
exchange of Pre-Exchange Offer Securities that is in substitution for shares of
TCI Ventures Group Common Stock that would have been issuable upon such
conversion, exercise or exchange if
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it had occurred prior to the redemption. Likewise if Pre-Exchange Offer
Securities remain outstanding at the time of any redemption of all the
outstanding shares of TCI Ventures Group Common Stock in exchange for stock of
any one or more Qualifying Subsidiaries of the Company which hold all of the
assets and liabilities of the TCI Ventures Group (see "Description of TCI
Ventures Group Common Stock and Effects on Existing Common Stock -- Conversion
and Redemption -- Redemption in Exchange for Stock of Subsidiary"), the number
of shares of such subsidiaries deliverable in redemption of the outstanding
shares of TCI Ventures Group Common Stock will be determined on the basis of the
Adjusted TCI Ventures Group Outstanding Interest Fraction, resulting in the
allocation to the TCI Group of a portion of the shares of such subsidiaries, in
addition to the number of shares so allocated in respect of any Inter-Group
Interest, sufficient to provide for the delivery of the portion of the
consideration (if any) deliverable by the Company upon any post-redemption
conversion, exercise or exchange of Pre-Exchange Offer Securities that is in
substitution for shares of TCI Ventures Group Common Stock that would have been
issuable upon such conversion, exercise or exchange if it had occurred prior to
such redemption. If Pre-Exchange Offer Securities remain outstanding at the time
of any conversion at the option of the Company of all outstanding shares of TCI
Ventures Group Common Stock into TCI Group Common Stock (see "Description of TCI
Ventures Group Common Stock and Effects on Existing Common Stock -- Conversion
and Redemption -- Conversion at the Option of the Company"), the determination
of the value (as determined on the basis of appraisals performed by investment
banking firms) of one share of TCI Ventures Group Common Stock used in
calculating the conversion ratio will be made on a basis that assumes
conversion, exercise or exchange, as applicable, of all Pre-Exchange Offer
Securities.
As of June 30, 1997, the TCI-UA Notes in the aggregate were exchangeable
for 34,853,145 shares of Series A TCI Group Common Stock and 13,069,918 shares
of Series A Liberty Media Group Common Stock, and the Adjustable Options in the
aggregate were exercisable for 18,993,639 shares of Series A TCI Group Common
Stock. As a result of the adjustments described above, immediately following the
closing of the Exchange Offers, the TCI-UA Notes will be exchangeable for
24,397,201 shares of Series A TCI Group Common Stock, 13,069,918 shares of
Series A Liberty Media Group Common Stock and 10,455,944 shares of Series A TCI
Ventures Group Common Stock, and the Adjustable Options will be replaced by
options to purchase an aggregate of 5,698,093 shares of Series A TCI Ventures
Group Common Stock and options to purchase an aggregate of 13,295,546 shares of
Series A TCI Group Common Stock. On July 23, 1997, the Board of Directors
approved the grant of Adjustable Options exercisable for 3,850,000 shares of
Series A TCI Group Common Stock. Immediately following the closing of the
Exchange Offers, such options will be replaced by options to purchase an
aggregate of 1,155,000 shares of Series A TCI Ventures Group Common Stock, and
options to purchase an aggregate of 2,695,000 shares of Series A TCI Group
Common Stock.
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 TCI Ventures Group Stock
Proposal would authorize issuance of the TCI Ventures Group Common Stock with
economic terms designed to reflect the separate performance of the TCI Ventures
Group, a person interested in acquiring only the TCI Ventures Group without
negotiation with the Company's management would still be required to seek
control of the voting power represented by all of the outstanding capital stock
of the Company, including the TCI Group Common Stock, the Liberty Media Group
Common Stock and the TCI Ventures Group Common Stock. See "Description of TCI
Ventures 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
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could include shares of TCI Ventures Group Common Stock, as well as the issuance
of such shares upon the conversion or exercise of securities of the Company that
are convertible into or exercisable or exchangeable for such shares. The
approval of the stockholders of the Company will not be sought by the Company
for the issuance of authorized but unissued shares of TCI Ventures Group Common
Stock (or the reissuance of previously issued shares that have been reacquired
by the Company) or securities of the Company that are convertible into or
exercisable or exchangeable for such shares, unless deemed advisable by the
Board of Directors or required by applicable law, regulation or Nasdaq National
Market requirements.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the 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" for a period of three years following the time that
such stockholder became 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 TCI Ventures 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 TCI Ventures Group Common Stock. The
provisions of the DGCL, the Amended Charter and the Company's Bylaws and the
existence of the TCI Ventures Group Common Stock could, under certain
circumstances, prevent stockholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control. See "Anti-Takeover
Considerations."
MANAGEMENT AND ALLOCATION POLICIES
If the TCI Ventures 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 TCI
Ventures Group (for so long as the TCI Ventures Group Common Stock is
outstanding), the TCI Group (for so long as either the TCI Ventures Group Common
Stock or the Liberty Media Group Common Stock is outstanding), and the Liberty
Media Group (for so long as the Liberty Media Group Common Stock is
outstanding). Except for the financial statements included in this Proxy
Statement and in the Offering Circular, the Company does not intend to provide
separate combined financial statements for the TCI Ventures Group until shares
of TCI Ventures Group Common Stock are first issued. The combined financial
statements of each Group, taken together and after giving effect to inter-Group
eliminations, would effectively comprise the consolidated financial statements
of the Company. The combined financial statements of each Group will principally
reflect the combined financial position, results of operations and cash flows of
the businesses attributed thereto. Consistent with the Amended Charter and
applicable policies, the Group financial information could also include
allocated portions of individual assets and liabilities that are not separately
identified with the operations of a specific Group. Notwithstanding allocations
of assets and liabilities for the purpose of preparing Group combined financial
statements, holders of each series of Common Stock would continue to be subject
to risks associated with an investment in the Company and all of
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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 TCI Ventures Group Stock Proposal is approved by stockholders, upon
initial issuance of TCI Ventures 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 reflected on the combined financial
statements of the Group that includes the entity which incurred the debt or
issued the preferred stock or, in case the entity incurring the debt or
issuing the preferred stock is Tele-Communications, Inc., the TCI Group.
The Board of Directors could, however, determine from time to time that
debt incurred or preferred stock issued by entities included in a Group
should be specifically attributed to and reflected on the combined
financial statements of one of the other Groups to the extent that the debt
is incurred or the preferred stock is issued for the benefit of such other
Group. As described above, the obligations of the TCI Ventures Group with
respect to indebtedness under the Revolving Credit Facility and the TCI
Ventures Group Preferred Interest will be reflected in the combined
financial statements of the TCI Ventures Group.
(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 reflected in the combined financial statements of
the TCI Group. All financial impacts of issuances of shares of TCI Ventures
Group Common Stock the proceeds of which are attributed to the TCI Ventures
Group will be to such extent reflected in the combined financial statements
of the TCI Ventures Group, and all financial impacts of issuances of shares
of TCI Ventures Group Common Stock the proceeds of which are attributed to
the TCI Group in respect of a reduction in any Inter-Group Interest of the
TCI Group in the TCI Ventures Group will be to such extent reflected in the
combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on TCI Ventures Group Common Stock will be
attributed entirely to the TCI Ventures Group, except that dividends or
other distributions on the TCI Ventures Group Common Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in
the TCI Group being credited, and the TCI Ventures Group being charged (in
addition to the charge for the dividend or other distribution paid on the
outstanding shares of TCI Ventures Group Common Stock), with an amount
equal to the product of (x) the aggregate amount of such dividend or other
distribution paid or distributed in respect of outstanding shares of TCI
Ventures Group Common Stock and (y) a fraction the numerator of which is
the TCI Ventures Group Inter-Group Interest Fraction and the denominator of
which is the TCI Ventures Group Outstanding Interest Fraction. Financial
impacts of repurchases of TCI Ventures Group Common Stock the consideration
for which is charged to the TCI Ventures Group will be to such extent
reflected in the combined financial statements of the TCI Ventures Group,
and financial impacts of repurchases of TCI Ventures Group Common Stock the
consideration for which is charged to the TCI Group will be to such extent
reflected in the combined financial statements of the TCI Group and will
result in the creation of an, or an increase in any then existing,
Inter-Group Interest of the TCI Group in the TCI Ventures Group.
(iii) To the extent cash needs of one Group exceed cash provided by
such Group, one of the other Groups may transfer funds to such Group. The
TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities
attributed to the
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other Groups are remitted to the TCI Group and certain cash disbursements
of the other Groups will be funded by the TCI Group on a daily basis. Such
transfers of funds among the Groups will be reflected as borrowings or, if
determined by the Board of Directors, in the case of a transfer from the
TCI Group to either the TCI Ventures Group or the Liberty Media Group,
reflected as the creation of an, or an increase in any then existing,
Inter-Group Interest of the TCI Group in such Group or, in the case of a
transfer from either the TCI Ventures Group or the Liberty Media Group to
the TCI Group, reflected as a reduction in any Inter-Group Interest of the
TCI Group in such Group. There are no specific criteria for determining
when a transfer will be reflected as borrowings or as an increase or
reduction in an Inter-Group Interest. The Board of Directors expects to
make such determinations, either in specific instances or by setting
generally applicable policies from time to time, after consideration of
such factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates
and general economic conditions. Generally, it is expected that entities
included in the TCI Ventures Group will require additional advances from
the TCI Group for some period of time. To satisfy this need, the Company
has agreed to provide the Revolving Credit Facility to the TCI Ventures
Group for a five-year period commencing on the closing of the Exchange
Offers. Such facility would permit aggregate borrowings at any one time
outstanding of up to $500 million (subject to reduction as provided below),
which borrowings would bear interest at a rate per annum equal to The Bank
of New York's prime rate (as in effect from time to time) plus 1% per
annum, payable quarterly. A commitment fee equal to 3/8% per annum of the
average unborrowed availability under the Revolving Credit Facility will be
payable by the TCI Ventures Group to the TCI Group on a quarterly basis.
The maximum amount of borrowings permitted under the Revolving Credit
Facility will be reduced on a dollar-for-dollar basis by up to $300 million
if and to the extent that the aggregate amount of any additional capital
that TCI Telephony is required to contribute to the Sprint PCS Partnerships
subsequent to the closing of the Exchange Offers is less than $300 million.
(iv) Except as described above with respect to the Revolving Credit
Facility, loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the Board
of Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable policies
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the use
of proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans of and the investment opportunities available to each
Group and the availability, cost and time associated with alternative
financing sources.
(v) In the event of a transfer of funds or other assets from the TCI
Group to the TCI Ventures Group that the Board of Directors has determined
to reflect as creating or increasing the TCI Group's Inter-Group Interest
in the TCI Ventures Group, the Number of Shares Issuable with Respect to
the TCI Ventures Group Inter-Group Interest would be increased by an amount
determined by dividing the amount of funds or the value of the assets
transferred by the Market Value of a share of Series A TCI Ventures Group
Common Stock as of the date of such transfer, and the TCI Ventures Group
Inter-Group Interest Fraction would be increased and the TCI Ventures Group
Outstanding Interest Fraction would be decreased accordingly. In the event
of a transfer of funds or other assets from the TCI Ventures Group to the
TCI Group that the Board of Directors has determined to reflect as a
decrease in the TCI Group's Inter-Group Interest in the TCI Ventures Group,
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be decreased by an amount determined by dividing
the amount of funds or the value of the assets transferred by the Market
Value of a share of Series A TCI Ventures Group Common Stock as of the date
of such transfer and the TCI Ventures Group Inter-Group Interest Fraction
would be decreased and the TCI Ventures Group Outstanding Interest Fraction
would be increased accordingly. For illustrations of the effects of the
issuance of shares of TCI Ventures Group Common Stock, see Annex
IV--Illustration of Certain Terms.
(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
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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 TCI Ventures Group
have been included as a component of the TCI Ventures Group's combined
equity. Such net borrowings incurred prior to the consummation of the
Exchange Offers will continue to be reflected as a component of the TCI
Ventures Group's combined equity. Amounts borrowed by the TCI Ventures
Group from another Group on and subsequent to the consummation of the
Exchange Offers (including pursuant to the Revolving Credit Facility), will
be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
(vii) Certain corporate general and administrative costs (including,
but not limited to, certain corporate, legal, finance, accounting, tax,
data processing, employee benefit and insurance costs) would be charged to
both the TCI Ventures Group and the Liberty Media Group at rates set at the
beginning of each year based on projected utilization for that year. The
balance of such costs would be reflected in the combined financial
statements of the TCI Group. The utilization-based charges would be set at
levels that management believes to be reasonable and that would approximate
the costs that the TCI Ventures Group and the Liberty Media Group would
incur for comparable services on a stand-alone basis. Assuming shares of
TCI Ventures Group Common Stock had first been issued on January 1, 1996,
the Company estimates that such costs of the TCI Ventures Group would have
aggregated approximately $7,918,000 for the year ended December 31, 1996.
Certain other corporate general and administrative costs related
specifically to management of a Group would be allocated entirely to such
Group. The scope of the services charged to the TCI Ventures Group and the
Liberty Media Group on an allocated basis could be adjusted from time to
time depending on the extent to which it is determined that services should
instead be performed directly by employees of entities attributed to such
Group.
(viii) Certain of the companies with domestic operations that would be
attributed to the TCI Ventures Group provide services to companies
attributed to one or more of the other Groups, and certain of the companies
attributed to the other Groups provide services and the use of facilities
to companies attributed to the TCI Ventures Group, all as more fully
described in Annex III. Generally, services and rights to use facilities
provided pursuant to contractual arrangements to which a member of the TCI
Ventures Group that is not a wholly owned subsidiary of the Company is a
party will continue to be provided in accordance with the terms of such
arrangements following the consummation of the Exchange Offers. For
example, Teleport has the indefeasible right to use certain fiber optic and
cable transmission facilities of the Company for compensation based on the
cost of construction of such facilities. In general, such arrangements were
entered into with Teleport by the Company and other multiple cable system
operators ("MSOs") that are stockholders of Teleport several years ago when
Teleport was a privately owned company. Similarly, @Home has entered into
arrangements for the distribution of its @Home service with its
stockholders that are MSOs. The TCI Group has agreements with UVSG for,
among other things, the carriage of UVSG's Prevue Networks and superstation
programming on certain of the cable systems attributed to the TCI Group,
and UVSG purchases programming from companies attributed to the Liberty
Media Group. Many of these contracts were entered into prior to the
Company's acquisition of an equity interest in UVSG. Because of the
presence in each of TCG, @Home and UVSG of other stockholders not
affiliated with the Company and the independent management teams at each of
these companies, the Company anticipates that future contractual
arrangements between these companies and entities attributed to the other
Groups will be negotiated on an arm's-length basis. DigiVentures, a lease
finance company owned by the Company and Babcock & Brown, leases digital
set-top boxes to TCIC (which is attributed to the TCI Group) at rates
commensurate with market rates given TCIC's size and creditworthiness.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each
of which is a wholly owned subsidiary of the Company, provide or may
provide services to the other Groups. WTCI provides video transport
services to the TCI Group (in addition to services provided to third
parties) based on published tariffed rates. NDTC provides digital
television services, including digital compression of
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programming, satellite uplinking, and transponder management, primarily to
programming suppliers, many of which are affiliated with the Liberty Media
Group, and satellite distributors. Such services provided to affiliated
companies are governed by agreements which have been negotiated on a basis
which approximates arm's-length terms and the material terms of which are
substantially the same as those governing relationships with third parties,
except as appropriate to take into account volume differences. NDTC has
also recently begun offering on a commercial basis its newly developed
service of authorization of addressable set-top boxes and transmission of
compressed and encrypted digital programming signals directly to cable
operators, and is currently negotiating a long term contract with the TCI
Group, for such services. Such negotiations are being carried out on a
basis which approximates arm's-length terms and it is expected that the
material terms made available to the TCI Group will be substantially the
same as those provided to unaffiliated third parties, but will include
pricing on a most favored nations basis due to the importance to NDTC of
the TCI Group's large customer base. SUMMITrak has been funded by the TCI
Group during its development and test phases, which are substantially
complete. Currently, the TCI Group is only utilizing SUMMITrak's services
on a test basis and has no agreement with SUMMITrak for commercial
deployment. If SUMMITrak's services are used by the TCI Group on a
commercial basis, such use will be at commercial rates and on a basis which
approximates arm's-length terms.
(ix) A tax sharing agreement (the "Old Tax Sharing Agreement") among
entities attributed to the TCI Ventures Group, Liberty Media Group, the TCI
Group and certain subsidiaries of TCI was implemented effective July 1,
1995 for all periods after such effective date and prior to October 1,
1997. The Old Tax Sharing Agreement formalizes certain of the elements of a
pre-existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. Under the Old Tax Sharing Agreement, tax
liabilities and benefits of the entities attributed to the TCI Ventures
Group, Liberty Media Group, and TCI Group are charged or credited to
intercompany accounts between TCI and each of its first tier subsidiaries.
The Old Tax Sharing Agreement encompasses U.S. federal, state, local and
foreign tax consequences and relies upon the Internal Revenue Code of 1986,
as amended (the "Code"), and any applicable state, local and foreign tax
law and related regulations. In connection with the formation of the TCI
Ventures Group, the net amount of the balance of each intercompany account
under the Old Tax Sharing Agreement that is attributable to entities
included in the TCI Ventures Group for the period beginning July 1, 1995
and ending prior to the consummation of the Exchange Offers will be
reflected as a component of the TCI Ventures Group's combined equity. The
intercompany account existing between TCI and International for the period
beginning July 1, 1995 and ending prior to the consummation of the Exchange
Offers will be required to be settled by the TCI Ventures Group and
International when International ceases to be a member of the TCI
consolidated group for federal income tax purposes. Tax liabilities and
benefits, as determined under the Old Tax Sharing Agreement, that are
generated by the entities comprising the TCI Ventures Group for the period
beginning on the consummation of the Exchange Offers and ending prior to
October 1, 1997 will be credited or debited to an intercompany account
between TCI and the TCI Ventures Group as described below. For the period
beginning on the consummation of the Exchange Offers and ending prior to
October 1, 1997, the TCI Ventures Group will be responsible to TCI for its
share of consolidated income tax liabilities (computed as if the Company
was not liable for the alternative minimum tax) determined in accordance
with the Old Tax Sharing Agreement. TCI will be responsible to the TCI
Ventures Group to the extent that the TCI Ventures Group's income tax
attributes generated during the period beginning on the consummation of the
Exchange Offers and ending prior to October 1, 1997 are utilized by TCI to
reduce its consolidated income tax liabilities (computed as if the Company
was not liable for the alternative minimum tax). Accordingly, all tax
attributes generated by the TCI Ventures Group's operations for the period
beginning on the consummation of the Exchange Offers and ending prior to
October 1, 1997 (including, but not limited to, net operating losses, tax
credits, deferred intercompany gains, and the tax basis of assets) will be
inventoried and tracked for the entities comprising the TCI Ventures Group.
All intercompany accounts existing under the Old Tax Sharing Agreement with
respect to entities attributed to the TCI Group, entities attributed to the
Liberty Media
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Group and, for the period beginning on the consummation of the Exchange
Offers, entities attributed to the TCI Ventures Group, will be required to
be settled only upon the date that an entity ceases to be a member of the
TCI consolidated group for federal income tax purposes. Under the Old Tax
Sharing Agreement, TCI retains the burden of any alternative minimum tax
and has the right to receive the tax benefits from any alternative minimum
tax credit attributable to any tax period beginning on or after July 1,
1995 and ending on or before October 1, 1997.
For periods from and after October 1, 1997, federal income taxes will
be computed pursuant to a new tax sharing agreement (the "New Tax Sharing
Agreement") based upon the type of tax paid by the Company (on a regular
tax or alternative minimum tax basis) on a separate basis for each Group
(applying provisions of the Code, and related regulations as if such Group
filed a separate consolidated return for federal income tax purposes, with
certain adjustments, but was subject to the same type of tax as the
Company). Based upon these separate calculations, an allocation of tax
liabilities and benefits will be made such that each Group will be required
to make cash payments to the Company based on its allocable share of the
Company's consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable). The Company may be required
at the times and under the circumstances described below to make cash
payments to each Group for tax benefits (on a regular tax or alternative
minimum tax basis, as applicable) attributable to such Group and actually
used by the Company in reducing its consolidated federal income tax
liability. Tax attributes, including but not limited to net operating
losses, foreign tax credits, investment tax credits, alternative minimum
tax net operating losses, deferred intercompany gains, and tax basis in
assets would be inventoried and tracked for ultimate credit to or charge
against each Group. Similarly, in each taxable period that the Company pays
alternative minimum tax, the federal income tax liabilities and federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group (at the difference between the amount such Group would have
paid or received under the New Tax Sharing Agreement if the Company had
paid regular tax during such taxable period and the amount such Group paid
or received under the New Tax Sharing Agreement on an alternative minimum
tax basis for such taxable period) in years that the Company utilizes the
alternative minimum tax credit associated with such taxable period. Even
though the tax benefits of a Group are utilized by the Company in reducing
its consolidated federal income tax liability, such Group may not receive
current cash payments for such benefit (or the difference between such
Group's benefits computed under the New Tax Sharing Agreement on a regular
tax basis and on an alternative minimum tax basis) if the Group against the
income of which the tax benefits are applied had other separate taxable
losses (not currently utilized by the Company) which would offset income
attributable to such Group. The Group generating the utilized tax benefits
would receive a cash payment only if, and when, the unutilized taxable
losses of the other Group are actually utilized. If the unutilized taxable
losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits. In
addition, if the unutilized taxable losses are connected with a Group or
part of a Group which ceases to be part of the TCI consolidated group for
federal income tax purposes, there can be no assurance that the transferee
will agree to pay for the eventual use of the unutilized taxable losses. In
addition, pursuant to the New Tax Sharing Agreement, state and local income
taxes are calculated on a separate return basis for each Group (applying
provisions of state and local tax law and related regulations as if the
Group were a separate unitary or combined group for tax purposes), and the
Company's combined or unitary tax liability is allocated among the Groups
based upon such separate calculation. The Company has retained the right to
file all returns, make all elections and control all audits and contests.
As detailed elsewhere, unutilized taxable losses of the TCI Ventures
Group may be used to offset the obligation of the TCI Ventures Group to pay
dividends on the TCI Ventures Group Preferred Interest. Any such taxable
losses which are so used will be considered taxable losses of the TCI Group
for all calculations under the New Tax Sharing Agreement relating to
federal income taxes. Such taxable losses will continue to be treated as
taxable losses of the TCI Ventures Group for all calculations relating to
state and local income taxes. In addition, any amount owed by the TCI Group
with respect to utilized
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taxable losses of the TCI Ventures Group may be cancelled as an offset to
the obligation of the TCI Ventures Group to pay dividends on the TCI
Ventures Group Preferred Interest.
(x) The Board of Directors expects to determine, either in specific
instances or by setting generally applicable policies from time to time,
whether to allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group or one or more of
the other Groups, after consideration of such factors as it deems relevant.
The Company has advised International that the Company intends (a) to make
available to International any opportunity to acquire, develop, own and/or
manage cable and/or telephony operations outside the United States that is
presented to the Company or any of its controlled affiliates and (b) except
as provided below, to make available to International any opportunity to
acquire, develop, manage and/or operate programming services outside of the
United States (an "International Programming Opportunity") that is
presented to the Company or any of its controlled affiliates, including
those affiliates that are a part of the Liberty Media Group. The foregoing
does not apply to (1) international programming services owned or managed,
directly or indirectly (in whole or in part), by the Company or any of its
controlled affiliates other than International as of July 12, 1995 (the
date of the prospectus for International's initial public offering), (2)
International Programming Opportunities under development by the Company or
any of its controlled affiliates other than International that were the
subject of a signed letter of intent or other agreement in principle as of
July 12, 1995, (3) an International Programming Opportunity in respect of
foreign sports programming, which may be pursued either through
International or the Liberty Media Group, (4) an International Programming
Opportunity presented to a public company that is a controlled affiliate of
either the Company or any of the Company's controlled affiliates (other
than International), (5) an International Programming Opportunity presented
to, or cable television or cable telephony services provided by, any
company or other entity in which the Company or any of its controlled
affiliates has an interest but which is not itself a controlled affiliate
of either the Company or any of the Company's controlled affiliates and (6)
the distribution outside the United States of a programming service
initially distributed within the United States and owned and/or managed by
the Company or any of its controlled affiliates (other than International).
If International determines not to pursue an International Programming
Opportunity, subsidiaries or controlled affiliates of the Company other
than International may pursue such International Programming Opportunity or
International and another subsidiary of the Company (or any of its other
controlled affiliates) may pursue such opportunity jointly. To the extent
that the Company or any of its controlled affiliates (other than
International) owns rights to worldwide or regional sporting events, the
Company or such affiliates may also utilize those rights worldwide,
including to provide "backdrop" services. Neither the Company nor any of
its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent the
Company or such controlled affiliate is legally (for example, by a
fiduciary duty owed to others) or contractually prohibited from doing so.
The foregoing arrangement concerning International Programming
Opportunities will, in any event, be terminable at such time as the Company
ceases to beneficially own at least a majority in voting power of the
outstanding shares of common stock of International. See Annex
III -- Description of TCI Ventures Group.
Notwithstanding the policies described above, determinations with respect
to the transfer of funds from one Group to one of the other Groups would be made
at the discretion of the Board of Directors, except to the extent that the
Company is contractually obligated to make a transfer of funds to an entity
included in a Group. Nothing in the foregoing policies (as opposed to any such
contractual obligation) obligates the Board of Directors to cause a Group to
provide funds to one of the other Groups if the Board of Directors determines
that it is in the best interests of the Company not to do so.
The above management and allocation policies could be modified or rescinded
by the Board of Directors, in its sole discretion, without approval of
stockholders, although there is no present intention to do so. The Board of
Directors could also adopt additional policies depending upon the circumstances.
The Board of Directors intends that any determination it might make to modify or
rescind such policies, or to adopt additional policies, including any such
decision that could have disparate effects upon holders of different series of
Common Stock, would be made by the Board of Directors as set forth under
"Factors to be
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Considered -- Fiduciary Duties of the Board of Directors Are to All Stockholders
Regardless of Class or Series."
DESCRIPTION OF TCI VENTURES 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 3,602,375,096 shares of capital stock, including (i) 3,550,000,000 shares
of Common Stock, of which 1,750,000,000 shares are designated Series A TCI Group
Common Stock, 150,000,000 shares are designated Series B TCI Group Common Stock,
750,000,000 shares are designated Series A Liberty Media Group Common Stock,
75,000,000 shares are designated Series B Liberty Media Group Common Stock,
750,000,000 shares are designated Series A Telephony Group Common Stock and
75,000,000 shares are designated Series B Telephony Group Common Stock and (ii)
52,375,096 shares of Preferred Stock. If the TCI Ventures Group Stock Proposal
is approved, the Company Charter will be amended to, among other things, change
the designation of the Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock to Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, respectively.
The authorized but unissued shares of TCI Ventures 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
Holders of Series A TCI Ventures Group Common Stock will be entitled to one
vote for each share of such stock held and holders of Series B TCI Ventures
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 TCI Ventures 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.
The term "Voting Securities" will include the Series A TCI Ventures Group
Common Stock and Series B TCI Ventures 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 Common Stock generally upon all
matters which may be submitted to a vote of stockholders at any annual or
special meeting. 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
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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 TCI Ventures Group Common Stock and Series B TCI
Ventures 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
TCI Ventures Group Common Stock and the Series B TCI Ventures 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 TCI
Ventures Group Common Stock) voting together as a single class, if the holders
of one or more series of Common Stock have more than the number of votes
required to approve any such matter, such holders would be in a position to
control the outcome of the vote on such matter.
DIVIDENDS
Dividends on TCI Ventures Group Common Stock. Dividends on TCI Ventures
Group Common Stock will be limited to legally available funds of the Company
under the DGCL and will be subject to the prior payment of dividends on
outstanding shares of Preferred Stock. The DGCL limits the amount of
distributions on the Common Stock to the funds of the Company legally available
for that purpose, which are determined on the basis of the entire Company and
not just the Groups. Consequently, the amount of legally available funds will be
reduced by the amount of any net losses of the Groups and any dividends or
distributions on, or repurchases of, the TCI Group Common Stock, the Liberty
Media Group Common Stock or the TCI Ventures 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.
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Dividends on the TCI Ventures 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 TCI Ventures 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 TCI Ventures Group Common Stock under the DGCL if
the TCI Ventures Group were a separate Delaware corporation. There can be no
assurance that there will be a TCI Ventures Group Available Dividend Amount.
The "TCI Ventures Group Available Dividend Amount," as of any date, means
the product of the TCI Ventures Group Outstanding Interest Fraction and either
(i) the excess of (a) an amount equal to the total assets of the TCI Ventures
Group less the total liabilities (not including preferred stock) of the TCI
Ventures Group as of such date over (b) the aggregate par value of, or any
greater amount determined to be capital in respect of, all outstanding shares of
TCI Ventures Group Common Stock, each class or series of Preferred Stock
attributed to the TCI Ventures Group and the TCI Ventures Group Preferred
Interest or (ii) in case there is no such excess, an amount equal to the Company
Earnings (Loss) Attributable to the TCI Ventures Group (if positive) for the
fiscal year in which such date occurs and/or the preceding fiscal year. The
"Company Earnings (Loss) Attributable to the TCI Ventures Group," for any
period, means the net earnings or loss of the TCI Ventures Group for such period
determined on a basis consistent with the determination of the net earnings or
loss of the TCI Ventures Group for such period as presented in the combined
financial statements of the TCI Ventures Group, including income and expenses of
the Company attributed to the operations of the TCI Ventures Group on a
substantially consistent basis, including, without limitation, corporate
administrative costs, net interest and income taxes.
Except for dividends declared or paid as described below under "-- Share
Distributions" and "-- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of TCI Ventures Group Common Stock," any dividends paid
on the Series A TCI Ventures Group Common Stock or the Series B TCI Ventures
Group Common Stock will be paid only on both series, in equal amounts per share.
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 TCI Ventures 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 TCI Ventures 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 TCI Ventures Group
Common Stock or any other factor. See "Dividend Policy."
At the time of any dividend or other distribution on the outstanding shares
of TCI Ventures Group Common Stock (including any dividend of TCI Ventures Group
Net Proceeds from the Disposition of all or substantially all of the properties
and assets of the TCI Ventures Group as described under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock"), the TCI Group will (if at such time there is an Inter-Group
Interest in the TCI Ventures Group) be credited, and the TCI Ventures Group will
be charged (in addition to the charge for the dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures Group
Common Stock), with an amount equal to the product of (i) the aggregate amount
of such dividend or distribution paid or distributed in respect of outstanding
shares of TCI Ventures Group Common Stock times (ii) a fraction the numerator of
which is the TCI Ventures Group Inter-Group Interest Fraction and the
denominator of which is the TCI Ventures Group Outstanding Interest Fraction.
See Annex IV -- Illustration of Certain Terms for illustrations of the
calculation of the TCI Ventures Group Inter-Group Interest Fraction and the
effects of dividends on shares of TCI Ventures Group Common Stock.
Dividends on TCI Group Common Stock and Liberty Media Group Common
Stock. 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
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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 TCI Ventures Group Stock Proposal. Because
certain of the assets and liabilities attributed to the TCI Ventures Group are
currently included in the TCI Group, the TCI Ventures 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. If at any time after the initial
issuance of shares of TCI Ventures Group Common Stock, a distribution paid in
TCI Group Common Stock, Liberty Media Group Common Stock, TCI Ventures Group
Common Stock, or any other securities of the Company or any other person (a
"share distribution") is made with respect to the TCI Group Common Stock, such
share distribution will be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series B TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series A TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B TCI Group Common
Stock) to holders of Series B TCI Group Common Stock;
(ii) a share distribution consisting of shares of Series A 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 TCI
Ventures Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock, on an equal per share basis; or consisting of
shares of Series B TCI Ventures Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of
Series B TCI Ventures Group Common Stock) to holders of Series A TCI Group
Common Stock and Series B TCI Group Common Stock, on an equal per share
basis; or consisting of shares of Series A TCI Ventures Group Common Stock
(or Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A TCI Ventures Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Ventures Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B TCI
Ventures Group Common Stock) to holders of Series B TCI Group Common Stock;
provided that the sum of (A) the aggregate number of shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock to
be so issued (or the number of such shares which would be issuable upon
conversion, exercise or exchange of any Convertible Securities to be so
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issued) and (B) the number of shares of Series A TCI Ventures Group Common
Stock that are subject to issuance upon conversion, exercise or exchange of
any Convertible Securities then outstanding that are attributed to the TCI
Group (other than Pre-Exchange Offer Securities) is less than or equal to
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest; 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 TCI Ventures 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
TCI Ventures Group Common Stock), either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of Series A
TCI Group Common Stock and Series B TCI Group Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series
A TCI Group Common Stock and another class or series of securities to
holders of Series B TCI Group Common Stock, provided that the securities so
distributed (and, if the distribution consists of Convertible Securities,
the securities into which such Convertible Securities are convertible or
for which they are exercisable or exchangeable) do not differ in any
respect other than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions, with
holders of shares of Series B TCI Group Common Stock receiving the class or
series having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company, such
rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
The Company will not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
Distributions on TCI Ventures Group Common Stock. If at any time a share
distribution is to be made with respect to the TCI Ventures Group Common Stock,
such share distribution will be declared and paid only as follows (or as
described under "-- Conversion and Redemption" with respect to the redemptions
and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A TCI Ventures
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, on an equal per share basis; or
consisting of shares of Series B TCI Ventures Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B TCI Ventures Group Common Stock) to holders of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock, on an equal per share basis; or consisting of shares of Series A TCI
Ventures Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Ventures Group Common Stock and,
on an equal per share basis, shares of Series B TCI Ventures Group Common
Stock (or like Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Ventures Group Common Stock) to
holders of Series B TCI Ventures Group Common Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Company or any other person other than as described in
the immediately preceding clause (i) and other than TCI Group Common Stock
or Liberty Media Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of TCI Group Common Stock or
Liberty Media Group Common
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Stock), either on the basis of a distribution of identical securities, on
an equal per share basis, to holders of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock or on the basis of a
distribution of one class or series of securities to holders of Series A
TCI Ventures Group Common Stock and another class or series of securities
to holders of Series B TCI Ventures Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of Convertible
Securities, the securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions, with holders of shares of Series B TCI Ventures Group Common
Stock receiving the class or series having the higher relative voting
rights (without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series
A TCI Ventures Group Common Stock and the Series B TCI Ventures Group
Common Stock), provided that if the securities so distributed constitute
capital stock of a subsidiary of the Company, such rights will not differ
to a greater extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A TCI Ventures Group Common Stock and the Series B TCI
Ventures Group Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
Because the TCI Ventures Group is not permitted to have an Inter-Group
Interest in either the TCI Group or the Liberty Media Group, no distributions on
the TCI Ventures Group Common Stock of shares of TCI Group Common Stock (or
related Convertible Securities) or Liberty Media Group Common Stock (or related
Convertible Securities) are permitted.
The Company will not reclassify, subdivide or combine the Series A TCI
Ventures Group Common Stock without reclassifying, subdividing or combining the
Series B TCI Ventures Group Common Stock, on an equal per share basis, and the
Company will not reclassify, subdivide or combine the Series B TCI Ventures
Group Common Stock without reclassifying, subdividing or combining the Series A
TCI Ventures Group Common Stock, on an equal per share basis.
Distributions on Liberty Media Group Common Stock. Under the Company
Charter, share distributions on the Liberty Media Group Common Stock consisting
of TCI Group Common Stock (or related Convertible Securities) or Telephony Group
Common Stock (or related Convertible Securities) are not permitted. In the
Amended Charter, the TCI Ventures Group Common Stock is substituted for the
Telephony Group Common Stock.
CONVERSION AND REDEMPTION
Conversion at the Option of the Holder. Each share of Series B TCI
Ventures Group Common Stock will be convertible, at the option of the holder
thereof, into one share of Series A TCI Ventures Group Common Stock. Shares of
Series A TCI Ventures Group Common Stock will not be convertible into shares of
Series B TCI Ventures 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 TCI Ventures
Group Common Stock will be converted into a number (or fraction) of fully paid
and nonassessable shares of Series A TCI Group Common Stock equal to the TCI
Ventures Group Optional Conversion Ratio, and (ii) all of the outstanding shares
of Series B TCI Ventures Group Common Stock will be converted into a number (or
fraction) of fully paid and nonassessable shares of Series B TCI Group Common
Stock equal to the TCI Ventures Group Optional Conversion Ratio. As more fully
described below, the TCI Ventures Group Optional Conversion Ratio is the ratio
of the private market value of a share of TCI Ventures Group Common Stock
determined by appraisal to the public trading price of a share of TCI Group
Common Stock.
Under the Amended Charter, the "TCI Ventures Group Optional Conversion
Ratio" means the quotient (calculated to the nearest five decimal places)
obtained by dividing (x) the TCI Ventures Group Common Stock Per Share Value by
(y) the average Market Value of one share of Series A TCI Group Common Stock
over the 20-Trading Day period ending on the Trading Day preceding the Appraisal
Date. The TCI Ventures
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Group Common Stock Per Share Value will equal the quotient obtained by dividing
the TCI Ventures Group Private Market Value by the Adjusted Outstanding Shares
of TCI Ventures Group Common Stock, which will be determined in the manner
provided below.
The "TCI Ventures Group Private Market Value" means an amount equal to the
private market value of the TCI Ventures Group as of the 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 TCI Ventures 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 TCI Ventures Group as of the Appraisal Date and
will consult with one another with respect thereto. Not later than the 30th day
after the Selection Date, the First Appraiser and the Second Appraiser will each
have determined its final view as to such private market value. If the higher 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
TCI Ventures Group Private Market Value (subject to any adjustment described in
the second succeeding paragraph) will be the average of those two amounts. If
the Higher Appraised Amount is more than 120% of the Lower Appraised Amount, the
First Appraiser and the Second Appraiser will agree upon and jointly designate 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 TCI Ventures Group Private Market Value (subject to any
adjustment described in the second succeeding paragraph) will be (i) if the
Mutually Appraised Amount is between the Lower Appraised Amount and the Higher
Appraised Amount, (a) the average of (1) the Mutually Appraised Amount and (2)
the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer
to the Mutually Appraised Amount, or (b) the Mutually Appraised Amount, if
neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to
the Mutually Appraised Amount, or (ii) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such investment banking firm expresses its
final view of the private market value of the TCI Ventures Group as a range of
values, such investment banking firm's final view of such private market value
will be deemed to be the midpoint of such range of values.
Each of the investment banking firms referred to in the immediately
preceding paragraph will be instructed to determine the private market value of
the TCI Ventures Group as of the Appraisal Date based upon the amount a willing
purchaser would pay to a willing seller, in an arm's-length transaction, if it
were acquiring the TCI Ventures Group, as if the TCI Ventures Group were a
publicly traded non-controlled corporation and the purchaser was acquiring all
of the capital stock of such corporation and without consideration of any
potential regulatory constraints limiting the potential purchasers of the TCI
Ventures Group other than that which would have existed if the TCI Ventures
Group were a publicly traded non-controlled entity.
Following the determination of the TCI Ventures Group Private Market Value,
the investment banking firms whose final views of the private market value of
the TCI Ventures Group were used in the calculation of the TCI Ventures Group
Private Market Value will determine the Adjusted Outstanding Shares of TCI
Ventures Group Common Stock together with any further appropriate adjustments to
the TCI Ventures Group Private Market Value resulting from such determination.
The "Adjusted Outstanding Shares of TCI Ventures Group Common Stock" means a
number, as determined by such investment banking firms as of the
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Appraisal Date, equal to the sum of the number of shares of TCI Ventures Group
Common Stock outstanding, the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest, the number of shares of TCI Ventures Group
Common Stock issuable upon the conversion, exercise or exchange of all
Pre-Exchange Offer Securities, and the number of shares of TCI Ventures Group
Common Stock issuable upon the conversion, exercise or exchange of those
Convertible Securities (other than Pre-Exchange Offer Securities) the holders of
which would derive an economic benefit from conversion, exercise or exchange of
such Convertible Securities which exceeds the economic benefit of not
converting, exercising or exchanging such Convertible Securities. The "TCI
Ventures Group Common Stock Per Share Value" means the quotient obtained by
dividing the TCI Ventures Group Private Market Value by the Adjusted Outstanding
Shares of TCI Ventures Group Common Stock, provided that if such investment
banking firms do not agree on the determinations provided for in this paragraph,
the TCI Ventures Group Common Stock Per Share Value will be the average of the
quotients so obtained on the basis of the respective determinations of such
firms.
If the Company determines to convert shares of Series A TCI Ventures Group
Common Stock into Series A TCI Group Common Stock and shares of Series B TCI
Ventures Group Common Stock into Series B TCI Group Common Stock at the TCI
Ventures Group Optional Conversion Ratio, such conversion will occur on a
conversion date on or prior to the 120th day following the Appraisal Date. If
the Company determines not to undertake such conversion, the Company may at any
time thereafter undertake to reestablish the TCI Ventures Group Common Stock Per
Share Value as of a subsequent date.
Any such conversion would dilute the interests of holders of TCI Group
Common Stock and would preclude holders of TCI Ventures Group Common Stock from
retaining their interest in a security reflecting separately the business of the
TCI Ventures Group. In addition, the adjustments in respect of Pre-Exchange
Offer Securities would dilute the interests of holders of TCI Ventures Group
Common Stock upon any conversion of shares of TCI Ventures Group Common Stock
into TCI Group Common Stock at the TCI Ventures Group Optional Conversion Ratio.
See "Factors to be Considered -- Potential Dilution from Issuances of TCI
Ventures Group Common Stock upon Conversion, Exercise or Exchange of Certain
Outstanding Securities."
See Annex IV -- Illustration of Certain Terms for an illustration of the
conversion of TCI Ventures Group Common Stock into TCI Group Common Stock at the
TCI Ventures Group Optional Conversion Ratio.
Mandatory Dividend, Redemption or Conversion of TCI Ventures Group Common
Stock. Upon the Disposition in one transaction or a series of related
transactions by the Company and its subsidiaries of all or substantially all of
the properties and assets of the TCI Ventures Group to any one or more persons,
entities or groups, the Company is required, on or prior to the 85th Trading Day
following the consummation of such Disposition, to take one of the actions
listed in the following paragraph. This requirement does not apply to a
Disposition (a) in connection with the Disposition by the Company of all of the
Company's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Company, (b) by dividend, other distribution or redemption in accordance
with any provision described under "-- 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 TCI Ventures
Group" means a portion of such properties and assets that represents at least
80% of the then-current market value (as determined by the Board of Directors)
of the properties and assets of the TCI Ventures Group as of such date.
The action the Company is required to take is to either:
(i) subject to the limitations described above under "-- Dividends,"
declare and pay a dividend in cash and/or securities or other property
(other than a dividend or distribution of Common Stock) to the holders of
the outstanding shares of TCI Ventures Group Common Stock equally on a
share for share basis (subject to the provisions described in the last
sentence of the following paragraph), in an aggregate
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amount equal to the product of the TCI Ventures Group Outstanding Interest
Fraction as of the record date for determining the holders entitled to
receive such dividend and the TCI Ventures Group Net Proceeds of such
Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the TCI Ventures Group Available Dividend Amount would have
been sufficient to pay a dividend in lieu thereof as described in clause
(i) of this paragraph, then:
(A) if such Disposition involves all (not merely substantially all)
of the properties and assets of the TCI Ventures Group, redeem all
outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock in exchange for cash and/or
securities or other property (other than Common Stock) in an aggregate
amount equal to the product of the Adjusted TCI Ventures Group
Outstanding Interest Fraction as of the date of such redemption and the
TCI Ventures Group Net Proceeds of such Disposition, such aggregate
amount to be allocated (subject to the provisions described in the last
sentence of the following paragraph) to shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock in the
ratio of the number of shares of each such series outstanding (so that
the amount of consideration paid for the redemption of each share of
Series A TCI Ventures Group Common Stock and each share of Series B TCI
Ventures Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the TCI Ventures Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the TCI Ventures Group Outstanding
Interest Fraction as of the date shares are selected for redemption and
the TCI Ventures Group Net Proceeds of such Disposition to the
redemption of outstanding shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock, such aggregate
amount to be allocated (subject to the provisions described in the last
sentence of the following paragraph) to shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock in the
ratio of the number of shares of each such series outstanding, with the
number of shares of each such series to be redeemed to equal the lesser
of (x) the whole number nearest the number determined by dividing the
aggregate amount so allocated to the redemption of such series by the
average Market Value of one share of Series A TCI Ventures Group Common
Stock during the ten-Trading Day period beginning on the 16th Trading
Day following the consummation of such Disposition and (y) the number of
shares of such series outstanding (so that the amount of consideration
paid for the redemption of each share of Series A TCI Ventures Group
Common Stock and each share of Series B TCI Ventures Group Common Stock
is the same); or
(iii) convert (A) each outstanding share of Series A TCI Ventures
Group Common Stock into a number (or fraction) of fully paid and
nonassessable shares of Series A TCI Group Common Stock and (B) each
outstanding share of Series B TCI Ventures Group Common Stock into a number
(or fraction) of fully paid and nonassessable shares of Series B TCI Group
Common Stock, in each case equal to 110% of the average daily ratio
(calculated to the nearest five decimal places) of the Market Value of one
share of Series A TCI Ventures Group Common Stock to the Market Value of
one share of Series A TCI Group Common Stock during the ten-Trading Day
period referred to in clause (ii)(B) of this paragraph.
The Company may elect to pay the dividend or redemption price referred to
in clause (i) or (ii) of the 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 TCI Ventures Group Net Proceeds. If
the dividend or redemption price is paid in the form of securities of an issuer
other than the Company, the Board of Directors may determine either to (i) pay
the dividend or redemption price in the form of separate classes or series of
securities, with one class or series of such securities to holders of Series A
TCI Ventures Group Common Stock and another class or series of securities to
holders of Series B TCI Ventures Group Common Stock, provided that such
securities (and, if such securities are convertible into or exercisable or
exchangeable for shares of another class or series of securities,
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the securities so issuable upon such conversion, exercise or exchange) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions with holders of shares of Series B TCI Ventures Group Common Stock
receiving the class or series having the higher relative voting rights (without
regard to whether such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion, redemption
and share distribution provisions between the Series A TCI Ventures Group Common
Stock and the Series B TCI Ventures Group Common Stock), provided that if such
securities constitute capital stock of a subsidiary of the Company, such rights
will not differ to a greater extent than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A TCI Ventures Group Common Stock and the Series B TCI
Ventures Group Common Stock, and otherwise such securities will be distributed
on an equal per share basis, or (ii) pay the dividend or redemption price in the
form of a single class of securities without distinction between the shares
received by the holders of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock.
The Related Business Transaction exception to the foregoing requirements
would enable the Company to enter into transactions in which the properties or
assets of the TCI Ventures Group may be considered to be "disposed of " in
exchange for equity securities of an entity engaged or proposing to engage in
similar or complementary business areas to those of the TCI Ventures Group while
maintaining the capital structure and delineation of business groups
contemplated by the TCI Ventures Group Stock Proposal.
The effect of using the Adjusted TCI Ventures Group Outstanding Interest
Fraction, instead of the TCI Ventures Group Outstanding Interest Fraction, in
the determination of amounts to be paid in redemption of shares of TCI Ventures
Group Common Stock following a Disposition of all of the properties and assets
of the TCI Ventures Group is to allocate to the TCI Group a portion of the TCI
Ventures Group Net Proceeds of the Disposition, in addition to the amount so
allocated in respect of any Inter-Group Interest, sufficient to provide for the
delivery of the portion of the consideration deliverable by the Company upon any
post-Disposition conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group Common Stock
that would have been issuable upon such exchange if it had occurred prior to
such Disposition. To the extent such Pre-Exchange Offer Securities are included
in the determination of the Adjusted TCI Ventures Group Outstanding Interest
Fraction, the Company's obligations in respect of such securities would not be a
reduction in the calculation of the TCI Ventures Group Net Proceeds. See
"Factors to be Considered -- Potential Dilution from Issuances of TCI Ventures
Group Common Stock upon Conversion, Exercise or Exchange of Certain Outstanding
Securities." In the event any redemption of the TCI Ventures Group Common Stock
or conversion of the TCI Ventures Group Common Stock into TCI Group Common Stock
is made in circumstances in which securities or property are allocated to the
TCI Group in respect of Pre-Exchange Offer Securities or other Convertible
Securities entitled to receive such securities or property upon conversion,
exercise or exchange (such securities or other property, the "Reserved
Property"), the TCI Group will segregate and hold such property separate (in the
case of any Reserved Property other than TCI Group Common Stock), or duly
reserve shares of TCI Group Common Stock issuable upon such conversion, exercise
or exchange, for the benefit of the holders of Pre-Exchange Offer Securities or
other Convertible Securities. In the event the holders of any such Pre-Exchange
Offer Securities or other Convertible Securities do not convert, exercise or
exchange such securities prior to the expiration of any conversion or exercise
right or the retirement of such security, then the Reserved Property shall
revert to the TCI Group and the former holders of TCI Ventures Group Common
Stock shall have no interest in such Reserved Property.
The option to convert the TCI Ventures Group Common Stock into TCI Group
Common Stock in the event of a Disposition provides the Company with additional
flexibility by allowing the Company to deliver consideration in the form of
shares of TCI Group Common Stock rather than cash or securities or other
properties. This alternative could be used, for example, in circumstances when
the Company did not have sufficient legally available assets under the DGCL to
pay the full amount of an otherwise required dividend or redemption or when the
Company desired to retain such proceeds.
If less than substantially all of the properties and assets of the TCI
Ventures Group were disposed of by the Company in one transaction, the Company
would not be required to pay a dividend on, redeem or convert
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the outstanding shares of TCI Ventures Group Common Stock, even if an additional
transaction were consummated at a later time in which additional properties and
assets of the TCI Ventures Group were disposed of by the Company, which,
together with the properties and assets disposed of in the first transaction,
would have constituted substantially all of the properties and assets of the TCI
Ventures Group at the time of the first transaction, unless such transactions
constituted a series of related transactions. The second transaction, however,
could trigger such a requirement if, at the time of the second transaction, the
properties and assets disposed of in such transaction constituted at least
substantially all of the properties and assets of the TCI Ventures Group at such
time. If less than substantially all of the properties and assets of the TCI
Ventures Group were disposed of by the Company, the holders of the TCI Ventures
Group Common Stock would not be entitled to receive any dividend or have their
shares redeemed or converted for TCI Group Common Stock, although the Board of
Directors could determine, in its sole discretion, to pay a dividend on the TCI
Ventures Group Common Stock in an amount related to the proceeds of such
Disposition.
At the time of any dividend made as a result of a Disposition referred to
above, the TCI Group will be credited, and the TCI Ventures Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of TCI Ventures Group Common Stock), with an amount equal to
the product of (i) the aggregate amount paid in respect of such dividend times
(ii) a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction.
See Annex IV -- Illustration of Certain Terms for an illustration of the
dividend on or redemption or conversion of TCI Ventures Group Common Stock
following the Disposition of all or substantially all of the properties and
assets of the TCI Ventures Group.
Redemption in Exchange for Stock of Subsidiary. At any time at which all
of the assets and liabilities attributed to the TCI Ventures Group have become
and continue to be held directly or indirectly by any one or more corporations
that are Qualifying Subsidiaries (the "TCI Ventures Group Subsidiaries"), the
Board of Directors may, subject to the availability of assets of the Company
legally available therefor, redeem on a pro rata basis, all of the outstanding
shares of TCI Ventures Group Common Stock in exchange for an aggregate number of
outstanding, fully paid and nonassessable shares of common stock of each TCI
Ventures Group Subsidiary equal to the product of the Adjusted TCI Ventures
Group Outstanding Interest Fraction and the number of outstanding shares of
common stock of such TCI Ventures Group Subsidiary that are owned by the
Company. The effect of using the Adjusted TCI Ventures Group Outstanding
Interest Fraction, instead of the TCI Ventures Group Outstanding Interest
Fraction, in the determination of shares of the TCI Ventures Group Subsidiaries
deliverable in such a redemption is to allocate to the TCI Group a portion of
the shares of the TCI Ventures Group Subsidiaries, in addition to the number of
such shares so allocated in respect of any Inter-Group Interest, sufficient to
provide for the delivery of the consideration deliverable by the Company upon
any post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that become so payable in substitution for shares of TCI Ventures
Group Common Stock that would have been issuable upon such exchange if it had
occurred prior to such redemption. See "Factors to be Considered -- Potential
Dilution from Issuances of TCI Ventures Group Common Stock upon Conversion,
Exercise or Exchange of Certain Outstanding Securities."
In effecting such a redemption, the Board of Directors may determine either
to (i) redeem shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock in exchange for shares of separate classes or
series of common stock of each TCI Ventures Group Subsidiary with relative
voting rights and related differences in designation, conversion, redemption and
share distribution provisions not greater than the corresponding differences in
voting rights, designation, conversion, redemption and share distribution
provisions between the Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock, with holders of shares of Series B TCI Ventures
Group Common Stock receiving the class or series having the higher relative
voting rights, or (ii) redeem shares of Series A TCI Ventures Group Common Stock
and Series B TCI Ventures Group Common Stock in exchange for shares of a single
class of common stock of each TCI Ventures Group Subsidiary without distinction
between the shares distributed to the holders of the two series of TCI Ventures
Group Common Stock.
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See Annex IV -- Illustration of Certain Terms for an illustration of the
redemption of TCI Ventures Group Common Stock in exchange for common stock of
the TCI Ventures Group Subsidiaries.
Certain Provisions Respecting Convertible Securities. Unless the
provisions of the Pre-Exchange Offer Securities provide specifically to the
contrary, after any conversion date or redemption date on which all outstanding
shares of TCI Ventures Group Common Stock were converted or redeemed, any shares
of TCI Ventures Group Common Stock that are issued on conversion, exercise or
exchange of any Pre-Exchange Offer Securities will, immediately upon issuance
pursuant to such conversion, exercise or exchange and without any notice or any
other action on the part of the Company or its Board of Directors or the holder
of such share of TCI Ventures Group Common Stock, be converted into or redeemed
in exchange for, as applicable, the kind and amount of shares of capital stock,
cash and/or securities or other property that a holder of such Pre-Exchange
Offer Securities would have been entitled to receive as a result of such
conversion and redemption had such Pre-Exchange Offer Securities been converted,
exercised or exchanged immediately prior to such action. Unless the provisions
of any class or series of Convertible Securities (other than Pre-Exchange Offer
Securities) which are convertible into or exercisable or exchangeable for shares
of TCI Ventures Group Common Stock provide specifically to the contrary, after
any conversion date or redemption date on which all outstanding shares of TCI
Ventures Group Common Stock were converted or redeemed, any share of TCI
Ventures Group Common Stock that is issued on conversion, exercise or exchange
of any such Convertible Securities will, immediately upon issuance pursuant to
such conversion, exercise or exchange and without any notice or any other action
on the part of the Company or its Board of Directors or the holder of such share
of TCI Ventures Group Common Stock, be redeemed in exchange for, to the extent
assets of the Company are legally available therefor, the amount of $.01 per
share in cash.
General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above under
"-- Conversion and Redemption -- Mandatory Dividend, Redemption or Conversion of
TCI Ventures Group Common Stock," the Company will announce publicly by press
release (i) the TCI Ventures Group Net Proceeds of such Disposition, (ii) the
number of outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, (iii) the number of shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
into or for which Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities are Pre-Exchange Offer
Securities), (iv) the TCI Ventures Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice and (v) the Adjusted TCI Ventures
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Company will
announce publicly by press release which of the actions described in clause (i),
(ii) or (iii) of the second paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend described in clause (i) of the
second paragraph under "-- Conversion and Redemption -- Mandatory Dividend,
Redemption or Conversion of TCI Ventures Group Common Stock," the Company will,
not later than the 30th Trading Day following the consummation of such
Disposition, cause to be given to each holder of outstanding shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock a
notice setting forth (i) the record date for determining holders entitled to
receive such dividend, which will be not earlier than the 40th Trading Day and
not later than the 50th Trading Day following the consummation of such
Disposition, (ii) the anticipated payment date of such dividend (which will not
be more than 85 Trading Days following the consummation of such Disposition),
(iii) the kind of shares of capital stock, cash and/or other securities or
property to be distributed in respect of shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock, (iv) the TCI Ventures
Group Net Proceeds of such Disposition, (v) the TCI Ventures Group Outstanding
Interest Fraction as of a recent date preceding the date of such notice, and
(vi) the number of outstanding shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock and the number of shares of
Series A TCI Ventures Group Common Stock
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and Series B TCI Ventures Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof.
If the Company determines to undertake a redemption of shares of TCI
Ventures Group Common Stock following a Disposition of all (not merely
substantially all) of the properties and assets of the TCI Ventures Group as
described in clause (ii)(A) of the second paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock a notice setting forth (i) a statement that all shares of TCI
Ventures Group Common Stock outstanding on the redemption date will be redeemed,
(ii) the redemption date (which will not be more than 85 Trading Days following
the consummation of such Disposition), (iii) the kind of shares of capital
stock, cash and/or other securities or property to be paid as a redemption price
in respect of shares of TCI Ventures Group Common Stock outstanding on the
redemption date, (iv) the TCI Ventures Group Net Proceeds of such Disposition,
(v) the Adjusted TCI Ventures Group Outstanding Interest Fraction as of a recent
date preceding the date of such notice, (vi) the place or places where
certificates for shares of TCI Ventures Group Common Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement), are to be
surrendered for delivery of certificates for shares of such capital stock, cash
and/or other securities or property, and (vii) the number of outstanding shares
of Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock and the number of shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof (and stating which, if any, of
such Convertible Securities are Pre-Exchange Offer Securities). Such notice will
be sent not less than 35 Trading Days nor more than 45 Trading Days prior to the
redemption date.
If the Company determines to undertake a redemption of shares of TCI
Ventures Group Common Stock following a Disposition of substantially all (but
not all) of the properties and assets of the TCI Ventures Group as described in
clause (ii)(B) of the second paragraph under "-- Conversion and Redemption --
Mandatory Dividend, Redemption or Conversion of TCI Ventures Group Common
Stock," the Company will, not later than the 30th Trading Day following the
consummation of such Disposition, cause to be given to each holder of record of
outstanding shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock a notice setting forth (i) a date not earlier than
the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition which will be the date on which shares of the
TCI Ventures Group Common Stock then outstanding will be selected for
redemption, (ii) the anticipated redemption date (which will not be more than 85
Trading Days following the consummation of such Disposition), (iii) the kind of
shares of capital stock, cash and/or other securities or property to be paid as
a redemption price in respect of shares of TCI Ventures Group Common Stock
selected for redemption, (iv) the TCI Ventures Group Net Proceeds of such
Disposition, (v) the TCI Ventures Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (vi) the number of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock and the number of shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof, and (vii)
a statement that the Company will not be required to register a transfer of any
shares of TCI Ventures Group Common Stock for a period of 15 Trading Days next
preceding the date referred to in clause (i) of this sentence. Promptly
following the date referred to in clause (i) of the preceding sentence, but not
earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition, the Company will cause to be
given to each holder of shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock to be redeemed, a notice setting forth
(i) the number of shares of Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock held by such holder to be redeemed, (ii) a
statement that such shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock will be redeemed, (iii) the redemption
date (which will not be more than 85 Trading Days following the consummation of
such Disposition), (iv) the kind and per share amount of shares of capital
stock, cash and/or other securities or property to be received by such holder
with
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respect to each share of such TCI Ventures Group Common Stock to be redeemed,
including details as to the calculation thereof, and (v) the place or places
where certificates for shares of such TCI Ventures Group Common Stock, properly
endorsed or assigned for transfer (unless the Company waives such requirement),
are to be surrendered for delivery of certificates for shares of such capital
stock, cash and/or other securities or property. The outstanding shares of TCI
Ventures Group Common Stock to be redeemed will be redeemed by the Company pro
rata among the holders of TCI Ventures Group Common Stock or by such other
method as may be determined by the Board of Directors to be equitable.
In the event of any conversion as described above under "-- Conversion and
Redemption -- Conversion at the Option of the Company" or "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock a notice setting forth (i) a statement that all outstanding
shares of TCI Ventures Group Common Stock will be converted, (ii) the conversion
date (which will not be more than 85 Trading Days following the consummation of
such Disposition in the event of a conversion pursuant to the provisions
described under "-- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion of TCI Ventures Group Common Stock" and which will not be more
than 120 days after the Appraisal Date in the event of a conversion pursuant to
the provisions described under "-- Conversion and Redemption -- Conversion at
the Option of the Company"), (iii) the per share number (or fraction) of shares
of Series A TCI Group Common Stock or Series B TCI Group Common Stock, as
applicable, to be received with respect to each share of Series A TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock, including
details as to the calculation thereof, (iv) the place or places where
certificates for shares of TCI Ventures Group Common Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement), are to be
surrendered, and (v) the number of outstanding shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock, and the number
of shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof. Such notice will be sent not less than 35 Trading Days
nor more than 45 Trading Days prior to the conversion date.
If the Company determines to redeem shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock as described above
under "-- Conversion and Redemption -- Redemption in Exchange for Stock of
Subsidiary," the Company will promptly cause to be given to each holder of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock a notice setting forth (i) a statement that all outstanding shares of TCI
Ventures Group Common Stock will be redeemed in exchange for shares of common
stock of the TCI Ventures Group Subsidiaries, (ii) the redemption date, (iii)
the Adjusted TCI Ventures Group Outstanding Interest Fraction as of a recent
date preceding the date of such notice, (iv) the place or places where
certificates for shares of TCI Ventures Group Common Stock, properly endorsed or
assigned for transfer (unless the Company waives such requirement), are to be
surrendered for delivery of certificates for shares of common stock of the TCI
Ventures Group Subsidiaries, and (v) the number of outstanding shares of Series
A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
and the number of shares of Series A TCI Ventures Group Common Stock and Series
B TCI Ventures Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof (and stating which, if any, of such
Convertible Securities are Pre-Exchange Offer Securities). Such notice will be
sent not less than 35 Trading Days nor more than 45 Trading Days prior to the
redemption date.
In each case in which a notice is required to be given to holders of
outstanding shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock in accordance with the preceding five paragraphs
(other than a notice to holders of shares selected for redemption), notice shall
also be given, within the required time period, to each holder of Convertible
Securities that are convertible into or exercisable or exchangeable for shares
of either such series (unless provision for such notice is otherwise made
pursuant to the terms of such Convertible Securities), which notice shall
include, in addition to all of the information set forth in the corresponding
notice to holders of TCI Ventures Group Common Stock, a
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statement to the effect that the holders of such Convertible Securities will be
entitled to receive the dividend, participate in the redemption of shares
following a Disposition or in the selection of shares for redemption,
participate in the conversion of shares or participate in the redemption of
shares in exchange for stock of the TCI Ventures Group Subsidiaries only if such
holder appropriately converts, exercises or exchanges such Convertible
Securities on or prior to the record date for the dividend, redemption date,
date fixed for selection of shares to be redeemed or conversion date, as
applicable, set forth in such notice. In the case of a redemption or conversion
of shares of TCI Ventures Group Common Stock, the notice to holders of
Convertible Securities shall also state what, if anything, such holders will be
entitled to receive pursuant to the terms of such Convertible Securities or, if
applicable, the provision described under "-- Conversion and Redemption
- -- Certain Provisions Respecting Convertible Securities" if such holders
convert, exercise or exchange such Convertible Securities following the
redemption date or conversion date, as applicable.
All notices required to be given in accordance with the preceding
paragraphs will be sent to a holder by first class mail, postage prepaid, at the
holder's address as the same appears on the transfer books of TCI. Neither the
failure to mail any notice to any particular holder of TCI Ventures Group Common
Stock or of Convertible Securities nor any defect therein will affect the
sufficiency thereof with respect to any other holder of outstanding shares of
TCI Ventures Group Common Stock or of Convertible Securities, or the validity of
any conversion or redemption.
The Company will not be required to issue or deliver fractional shares of
any class of capital stock or any fractional securities to any holder of TCI
Ventures Group Common Stock upon any conversion, redemption, dividend or other
distribution described above. In connection with the determination of the number
of shares of any class of capital stock that is issuable or the amount of
securities that is deliverable to any holder of record upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares or
securities), the Company may aggregate the number of shares of TCI Ventures
Group Common Stock held at the relevant time by such holder of record. If the
number of shares of any class of capital stock or the amount of securities
remaining to be issued or delivered to any holder of TCI Ventures Group Common
Stock is a fraction, the Company will, if such fraction is not issued or
delivered to such holder, pay a cash adjustment in respect of such fraction in
an amount equal to the fair market value of such fraction on the fifth Trading
Day prior to the date such payment is to be made (without interest). For
purposes of the preceding sentence, "fair market value" of any fraction will be
(i) in the case of any fraction of a share of capital stock of the Company, the
product of such fraction and the Market Value of one share of such capital stock
and (ii) in the case of any other fractional security, such value as is
determined by the Board of Directors.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of TCI Ventures Group Common Stock; provided, however,
that if the conversion date or the redemption date with respect to the TCI
Ventures Group Common Stock is subsequent to the record date for the payment of
a dividend or other distribution thereon or with respect thereto, the holders of
shares of TCI Ventures Group Common Stock at the close of business on such
record date will be entitled to receive the dividend or other distribution
payable on or with respect to such shares on the date set for payment of such
dividend or other distribution, notwithstanding the conversion or redemption of
such shares or the Company's default in payment of the dividend or distribution
due on such date.
Before any holder of shares of TCI Ventures Group Common Stock will be
entitled to receive certificates representing shares of any kind of capital
stock or cash and/or securities or other property to be received by such holder
with respect to any conversion or redemption of shares of TCI Ventures Group
Common Stock, such holder is required to surrender at such place as the Company
will specify certificates for such shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement). The Company will as soon
as practicable after surrender of certificates representing shares of TCI
Ventures Group Common Stock deliver to the person for whose account such shares
were so surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock or cash
and/or securities or other property to which such person is entitled, together
with any payment for fractional securities referred to above. If less than all
of the shares of TCI Ventures Group Common Stock represented by any one
certificate are to be redeemed, the Company will issue and deliver a new
certificate for the shares of TCI Ventures Group Common Stock not redeemed. The
Company will not be required to register a transfer of
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(i) any shares of TCI Ventures Group Common Stock for a period of 15 Trading
Days next preceding any selection of shares of TCI Ventures Group Common Stock
to be redeemed or (ii) any shares of TCI Ventures Group Common Stock selected or
called for redemption. Shares selected for redemption may not thereafter be
converted pursuant to the provisions described under "-- 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 TCI Ventures Group Common Stock that were
converted or redeemed will cease except for the right, upon surrender of the
certificates representing shares of TCI Ventures Group Common Stock, to receive
certificates representing shares of the kind and amount of capital stock or cash
and/or securities or other property for which such shares were converted or
redeemed, together with any payment for fractional securities, and such holder
will have no other or further rights in respect of the shares of TCI Ventures
Group Common Stock so converted or redeemed, including, but not limited to, any
rights with respect to any cash, securities or other property which are reserved
or otherwise designated by the Company as being held for the satisfaction of the
Company's obligations to pay or deliver any cash, securities or other property
upon the conversion, exercise or exchange of any Convertible Securities
outstanding as of the date of such conversion or redemption. No holder of a
certificate that, immediately prior to the applicable conversion date or
redemption date for the TCI Ventures Group Common Stock, represented shares of
TCI Ventures Group Common Stock will be entitled to receive any dividend or
other distribution with respect to shares of any kind of capital stock into or
in exchange for which the TCI Ventures Group Common Stock was converted or
redeemed until surrender of such holder's certificate for a certificate or
certificates representing shares of such kind of capital stock. Upon such
surrender, there will be paid to the holder the amount of any dividends or other
distributions (without interest) which theretofore became payable with respect
to a record date after the conversion date or redemption date, as the case may
be, but that were not paid by reason of the foregoing, with respect to the
number of whole shares of the kind of capital stock represented by the
certificate or certificates issued upon such surrender. From and after a
conversion date or redemption date, as the case may be, of TCI Ventures Group
Common Stock, the Company will, however, be entitled to treat the certificates
for shares of TCI Ventures Group Common Stock that have not yet been surrendered
for conversion or redemption as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock for which the shares of TCI
Ventures Group Common Stock represented by such certificates have been converted
or redeemed, notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of TCI Ventures Group Common Stock. The Company will not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of any shares of capital stock in a name other than
that in which the shares of TCI Ventures Group Common Stock so converted or
redeemed were registered and no such issue or delivery will be made unless and
until the person requesting such issue has paid to the Company the amount of any
such tax, or has established to the satisfaction of the Company that such tax
has been paid.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after payment or provision for payment of the
debts and other liabilities of the Company and subject to the prior payment in
full of the preferential amounts to which any class or series of Preferred Stock
is entitled, (i) the holders of the shares of TCI Group Common Stock will share
equally, on a share for share basis, in a percentage of the funds of the Company
remaining for distribution to its common stockholders equal to 100% multiplied
by the average daily ratio (expressed as a decimal) of W/Z for the 20-Trading
Day period ending on the Trading Day prior to the date of the public
announcement of such liquidation, dissolution or winding up, (ii) the holders of
the shares of Liberty Media Group Common Stock will share equally, on a share
for share basis, in a percentage of the funds of the Company remaining for
distribution to its common stockholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of X/Z for such 20-Trading Day period and
(iii) the holders of the shares of TCI Ventures Group Common Stock will share
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equally, on a share for share basis, in a percentage of the funds of the Company
remaining for distribution to its common stockholders equal to 100% multiplied
by the average daily ratio (expressed as a decimal) of Y/Z for such 20-Trading
Day period, where W is the aggregate Market Capitalization of the Series A TCI
Group Common Stock and the Series B TCI Group Common Stock, X is the aggregate
Market Capitalization of the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock, Y is the aggregate Market
Capitalization of the Series A TCI Ventures Group Common Stock and the Series B
TCI Ventures Group Common Stock, and Z is the aggregate Market Capitalization of
the Series A TCI Group Common Stock, the Series B TCI Group Common Stock, the
Series A Liberty Media Group Common Stock, the Series B Liberty Media Group
Common Stock, the Series A TCI Ventures Group Common Stock and the Series B TCI
Ventures Group Common Stock. Neither a consolidation, merger nor sale of assets
will be construed to be a "liquidation," "dissolution" or "winding up" of the
Company. 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 TCI Ventures Group Common Stock will have any special right to
receive specific assets of the TCI Ventures Group in the case of any
dissolution, liquidation or winding up of the Company.
DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made by the Board of Directors under any provision
described under "Description of TCI Ventures 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
The holders of the TCI Group Common Stock, Liberty Media Group Common Stock
and TCI Ventures 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:
"Adjusted TCI Ventures Group Outstanding Interest Fraction", as of any
date, means a fraction the numerator of which is the aggregate number of shares
of Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock outstanding on such date and the denominator of which is the sum of
(a) such aggregate number of outstanding shares, (b) the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest as of such
date, and (c) the aggregate number of shares of Series A TCI Ventures Group
Common Stock issuable, determined as of such date, upon conversion, exercise or
exchange of Pre-Exchange Offer Securities.
"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.
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"Initial Ventures Options" means those certain options to purchase shares
of Series A TCI Ventures Group Common Stock that are issued effective upon the
consummation of the Exchange Offers, in connection with the adjustment of the
Adjustable Options. For purposes of this definition, the term "Adjustable
Options" means those options to purchase shares of Series A TCI Group Common
Stock that are outstanding immediately prior to the consummation of the Exchange
Offers under any Existing Stock Plan (as defined below), which options the Board
of Directors and, if applicable, the committee of the Board of Directors charged
with the administration of such Existing Stock Plan, determined to adjust for
the effects of the Exchange Offers by the issuance, in substitution for and in
cancellation of each such Adjustable Option effective upon the consummation of
the Exchange Offers, of an Initial Ventures Option to purchase a number of
shares of Series A TCI Ventures Group Common Stock initially equal to 30%
(rounded up to the next whole number) of the number of shares of Series A TCI
Group Common Stock that would have been issuable upon exercise of such
Adjustable Option immediately prior to the consummation of the Exchange Offers,
and an option to purchase a number of shares of Series A TCI Group Common Stock
equal to 70% (rounded down to the next whole number) of the number of shares of
Series A TCI Group Common Stock that would have been issuable upon exercise of
such Adjustable Option immediately prior to the consummation of the Exchange
Offers, together with such other securities as were then issuable upon exercise
of such Adjustable Option (and in each case, having such other terms consistent
with the terms of the Adjustable Option for which they are exchanged as the
Board of Directors or the committee, as applicable, determines.) The term
"Existing Stock Plans" means each of the following: the Tele-Communications,
Inc. 1994 Stock Incentive Plan, the Tele-Communications, Inc. 1995 Stock
Incentive Plan and the Tele-Communications, Inc. 1996 Incentive Plan.
The "Liberty Media Group Available Dividend Amount," as of any date, means
the product of the Liberty Media Group Outstanding Interest Fraction and either
(i) the excess of (a) an amount equal to the total assets of the Liberty Media
Group less the total liabilities (not including preferred stock) of the Liberty
Media Group as of such date over (b) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding shares of Liberty
Media Group Common Stock and each class or series of Preferred Stock attributed
to the Liberty Media Group or (ii) in case there is no such excess, an amount
equal to Company Earnings (Loss) Attributable to the Liberty Media Group (if
positive) for the fiscal year in which such date occurs and/or the preceding
fiscal year. The "Company Earnings (Loss) Attributable to the Liberty Media
Group," for any period, means the net earnings or loss of the Liberty Media
Group for such period determined on a basis consistent with the determination of
the net earnings or loss of the Liberty Media Group for such period as presented
in the combined financial statements of the Liberty Media Group for such period,
including income and expenses of the Company attributed to the operations of the
Liberty Media Group on a substantially consistent basis, including, without
limitation, corporate administrative costs, net interest and income taxes. The
Liberty Media Group Available Dividend Amount is intended to be similar to the
amount that would be legally available for the payment of dividends on the
Liberty Media Group Common Stock under the DGCL if the Liberty Media Group were
a separate Delaware corporation.
"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 TCI Ventures 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
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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.
"Pre-Exchange Offer Securities" means the TCI-UA Notes and the Initial
Ventures Options.
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 Preferred Stock attributed to the TCI Group or (ii) in case
there is no such excess, an amount equal to the Company Earnings (Loss)
Attributable to the TCI Group (if positive) for the fiscal year in which such
date occurs and/or the preceding fiscal year. "Company Earnings (Loss)
Attributable to the TCI Group," for any period, means the net earnings or loss
of the TCI Group for such period determined on a basis consistent with the
determination of the net earnings or loss of the TCI Group for such period as
presented in the combined financial statements of the TCI Group for such period,
including income and expenses of the Company attributed to the operations of the
TCI Group on a substantially consistent basis, including, without limitation,
corporate administrative costs, net interest and income taxes. The TCI Group
Available Dividend Amount is intended to be similar to the amount that would be
legally available for the payment of dividends on the TCI Group Common Stock
under the DGCL if the TCI Group were a separate Delaware corporation.
"TCI-UA Notes" shall mean those certain convertible notes due December 12,
2021 issued by TCI-UA, Inc. a Subsidiary of the Corporation, which notes were,
prior to the consummation of the Exchange Offers, exchangeable for shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common Stock.
"TCI Ventures Group Inter-Group Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest as of such date and the
denominator of which is the sum of (a) such Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest as of such date and (b)
the aggregate number of shares of TCI Ventures Group Common Stock outstanding as
of such date.
"TCI Ventures Group Net Proceeds" shall mean, as of any date, with respect
to any Disposition of any of the properties and assets of the TCI Ventures
Group, an amount, if any, equal to the gross proceeds of such Disposition after
any payment of, or reasonable provision for, (a) any taxes payable by 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 TCI Ventures Group Common Stock" (or which would have been payable
but for the utilization of tax benefits attributable to the TCI Group or the
Liberty Media Group), (b) any transaction costs, including, without limitation,
any legal, investment banking and accounting fees and expenses and (c) any
liabilities and other obligations (contingent or otherwise) of, or attributed
to, the TCI Ventures Group, including, without
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limitation, any indemnity or guarantee obligations incurred in connection with
the Disposition or any liabilities for future purchase price adjustments and any
preferential amounts plus any accumulated and unpaid dividends and other
obligations (without duplication of amounts allocated for the satisfaction of
the Company's obligations with respect to Pre-Exchange Offer Securities which
are included in the determination of the Adjusted TCI Ventures Group Outstanding
Interest Fraction) in respect of Preferred Stock attributed to the TCI Ventures
Group and in respect of the TCI Ventures Group Preferred Interest. For purposes
of this definition, any properties and assets of the TCI Ventures Group
remaining after such Disposition shall constitute "reasonable provision" for
such amount of taxes, costs and liabilities (contingent or otherwise) as can be
supported by such properties and assets. To the extent the proceeds of any
Disposition include any securities or other property other than cash, the Board
of Directors shall determine the value of such securities or property, including
for the purpose of determining the equivalent value thereof if the Board of
Directors determines to pay a dividend or redemption price in cash or securities
or other property as provided in the third paragraph under "-- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of TCI Ventures Group
Common Stock."
"TCI Ventures Group Outstanding Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the aggregate number of shares of TCI
Ventures Group Common Stock outstanding on such date and the denominator of
which is the sum of (a) such aggregate number of shares of Series A TCI Ventures
Group Common Stock outstanding on such date and (b) the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest as of such
date.
NO INITIAL INTER-GROUP INTEREST IN THE TCI VENTURES GROUP
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent all of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares are issued in the Exchange
Offers, the TCI Group will not have any Inter-Group Interest in the TCI Ventures
Group. If fewer than all of the shares offered are issued, the remaining
Inter-Group Interest would be extinguished in consideration of the attribution
to the TCI Group of the TCI Ventures Group Preferred Interest.
An Inter-Group Interest in the TCI Ventures Group would be created only if
a subsequent transfer of cash or other property from the TCI Group to the TCI
Ventures Group is specifically designated by the Board of Directors as being
made to create an Inter-Group Interest in the TCI Ventures Group (in contrast to
transfers made for other consideration such as transfers as loans or in purchase
and sale transactions) or if outstanding shares of TCI Ventures Group Common
Stock are retired or otherwise cease to be outstanding following their purchase
with funds attributed to the TCI Group. In structuring the terms of the TCI
Ventures Group Stock Proposal, the Board of Directors determined that the TCI
Ventures 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. The
Company Charter does not permit the Liberty Media Group to create an interest in
the TCI Group or the Telephony Group, and the Amended Charter would not permit
the Liberty Media Group to create an interest in the TCI Ventures 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 TCI Ventures Group in either the TCI Group or the Liberty
Media Group could influence adversely the ability of the TCI Ventures Group
Common Stock to reflect the separate performance of the TCI Ventures Group, and
that an interest corresponding to the Inter-Group Interest held by the Liberty
Media Group in either the TCI Group or the TCI Ventures Group could influence
adversely the ability of the Liberty Media Group Common Stock to reflect the
separate performance of the Liberty Media Group.
The "Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest" means the number of shares of Series A TCI Ventures Group
Common Stock or Series B TCI Ventures Group Common Stock that could be issued or
sold by the Company for the account of the TCI Group in respect of any
Inter-Group Interest of the TCI Group in the TCI Ventures Group. The authorized
shares of TCI Ventures Group Common Stock in excess of the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest, if any,
and the outstanding shares of TCI Ventures Group Common Stock (the "Available
Shares") will be available for issuance as additional equity for the TCI
Ventures
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Group. The "TCI Ventures Group Outstanding Interest Fraction" means the
percentage interest in the common stockholders' equity value of the Company
attributable to the TCI Ventures Group that is represented at any time by the
outstanding shares of TCI Ventures Group Common Stock, and the "TCI Ventures
Group Inter-Group Interest Fraction" means any remaining percentage interest in
the common stockholders' equity value of the Company attributable to the TCI
Ventures Group that is attributed to the TCI Group and represented by the
Inter-Group Interest. The sum of the TCI Ventures Group Outstanding Interest
Fraction and the TCI Ventures Group Inter-Group Interest Fraction would always
equal 100%. The "Adjusted TCI Ventures Group Outstanding Interest Fraction"
means a fraction the numerator of which is the number of outstanding shares of
TCI Ventures Group Common Stock and the denominator of which is the sum of (a)
such number of outstanding shares, (b) the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest and (c) the number of
shares of TCI Ventures Group Common Stock issuable upon conversion, exercise or
exchange of Pre-Exchange Offer Securities. The Adjusted TCI Ventures Group
Outstanding Interest Fraction is used instead of the TCI Ventures Group
Outstanding Interest Fraction in certain provisions described under "Description
of TCI Ventures Group Common Stock and Effects on Existing Common
Stock -- Conversion and Redemption". The full definitions of "Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest," "TCI
Ventures Group Outstanding Interest Fraction", "TCI Ventures Group Inter-Group
Interest Fraction" and "Adjusted TCI Ventures Group Outstanding Interest
Fraction" are set forth in Annex II-A.
Any Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be represented by outstanding shares of TCI
Ventures Group Common Stock and, therefore, would not be entitled to any voting
rights. In addition, outstanding shares of TCI Ventures Group Common Stock that
are held by majority-owned subsidiaries of the Company (as to which the Company
owns a majority of the shares entitled to vote in the election of directors)
would not, in accordance with the DGCL, be entitled to vote on matters presented
to stockholders or be counted for quorum purposes. Accordingly, the Company will
not have any voting rights with respect to any Inter-Group Interest in the TCI
Ventures Group, and the outcome of any vote of the TCI Ventures Group Common
Stock would be determined by the holders of the outstanding shares of TCI
Ventures Group Common Stock (excluding any shares held by such majority-owned
subsidiaries of the Company).
For financial reporting purposes, shares of TCI Ventures Group Common Stock
acquired by consolidated subsidiaries of the Company included in the TCI Group
which remain outstanding following such acquisition would be combined with the
Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest, if any, and reported as the TCI Group's investment in the TCI Ventures
Group. Any differences between such reported investment and any then existing
Inter-Group Interest in the TCI Ventures Group would be reconcilable by adding
to any then existing Inter-Group Interest the number of outstanding shares of
TCI Ventures Group Common Stock held by consolidated subsidiaries of the
Company. Because these shares would still be outstanding for purposes of the
receipt of dividends and payment of redemption or liquidation amounts, the TCI
Group would obtain substantially the same economic benefits from such
outstanding shares as it would have received had such shares been retired or
otherwise ceased to be outstanding following their purchase and added to the
Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest.
The authorized shares of TCI Ventures 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 TCI
Ventures Group Common Stock. If there is an Inter-Group Interest in the future,
whenever shares of TCI Ventures Group Common Stock are subsequently issued or
sold by the Company, the Company will identify (i) the number of shares of TCI
Ventures Group Common Stock issued and sold that represent the Inter-Group
Interest, if any, the sale of which shares will reduce the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest on a
share-for-share basis and the net proceeds of which sale will be reflected
entirely in the combined financial statements of the TCI Group, and (ii) the
number of such shares that represent an additional equity interest in the TCI
Ventures Group, the sale of which shares will reduce the Available Shares and
the net proceeds of which sale will be reflected entirely in the combined
financial
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statements of the TCI Ventures Group. The Board of Directors expects to make
such determination, in its sole discretion, after consideration of such factors
as it deems relevant, including, without limitation, the needs of the Company,
the relative levels of internally generated cash flow of the Groups, the capital
expenditure plans of and investment opportunities available to the Groups, the
long-term business prospects for the Groups and the availability, cost and time
associated with alternative financing sources. See "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
TCI Ventures Group Common Stock, see Annex IV -- Illustration of Certain Terms.
If there is an Inter-Group Interest in the TCI Ventures Group, whenever
additional shares of TCI Ventures Group Common Stock are issued or sold by the
Company for the account of the TCI Group in respect of a reduction in its
Inter-Group Interest in the TCI Ventures Group, the Number of Shares Issuable
with Respect to the TCI Ventures Group Inter-Group Interest would decrease on a
share-for-share basis and the TCI Ventures Group Inter-Group Interest Fraction
would decrease and the TCI Ventures Group Outstanding Interest Fraction would
increase accordingly. If the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest is reduced to zero as a result of any
combination of one or more of such issuances or sales, shares of TCI Ventures
Group Common Stock could no longer be issued or sold by the Company for the
account of the TCI Group unless a further Inter-Group Interest in the TCI
Ventures Group is subsequently created. If the net proceeds of any issuance or
sale by the Company of TCI Ventures Group Common Stock are allocated to the TCI
Ventures Group, the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest would not be reduced, but the TCI Ventures Group
Inter-Group Interest Fraction would decrease and the TCI Ventures Group
Outstanding Interest Fraction would increase accordingly.
If there is an Inter-Group Interest in the TCI Ventures Group and the Board
of Directors determines to issue or deliver shares of TCI Ventures Group Common
Stock as a distribution on the TCI Group Common Stock, such distribution would
be treated as a distribution of shares issuable with respect to the TCI Group's
Inter-Group Interest in the TCI Ventures Group, and as a result, the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest
would decrease by the number of shares distributed to the holders of TCI Group
Common Stock, resulting in a proportionate decrease in the TCI Ventures Group
Inter-Group Interest Fraction and increase in the TCI Ventures Group Outstanding
Interest Fraction.
If shares of TCI Ventures Group Common Stock are retired or otherwise cease
to be outstanding following their purchase with funds attributed to the TCI
Group, the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would increase on a share-for-share basis and the TCI
Ventures Group Inter-Group Interest Fraction would increase and the TCI Ventures
Group Outstanding Interest Fraction would decrease accordingly. If the purchase
of shares of TCI Ventures Group Common Stock were made with funds attributed to
the TCI Ventures Group, the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest would not be increased, but the TCI Ventures
Group Inter-Group Interest Fraction would increase and the TCI Ventures Group
Outstanding Interest Fraction would decrease accordingly. The Board of Directors
would, in its sole discretion, determine whether purchases of TCI Ventures Group
Common Stock should be made with consideration attributed to the TCI Group or
the TCI Ventures Group, by considering such factors as it deems relevant,
including, without limitation, the needs of the Company, the relative levels of
internally generated cash flow of the Groups, the capital expenditure plans of
the Groups, the investment opportunities available to the Groups, the long-term
business prospects for the Groups and the availability, cost and time associated
with alternative financing sources.
The Board of Directors could, in its sole discretion, determine from time
to time to have the Company contribute cash or other property of the TCI Group
as additional equity to the TCI Ventures Group, which would increase the Number
of Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest
by the number determined by dividing the amount of such cash or the fair value
(as determined by the Board of Directors) of such property by the Market Value
of one share of Series A TCI Ventures Group Common Stock as of the date of such
contribution. In such event, the TCI Ventures Group Inter-Group Interest
Fraction will increase and the TCI Ventures Group Outstanding Interest Fraction
will decrease accordingly.
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The Board of Directors could, in its sole discretion, also determine from time
to time to transfer cash or other property of the TCI Ventures Group from the
TCI Ventures Group to the TCI Group in respect of a reduction in its Inter-Group
Interest in the TCI Ventures Group, in which case the Number of Shares Issuable
with Respect to the TCI Ventures Group Inter-Group Interest would be decreased
by the number determined by dividing the amount of such cash or the fair value
(as determined by the Board of Directors) of such property by the Market Value
of one share of Series A TCI Ventures Group Common Stock as of the date of such
contribution. In such event, the TCI Ventures Group Inter-Group Interest
Fraction would decrease and the TCI Ventures Group Outstanding Interest Fraction
would increase accordingly. The Board of Directors could, in its sole
discretion, determine to make contributions or other transfers referred to in
this paragraph after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing needs and
objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
In the event of any dividend or other distribution paid or distributed in
respect of the outstanding shares of TCI Ventures Group Common Stock (other than
in shares of TCI Ventures Group Common Stock, which will result in an adjustment
to the Number of Shares Issuable with Respect to the TCI Ventures Group Inter-
Group Interest as described above), the TCI Group will be credited, and the TCI
Ventures Group will be charged (in addition to the charge for such dividend or
other distribution paid upon outstanding shares of TCI Ventures Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or other distribution paid or distributed in respect of outstanding
shares of TCI Ventures Group Common Stock (including any dividend of TCI
Ventures Group Net Proceeds from the Disposition of all or substantially all of
the assets and properties of the TCI Ventures Group), times (ii) a fraction the
numerator of which is the TCI Ventures Group Inter-Group Interest Fraction and
the denominator of which is the TCI Ventures Group Outstanding Interest
Fraction.
See Annex IV -- Illustration of Certain Terms for illustrations of the
calculation of the Inter-Group Interest in the TCI Ventures Group and the
effects thereon of dividends on, and the sale or purchase of, shares of TCI
Ventures Group Common Stock and contributions of cash or other property of the
TCI Group to the TCI Ventures Group.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Board of
Directors does not currently intend to pay dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock or the TCI Ventures Group Common
Stock. However, the Board of Directors reserves the right to pay such dividends
at any time and from time to time out of funds legally available therefor.
Any decision to pay dividends in the future will depend on the financial
condition, results of operations and business requirements of the Company as a
whole. Any future dividends on the TCI Group Common Stock, the Liberty Media
Group Common Stock and the TCI Ventures Group Common Stock would be paid on such
basis as the Board of Directors determines, subject to the provisions described
under "Description of TCI Ventures 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 and the Combined Financial Information of
the TCI Ventures Group.
For information concerning dividends on the TCI Group Common Stock, the
Liberty Media Group Common Stock and the TCI Ventures Group Common Stock, see
"Description of TCI Ventures 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 TCI
Ventures Group Common Stock upon issuance thereof.
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INCLUSION IN NASDAQ NATIONAL MARKET
The Company has applied for inclusion of the Series A TCI Ventures Group
Common Stock and the Series B TCI Ventures Group Common Stock in the National
Market tier of The Nasdaq Stock Market under the symbols "TCIVA " and "TCIVB",
respectively. The Series A TCI Group Common Stock, Series B TCI Group Common
Stock, Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock will continue to be included in the National Market tier of
The Nasdaq Stock Market under the symbols "TCOMA," "TCOMB," "LBTYA" and "LBTYB,"
respectively.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion is a summary of the material federal
income tax consequences of the TCI Ventures Group Stock Proposal, but does not
purport to be a complete analysis of the relevant tax issues. The discussion is
based on the Code, Treasury Department regulations, published positions of the
Service and court decisions now in effect, all of which are subject to change.
In particular, Congress could enact legislation affecting the treatment of stock
with characteristics similar to the TCI Ventures Group Common Stock, or the
Treasury Department could change the current law in future regulations,
including regulations issued pursuant to its authority under Section 337(d) of
the Code (granting the Treasury regulatory authority with respect to the proper
tax treatment of corporate distributions of appreciated property to
shareholders). Any further legislation or regulations could be enacted or
promulgated so as to apply retroactively to the TCI Ventures Group Common Stock.
However, the Company believes that, as a practical matter, it is unlikely that
such legislation or regulations would apply retroactively to the TCI Ventures
Group Common Stock. The discussion contained herein is based on the assumption
that the TCI Ventures Group Stock Proposal will be implemented and the TCI
Ventures Group Common Stock will have the characteristics as described herein.
The Company has not applied for an advance tax ruling from the Service
because the Service has announced that it will not issue advance rulings on the
classification of stock with characteristics similar to the TCI Ventures Group
Common Stock.
IT IS IMPORTANT TO NOTE THAT THE FOLLOWING DISCUSSION IS BASED UPON THE LAW
IN EFFECT AS OF THE DATE HEREOF.
TAX IMPLICATIONS TO STOCKHOLDERS
This discussion addresses only those stockholders who hold TCI Group Common
Stock and/or would hold TCI Ventures Group Common Stock as a capital asset
within the meaning of Section 1221 of the Code. This discussion is included for
general information only. It does not discuss all aspects of federal income
taxation that could be relevant to a stockholder in light of such stockholder's
particular tax circumstances and does not apply to certain types of stockholders
who could be subject to special treatment under the federal income tax laws.
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS
WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS
TO WHICH THEY COULD BE SUBJECT.
Exchange of TCI Group Common Stock for TCI Ventures Group Common
Stock. Subject to certain conditions, including approval by stockholders of the
TCI Ventures Group Stock Proposal, the Company currently intends to offer shares
of Series A TCI Ventures Group Common Stock in exchange for shares of Series A
TCI Group Common Stock and to offer shares of Series B TCI Ventures Group Common
Stock in exchange for shares of Series B TCI Group Common Stock, on the terms
and subject to the conditions to be set forth in an Offering Circular and
related Letter of Transmittal. Additional shares of TCI Ventures 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 TCI Ventures
Group Common Stock for other corporate purposes.
The Company believes that the TCI Ventures Group Common Stock would be
stock of the Company for federal income tax purposes, and therefore that the
exchange of TCI Group Common Stock for TCI Ventures Group Common Stock would be
a tax free exchange. The tax basis in the TCI Ventures Group Common Stock
received in such exchange would equal the sum of the tax basis in the TCI Group
Common Stock
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surrendered in exchange therefor, and, although the question is not free from
doubt, the holding period of such TCI Ventures Group Common Stock would include
the holding period of the TCI Group Common Stock surrendered therefor, assuming
that such TCI Group Common Stock was a capital asset in the hands of the
exchanging stockholder on the date of the exchange. If different shares of TCI
Group Common Stock have different holding periods, the Service takes the
position that the various holding periods must be allocated pro rata among all
the TCI Ventures Group Common Stock received.
Although the Company believes that the exchange of the TCI Group Common
Stock for TCI Ventures Group Common Stock would not result in the recognition of
any income, gain or loss by stockholders, there are no federal income tax
regulations, court decisions or published Service rulings bearing directly on
stock with characteristics of the TCI Ventures Group Common Stock, particularly
the dividend and liquidation features. In addition, the Service announced during
1987 that it was studying the federal income tax consequences of stock which has
certain voting and liquidation rights in an issuing corporation, but whose
dividend rights are determined by reference to the earnings and profits of a
segregated portion of the issuing corporation's assets, and that it would not
issue any advance rulings regarding such stock. Although the Service has since
withdrawn such stock from its list of matters under consideration, it has
reiterated that it would not issue advance rulings regarding such stock. In the
absence of such a ruling, there is a risk that the Service could assert that the
TCI Ventures Group Common Stock represents property other than stock of the
Company.
If the TCI Ventures Group Common Stock were treated as property other than
stock of the Company, stockholders participating in the Exchange Offers would
recognize gain (or loss) in the amount by which the fair market value of the TCI
Ventures Group Common Stock received exceeds (or is less than) the adjusted
basis of the TCI Group Common Stock exchanged therefor. In addition, if the TCI
Ventures Group Common Stock were treated as property other than stock of the
Company, the Company could recognize gain on the exchange of the TCI Ventures
Group Common Stock for TCI Group Common Stock, in an amount equal to the
difference between the fair market value of the TCI Ventures Group Common Stock,
and the Company's tax basis in such property. However, as indicated above, the
Company believes that the TCI Ventures Group Common Stock would be treated as
stock of the Company.
Sale or Exchange of Common Stock. Upon the taxable sale or exchange of the
TCI Ventures Group Common Stock, a stockholder would recognize gain or loss
equal to the difference between (i) any cash received plus the fair market value
of any other consideration received and (ii) the tax basis of the stock sold or
exchanged. Such tax basis would, in the case of a purchase of the stock, be the
amount paid therefor, or, if received in the Exchange Offers, be determined as
described under "-- Exchange of TCI Group Common Stock for TCI Ventures Group
Common Stock" above.
Should the Company redeem the TCI Ventures Group Common Stock in the future
by distributing shares of one or more TCI Ventures Group Subsidiaries in
exchange therefor, it intends to do so in a manner so that such redemption will
be tax free under Section 355 of the Code. If such redemption does not qualify
under Section 355 of the Code, then the holders of the TCI Ventures Group Common
Stock could, depending upon their individual circumstances, either (a) recognize
gain on the redemption in an amount equal to the difference between the fair
market value of the TCI Ventures Group Subsidiaries' stock received and the
stockholders' tax basis in their shares being redeemed or (b) be treated as
having received a taxable dividend in an amount equal to the fair market value
of the received TCI Ventures Group Subsidiaries' stock.
The excess of net long-term capital gains over net short-term capital loss
could be taxed at a rate lower than ordinary income for certain noncorporate
taxpayers. A capital gain is long-term if the asset is held for more than one
year and is short-term if held for one year or less. The distinction between
capital gain or loss and ordinary income is also relevant for purposes of, among
other things, the limitation on the deductibility of capital losses.
Conversion. The TCI Ventures Group Common Stock should be treated as stock
of the Company for federal income tax purposes. If the TCI Ventures Group Common
Stock is so treated, a conversion of such stock into TCI Group Common Stock
pursuant to the terms of the Amended Charter should constitute a tax free
exchange. However, it is not clear that an exchange of shares of TCI Ventures
Group Common Stock for
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shares of TCI Group Common Stock, or shares of TCI Group Common Stock for shares
of TCI Ventures Group Common Stock, would constitute a tax free exchange under
the Code if such exchange occurred between shareholders (rather than between a
shareholder and the Company).
Dividends. Dividend payments received by a holder of TCI Ventures Group
Common Stock who is not a Nonresident Alien (as defined below) will be taxable
at ordinary income rates to the extent of the current and accumulated earnings
and profits of the Company, then as a return of basis of the TCI Ventures Group
Common Stock of the holder, then as capital gain. Corporate shareholders would
generally be eligible for a dividends received deduction with respect to the
distribution.
Nonresident Alien Holders. Dividend payments received by a holder of TCI
Ventures Group Common Stock who is a Nonresident Alien would be subject to
United States federal withholding tax unless a treaty exemption applies or the
Nonresident Alien otherwise establishes an exemption. A Nonresident Alien holder
would not be subject to United States federal income or withholding tax on any
gain realized on the taxable sale or exchange of any such stock, unless (A) such
gain was effectively connected with a United States trade or business of the
Nonresident Alien, (B) the Nonresident Alien was an individual who had been
present in the United States for a period or periods of 183 days or more during
the taxable year and certain other conditions were met or (C) the stock sold or
exchanged was a "United States Real Property Interest" as defined in Section
897(c)(1) of the Code at any time during the five years prior to the sale or
exchange of the stock or at any time during the time that the Nonresident Alien
held such stock, whichever time was shorter. The TCI Ventures Group Common Stock
sold or exchanged would be a United States Real Property Interest only if, at
any time during the five years prior to the sale or exchange of such stock, or
at any time during the period that the Nonresident Alien held such stock,
whichever time was shorter, the Company had been a "United States real property
holding corporation" as defined in Section 897(c)(2) of the Code and the
Nonresident Alien owned directly or indirectly more than 5% of such series of
TCI Ventures Group Common Stock. The Company believes that it is not, has not
been and will not become a "United States real property holding corporation" for
federal income tax purposes.
A "Nonresident Alien" is any person who, for federal income tax purposes,
is a foreign corporation, a nonresident alien individual, a nonresident alien
fiduciary or a foreign estate or trust, or a foreign partnership that includes
as a member any of the foregoing persons.
Backup Withholding. Certain noncorporate holders of TCI Ventures Group
Common Stock could be subject to backup withholding at a rate of 31% on the
payment of dividends on such stock. Backup withholding will apply only if the
holder (i) failed to furnish its Taxpayer Identification Number ("TIN"), which,
for an individual, is his or her Social Security number, (ii) furnished an
incorrect TIN, (iii) was notified by the Service that it had failed to properly
report payments of interest or dividends or (iv) under certain circumstances,
failed to certify under penalties of perjury that it (x) had furnished a correct
TIN and (y) had not been notified by the Service that it had failed to properly
report payments of interest or dividends. Stockholders should consult their tax
advisors regarding their qualification for exemption from backup withholding and
the procedures for obtaining such an exemption if applicable.
The amount of any backup withholding on a payment to a holder of TCI
Ventures Group Common Stock would be allowed as a credit against such
stockholder's federal income tax liability and could entitle such stockholder to
a refund, provided that the required information was furnished to the Service.
TAX IMPLICATIONS TO THE COMPANY
As noted above, the TCI Ventures Group Common Stock should be treated as
stock of the Company for federal income tax purposes. Accordingly, no gain or
loss should be recognized by the Company on the issuance of shares of TCI
Ventures Group Common Stock in exchange for shares of TCI Group Common Stock or
on subsequent sales of TCI Ventures Group Common Stock. If, however, the TCI
Ventures Group Common Stock were treated as property other than stock of the
Company, the Company could recognize gain on the sale of TCI Ventures Group
Common Stock in an amount equal to the difference between the proceeds received
therefrom and its tax basis in the hands of the Company. If the TCI Ventures
Group Common Stock is treated as stock of a subsidiary of the Company, and not
as stock of the Company, the TCI Ventures Group
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could, depending upon the amount of stock issued, be treated as not includable
in the Company's consolidated federal income tax return. If so treated, any
dividends paid or deemed paid to the Company by the TCI Ventures Group would be
taxed to the Company.
EXISTING CAPITAL STOCK
Each series of Common Stock and each class and series of Preferred Stock
currently outstanding will remain authorized following approval of the TCI
Ventures Group Stock Proposal.
No shares of Telephony Group Common Stock have been issued or are
outstanding. As of June 30, 1997, 628,870,996 shares of Series A TCI Group
Common Stock (net of shares held by subsidiaries of TCI), 54,221,314 shares of
Series B TCI Group Common Stock (net of treasury stock), 228,239,906 shares of
Series A Liberty Media Group Common Stock (net of treasury stock) and 21,175,465
shares of Series B Liberty Media Group Common Stock had been issued and were
outstanding and 116,853,196 shares of Series A TCI Group Common Stock were held
by subsidiaries of the Company. As of that date, 125,616,994 shares of Series A
TCI Group Common Stock and 29,915,040 shares of Series A Liberty Media Group
Common Stock were reserved for issuance upon conversion, exchange or exercise of
outstanding convertible or exchangeable securities 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 416,528,172
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
authorized and unissued shares of Series Preferred Stock, may be reissued as
shares of another series of Series Preferred Stock, but may not be reissued as
Series E Preferred Stock.
As of June 30, 1997, 1,620,026 shares of Class B Preferred Stock, 70,575
shares of Series C Preferred Stock, 995,324 shares of Series D Preferred Stock,
278,307 shares of Series F Preferred Stock, 6,693,077 shares of Series G
Preferred Stock and 6,693,177 shares of Series H Preferred Stock were
outstanding. All of the outstanding shares of Series F Preferred Stock are held
by subsidiaries of the Company. The liquidation preference as of such date of
the Class B Preferred Stock was $100 per share, of the Series C Preferred Stock
was $2,375 per share, of the Series D Preferred Stock was $300 per share, of the
Series F Preferred Stock was $.01 per share, of the Series G Preferred Stock was
$21.60 per share, and of the Series H Preferred Stock was $5.40 per share. After
receipt of their liquidation preference, holders of Series F Preferred Stock are
entitled to receive from the assets of the Company available for distribution to
common stockholders an amount equal to the amount per share to be distributed to
holders of Series A TCI Group Common Stock in such liquidation,
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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 25 shares of Series A Liberty Media Group Common Stock, and, upon
conversion of shares of the Series C Preferred Stock each holder of Series C
Preferred Stock is entitled to receive one additional share of Series A Liberty
Media Group Common Stock for every two such shares received upon conversion;
(ii) each share of Series D Preferred Stock is convertible at the option of the
holder into 10 shares of Series A TCI Group Common Stock, two and one-half
shares of Series A Liberty Media Group Common Stock (and, upon conversion of
shares of the Series D Preferred Stock, each holder of Series D Preferred Stock
is entitled to receive one additional share of Series A Liberty Media Group
Common Stock for every two such shares received upon conversion), and one share
of TCI Satellite Entertainment, Inc. Series A Common Stock ("SATCo Series A
Stock"); (iii) each share of Series F Preferred Stock is convertible into
1,496.65 shares of Series A TCI Group Common Stock; (iv) each share of Series G
Preferred Stock is convertible at the option of the holder into 1.190 shares of
Series A TCI Group Common Stock, and (v) each share of Series H Preferred Stock
is convertible at the option of the holder into .2625 shares of Series A Liberty
Media Group Common Stock and, upon conversion of shares of Series H Preferred
Stock each holder of Series H Preferred Stock is entitled to receive one
additional share of Series A Liberty Media Group Common Stock for every two such
shares received upon conversion, in each case subject to antidilution
adjustments. The Series C Preferred 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, the Company Charter and
the Company's Bylaws with respect to the foregoing are outlined below.
DGCL Section 203, in general, prohibits a "business combination" between a
corporation and an "interested stockholder" within three years of the time such
stockholder became an "interested stockholder," unless (i) prior to such time
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
directors who are also officers and by
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certain employee stock plans or (iii) at or subsequent to such time, the
business combination is approved by the board of directors and authorized by the
affirmative vote at a stockholders' meeting of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. The
term "business combination" is defined to include, among other transactions
between the interested stockholder and the corporation or any direct or indirect
majority-owned subsidiary thereof, a merger or consolidation; a sale, pledge,
transfer or other disposition (including as part of a dissolution) of assets
having an aggregate market value equal to 10% or more of either the aggregate
market value of all assets of the corporation on a consolidated basis or the
aggregate market value of all the outstanding stock of the corporation; certain
transactions that would increase the interested stockholder's proportionate
share ownership of the stock of any class or series of the corporation or such
subsidiary; and any receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any such subsidiary. In general, and subject to
certain exceptions, an "interested stockholder" is any person who is the owner
of 15% or more of the outstanding voting stock (or, in the case of a corporation
with classes of voting stock with disparate voting power, 15% or more of the
voting power of the outstanding voting stock) of the corporation, and the
affiliates and associates of such person. The term "owner" is broadly defined to
include any person 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 The Nasdaq Stock Market 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, the Telephony Group Common Stock (of which
no shares have been issued) 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 TCI Ventures Group Stock Proposal is
approved, would include the TCI Ventures Group Common Stock (which would be
substituted for 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 annual meeting of stockholders. The exact number of
directors, currently 10, is fixed by the Board of Directors. The holders of
Voting Securities and of Class B Preferred Stock, Series G Preferred Stock and
Series H Preferred Stock, voting together as a single class, vote in elections
for directors. (The holders of the Company's Series F Preferred Stock are
entitled to vote in the election of directors; however, the DGCL prohibits the
voting of such shares because such shares are held by subsidiaries of the
Company.) Stockholders of the Company do not have cumulative voting rights.
The Company Charter authorizes the issuance of 50,000,000 shares of Series
Preferred Stock, of which 33,901,240 remain available for issuance as of June
30, 1997. Under the Company Charter, the Board of
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Directors is authorized, without further action by the stockholders of the
Company, to establish the preferences, limitations and relative rights of the
Series Preferred Stock. In addition, 1,900,000,000 shares of TCI Group Common
Stock, 825,000,000 shares of Liberty Media Group Common Stock and 825,000,000
shares of Telephony Group Common Stock are currently authorized by the Company
Charter, of which 1,069,508,630 shares of TCI Group Common Stock, 575,022,629
shares of Liberty Media Group Common Stock and 825,000,000 shares of Telephony
Group Common Stock remain available for issuance as of June 30, 1997 (without
taking into consideration shares reserved for issuance upon conversion, exchange
or exercise of outstanding convertible or exchangeable securities and options).
If the TCI Ventures Group Stock Proposal is approved by stockholders, the
825,000,000 authorized shares of Telephony Group Common Stock would become
authorized shares of TCI Ventures Group Common Stock. The issue and sale of
shares of TCI Group Common Stock and Liberty Media Group Common Stock, TCI
Ventures Group Common Stock and/or Series Preferred Stock could occur in
connection with an attempt to acquire control of the Company, and the terms of
such shares of Series Preferred Stock could be designed in part to impede the
acquisition of such control.
The 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 SEC had each proposed
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (5) the consent of each nominee to serve as a director of the Company if so
elected. Any action to remove directors is required to be for "cause" (as
defined in the 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 TCI Ventures Group Stock Proposal, if
approved by the stockholders, should not make a change in control of the Company
more difficult. The number of authorized shares of Common Stock will not
increase and, although the number of outstanding shares will increase upon the
issuance of the TCI Ventures Group Common Stock, the cost to an acquiring person
of obtaining majority control would depend on the aggregate market value and the
terms of the outstanding shares. The Company cannot predict whether, to what
extent or during what periods of time such cost may increase or decrease. See
"Factors to be Considered -- No Assurance as to Market Price."
Nevertheless, the existence of the TCI Ventures 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
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to take into account different prices at which shares of the different series
might be acquired, that a merger would require allocation of consideration among
the different series of Common Stock and the effects of actions the Company
might take such as causing a conversion of the TCI Ventures Group Common Stock.
PROPOSAL NO. 3 -- LIBERTY MEDIA GROUP AMENDMENT
GENERAL
The holders of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Series C Preferred Stock are also being asked to consider and
approve the proposed amendments to the Company Charter set forth in Annex II-B.
The Liberty Media Group Amendment would expand the Company's right to redeem the
Liberty Media Group Common Stock in exchange for stock of a subsidiary that
holds all of the assets and liabilities attributed to the Liberty Media Group.
REDEMPTION FOR STOCK OF SUBSIDIARY
The Company Charter currently provides that at any time at which all of the
assets and liabilities attributed to the Liberty Media Group are held, directly
or indirectly, by any one or more corporations all of the capital stock of which
is owned by the Company (the "Liberty Media Group Subsidiaries"), TCI may redeem
all of the outstanding shares of Liberty Media Group Common Stock in exchange
for shares of the common stock of each Liberty Media Group Subsidiary. The
Liberty Media Group Amendment would redefine the term "Liberty Media Group
Subsidiaries" to be those "Qualifying Subsidiaries" that at the time of such
redemption hold, directly or indirectly, all of the assets and liabilities
attributed to the Liberty Media Group.
The term "Qualifying Subsidiary", which the Company Charter currently uses
only with respect to the Telephony Group, would be redefined as a Subsidiary of
the Company in which either (i) the Company's ownership and voting interest is
sufficient to satisfy the requirements of the Service for a distribution of the
Company's interest in such Subsidiary to the holders of Liberty Media Group
Common Stock or TCI Ventures Group Common Stock, as applicable, to be tax free
to such holders or (ii) the Company owns, directly or indirectly, all of the
issued and outstanding capital stock.
The Liberty Media Group Amendment, by permitting the redemption of the
Liberty Media Group Common Stock in exchange for the stock of a less than wholly
owned subsidiary, would increase the Company's flexibility in structuring the
ownership of the assets attributed to the Liberty Media Group. The Company
currently has such flexibility under the Company Charter with respect to the
Telephony Group and would have such flexibility under the Amended Charter with
respect to the TCI Ventures Group. The flexibility that the Liberty Media Group
Amendment would provide the Company with respect to the Liberty Media Group
would be accomplished without imposing on the holders of Liberty Media Group
Common Stock any tax risk with respect to such redemption that would be in
addition to the tax consequences associated with the redemption of Liberty Media
Group Common Stock for stock of a wholly owned subsidiary.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE LIBERTY MEDIA GROUP
AMENDMENT PROPOSAL AND BELIEVES THAT IT 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 LIBERTY MEDIA GROUP STOCK PROPOSAL.
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PROPOSAL OF STOCKHOLDER
The following proposal is expected to be presented to the Annual Meeting:
PROPOSAL NO. 4
STOCKHOLDER PROPOSAL REQUESTING ELIMINATION OF ELECTION OF
DIRECTORS BY CLASSES AND DIRECTORS' STATEMENT AGAINST PROPOSAL
The Company is informed that John J. Gilbert, whose address is 29 East 64th
Street, New York, New York 10021-7043, a record holder of 204 shares of common
stock, and Margaret B. Gilbert who, along with John J. Gilbert, are the
Executors of the Estate of Lewis D. Gilbert for 400 shares, and both also
trustees U/W of Samuel Rosenthal for 200 shares, intend to propose at the Annual
Meeting the following resolution.
"RESOLVED: That the stockholders of Tele-Communications, Inc., assembled in
annual meeting in person and by proxy, hereby request that the Board of
Directors take the needed steps to provide that at future elections of directors
new directors be elected annually and not by classes, as is now provided, and
that on expiration of present terms of directors their subsequent election shall
also be on an annual basis."
The proponents have furnished the following statement setting forth the
reasons advanced by them in support of their proposal:
"ARCO to its credit, voluntarily ended theirs stating that when a very high
percentage (34.6%) desired it to be changed to an annual election it was
reason enough for them to change it. Several other companies have also
followed suit such as: Pacific Enterprises, Katy Industries, Hanover Direct
and others. Ameritech is one of the latest to end theirs."
"A few years ago my resolution on the subject was withdrawn when the
Westinghouse directors agreed to end their stagger system. At the
Lockheed-Martin merger the stagger system was ended and also at a special
meeting of First Commerce Corporation in 1995. Further, Alleghany Power
System tried to put in a stagger system, as well as take away cumulative
voting and the stockholders defeated it, showing stockholders are
interested in their rights."
"In the recent merger of Nynex into Bell Atlantic the annual election of
directors, instead of the stagger system that Nynex had, will be adopted."
"Because of the normal need to find new directors and because of
environment problems and the avalanche of derivative losses and many groups
desiring to have directors who are qualified on the subjects, we think that
ending the stagger system of electing directors is the answer."
"Equitable Life Insurance Company, which is now called Equitable Companies,
converted from a policy owned company to a public stockholder meeting.
Thanks to AXA, the comptrolling [sic] French insurance company not wanting
it, they now do not have a staggered board."
"Orange and Rockland Utility Company had a terrible time with the stagger
system and its 80% clause to recall a director. The chairman was involved
in a scandal affecting the company. Not having enough votes the meeting to
get rid of the chairman had to be adjourned. Finally, at the adjourned
meeting enough votes were counted to recall him."
"If you agree, please mark your proxy for this resolution; otherwise it is
automatically cast against it, unless you have marked to abstain."
BOARD OF DIRECTORS STATEMENT IN OPPOSITION TO PROPOSAL NO. 4
Under the corporate law of Delaware, the state in which the Company is
incorporated, the change contemplated by the proposal would require an amendment
to the Company Charter which must first be approved by the Board of Directors
and then submitted to a vote of the stockholders. A vote in favor of Proposal
No. 4, therefore, would constitute a request that the Board initiate this
amendment. The Board of
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Directors does not believe, however, that such an amendment would be in the best
interests of the Company or its stockholders.
The Company has had a classified board since 1979, when the stockholders
approved an amendment to the Company's then Certificate of Incorporation to
provide for the current division of the Board of Directors into three classes,
with one class elected each year for a three-year term. The Board of Directors'
reasons for initially proposing such amendment, which reasons are still
applicable today, include the Board's belief that a classified Board enables the
Company to provide continuity of membership on the Board and to preserve
stability and continuity of planning and operations for a reasonable period into
the future. In addition, the Board of Directors believes a classified Board
better enables the Board to protect the interests of stockholders generally in
the event that another corporation or group of persons should acquire a
substantial amount of the Company's shares and seek to dominate or otherwise
influence the Company's affairs. Since only one class of directors stands for
election each year, a change in the majority of the Board, absent resignations,
would require action at two annual meetings of stockholders. In addition, the
classified board may significantly impede the efforts of a small but dominant
group to "pack" the Board of Directors by increasing the number of directors and
electing its own designees to fill the increase or to attempt to assert control
over the Board of Directors, by removing incumbent directors and filling the
resulting vacancy with persons of their own choosing. For the foregoing reasons,
the Board of Directors believes that the amendment contemplated by Proposal No.
4 is not in the best interests of the Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS, FOR THE REASONS STATED ABOVE, UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST PROPOSAL NO. 4.
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CONCERNING MANAGEMENT
EXECUTIVE OFFICERS
The following lists the executive officers of TCI, other than directors
listed under "PROPOSAL NO. 1 -- ELECTION OF DIRECTORS," their birth dates, a
description of their business experience and positions held with the Company as
of April 15, 1997. All officers are appointed for an indefinite term, serving at
the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Stephen M. Brett.......................... Executive Vice President, General Counsel and
Born September 20, 1940 Secretary of TCI since January of 1994. Appointed TCIC
Senior Vice President and General Counsel of TCIC as
of December of 1991. Vice President and Secretary and
a director of most of TCI's subsidiaries.
Fred A. Vierra............................ Executive Vice President of TCI since January of 1994.
Born November 9, 1931 Chief Executive Officer and director of International
since October of 1994. Vice Chairman of the Board of
International since May of 1995. From October 1994
through May 1995, Mr. Vierra served as Chairman of the
Board of International. Executive Vice President of
TCIC from December of 1991 to October of 1994.
Robert R. Bennett......................... President and Chief Executive Officer of Liberty since
Born April 19, 1958 April of 1997. From June 1995 through March 1997, was
Executive Vice President, Chief Financial Officer,
Secretary and Treasurer of Liberty. Prior to June
1995, was Senior Vice President of Liberty since
September 1991 and Vice President of TCIC from 1990
through March 1991 while also holding the titles of
Treasurer, Secretary and Chief Financial Officer of
Liberty.
Brendan R. Clouston....................... Executive Vice President of TCI since January of 1994;
Born April 28, 1953 Chief Financial Officer of TCI from March 1997 to
April 1997; President and Chief Executive Officer of
TCIC from October of 1994 to March of 1997; Executive
Vice President and Chief Operating Officer of TCIC
from March of 1992 to October of 1994; previously
Senior Vice President of TCIC since December of 1991.
Larry E. Romrell.......................... Executive Vice President of TCI since January 1994.
Born December 30, 1939 President of TCI Technology Ventures, Inc., a wholly
owned subsidiary of TCI, since September of 1994 and a
director of same since December of 1994; Senior Vice
President of TCIC from 1991 to October of 1994;
previously held various executive positions with
WestMarc.
Marvin Jones.............................. Appointed TCIC Executive Vice President and Chief
Born September 11, 1937 Operating Officer in March 1997. Named TCIC director
in 1997. President of one of TCIC's three cable units
since November 1, 1996. Consultant since December 1991
in the cable television industry.
Gary K. Bracken........................... Controller of TCIC since 1969. Appointed Senior Vice
Born July 29, 1939 President of TCIC in December of 1991. Was named Vice
President and Principal Accounting Officer of TCIC in
1982. Senior Vice President of TPAC.
Bernard W. Schotters...................... Appointed Senior Vice President-Finance and Treasurer
Born November 25, 1944 of TCIC in December of 1991. Was appointed Vice
President-Finance of TCIC in 1984. Vice President and
Treasurer of most of TCI's subsidiaries.
</TABLE>
Mr. Bob Magness, founder and Chairman of the Board of TCI, died in November
of 1996. Mr. Magness had been Chairman of the Board and director of TCI since
June of 1994 and of TCIC (predecessor company to TCI) since 1973. He had been a
TCIC director since 1968. On November 25, 1996, the Board of Directors
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<PAGE> 96
named John C. Malone to the position of Chairman of the Board to replace Bob
Magness. On December 13, 1996, the Board of Directors named Paul A. Gould as
director to fill the unexpired term on the Board of Directors held by Bob
Magness.
Mr. Peter R. Barton was Executive Vice President of TCI since January of
1994 and was President and Chief Executive Officer of Liberty since June of
1990. In April of 1997, Mr. Barton resigned his positions with the Company.
Mr. Barry P. Marshall was Executive Vice President and Chief Operating
Officer of TCIC from October of 1994 through March of 1997. In March of 1997,
Mr. Marshall resigned his positions as Executive Vice President and Chief
Operating Officer of TCIC. Mr. Marshall was Executive Vice President and Chief
Operating Officer of TCI Cable Management Corporation, TCIC's primary operating
subsidiary, from March of 1992 through January 1, 1994, where he directly
oversaw all of TCIC's regional operating divisions. From 1986 to March of 1992,
Mr. Marshall was Vice President and Chief Operating Officer of TCIC's largest
regional operating division.
Mr. Robert N. Thomson was appointed Senior Vice President of TCIC in
February of 1995. He was Senior Vice President of Communications and Policy
Planning for TCIC from 1991 to October of 1994. In June of 1997, Mr. Thomson
resigned his position with the Company.
There are no family relations, of first cousin or closer, among the above
named individuals, by blood, marriage or adoption, except that Bob Magness and
Kim Magness were father and son, respectively.
During the past five years, none of the above persons have had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
TCI's executive officers and directors, and persons who own more than ten
percent of a registered class of TCI's equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than ten-percent shareholders are required by SEC regulation to furnish TCI with
copies of all Section 16 forms they file.
Based solely on a review of the copies of such Forms 3, 4 and 5 and
amendments thereto furnished to TCI with respect to its most recent fiscal year,
or written representations that no Forms 5 were required, TCI believes that,
during the year ended December 31, 1996, all Section 16(a) filing requirements
applicable to its officers, directors and greater than ten-percent beneficial
owners were complied with, except that one report, covering one transaction, was
filed late by Mr. Donne F. Fisher, a director of the Company, one report,
covering one transaction, was filed late by Mr. J.C. Sparkman, another director
of the Company, and one report, covering shares held by minors, was filed late
by Mr. Bernard W. Schotters, an officer of the Company.
EXECUTIVE COMPENSATION
On December 4, 1996, the Company distributed (the "Satellite Distribution")
to the holders of shares of TCI Group Common Stock all of the issued and
outstanding common stock of Satellite. Certain directors, officers and employees
of TCI and its subsidiaries have been granted options to purchase shares of
Series A TCI Group Common Stock ("TCI Options") and stock appreciation rights
with respect to shares of Series A TCI Group Common Stock ("TCI SARs"). The TCI
Options and TCI SARs have been granted pursuant to various stock plans of TCI
(the "TCI Plans"). The TCI Plans give the Board of Directors of TCI (the "TCI
Board") the authority to make equitable adjustments to outstanding TCI Options
and TCI SARs in the event of certain transactions, of which the Satellite
Distribution was one.
The TCI Board determined that, immediately prior to the Satellite
Distribution, each TCI Option would be divided into two separately exercisable
options: (i) an option to purchase TCI Satellite Entertainment, Inc. Series A
Common Stock ("SATCo Option"), exercisable for the number of shares of SATCo
Series A Stock that would have been issued in the Satellite Distribution in
respect of the shares of Series A TCI Group Common Stock subject to the
applicable TCI Option, if such TCI Option had been exercised in full immediately
prior to the record date of the Satellite Distribution, and containing
substantially equivalent terms as the existing TCI Option, and (ii) an option to
purchase Series A TCI Group Common Stock (a
87
<PAGE> 97
"TCI Group Series A Option"), exercisable for the same number of shares of
Series A TCI Group Common Stock as the corresponding TCI Option had been. The
aggregate exercise price of each TCI Option was allocated between the SATCo
Option and the TCI Group Series A Option into which it was divided, and all
other terms, including date of grant, of the SATCo Option and TCI Group Series A
Option are in all material respects the same as the terms of such TCI Option.
Similar adjustments were made to the outstanding TCI SARs, resulting in the
holders thereof holding TCI Group Series A SARs and SATCo SARs instead of TCI
SARs, and to outstanding restricted stock awards, resulting in the holders
thereof holding restricted shares of SATCo Series A Stock in addition to
restricted stock of Series A TCI Group Common Stock. The foregoing adjustments
were made pursuant to the anti-dilution provisions of the TCI Plans pursuant to
which the respective TCI Group Series A Options and TCI Group Series A SARs were
granted.
Prior to the Satellite Distribution, TCI and Satellite entered into an
agreement to sell to each other from time to time at the then current market
price shares of Series A TCI Group Common Stock and SATCo Series A Stock,
respectively, as necessary to satisfy their respective obligations under such
securities.
Prior to the Satellite Distribution, Satellite was a member of the TCI
Group and all of the assets and businesses transferred to Satellite were
included in the TCI Group. Accordingly, the Satellite Distribution was made to
the TCI Group stockholders and the holders of Liberty Media Group Common Stock
did not participate in the Satellite Distribution.
Effective January 14, 1997, the Company distributed the Liberty Group Stock
Dividend. As a result of the Liberty Group Stock Dividend, the number of options
granted to purchase Series A Liberty Media Group Common Stock and the price to
purchase such options have been adjusted.
Summary Compensation Table of TCI. The following table shows, for the
three years ended December 31, 1996, all forms of compensation for the Chief
Executive Officer and each of the four most highly compensated executive
officers of TCI, whose total annual salary and bonus exceeded $100,000 for the
year ended December 31, 1996. Additionally, the following table includes
disclosure of all forms of compensation paid to Mr. Bob Magness during the year
ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------------
-------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ ALL OTHER
COMPENSATION AWARDS SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($) ($) (#)(17) ($)
--------------------------- ---- --------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bob Magness.................. 1996 $863,462 $ 65,900(3)(4) -- -- $17,000(15)(16)
Formerly Chairman 1995 $850,000 $ -- -- 1,475,000(10) $17,500(15)(16)
of the Board 1994 $830,769 $ -- -- -- $ 2,500(16)
John C. Malone............... 1996 $900,000 $ 4,496(3) -- 50,000(12) $17,500(15)(16)
Chief Executive Officer 1995 $850,000(1) $ 3,758(3) -- 1,475,000(10) $17,500(15)(16)
1994 $821,731(1) $ 2,610(3) -- -- $17,500(15)(16)
Fred A. Vierra............... 1996 $650,000(2) $ 4,231(3) -- -- $15,000(15)
Executive Vice President 1995 $650,000(2) $ 3,207(3) $ 380,625(6) 400,000(10) $15,000(15)
1994 $669,613(2) $ 1,024(3) -- 295,000(11) $15,000(15)
Brendan R. Clouston.......... 1996 $650,000 $244,147(3)(5) $1,999,500(7) 664,106(13) $15,000(15)
Executive Vice President 1995 $550,000 $ 3,181(3) $2,062,500(8) 1,100,000(10) $15,000(15)
1994 $525,000 $ 1,000(3) -- 295,000(11) $15,000(15)
Peter R. Barton.............. 1996 $503,846 $ 1,315(3) -- -- $ 9,500(15)
Executive Vice President 1995 $400,000 $ 1,283(3) -- 1,500,000(10) $ 9,240(15)
1994 $350,000 $ -- -- 295,000(11) $ 9,240(15)
Larry E. Romrell............. 1996 $500,000 $ 4,910(3) -- 664,086(14) $15,000(15)
Executive Vice President 1995 $408,654 $ 3,788(3) $1,087,500(9) 442,500(10) $15,000(15)
1994 $391,347 $ 1,659(3) -- 295,000(11) $15,000(15)
</TABLE>
- ---------------
(1) Includes deferred compensation of $320,000 in each of 1995 and 1994.
(2) Includes deferred compensation of $250,000 in each of the years presented.
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<PAGE> 98
(3) Consists of amounts reimbursed during the year for the payment of taxes.
During 1996, a total of $4,207 was paid to Mr. Clouston and $4,159 was paid
to Mr. Magness.
(4) Includes $61,741 in 1996 representing the Company's allocated cost for
personal use of the Company's aircraft and flight crew.
(5) Includes $239,940 in 1996 of dividend income received on WestMarc preferred
stock which is subject to forfeiture (see note 7 below).
(6) International has a stock incentive plan (the "International Plan"). On
December 13, 1995, pursuant to the International Plan, Mr. Vierra was
granted 15,000 restricted shares of TINTA Series A Stock. Such restricted
shares vest as to 50% of such shares on December 13, 1999 and as to the
remaining 50% of such shares on December 13, 2000. The value of such
restricted stock award was $198,750 at the end of 1996 based upon the
closing price of TINTA Series A Stock on December 31, 1996. International
has not paid cash dividends on TINTA Series A Stock and does not anticipate
declaring and paying cash dividends on the TINTA Series A Stock at any time
in the foreseeable future.
(7) On July 1, 1996, pursuant to a Restricted Stock Award Agreement, Mr.
Clouston was transferred all of the Company's right, title and interest in
and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock
of WestMarc owned by the Company. Such preferred stock is subject to
forfeiture in the event of certain circumstances from the date of grant
through December 13, 2005.
(8) The Company has a stock incentive plan, the Tele-Communications, Inc. 1994
Stock Incentive Plan (the "1994 Plan"). On December 13, 1995, pursuant to
the 1994 Plan, Mr. Clouston was granted 100,000 restricted shares of Series
A TCI Group Common Stock and 10,000 restricted shares of SATCo Series A
Stock. Such restricted shares vest as to 50% of such shares on December 13,
1999 and as to the remaining 50% of such shares on December 13, 2000. The
value of such restricted stock award was $1,405,000 at the end of 1996
based upon the closing price of Series A TCI Group Common Stock and SATCo
Series A Stock on December 31, 1996. TCI has not paid cash dividends on the
Series A TCI Group Common Stock and does not anticipate declaring and
paying cash dividends on the Series A TCI Group Common Stock at any time in
the foreseeable future.
(9) On December 13, 1995, pursuant to the 1994 Plan, Mr. Romrell was granted
40,000 restricted shares of Series A TCI Group Common Stock, 15,000
restricted shares of Series A Liberty Media Group Common Stock and 4,000
restricted shares of SATCo Series A Stock. Such restricted shares vest as
to 50% of such shares on December 13, 1999 and as to the remaining 50% of
such shares on December 13, 2000. The value of such restricted stock award
was $847,630 at the end of 1996 based upon the closing prices of Series A
TCI Group Common Stock, Series A Liberty Media Group Common Stock and SATCo
Series A Stock on December 31, 1996. TCI has not paid cash dividends on the
Series A Liberty Media Group Common Stock and does not anticipate declaring
and paying cash dividends on the Series A Liberty Media Group Common Stock
at any time in the foreseeable future.
(10) On December 13, 1995, pursuant to an incentive plan (the "1996 Plan"),
certain executive officers of TCI were granted an aggregate of 2,000,000
options in tandem with stock appreciation rights to acquire shares of
Series A TCI Group Common Stock, 1,650,000 options in tandem with stock
appreciation rights to acquire shares of Series A Liberty Media Group
Common Stock and 200,000 options in tandem with stock appreciation rights
to acquire shares of SATCo Series A Stock at adjusted purchase prices of
$14.62, $16.00 and $23.76 per share, respectively. Each such grant of
options with tandem stock appreciation rights vests evenly over five years
with such vesting period beginning August 4, 1995, first becomes
exercisable beginning on August 4, 1996 and expires on August 4, 2005.
On December 13, 1995, pursuant to the 1994 Plan, certain executive
officers were granted an aggregate of 2,650,000 options in tandem with
stock appreciation rights to acquire shares of Series A TCI Group Common
Stock, an aggregate of 1,012,500 options, in tandem with stock
appreciation rights to acquire shares of Series A Liberty Media Group
Common Stock and 265,000 options in tandem with stock appreciation rights
to acquire shares of SATCo Series A Stock at adjusted purchase prices of
$14.62, $16.00 and $23.76 per share, respectively. Additionally, the
Company has a stock incentive plan, the Tele-Communications, Inc. 1995
Stock Incentive Plan (the "1995 Plan"). On December 13, 1995,
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pursuant to the 1995 Plan, certain key employees were granted an aggregate
of 2,757,500 options in tandem with stock appreciation rights to acquire
shares of Series A TCI Group Common Stock, an aggregate of 654,000 options
in tandem with stock appreciation rights to acquire shares of Series A
Liberty Media Group Common Stock and 275,750 options in tandem with stock
appreciation rights to acquire shares of SATCo Series A Stock at adjusted
purchase prices of $14.62, $16.00 and $23.76 per share, respectively. Each
such grant of options with tandem stock appreciation rights vests evenly
over five years with such vesting period beginning August 4, 1995, first
became exercisable beginning on August 4, 1996 and expires on August 4,
2005.
Notwithstanding the vesting schedule as set forth in the option agreement,
the option shares shall become available for purchase if grantee's
employment with the Company (a) shall terminate by reason of (i)
termination by the Company without cause, (ii) termination by the grantee
for good reason (as defined in the agreement) or (iii) disability, (b)
shall terminate pursuant to provisions of a written employment agreement,
if any, between the grantee and the Company which expressly permits the
grantee to terminate such employment upon occurrence of specified events
(other than the giving of notice and passage of time), or (c) if grantee
dies while employed by the Company. Further, the option shares will become
available for purchase in the event of an Approved Transaction, Board
Change, or Control Purchase (each as defined in the applicable Plan),
unless in the case of an Approved Transaction, the Compensation Committee
under the circumstances specified in the Plan determines otherwise.
(11) On November 17, 1994, pursuant to the 1994 Plan, certain executive officers
and other key employees were granted an aggregate of 3,220,000 options in
tandem with stock appreciation rights to acquire shares of Series A TCI
Group Common Stock at an adjusted purchase price of $14.19 per share, an
aggregate of 1,196,625 options in tandem with stock appreciation rights to
acquire shares of Series A Liberty Media Group Common Stock at a purchase
price of $14.67 per share and 322,000 options in tandem with stock
appreciation rights to acquire shares of SATCo Series A Stock at an
adjusted purchase price of $23.06 per share. Such options vest evenly over
five years, became exercisable beginning on November 17, 1995 and expire on
November 17, 2004.
(12) On April 11, 1996, Dr. Malone was granted, pursuant to the International
Director Stock Option Plan, options to acquire 50,000 shares of TINTA
Series A Stock. For additional information relating to this grant, see note
4 to the Option/SAR Grants Table of TCI, below.
(13) On December 1, 1996, Mr. Clouston was granted options to acquire 10 shares
of common stock of TTS-Delaware (the "Telephony Option"), 10 shares of
common stock of TCI Wireline (the "Wireline Option") and 10 shares of
common stock of TCI Internet (the "Internet Option"). On December 4, 1996,
Mr. Clouston was granted options to acquire 664,076 shares of SATCo Series
A Stock. For additional information with respect to such grants, see the
notes to the Option/SAR Grants Table of TCI, below.
(14) On December 1, 1996, Mr. Romrell was granted an Internet Option to acquire
10 shares of common stock of TCI Internet. On December 4, 1996, Mr. Romrell
was granted options to acquire 664,076 shares of SATCo Series A Stock. For
additional information with respect to such grants, see the notes to the
Option/SAR Grants Table of TCI, below.
(15) Includes dollar value of annual TCI contributions to TCI's ESPP in which
all named executive officers are fully vested. Directors who are not
employees of TCI are ineligible to participate in the ESPP. The ESPP, a
defined contribution plan, enables participating employees to acquire a
proprietary interest in TCI and benefits upon retirement. Under the terms
of the ESPP, employees are eligible for participation after one year of
service. The ESPP's normal retirement age is 65 years. Participants may
contribute up to 10% of their compensation and TCI (by annual resolution of
the Board of Directors) may contribute up to 100% of the participants'
contributions. The ESPP includes a salary deferral feature in respect of
employee contributions. Forfeitures (due to participants' withdrawal prior
to full vesting) are used to
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reduce TCI's otherwise determined contributions. Generally, participants
acquire a vested right in TCI contributions as follows:
<TABLE>
<CAPTION>
VESTING
YEARS OF SERVICE PERCENTAGE
---------------- ----------
<S> <C>
Less than 1................................................. 0
1-2....................................................... 20
2-3....................................................... 30
3-4....................................................... 45
4-5....................................................... 60
5-6....................................................... 80
6 or more................................................. 100
</TABLE>
Participant contributions are fully vested. Although TCI has not expressed an
intent to terminate the ESPP, it may do so, at any time. The ESPP provides
for full and immediate vesting of all participants' rights upon termination.
In each of the years ending December 31, 1996, 1995 and 1994, TCI contributed
$15,000 to the ESPP for Dr. Malone. In each of the years ended December 31,
1996 and 1995, TCI contributed $15,000 to the ESPP for Mr. Magness.
(16) Includes fees paid to directors for attendance at each meeting of the Board
of Directors ($500 per meeting). During each of the years ending December
31, 1996, 1995 and 1994, a total of $2,500 of such fees, respectively, were
paid to Dr. Malone. During 1996, 1995 and 1994, $2,000, $2,500 and $2,500
was paid to Mr. Magness, respectively.
(17) Adjusted to reflect the effect of the Satellite Distribution and the
Liberty Group Stock Dividend.
Option/SAR Grants Table of TCI. The following table shows all individual
grants of stock options and stock appreciation rights ("SARs") granted to each
of the named executive officers of TCI during the year ended December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE MARKET PRICE ON EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) GRANT DATE($/SH) DATE ($)
---- ------------ ------------ ---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Brendan R. Clouston..... 10(1) 50% $855,631(1) $2,100,000(6) February 1, 2006 $ 13,477,000(9)
10(2) 50% $ 12,537(2) $ 12,537(6) February 1, 2006 $ 44,000(10)
10(3) 33 1/3% $ 55,246(3) $ 400,000(6) February 1, 2006 $ 3,468,000(11)
664,076(4) 28.6% $ 8.86 $ 12.625(7) February 1, 2006 $ 5,806,083(12)
Larry E. Romrell........ 10(3) 33 1/3% $ 55,246(3) $ 400,00(6) February 1, 2006 $ 3,468,000(11)
664,076(4) 28.6% $ 8.86 $ 12.625(7) February 1, 2006 $ 5,806,083(12)
John C. Malone.......... 50,000(5) 25% $ 16.00 $ 20.25(8) April 11, 2006 $ 400,450(13)
</TABLE>
- ---------------
(1) Effective December 1, 1996, Mr. Clouston and another employee of TCI were
each granted an option to acquire 1.0% of the Company's common equity in
TTS-Delaware. The aggregate exercise price for each Telephony Option, which
is payable to TTS-Delaware, is equal to 1.0% of (i) the Company's
cumulative investment in TCI Telephony as of December 1, 1996, adjusted for
a 6% per annum interest factor from the date each such investment was made
to the date of such exercise, less (ii) the sum of (x) $500 million
(representing the aggregate initial liquidation price of certain preferred
stock of TTS-Delaware) and (y) the amount of the tax benefits generated by
TCI Telephony (up to $500 million) as and when used by TCI. The per share
exercise price on the date of grant was $850,029. Any exercise by one of
such executive officers of all or part of such options would need to be
accompanied by the exercise by such executive officer of a pro rata portion
of the option described in note 3 below. All 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.
(2) Effective December 1, 1996, Mr. Clouston and another employee of TCI were
each granted an option to acquire 1.0% of the Company's common equity in
TCI Wireline. The aggregate exercise price for each Wireline Option, which
is payable to TCI Wireline is equal to 1.0% of the Company's cumulative
investment in TCI Wireline as of December 1, 1996, adjusted for a 6% per
annum interest factor from
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the date each such investment was made to the date of such exercise. The
per share exercise price on the date of grant was $12,502. 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. Such options must be exercised on a pro rata
basis with the Telephony Options as discussed in note 1 above.
(3) Effective December 1, 1996, Mr. Clouston, Mr. Romrell and another employee
of TCI were each granted an option to acquire 1.0% of the Company's common
equity in TCI Internet. The aggregate exercise price for each Internet
Option, which is payable to TCI Internet, is equal to 1.0% of the Company's
cumulative investment in TCI Internet as of December 1, 1996, adjusted for
a 6% per annum interest factor from the date each such investment was made
to the date of such exercise. The per share exercise price on the date of
grant was $55,070. All of such options will vest and become exercisable in
five equal annual installments, with the first annual installment vesting
on February 1, 1997, and will expire on February 1, 2006. In anticipation
of the transfer of the Internet services distribution business to TCI.NET,
a member of the TCI Group, each such option was replaced during 1997 with
an option to acquire a number of shares equal to 1.0% of the common equity
of TCI.NET at December 1, 1996 and a stock appreciation right with respect
to a number of shares equal to 1.0% of the common equity of TCI Internet at
December 1, 1996. The material terms of the option to acquire shares of
TCI.NET are the same as those of the Internet Option, except that the
exercise price, which will be payable to TCI.NET, is an allocated portion
of the current exercise price under the Internet Option based on the
Company's cumulative investment in the Internet services distribution
business relative to the balance of its cumulative investment in TCI
Internet at December 1, 1996. The stock appreciation right entitles the
holder to the excess of the value of the shares subject to the stock
appreciation right (based on the percentage that such shares represent of
the total value of the common equity of TCI Internet as of the exercise
date) over 1% of the Company's cumulative investment in TCI Internet at
December 1, 1996, plus a 6% per annum interest factor from the date when
each such investment was made to the date of exercise. Amounts payable upon
exercise of the stock appreciation right may be paid in cash or, at the
Company's election, Series A TCI Group Common Stock or, following
stockholder approval of the TCI Ventures Group Stock Proposal, Series A TCI
Ventures Group Common Stock. Any exercise by the holder of all or part of
the TCI.NET option must be accompanied by the exercise by such holder of a
pro rata portion of the TCI Internet stock appreciation right, and vice
versa.
(4) On December 4, 1996, Mr. Clouston and Mr. Romrell were each granted an
option to purchase 664,076 shares of SATCo Series A Stock representing 1.0%
of the number of shares of Satellite common stock issued and outstanding on
the date of the Satellite Distribution, determined immediately after giving
effect to the Satellite Distribution, but before giving effect to the
exercise of such option or the other options to be evidenced by a stock
option agreement. The aggregate exercise price for such option is equal to
1.0% of TCI's net investment as of the date of the Satellite Distribution,
but excluding any portion of TCI's net investment that as of such date is
represented by a promissory note or other evidence of indebtedness from
Satellite to TCI. 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. Another employee
of TCI received a 1.0% option and another employee received a 0.5% option.
(5) On April 11, 1996, pursuant to the International Director Stock Option
Plan, certain directors of International were granted an aggregate of
200,000 options to acquire shares of TINTA Series A Stock at a purchase
price of $16.00 per share. Such options vest evenly over five years, first
become exercisable on April 11, 1997 and expire on April 11, 2006.
(6) Represents the market value on December 1, 1996 as determined by the Board
of Directors.
(7) Represents the closing market price per share of SATCo Series A Stock on
December 5, 1996, the first day of trading following the date of grant.
(8) Represents the closing market price per share of TINTA Series A Stock on
April 11, 1996.
(9) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.87% discount rate; (b) a 50% volatility factor; (c) the 10-year
option term; (d) the
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market value of the Telephony Option on December 1, 1996 as determined by
the Board of Directors of TCI; (e) a per share exercise price of $850,029
on December 1, 1996; and (f) a 6% per annum interest adjustment to the
exercise price. The actual value an executive may realize will depend upon
the extent to which the stock price exceeds the exercise price on the date
the option is exercised. Accordingly, the value, if any, realized by an
executive will not necessarily be the value determined by the model.
(10) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.87% discount rate; (b) a 55% volatility factor; (c) the 10-year
option term; (d) the market value of the Wireline Option on December 1,
1996 as determined by the Board of Directors of TCI; (e) a per share
exercise price of $12,502 on December 1, 1996; and (f) a 6% per annum
interest adjustment to the exercise price. The actual value an executive
may realize will depend upon the extent to which the stock price exceeds
the exercise price on the date the option is exercised. Accordingly, the
value, if any, realized by an executive will not necessarily be the value
determined by the model.
(11) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.87% discount rate; (b) a 60% volatility factor; (c) the 10-year
option term; (d) the market value of the Internet Option on December 1,
1996 as determined by the Board of Directors of TCI; (e) a per share
exercise price of $55,070 on December 1, 1996; and (f) a 6% per annum
interest adjustment to the exercise price. The actual value an executive
may realize will depend upon the extent to which the stock price exceeds
the exercise price on the date the option is exercised. Accordingly, the
value, if any, realized by an executive will not necessarily be the value
determined by the model.
(12) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.22% discount rate; (b) a 35% volatility factor; (c) the 10-year
option term; (d) the closing price of SATCo Series A Stock on December 5,
1996; and (e) a per share exercise price of $8.86. The actual value an
executive may realize will depend upon the extent to which the stock price
exceeds the exercise price on the date the option is exercised.
Accordingly, the value, if any, realized by an executive will not
necessarily be the value determined by the model.
(13) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.25% discount rate; (b) a 35% volatility factor; (c) the 10-year
option term; (d) the closing price of TINTA Series A Stock on February 14,
1997; and (e) a per share exercise price of $16.00. The actual value an
executive may realize will depend upon the extent to which the stock price
exceeds the exercise price on the date the option is exercised.
Accordingly, the value, if any, realized by an executive will not
necessarily be the value determined by the model.
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Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
of TCI. The following table shows each exercise of stock options and SARs
during the year ended December 31, 1996 by each of the named executive officers
of TCI and the December 31, 1996 number and year-end value of unexercised
options and SARs on an aggregated basis:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES VALUE OPTIONS/SARS AT THE-MONEY OPTIONS/SARS
ACQUIRED ON REALIZED DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
---- ------------ -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
John C. Malone
Exercisable
TCI Group Series A......... -- -- 1,000,000 $ 1,850,000
Liberty Group Series A..... -- -- 375,000 $ 2,592,750
TINTA Series A............. -- -- -- --
SATCo Series A............. -- -- 100,000 --
Unexercisable
TCI Group Series A......... -- -- 1,000,000 $ 462,500
Liberty Group Series A..... -- -- 375,000 $ 1,503,750
TINTA Series A............. -- -- 50,000 --
SATCo Series A............. -- -- 100,000 --
Fred A. Vierra
Exercisable
TCI Group Series A......... -- -- 235,000 $ 358,438
Liberty Group Series A..... -- -- 88,125 $ 589,301
TINTA Series A............. -- -- 80,000 --
SATCo Series A............. -- -- 23,500 --
Unexercisable
TCI Group Series A......... -- -- 165,000 $ 104,063
Liberty Group Series A..... -- -- 61,875 $ 329,749
TINTA Series A............. -- -- 320,000 --
SATCo Series A............. -- -- 16,500 --
Brendan R. Clouston
Exercisable
TCI Group Series A......... -- -- 730,000 $ 1,040,625
Liberty Group Series A..... -- -- 198,750 $ 1,461,248
SATCo Series A............. -- -- 80,125 --
Telephony.................. -- -- -- --
Wireline................... -- -- -- --
Internet................... -- -- -- --
Unexercisable
TCI Group Series A......... -- -- 1,145,000 $ 520,313
Liberty Group Series A..... -- -- 129,375 $ 861,784
SATCo Series A............. -- -- 771,451 $ 674,037
Telephony.................. -- -- 10 $12,443,692
Wireline................... -- -- 10 --
Internet................... -- -- 10 $ 3,447,538
Peter R. Barton
Exercisable
TCI Group Series A......... -- -- 719,321 $ 8,018,689
Liberty Group Series A..... -- -- 569,745 $ 5,479,514
SATCo Series............... -- -- 71,933 $ 577,631
Unexercisable Series
TCI Group Series A......... -- -- 226,554 $ 1,336,448
Liberty Group Series A..... -- -- 1,284,957 $ 4,586,432
SATCo Series A............. -- -- 22,655 $ 96,272
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES VALUE OPTIONS/SARS AT THE-MONEY OPTIONS/SARS
ACQUIRED ON REALIZED DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
---- ------------ -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Larry E. Romrell
Exercisable
TCI Group Series A......... -- -- 295,000 $ 358,438
Liberty Group Series A..... -- -- 110,625 $ 657,746
SATCo Series A............. -- -- 29,500 --
Internet................... -- -- -- --
Unexercisable
TCI Group Series A......... -- -- 405,000 $ 104,063
Liberty Group Series A..... -- -- 151,875 $ 603,529
SATCo Series A............. -- -- 704,576 $ 674,037
Internet................... -- -- 10 $ 3,447,538
</TABLE>
Employment Contracts and Termination of Employment and Change of Control
Arrangements. Effective November 1, 1992, the employment agreement between TCIC
and Dr. Malone, as amended, was further amended and restated. Pursuant to an
Assignment and Assumption Agreement, dated August 4, 1994, the payment,
performance and other obligations of such employment agreements were assumed by
TCI. The term of each agreement is extended daily so that the remainder of the
employment term shall at all times on and prior to the effective date of the
termination of employment as provided by each agreement be five years. Dr.
Malone's employment agreement provides for an annual salary of $800,000, subject
to increase upon approval of the board of directors. During 1996, Dr. Malone was
given a salary increase such that his annual salary in 1996 was $900,000. Dr.
Malone has elected to take a reduction in compensation until certain financial
goals are reached to the extent of 20% of his compensation. Additionally, this
employment agreement provides for personal use of the Company's aircraft and
flight crew, limited to an aggregate value of $35,000 per year.
Prior to Mr. Bob Magness' death, he was party to an employment agreement
with comparable provisions to the previously described employment agreement for
Dr. Malone.
Dr. Malone's employment agreement provides, among other things, for
deferral of a portion (40% in 1993 and not in excess of 40% thereafter) of the
monthly compensation payable to him. Pursuant to a letter agreement entered into
between Dr. Malone and the Company subsequent to the date of his employment
agreement, Dr. Malone deferred $150,000 in 1993 in lieu of 40% of his
compensation for such year. The deferred amounts will be payable in monthly
installments over a 20-year period commencing on the termination of Dr. Malone's
employment, together with interest thereon at the rate of 8% per annum
compounded annually from the date of deferral to the date of payment. The
amendment also provides for the payment of certain benefits, discussed below.
Dr. Malone's agreement described above also provides that upon termination
of such executive's employment by the Company (other than for cause, as defined
in the agreement), or if Dr. Malone elects to terminate the agreement because of
a change in control of the Company, all remaining compensation due under the
agreement for the balance of the employment term shall be immediately due and
payable.
Dr. Malone's agreement provides that during his employment with the Company
and for a period of two years following the effective date of his termination of
employment with the Company, unless termination results from a change in control
of the Company, he will not be connected with any entity in any manner specified
in the agreement, which competes in a material respect with the business of the
Company. However, the agreement provides that Dr. Malone may own securities of
any corporation listed on a national securities exchange or quoted in the Nasdaq
Stock Market to the extent of an aggregate of 5% of the amount of such
securities outstanding.
Dr. Malone's agreement also provides that in the event of termination of
his employment with the Company, he will be entitled to receive 240 consecutive
monthly payments of $15,000 (increased at the rate of 12% per annum compounded
annually from January 1, 1988 to the date payment commences), the first of
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which will be payable on the first day of the month succeeding the termination
of Dr. Malone's employment. In the event of Dr. Malone's death, his
beneficiaries will be entitled to receive the foregoing monthly payments. The
Company currently owns a whole-life insurance policy on Dr. Malone, the face
value of which is sufficient to meet its obligation under the salary
continuation arrangement. The premiums payable by the Company on such insurance
policy are currently being funded through earnings on the policy. Dr. Malone has
no interest in this policy.
The Company pays a portion of the annual premiums (equal to the "PS-58"
costs) on three whole-life insurance policies of which Dr. Malone is the insured
and trusts for the benefit of members of his family are the owners. The Company
is the designated beneficiary of the proceeds of such policies less an amount
equal to the greater of the cash surrender value thereof at the time of Dr.
Malone's death and the amount of the premiums paid by the policy owners.
Dr. Malone deferred a portion of his monthly compensation under his
previous employment agreement. Such deferred compensation (together with
interest thereon at the rate of 13% per annum compounded annually from the date
of deferral to the date of payment) will continue to be payable under the terms
of the previous agreement. The rate at which interest accrues on such previously
deferred compensation was established in 1983 pursuant to such earlier
agreement.
International and TCI have entered into an Amended and Restated Employment
Agreement with Mr. Vierra relating to Mr. Vierra's employment with International
as Vice Chairman and Chief Executive Officer, providing for a base salary of
$650,000 per year. Mr. Vierra's salary is subject to annual review by the board
of directors, which may in its sole discretion increase his salary. Mr. Vierra's
salary for 1996 is currently set at $650,000. Mr. Vierra's employment agreement
provides for the deferral of a portion of each monthly salary payment so as to
result in the deferral of salary at the rate of $250,000 per annum. The deferred
amounts are to be paid in monthly installments over a 240-month period
commencing on the later of December 31, 1998 and the termination of Mr. Vierra's
full-time employment with International, together with interest thereon at the
rate of 8% per annum compounded annually from the date of deferral to the
payment date. In the event of Mr. Vierra's death, all outstanding deferred
amounts will be paid in a lump sum to his beneficiaries.
While he is employed by International pursuant to his employment agreement,
Mr. Vierra is entitled to participate in all formal incentive compensation
plans, stock incentive plans, employee stock purchase plans, retirement plans
and insurance plans or policies adopted for the benefit of TCI's or
International's executive officers or employees generally. Additionally, Mr.
Vierra's employment agreement provides for personal use of TCI's aircraft and
flight crew, limited to an aggregate value of $35,000 per year.
Mr. Vierra's employment agreement has a stated termination date of December
31, 1998. It also provides that upon an earlier termination of Mr. Vierra's
employment by International without cause, all remaining compensation due under
such agreement for the balance of the employment term would become immediately
due and payable to Mr. Vierra. Upon his death during the employment term,
International would pay to Mr. Vierra's beneficiaries a lump sum in an amount
equal to the lesser of (i) the compensation due under his employment agreement
for the balance of the employment term and (ii) one year's salary. In the event
of his disability, International would continue to pay Mr. Vierra his annual
salary as and when it would have otherwise become due until the first to occur
of the end of the employment term or the date of his death.
Mr. Vierra's agreement further provides that during his employment with
International and for the longer of a period of two years following the
effective date of his termination of employment or if Mr. Vierra terminates his
employment before the end of the term of his employment in breach of the
employment agreement, or if Mr. Vierra is terminated "for cause" (as defined in
the employment agreement) by International, until December 31, 1998, he will not
be connected with any entity in any manner specified in the agreement, which
competes in a material respect with the business of International or any of
International's or TCI's majority owned subsidiaries. However, the agreement
provides that Mr. Vierra may own securities of any corporation listed on a
national securities exchange or quoted in the National Market tier of the Nasdaq
Stock Market to the extent of an aggregate of 5% of the amount of such
securities outstanding. Under the employment agreement, substantially all of Mr.
Vierra's business time, attention and efforts will be devoted to the affairs of
International.
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<PAGE> 106
TCIC and Mr. Romrell entered into an employment agreement on January 1,
1993. Pursuant to an Assignment and Assumption Agreement, dated August 4, 1994,
the payment, performance and other obligations of such employment agreement were
assumed by TCI. The term of Mr. Romrell's agreement extends through December 31,
1999. Mr. Romrell's employment agreement provides for a base salary of $350,000
per year to be increased by the amount of $25,000 per annum in each succeeding
year commencing January 1, 1994. Mr. Romrell's salary is subject to annual
review by the board of directors which may in its sole discretion increase his
salary. Mr. Romrell's salary for 1996 is currently set at $500,000.
While he is employed by the Company pursuant to his employment agreement,
Mr. Romrell is entitled to participate in all formal incentive compensation
plans, stock incentive plans, employee stock purchase plans, retirement plans
and insurance plans or policies adopted for the benefit of TCI's executive
officers or employees generally.
Mr. Romrell's employment agreement also provides that upon an earlier
termination of Mr. Romrell's employment by the Company without cause, all
remaining compensation due under such agreement for the balance of the
employment term would become immediately due and payable to Mr. Romrell. Upon
his death during the employment term, the Company would pay to Mr. Romrell's
beneficiaries a lump sum in an amount equal to the lesser of (i) the
compensation due under his employment agreement for the balance of the
employment term and (ii) one year's salary. In the event of his disability, the
Company would continue to pay Mr. Romrell his annual salary as and when it would
have otherwise become due until the first to occur of the end of the employment
term or the date of his death.
Mr. Romrell's agreement further provides that during his employment with
the Company and for the longer of a period of two years following the effective
date of his termination of employment or if Mr. Romrell terminates his
employment before the end of the term of his employment in breach of the
employment agreement, or if Mr. Romrell is terminated "for cause" (as defined in
the employment agreement) by the Company, until December 31, 1999, he will not
be connected with any entity in any manner specified in the agreement, which
competes in a material respect with the business of TCI or TCI's majority owned
subsidiaries. However, the agreement provides that Mr. Romrell may own
securities of any corporation listed on a national securities exchange or quoted
in the National Market tier of the Nasdaq Stock Market to the extent of an
aggregate of 5% of the amount of such securities outstanding. Under the
employment agreement, substantially all of Mr. Romrell's business time,
attention and efforts will be devoted to the affairs of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS.
The members of the Company's Compensation Committee are Messrs. Kim
Magness, John W. Gallivan and Paul A. Gould, all directors of the Company. None
of the members of the compensation committee are or were officers of the Company
or any of its subsidiaries. Upon consummation of the Kearns-Tribune Merger, Mr.
Gallivan will resign from the Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Neither the report of the Compensation Committee of the Board of Directors
(the "Compensation Committee") nor the stock performance graphs that follow such
report shall be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933 or under the Exchange Act, except to the extent that the
Company specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
Compensation Philosophy. The Compensation Committee's compensation
philosophy is based on the belief that a link should exist between executive
compensation and the return on investment provided to stockholders as reflected
by the appreciation in the price of the Company's stock. In applying this
philosophy, the Compensation Committee has developed and implemented a
compensation policy which seeks to attract and retain highly skilled and
effective executives with the business experience and acumen necessary to
achievement of the long-term business objectives of the Company and to align the
financial interests of the Company's senior executives with those of its
stockholders. The Company attempts to realize these goals by
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<PAGE> 107
providing competitive compensation and linking a substantial portion of
compensation to the enhancement of stockholder value.
The Company's executive compensation is based principally on two
components--salary and equity-based incentives--each of which is intended to
serve the Company's overall compensation philosophy. The Compensation Committee
uses independent compensation consultants and compensation surveys furnished and
evaluated by such consultants to provide advice and data to assist it in
developing compensation programs that are competitive with other
similarly-situated cable/media companies and which reinforce the Company's
objective of aligning executive compensation with the interests of the Company's
stockholders.
Base Salary. Base salary for executive officers is generally targeted at
or below the median for executives with comparable qualifications, experience
and responsibilities at other companies in the cable/media industry. In the
aggregate, executive salaries are consistent with this philosophy. Base salary
levels are also based on the employees' relative levels of seniority and
responsibility. Although the 1996 Plan permits cash bonuses and other
performance based awards, the Company does not usually pay cash bonuses to its
senior executives.
During 1992, TCIC undertook a review of the compensation paid to its key
employees and retained independent consultants to advise it in connection with
setting base salaries. The Compensation Committee then established new salary
levels for its executive officers below the median of the annual salaries and
bonuses of officers in comparable positions and in media companies in the
survey.
In connection with this review, in late 1992, TCIC entered into employment
agreements with six of its executive officers, including the Chief Executive
Officer and three of the four other named executive officers. Certain of the
Company's employment agreements with executives (not including any of the named
executives) required minimum automatic increases of $25,000 per year in base
salary. Four of the agreements, including the Chief Executive Officer's
agreement, established a minimum annual salary and provided that any increases
would be in the discretion of the Board of Directors. Except as discussed below
with respect to the fourth quarter 1996 salary reductions, the executive
officers generally have been paid in accordance with the salary levels set in
1992 or pursuant to their employment agreements, with modest increases in the
cash compensation paid to the Company's executives in 1995 and 1996. Certain
terms of the employment agreements of certain named executive officers are
described under "Executive Compensation -- Employment Contracts and Termination
of Employment and Change of Control Arrangements." The employment agreements do
not provide for an automatic increase in salary for any named executive officer.
In the fourth quarter of 1996, the Company began instituting cost
containment measures as a response to the Company's third quarter financial
results. As part of this cost containment effort, management of the Company
imposed a salary freeze for many employees of the Company who earned over
$100,000 per year in base salary. In addition, for certain more highly
compensated employees, including certain of the named executive officers, the
Company instituted salary reductions ranging from 5% to 20%. In connection with
such reductions, Messrs. Malone and Clouston each became subject to a voluntary
20% reduction in base salary.
Management anticipated at the time of the implementation of the freezes and
reductions that such measures would stay in place until certain financial goals
of the Company had been met. Management has lifted the reductions and freezes
for certain lower-compensated employees as of the second quarter of 1997. Such
measures continue in effect for Messrs. Malone and Clouston.
Equity-Based Incentives. In order to make the overall compensation
packages of the Company's executives and other key employees competitive with
other companies in the cable/media industry, the Compensation Committee has
emphasized equity-based incentives rather than salary and bonuses. The
Compensation Committee believes that reliance upon such incentives is
advantageous to the Company because they foster a long-term commitment by the
recipient to the Company and motivate the employees to seek to improve the
long-term market performance of the Company's stock.
During 1995, the Company undertook a review of the compensation paid to its
key employees and retained independent consultants to advise it in connection
with making grants of long-term equity based compensation awards. The
consultants provided the Compensation Committee with a survey of the
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compensation packages of the chief executive officers and certain other senior
officers at 13 companies in the cable/media industry. The Compensation Committee
then evaluated the surveys and granted awards to the Company's executive
officers at a level below the median of the awards given to officers in
comparable positions in the cable/media companies included in the survey. Due to
the long-term focus of equity based awards, the Compensation Committee
determined that it was in the best interest of the Company to evaluate such
awards every few years rather than evaluate and grant such awards on an annual
basis.
In 1996, the Company reviewed the long-term, equity based compensation of
certain of its senior officers who were charged with managing certain of the
Company's strategic business units. The Company determined that grants of stock
options in the stock of the companies which owned these business units was in
the long-term best interests of the Company. As a result, the Company granted
the stock options described above in "Executive Compensation". The Company
determined that such awards were consistent with its philosophy of providing
equity-based, long-term incentives to senior management for the purposes of
retaining talented management, and for the purpose of aligning management's
financial interest with stockholders.
Deductibility of Executive Compensation. Section 162(m) of the Code and
the U.S. Treasury regulations relating thereto restrict publicly traded
companies from claiming or receiving a tax deduction on compensation paid to an
executive officer in excess of $1 million, unless such compensation is
performance based. As such, many companies with executive pay levels exceeding
the $1 million limit have revised or amended current compensation programs to
qualify the payments thereunder for deductibility. The Compensation Committee
has taken no action with respect to the Company's executive compensation plans
that were in effect at the time of the adoption of Section 162(m) in 1994 and
has not conformed the 1995 Plan to such requirements. The 1996 Plan has been
conformed to the requirements of Section 162(m) to the extent that the
Compensation Committee has discretionary authority under the 1996 Plan to grant
awards which conform to the requirements of Section 162(m).
COMPENSATION COMMITTEE
Kim Magness
Paul A. Gould
John W. Gallivan
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STOCK PERFORMANCE GRAPHS
On August 3, 1995, TCI amended its Restated Certificate of Incorporation
to, among other things, (i) redesignate its TCI Class A Common Stock as Series A
TCI Group Common Stock and TCI's Class B Common Stock as Series B TCI Group
Common Stock and (ii) authorize the Series A Liberty Media Group Common Stock
and the Series B Liberty Media Group Common Stock. Thereafter, TCI distributed
to the holders of TCI common stock one-fourth of a share of the corresponding
series of Liberty Media Group Common Stock in respect of each share of TCI Group
Common Stock held of record as of August 4, 1995, the record date for such
distribution.
The following graphs compare (i) the yearly percentage change in the
cumulative total stockholder return on the Class A Common Stock of TCI (and its
predecessor TCIC) from December 31, 1990 to August 9, 1995 (the date the Series
A TCI Group Common Stock and the Series A Liberty Media Group Common Stock
commenced trading on the Nasdaq National Market), (ii) the percentage change in
the cumulative total stockholder return on the Series A TCI Group Common Stock
from August 9, 1995 to December 31, 1996, and (iii) the percentage change in the
cumulative total stockholder return on the Series A Liberty Media Group Common
Stock from August 9, 1995 to December 31, 1996. The Class A Common Stock and the
Series A TCI Group Common Stock graphs are compared for each time period with
the cumulative total return on the Standard & Poor's 500 Stock Index and with a
selected peer group of six companies engaged in the cable television industry
(including the Company): Cablevision Systems Corp., Jones Intercable, Inc., TCA
Cable TV, Inc., Comcast Corporation and Time Warner, Inc. The Series A Liberty
Media Group Common Stock graph is compared for the time period with the
cumulative total return on the Standard & Poor's 500 Stock Index and with a
selected peer group of five companies engaged in the cable television and
television programming industry (including the Company): Cablevision Systems
Corp., Time Warner, Inc., Turner Broadcasting System, Inc., and Viacom Inc.
The comparisons assume $100 was invested at the beginning of each time
period and assume the reinvestment of dividends.
TOTAL RETURN TO STOCKHOLDERS
CLASS A COMMON STOCK
DECEMBER 31, 1990 -- AUGUST 9, 1995
<TABLE>
<CAPTION>
INDEXED RETURNS
YEARS ENDING
DEC 90 DEC 91 DEC 92 DEC 93 DEC 94 8/9/95
------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
S&P 500 INDEX 100 130.47 140.41 154.56 156.60 194.53
TELE-COMMUNICATIONS, INC. 100 232.68 290.85 414.04 297.70 444.85
PEER GROUP 100 116.21 149.02 238.28 182.20 227.06
</TABLE>
100
<PAGE> 110
TOTAL RETURN TO STOCKHOLDERS
SERIES A TCI GROUP COMMON STOCK
AUGUST 9, 1995 -- DECEMBER 31, 1996
[GRAPH]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD TELE-COMM
(FISCAL YEAR COVERED) S&P 500 INDEX PEER TCI GRP -SER A
<S> <C> <C> <C>
9/8/95 100 100 100
12/95 111.37 89.69 76.26
12/96 136.94 86.97 54.77
</TABLE>
TOTAL RETURN TO STOCKHOLDERS
SERIES A LIBERTY MEDIA GROUP
COMMON STOCK
AUGUST 9, 1995 -- DECEMBER 31, 1996
[GRAPH]
<TABLE>
<CAPTION>
TELE-COMM
MEASUREMENT PERIOD LBRTY MDIA -
(FISCAL YEAR COVERED) S&P 500 INDEX PEER GROUP SER A
<S> <C> <C> <C>
9/8/95 100 100 100
12/95 111.37 95.60 109.14
12/96 136.94 80.73 115.99
</TABLE>
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COMPENSATION OF DIRECTORS
The standard arrangement by which TCI's directors are compensated for all
services (including any amounts payable for committee participation or special
assignments) as a director is as follows: each director receives a fee of $500
plus travel expenses for attendance at each meeting of the Board of Directors
and each director who is not a full-time employee of TCI receives additional
compensation of $30,000 per year. In addition, the Company's stockholders
approved an option plan for its directors (the "Director Stock Option Plan") and
in connection with such approval, approved the grant effective as of November
16, 1994, to each person who as of such date was a member of the Board of
Directors and was not an employee of the Company or any of its subsidiaries, of
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. Such options have a
purchase price of $16.50 per share and $22.00 per share, respectively, and vest
and become exercisable over a five-year period, commencing on November 16, 1995,
and will expire on November 16, 2004. Each person who becomes a director of the
Company and is not an employee of the Company or any of its subsidiaries will be
automatically granted similar options upon such person's becoming a director.
Additionally, each person who is an employee and director of the Company who
ceases to be an employee but remains a director will be automatically granted
similar options upon such event. The exercise price of each such subsequently
granted option will be equal to the fair market value of the Series A TCI Group
Common Stock or Series A Liberty Media Group Common Stock, as applicable, on the
date the option is granted. In general, such fair market value will be 95% of
the last sale price for the shares of the Series A TCI Group Common Stock or
Series A Liberty Media Group Common Stock, as applicable, as reported on The
Nasdaq Stock Market on the date of the grant, with the price resulting from such
percentage rounded down to the nearest quarter dollar.
The Company has a deferred compensation plan for all non-employee
directors. Each director may elect to defer receipt of all, but not less than
all, of the annual compensation (excluding meeting fees and reimbursable
expenses) payable to the director for serving on the Company's Board of
Directors for each calendar year for which such deferral is elected. An election
to defer may be made as to the compensation payable for a single calendar year
or period of years. Any compensation deferred shall be credited to the
director's account on the last day of the quarter for which compensation has
accrued. Such deferred compensation bears interest from the date credited to the
date of payment at a rate of 8% per annum in 1993 and 120% of the applicable
federal long-term rate thereafter, compounded annually.
A director may elect payment of deferred compensation to be made at a
specified year in the future or upon termination of the director's service as
director of the Company. Each director may elect payment in a lump sum, three
substantially equal consecutive annual installments or five substantially equal
consecutive annual installments. In the event that a director dies prior to
payment of all the amounts payable pursuant to the plan, any amounts remaining
in the director's deferred compensation account, together with accrued interest
thereon, shall be paid to the director's designated beneficiary.
There are no other arrangements whereby any of TCI's directors received
compensation for services as a director during 1996 in addition to or in lieu of
that specified by the aforedescribed standard arrangement.
BOARD MEETINGS
During 1996, there were five meetings of the full Board of Directors of
TCI. No director attended fewer than 75% of the meetings of the Board of
Directors or of any committee of which he is a member.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Executive Committee, an Audit Committee and a
Compensation Committee. There is no standing nomination committee of the
Company's Board of Directors.
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<PAGE> 112
The members of the Executive Committee are John C. Malone, Paul A. Gould
and John W. Gallivan. The Executive Committee exercises all of the powers and
authority of the Board of Directors between meetings of the entire Board, other
than such powers and authority as the Delaware General Corporation Law
specifically prohibits an executive committee from performing. The Executive
Committee of TCI held no formal meetings during 1996, but actions were taken by
written consent.
The members of the Audit Committee are John W. Gallivan, Robert A. Naify
and Paul A. Gould. The duties of the Audit Committee are to review and monitor
the Company's financial reports and accounting practices to ascertain that they
are within acceptable limits of sound practice, to receive and review audit
reports submitted by the Company's independent auditors and by its internal
auditing staff and make such recommendations to the Board as may seem
appropriate to the Committee to assure that the interests of the Company are
adequately protected and to review all related party transactions and potential
conflict-of-interest situations. The Audit Committee of TCI held one meeting
during 1996.
The members of the Compensation Committee are John W. Gallivan, Paul A.
Gould and Kim Magness. The functions of the Compensation Committee are to review
and make recommendations to the Board of Directors concerning the compensation
of the executive officers of the Company, to consider and make recommendations
to the Board of Directors concerning existing and proposed employment agreements
between the Company and its executive officers and to administer the 1994 Plan,
the 1995 Plan and the 1996 Plan. The Compensation Committee of TCI held no
meetings during 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Management and Others. Pursuant to a Restricted Stock
Award Agreement dated December 10, 1992, the Company transferred to Mr. Fisher,
a director and until January 1, 1996, an officer of the Company, 124.03 shares
(having a liquidation value of $4 million) of WestMarc Preferred Stock owned by
the Company, subject to forfeiture in the event of certain circumstances from
the date of grant through February 1, 2002, with the number of shares subject to
forfeiture decreasing by 10% on February 1 of each year. Upon Mr. Fisher's
resignation as an officer of the Company effective January 1, 1996, he acquired
vested title to 37.209 of such shares of WestMarc Preferred Stock and forfeited
the balance of such shares. As described below, effective as of January 31,
1996, the 37.209 vested shares of WestMarc Series C Cumulative Compounding
Preferred Stock owned by Mr. Fisher were used by one of his affiliates as the
consideration for the purchase of certain partnership interests held by
subsidiaries of the Company.
In 1989, ECP Holdings, Inc., a subsidiary of the Company ("ECP"), and
Halcyon Communications, Inc., an Oklahoma corporation which is not an affiliate
of the Company ("HCI"), formed Halcyon Communications Partners, an Oklahoma
general partnership ("HCP"), for the purpose of acquiring, owning and operating
cable television systems. In 1994, HCI and American Televenture of Minersville,
Inc., a subsidiary of the Company ("ATM"), as general partners, and three other
subsidiaries of the Company, TCI Cablevision of Nevada, Inc. ("TCINV"), TEMPO
Cable, Inc. ("Tempo Cable"), and TCI Cablevision of Utah, Inc. ("TCIU") as
limited partners, formed Halcyon Communications Limited Partnership, an Oklahoma
limited partnership ("HCLP"), for the purpose of acquiring, owning and operating
certain other cable television systems. Effective as of January 31, 1996, Fisher
Communication Associates, L.L.C., a Colorado limited liability company ("Fisher
Communications") controlled by Mr. Donne F. Fisher, a director (and until
January 1, 1996, an executive officer) of the Company purchased one-third of
ECP's partnership interest in HCP and one third of the partnership interest of
each of ATM, TCINV, TCIU and Tempo Cable in HCLP, a ten-year option to purchase
the interest in HCP and ten-year options to purchase the balance of the
partnership interest in HCLP of each of ATM, TCINV, TCIU and Tempo Cable. The
purchase price for each such partnership interest purchased by Fisher
Communications consisted of shares of WestMarc Preferred Stock. The purchase
price for each such option acquired by Fisher Communications was $100 in cash,
and each such option is exercisable for cash in a specified amount. The number
of shares of WestMarc Preferred Stock delivered to each of the Company's
subsidiaries named above as consideration for one-third of
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<PAGE> 113
its partnership interest in HCP or HCLP, and the cash exercise price which
Fisher Communications would be required to pay in order to exercise the options
granted by those subsidiaries, are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF WESTMARC CASH EXERCISE
PREFERRED STOCK PRICE OF OPTION
---------------- ---------------
<S> <C> <C>
ECP................................................... 14.8836 $1,200,000
ATM................................................... 0.5224 42,120
TCINV................................................. 2.8911 233,100
TCIU.................................................. 4.3557 351,180
Tempo Cable........................................... 14.5562 1,173,600
------- ----------
37.2090 $3,000,000
======= ==========
</TABLE>
The WestMarc Preferred Stock is not publicly traded. The dividend,
liquidation, and redemption features of the WestMarc Preferred Stock are
determined by reference to "Liquidation Price," which is determined, per share,
as the sum of (i) $32,250 plus (ii) an amount equal to all dividends which
accrued during any quarterly dividend period and were not paid in full at the
end of that period or subsequently.
The Company has entered into an agreement in principle (a) to acquire (i)
from InterMedia CM -- LP ("Old ICM I") a 1.103% limited partner interest (the
"IP I Interest") in InterMedia Partners, a California limited partnership ("IP
I"), which the Company will contribute immediately after such acquisition to
InterMedia Capital Management, L.P. ("New ICM I") for a 99.998% limited partner
interest in New ICM I, (ii) a .001% general partner interest (which will convert
to a limited partner interest) in New ICM I, and (iii) a 75% limited partner
interest in Old ICM I (each of Old ICM I and New ICM I will hold, directly or
indirectly, partner interests in IP I) (collectively, the "ICM I Transaction"),
(b) to acquire all of the partner interests (other than a .001% general partner
and a .001% special limited partner interest) in InterMedia Capital Management
III, L.P. ("ICM III") (the "ICM III Transaction") and (c) to acquire all of the
partner interests (other than a .002% general partner and a .001% special
limited partner interest) in InterMedia Capital Management IV, L.P. ("ICM IV")
(the "ICM IV Transaction"), for total consideration of 2,545,455 shares (the
"TCI Shares") of the Company's Series B TCI Group Common Stock and an aggregate
amount of $21,300,000 in cash and assumption of certain liabilities (subject to
certain adjustments). Each of the entities in which the Company will acquire an
interest in the foregoing transactions has an indirect interest in cable
television operations. On June 10, 1997 (the "Phase I Closing Date"), the
Company entered into definitive Partnership Interest Purchase Agreements with
respect to the ICM I Transaction and the ICM III Transaction and a partial
closing of the ICM I Transaction and the ICM III Transaction occurred pursuant
to which the Company acquired (i) the IP I Interest which the Company
immediately contributed to New ICM I for a 99.998% limited partner interest in
New ICM I, (ii) a 75% limited partner interest in Old ICM I and (iii) a 99.998%
limited partner interest in ICM III in exchange for total consideration of
139,513 shares of the Company's Series B TCI Group Common Stock, $5,443,024 in
cash, and assumption of $405,000 of current liabilities of Old ICM I that were
paid by the Company on the Phase I Closing Date. The partner interests in ICM IV
to be acquired by the Company were acquired by the sellers of such interests in
January and July 1996 for $21,750. The other interests to be acquired by the
Company were acquired by the sellers of those interests before April 1995. Mr.
Hindery, an executive officer of the Company, was the beneficial owner of a
66.3% interest in Old ICM I (which was increased to a 99.999% interest in
connection with the Phase I Closing as a result of a non pro rata redemption of
the partner interests of all partners in Old ICM I other than Mr. Hindery and
InterMedia Management, Inc.) and a 94.0% interest in ICM III, and is the
beneficial owner of a 80.9% interest in ICM IV, and Mr. Fisher, a director of
the Company, is the beneficial owner of a 1.6% interest in ICM IV. The Company
also has agreed in principle that if InterMedia Partners VI, L.P. ("IP VI") is
formed and fully funded on terms and conditions agreed by the Company (the "IP
VI Effective Date"), the Company will acquire all of the partner interests
(other than a .001% general partner interest) of InterMedia Capital Management
VI, L.P. ("ICM VI") in exchange for a number of shares of Series B Liberty Media
Group Common Stock (the "Contingent TCI Shares") determined by dividing
$5,000,000 by the average of the closing prices of the corresponding Series A
Liberty Media Group Common Stock for the 20 trading days preceding the IP VI
Effective Date and $1,000,000 in cash (the "ICM
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VI Transaction" and, together with the ICM I Transaction, the ICM III
Transaction and the ICM IV Transaction, the "InterMedia Transactions"). Mr.
Hindery is the beneficial owner of 100% of ICM VI and acquired his interest in
ICM VI in July of 1996 for $10,000. Mr. Fisher will be entitled to a consulting
fee in the approximate amount of $400,000 in cash and 31,030 shares of Series B
TCI Group Common Stock upon completion of the ICM IV Transaction. Mr. Peter
Kern, son of Mr. Jerome H. Kern, a director of the Company, will be entitled to
an advisory fee in the amount of 36,364 shares of Series B TCI Group Common
Stock in connection with the InterMedia Transactions, 6,017 shares of which were
paid on the Phase I Closing Date and the balance of which will be paid on the
closing of the ICM IV Transactions. These fees will be paid by the entities
receiving payments from the Company in the InterMedia Transactions. It is
anticipated that the portion of the ICM I Transaction and the portion of ICM III
Transaction not completed as part of the Phase I Closing and the ICM IV
Transaction will be consummated in the third or fourth quarter of 1997. Upon
completion of the InterMedia Transactions, the general partner interests in New
ICM I, ICM III, ICM IV and ICM VI will each be held by an entity all of the
beneficial interests in which are owned, directly or indirectly, by Robert J.
Lewis. Mr. Hindery will continue to hold a 24.999% general partner interest and
Mr. Lewis indirectly will hold a .001% general partner interest in Old ICM I.
Mr. Lewis is an experienced cable executive who was an officer of a subsidiary
of the Company from May 1987 through April 1993.
Dr. Malone, an executive officer and director of the Company, will have the
power to direct the voting of the TCI Shares and, if they are issued, the
Contingent TCI Shares pursuant to a voting agreement, and Dr. Malone also will
have a right of first refusal with respect to any proposed transfer of the TCI
Shares and, if they are issued, the Contingent TCI Shares. That right of first
refusal may be exercised by Dr. Malone either by the payment of cash or, subject
to certain exceptions, by exchanging shares of Series A TCI Group Common Stock
for the TCI Shares and Series A Liberty Media Group Common Stock for the
Contingent TCI Shares to be acquired by him. If not exercised by Dr. Malone, the
right of first refusal may be exercised by the Company.
Completion of the InterMedia Transactions is subject to various conditions,
including execution of definitive agreements and receipt of consents from
governmental authorities and other third parties.
The interests of Messrs. Hindery, Fisher and Malone in the InterMedia
Transactions were disclosed to the Company's Board of Directors which approved
the InterMedia Transactions pursuant to a vote in which Messrs. Fisher, Kern and
Malone abstained from voting.
On April 1, 1996, Dr. Malone sold 450,000 shares of TINTA Series A Stock to
the Company for a total purchase price of $9,787,500. Such shares were owned of
record and beneficially by Dr. Malone. Dr. Malone purchased the shares of TINTA
Series A Stock in the initial public offering of the TINTA Series A Stock at a
price of $16.00 per share. Dr. Malone sold such shares to the Company at a price
of $21.75 per share, the market price for the TINTA Series A Stock as of the
close of business on April 1, 1996.
On June 16, 1997, the Company and Dr. Malone entered into the TCI-Estates
Agreement and on July 23, 1997, they entered into the TCI-KT Agreement, in
consideration of Dr. Malone's agreeing to forgo exercising his rights under the
1988 Agreement in connection with the Estate Swap and under both the 1988
Agreement and the agreement entered into on April 18, 1997 in connection with
the Kearns-Tribune Merger. On July 24, 1997, Dr. Malone acquired 7,296,324
shares of Series B TCI Group Common Stock and 2,278,125 shares of Series B
Liberty Media Group Common Stock in exchange for a like number of shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common Stock
held by Dr. Malone. Under the TCI-Estates Agreement and the TCI-KT Agreement,
Dr. Malone has the right to acquire an additional 32,362,040 shares of Series B
TCI Group Common Stock in the aggregate, for cash or shares of Series A TCI
Group Common Stock.
Effective January 1, 1996, Mr. Fisher resigned as an executive officer of
the Company and the Company and Mr. Fisher entered into a consulting agreement.
During the term of the consulting agreement, which extends until January 1, 2006
unless sooner terminated as provided in the agreement, Mr. Fisher is obligated
to provide consulting services for up to 70 hours per month and 700 hours during
any period of twelve consecutive months as and if requested by the Company's
chief executive officer. Whether or not his services
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<PAGE> 115
are requested, Mr. Fisher will receive compensation as follows: (i) during the
period from January 1, 1996 through December 31, 2000, inclusive, the rate of
$475,000 per annum, increased annually by the amount of $25,000 per annum in
each successive year of such period commencing January 1, 1997 and (ii) from and
after January 1, 2001 through the balance of the term of such consulting
agreement, the rate of $500,000 per annum. If he dies before the end of the term
of his consulting services, the Company is required to pay his designated
beneficiaries a lump sum equal to one year's compensation at the then-current
rate. During the term of the agreement, Mr. Fisher will continue to be entitled
to participate in, and to be accorded all rights and benefits under, all group
insurance policies (including, but not limited to, all disability, life, health
and medical insurance policies) maintained by the Company for the benefit of its
employees. The consulting agreement also provides for Mr. Fisher's personal use
of the Company's aircraft and flight crew, limited to an aggregate value of
$35,000 per year.
Under a prior employment agreement between Mr. Fisher and the Company, a
portion of Mr. Fisher's salary was deferred, and the deferred amounts, plus
interest at an annual rate of 13%, were to be paid to him in 240 monthly
installments which would have commenced on the date of termination of his
full-time employment with the Company. The consulting agreement provides for
such payment to be made to Mr. Fisher in 240 monthly installments of $21,425.92
each, without interest, commencing on January 1, 2001, with any remaining
payments due after Mr. Fisher's death being paid in a lump-sum to his designated
beneficiaries. Similarly, Mr. Fisher's 1992 employment agreement with the
Company provided for Mr. Fisher to receive, commencing on termination of his
employment, 240 consecutive monthly salary continuation payments of $6,250,
increased at the rate of 12% per annum, compounded annually from January 1, 1988
to the date of such termination. The consulting agreement provides that such
salary continuation payments will be made in 240 consecutive monthly payments of
$27,271.84 each, without interest, commencing on January 1, 2001, with any
remaining payments due after Mr. Fisher's death being made to his designated
beneficiaries.
Mr. Fisher's consulting agreement provides that during its term, Mr. Fisher
will not be connected in any manner specified in such agreement with any entity
which competes in a material respect with the business of the Company; however,
he may own securities of any corporation listed on a national securities
exchange or quoted in The Nasdaq Stock Market to the extent of an aggregate of
5% of the amount of such securities outstanding.
Effective March 11, 1995, Mr. Sparkman resigned as an executive officer of
the Company and the Company and Mr. Sparkman entered into a consulting
agreement. During the term of the consulting agreement, which extends until
September 30, 2002 unless sooner terminated as provided in the agreement, Mr.
Sparkman is required to provide consulting services for no more than 700 hours
per year as and if requested by the Company's chief executive officer. Whether
or not his services are requested, Mr. Sparkman will receive compensation as
follows: (i) during the period from March 11, 1995 through December 31, 1997, a
sum equal to the rate of $773,000 per annum and (ii) from and after January 1,
1998 throughout the balance of the term, the rate of $500,000 per annum. If he
dies before the end of the term of his consulting services, the Company is
required to pay his designated beneficiaries a lump sum equal to one year's
compensation at the then-current rate. During the term of the agreement, Mr.
Sparkman will continue to be entitled to participate in, and to be accorded all
rights and benefits under, all group insurance policies (including, but not
limited to, all disability, life, health and medical insurance policies)
maintained by the Company for the benefit of its employees.
Under a prior employment agreement between Mr. Sparkman and the Company, a
portion of Mr. Sparkman's salary was deferred, and the deferred amounts, plus
interest at an annual rate of 8%, were to be paid to him in 120 monthly
installments which would have commenced on the date of termination of his
full-time employment with the Company. The consulting agreement provides for
such payment to be made to Mr. Sparkman in 120 monthly installments of $7,294.32
each, without interest, commencing on January 1, 1998, with any remaining
payments due after Mr. Sparkman's death being paid in a lump-sum to his
designated beneficiaries. Under Mr. Sparkman's 1993 employment agreement with
the Company, a portion of Mr. Sparkman's salary was deferred, and the deferred
amounts, plus interest at an annual rate of 13%, were to be paid to him in 240
monthly installments which would have commenced on the date of termination of
his
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<PAGE> 116
full-time employment with the Company. The consulting agreement provides for
such payment to be made to Mr. Sparkman in 240 monthly payments of $15,116.03
each, without interest, commencing on January 1, 1998, with any remaining
payments due after Mr. Sparkman's death being paid in a lump-sum to his
designated beneficiaries. Similarly, Mr. Sparkman's 1993 employment agreement
with the Company provided for Mr. Sparkman to receive, commencing on termination
of his employment, 240 consecutive monthly salary continuation payments of
$6,250, increased at the rate of 12% per annum, compounded annually from January
1, 1988 to the date of such termination. The consulting agreement provides that
such salary continuation payments will be made in 240 consecutive monthly
payments of $19,411.55 each, without interest, commencing on January 1, 1998,
with any remaining payments due after Mr. Sparkman's death being made to his
designated beneficiaries.
Mr. Sparkman's consulting agreement provides that during its term, Mr.
Sparkman will not be connected in any manner specified in such agreement with
any entity which competes in a material respect with the business of the
Company; however, he may own securities of any corporation listed on a national
securities exchange or quoted in The Nasdaq Stock Market to the extent of an
aggregate of 5% of the amount of such securities outstanding.
The Company entered into an employment agreement with Tony Coelho, which
was effective as of October 1, 1995, with respect to the terms of Mr. Coelho's
employment as the Chairman of the Board and Chief Executive Officer of the
education business which is now conducted by ETC. The employment agreement runs
through September 30, 2000. Under the terms of the employment agreement, Mr.
Coelho is entitled to an annual base salary of not less than $400,000 as well as
benefits commensurate with similarly situated executives of the Company. In the
event that Mr. Coelho's employment is terminated by the Company other than as a
result of death or for cause (as defined in the employment agreement), Mr.
Coelho will be entitled to receive all remaining compensation to which he would
have been entitled through the term of his employment agreement. In connection
with his employment, Mr. Coelho was granted options to acquire 100,000 shares of
Series A TCI Group Common Stock at an exercise price of $14.62 per share and
10,000 shares of SATCo Series A Stock at an exercise price of $23.76 per share
subject to customary terms and was granted 1,500 shares of common stock of ETC
(which at the time of such grant represented 15% of the common equity
outstanding of ETC) at a price of $0.10 per share. Under certain circumstances,
Mr. Coelho will be entitled to increase his percentage ownership in ETC to up to
20%. The terms of the agreements under which Mr. Coelho will acquire such
additional equity interest in ETC will, among other rights, afford him the right
at any time after September 30, 2000 to require the Company to purchase his
equity interest at fair market value and require the Company to purchase his
entire equity interest at fair market value on September 30, 2001.
The Company and Mr. Brendan Clouston have entered into a letter agreement,
as amended (the "Agreement"). Mr. Clouston has notified the Company that a
financial institution may lend him certain amounts of money (the "Loan"), which
Loan may be secured in whole or in part, by the Agreement. Pursuant to the
Agreement, TCI agrees to purchase from Mr. Clouston, at his request or by the
request of such financial institution upon a default as provided under the
relevant agreements evidencing the Loan, all, but not less than all of Mr.
Clouston's grants of options and restricted stock awards as of April 7, 1997
(the "Grants") (as described under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" and "Executive Compensation -- Option/SAR Grants Table of
TCI") at a price of $10 million. The $10 million purchase price shall decrease
upon the exercise of any options and the vesting of any restricted stock awards
included in the Grants, by the amount of the difference between the exercise
price and the fair market value of the exercised options at the respective time
of such exercise and by the fair market value of any of the restricted stock
awards that vest at the time of such vesting. Additionally, Mr. Clouston will
apply an amount equal to such reduction in the purchase price, less only
applicable taxes, to prepay the Loan. The Agreement expires on March 31, 2002.
On July 23, 1997 the Board of Directors approved the grant to Jerome H.
Kern, a director of the Company, of options to acquire 1,500,000 shares of
Series A TCI Group Common Stock at an exercise price of $14.625 per share, and
562,500 shares of Series A Liberty Media Group Common Stock at an exercise
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price of $22.25 per share, and a restricted stock award of 200,000 shares of
Series A TCI Group Common Stock.
The Company believes that the foregoing business dealings with management
during 1996 and 1997 were based upon terms no less advantageous to the Company
than those which would be available in dealing with unaffiliated persons.
Certain Business Relationships. Jerome H. Kern, a director of TCI, is
special counsel with the law firm of Baker & Botts, L.L.P., the principal
outside counsel for TCI. Fees paid to Baker & Botts, L.L.P. by TCI and
consolidated subsidiaries were approximately $11 million for the 1996 fiscal
year.
John Malone is currently the Chief Executive Officer, Chairman of the Board
and a director of TCI and is also the Chairman of the Board and a director of
Satellite. Dr. Malone is also a principal stockholder of both TCI and Satellite.
Since the consummation of the Satellite Distribution, Satellite and TCI
have operated independently, and neither has any stock ownership, beneficial or
otherwise, in the other. However, for the purposes of governing certain of the
ongoing relationships between Satellite and TCI after the Satellite
Distribution, and to provide mechanisms for an orderly transition, Satellite and
TCI entered into various agreements prior to the Satellite Distribution which
are described below. In addition, TCIC continued to provide installation,
maintenance, retrieval and other customer fulfillment services for certain
customers of Satellite, pursuant to the "Fulfillment Agreement," and entered
into the "TCIC Credit Facility" with Satellite, both of which are described
below.
Reorganization Agreement. On the date the Satellite Distribution was
consummated (the "Distribution Date"), TCI, TCIC and a number of other TCI
subsidiaries, including Satellite, entered into the Reorganization Agreement,
which provided for, among other things, the principal corporate transactions
required to effect the Satellite Distribution, the conditions thereto and
certain provisions governing the relationship between Satellite and TCI with
respect to and resulting from the Satellite Distribution.
Certain of Satellite's assets relating to the digital satellite business
were historically owned by subsidiaries of TCI other than Satellite and its
predecessors. These assets include the capital stock of Tempo Satellite, Inc.
("Tempo") and the 20.86% partnership interests in PRIMESTAR Partners, L.P.
("PRIMESTAR Partners"). The Reorganization Agreement provided for, among other
things, the transfer of these assets to Satellite and for the assumption by
Satellite of related liabilities. No consideration was payable by Satellite for
these transfers, except that two subsidiaries of Satellite purchased TCI's
partnership interests in PRIMESTAR Partners for consideration payable by
delivery of promissory notes issued by such subsidiaries (the "K-1 Notes"),
which promissory notes were assumed by TCI on the Distribution Date in the form
of a capital contribution to Satellite. The Reorganization Agreement also
provides for certain cross-indemnities designed to make Satellite financially
responsible for all liabilities relating to the digital satellite business prior
to the Satellite Distribution, as well as for all liabilities incurred by
Satellite after the Satellite Distribution, and makes TCI financially
responsible for all potential liabilities of Satellite which are not related to
the digital satellite business, including, for example, liabilities arising as a
result of Satellite's having been a subsidiary of TCI. The Reorganization
Agreement further provided for each of Satellite and TCI to preserve the
confidentiality of all confidential or proprietary information of the other
party, for five years following the Satellite Distribution, subject to customary
exceptions, including disclosures required by law, court order or government
regulation.
Pursuant to the Reorganization Agreement, on the Distribution Date,
Satellite issued to TCIC a note in the principal amount of $250,000,000 (the
"Satellite Note") representing a portion of Satellite's intercompany balance
owed to TCIC on such date. See "TCIC Credit Facility" below. Pursuant to the
Reorganization Agreement, the remainder of Satellite's intercompany balance owed
to TCIC on the Distribution Date (other than certain advances to Satellite made
by TCIC in 1996 to fund certain construction and related costs associated with
certain satellites ("SATCo Satellites"), as described below under "Reimbursement
of Certain Satellite Expenses"), and the indebtedness represented by the K-1
Notes were assumed by TCI in the form of (i) a $100 million capital contribution
to Satellite, (ii) consideration for Satellite's assumption of TCI's
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obligations under options granted to Brendan R. Clouston, Larry E. Romrell and
another employee of TCI to purchase shares of SATCo Series A Stock representing
1.0%, 1.0% and 0.5%, respectively, of the shares of Satellite common stock
issued and outstanding on the Distribution Date, determined immediately after
giving effect to the Satellite Distribution but before giving effect to the
issuance of the shares of SATCo Series A Stock issuable upon exercise of such
options, and (iii) consideration for Satellite's grant of an option to TCI to
purchase up to 4,765,000 shares of SATCo Series A Stock (as such number may be
adjusted to reflect stock dividends, stock splits and the like), for a purchase
price equal to the par value of such shares, as necessary to satisfy TCI's
obligations to deliver shares of SATCo Series A Stock upon conversion of certain
convertible securities of TCI as a result of the Satellite Distribution. See
"Other Arrangements" below.
Transition Services Agreement. Pursuant to the Transition Services
Agreement between TCI and Satellite, TCI is obligated to provide to Satellite
certain services and other benefits, including certain administrative and other
services that were provided by TCI prior to the Satellite Distribution. Such
services include (i) tax reporting, financial reporting, payroll, employee
benefit administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock box,
remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and advanced
information technology department personnel, (iii) use of telecommunications and
data facilities and of systems and software developed, acquired or licensed by
TCI from time to time for financial forecasting, budgeting and similar purposes,
including without limitation any such software for use on personal computers, in
any case to the extent available under copyright law or any applicable
third-party contract, (iv) technology support and consulting services, and (v)
such other management, supervisory, strategic planning or other services as
Satellite and TCI may from time to time mutually determine to be necessary or
desirable.
Pursuant to the Transition Services Agreement, TCI has also agreed to
provide Satellite with certain most-favored-customer rights to programming
services that TCI or a wholly owned subsidiary of TCI may own in the future and
access to any volume discounts that may be available to TCI for purchase of home
satellite dishes, satellite receivers and other equipment.
As compensation for services rendered to Satellite and for the benefits
made available to Satellite pursuant to the Transition Services Agreement,
Satellite is required to pay TCI a fee of $1.50 per qualified subscribing
household or other residential or commercial unit (counted as one subscriber
regardless of the number of satellite receivers) per month, commencing with the
Distribution Date, up to a maximum of $3 million per month, and reimburse TCI
quarterly for direct, out-of-pocket expenses incurred by TCI to third parties in
providing the services.
The Transition Services Agreement continues in effect until the close of
business on December 31, 1999 and will be renewed automatically for successive
one-year periods thereafter, unless earlier terminated by (i) either party at
the end of the initial term or the then current renewal term, as applicable, on
not less than 180 days' prior written notice to the other party, (ii) TCI upon
written notice to Satellite following certain changes in control of Satellite,
and (iii) either party if the other party is the subject of certain bankruptcy
or insolvency-related events. During the period commencing with the Distribution
Date and ending on December 31, 1996, Satellite paid $763,000 to TCIC pursuant
to the Transition Services Agreement.
Tax Sharing Agreement. Through the Distribution Date, Satellite's results
of operations were included in TCI's consolidated U.S. federal income tax
returns, in accordance with the then existing tax sharing arrangements among TCI
and its consolidated subsidiaries. Pursuant to an amended tax sharing agreement
entered into prior to the Distribution Date and effective as of July 1, 1995,
Satellite is responsible to TCI for its share of current consolidated income tax
liabilities through the Distribution Date; TCI is responsible to the extent that
Satellite's income tax attributes generated after the effective date and through
the Distribution Date are utilized by TCI to reduce its consolidated income tax
liabilities.
Indemnification Agreements. On the Distribution Date, Satellite entered
into the Indemnification Agreements with TCIC and TCI UA 1. The Indemnification
Agreement with TCIC provides for Satellite to reimburse TCIC for any amounts
drawn under an irrevocable transferable letter of credit issued by The Bank
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of New York for the account of TCIC to support Satellite's share of PRIMESTAR
Partners' obligations under the Amended and Restated Memorandum of Agreement
between PRIMESTAR Partners and GE American Communications, Inc. ("GE Americom"),
with respect to PRIMESTAR Partners' use of transponders on the GE Americom
medium power satellite that was launched on January 30, 1997, and which was
declared commercially operational on March 6, 1997 ("GE-2"). At December 31,
1996, the drawable amount of such letter of credit was $25,000,000.
The Indemnification Agreement with TCI UA 1 provides for Satellite to
reimburse TCI UA 1 for any amounts drawn under the TCI UA I Letter of Credit,
which supports the PRIMESTAR Credit Facility that was obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
construction of SATCo Satellites and that is supported by letters of credit
arranged for by affiliates of the partners of the PRIMESTAR Partners (other than
G.E. Americom Services, Inc.). The amount of the TCI UA I Letter of Credit was
$141,250,000 at December 31, 1996.
The Indemnification Agreements further provide for Satellite to indemnify
and hold harmless TCIC and TCI UA 1 and certain related persons from and against
any losses, claims and liabilities arising out of the respective letters of
credit or any drawings thereunder. The payment obligations of Satellite to TCIC
and TCI UA 1 under such Indemnification Agreements are subordinated in right of
payment with respect to certain future obligations of Satellite to financial
institutions. During the year ended December 31, 1996, the aggregate amount paid
by Satellite to TCI under the Indemnification Agreements was $1,623,000. Such
amount represents the aggregate fees incurred by TCI with respect to the TCI UA
1 Letter of Credit from the Distribution Date through December 31, 1996.
Trade Name and Service Mark License Agreement. Pursuant to the Trade Name
and Service Mark License Agreement (the "License Agreement"), TCI granted to
Satellite, for an initial term of three years following the Satellite
Distribution, a non-exclusive non-assignable license to use certain trade names
and service marks specifically identified in the License Agreement, including
the mark "TCI" in the context of the digital satellite business. The License
Agreement provides, among other things, that all advertising, promotion and use
of certain of TCI's trade names and service marks by Satellite shall be
consistent with TCI guidelines and standards, as well as subject to TCI approval
in certain circumstances.
Fulfillment Agreement. TCIC has historically provided Satellite with
certain customer fulfillment services for PRIMESTAR customers enrolled by
Satellite's direct sales force or the national call center maintained by
Satellite for orders, information and customer service. Charges for such
services have been allocated to Satellite by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and Satellite,
TCIC continues to provide fulfillment services to Satellite following the
Satellite Distribution with respect to customers of the PRIMESTAR medium power
service. Such services include installation, maintenance, retrieval, inventory
management and other customer fulfillment services. The Fulfillment Agreement
became effective on January 1, 1997. Among other matters, the Fulfillment
Agreement (i) sets forth the responsibilities of TCIC with respect to
fulfillment services, including performance standards, (ii) provides for TCIC's
fulfillment sites to be connected to the billing and information systems used by
Satellite, allowing for on-line scheduling and dispatch of installation and
other service calls, and (iii) provides scheduled rates to be charged to
Satellite for the various customer fulfillment services to be provided by TCIC.
Satellite retains sole control under the Fulfillment Agreement to establish the
retail prices and other terms and conditions on which installation and other
services are provided to Satellite's customers. The Fulfillment Agreement also
provides that, during the term of the Fulfillment Agreement, TCIC will not
provide fulfillment services to any other Ku-band, Ka-band, direct broadcast
satellite ("DBS"), broadcast satellite service, fixed satellite service, C-band,
wireless or other similar or competitive provider or distributor of television
programming services (other than traditional cable). The Fulfillment Agreement
has an initial term of two years. The scheduled rates for the services to be
provided by TCIC under the Fulfillment Agreement exceed the scheduled rates upon
which charges historically have been allocated to Satellite for such services,
reflecting in part the value to Satellite, as determined by Satellite's
management, of the performance standards, exclusivity, termination right and
certain other provisions included in the Fulfillment Agreement. The parties are
currently negotiating an
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amendment to the Fulfillment Agreement that would change the termination date of
the Fulfillment Agreement to December 31, 1997 and reduce certain of the
scheduled rates for services provided by TCIC pursuant to the Fulfillment
Agreement. There can be no assurance that the terms of the Fulfillment Agreement
are not more or less favorable than those which could be obtained from
unaffiliated third parties. During the year ended December 31, 1996, the
aggregate amount paid by Satellite to TCIC for fulfillment services was
$74,049,000 (including $6,432,000 paid subsequent to the Distribution Date).
TCIC Credit Facility. In connection with the Satellite Distribution,
Satellite and TCIC entered into the TCIC Credit Facility to provide for the
terms of the Satellite Note and to provide for a revolving credit facility (the
"TCIC Revolving Loans"). The TCIC Credit Facility required Satellite to use its
best efforts to obtain external debt or equity financing after the Distribution
Date and provided for mandatory prepayment of the TCIC Revolving Loans and the
Satellite Note from the proceeds thereof. The initial borrowings under the Bank
Credit Facility were used to repay the Satellite Note in full. In connection
with the February 1997 issuance of certain debt securities by Satellite and the
March 1997 determination that GE-2 was commercially operational, borrowing
availability pursuant to the TCIC Credit Facility was terminated.
Borrowings under the TCIC Revolving Loans bore interest at 10% per annum,
compounded semi-annually. Commitment fees equal to 3/8% of the average
unborrowed availability under the TCIC Credit Facility were payable to TCIC
annually. Commitment fees paid to TCIC during the year ended December 31, 1996
aggregated $141,000. From the Distribution date through December 31, 1996, the
aggregate amount of interest paid by Satellite to TCIC pursuant to the TCIC
Credit Facility was $1,946,000.
Reimbursement of Certain Satellite Expenses. During 1996, TCIC made
intercompany advances to Satellite to fund the majority of the construction and
related costs associated with the SATCo Satellites. Prior to 1996, PRIMESTAR
Partners had funded substantially all of the construction and related costs
associated with the SATCo Satellites. In connection with the Satellite
Distribution, a determination was made to provide that such 1996 advances from
TCIC would be repaid by Satellite to TCIC (notwithstanding the Reorganization
Agreement), to the extent (and only to the extent) that Tempo received
corresponding advances from PRIMESTAR Partners.
As a result of negotiations between Satellite and PRIMESTAR Partners,
PRIMESTAR Partners advanced $73,786,000 to Tempo in December 1996 to reimburse
Tempo for all the 1996 costs which previously had been funded by TCIC. Upon
receipt, such advance was paid to TCIC by Tempo in repayment of such 1996
advance by TCIC.
Other Arrangements. On the Distribution Date, TCI and Satellite entered
into a certain Share Purchase Agreement, which obligates TCI and Satellite to
sell to each other from time to time, at the then current market price, shares
of Series A TCI Group Common Stock and SATCo Series A Stock, respectively, as
necessary to satisfy their respective obligations under TCI Group Series A
Options and SATCo Options held after the Distribution Date by their respective
employees and non-employee directors.
Beginning in March 1997, TCIC began providing Satellite with customer
support services from its Boise, Idaho call center (the "Boise Call Center").
The Boise Call Center responds to calls that exceed the capacity of Satellite's
National Call Center. Amounts charged by TCIC to Satellite for such services
aggregated $2,273,000 during the six months ended June 30, 1997.
Certain officers of Satellite who were officers or directors of TCI and/or
TCIC prior to the Satellite Distribution received undertakings of
indemnification from TCI and/or TCIC. Such undertakings survived the Satellite
Distribution.
NDTC, an indirect subsidiary of TCI, has obtained a nontransferable,
nonexclusive license to use certain proprietary technology of Imedia Corporation
currently under development ("Imedia Technology") to provide statistical
multiplexing of digitally compressed video signals. Although there can be no
assurance that the Imedia Technology will be successfully implemented, if
successful, such technology would increase the number of digital program signals
that could be transmitted simultaneously over a single satellite transponder,
thus effectively increasing the digital compression ratio. NDTC has agreed that
if, prior to September 1, 1997, Satellite engages NDTC to provide digitization,
compression and uplinking services for any high power DBS
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system operated by Satellite, and NDTC is authorized to use Imedia Technology or
other proprietary technologies to provide multiplexing of digitally compressed
video signals for Satellite, NDTC shall provide such multiplexing services to
Satellite for an agreed fee, based on NDTC's incremental costs and other
factors. Satellite's rights to receive multiplexing services under its agreement
with NDTC are assignable by Satellite to any affiliate of Satellite, including
for this purpose PRIMESTAR Partners.
Indebtedness of Management. On March 4, 1997, Dr. Malone received an
advance from a wholly owned subsidiary of the Company in the amount of
$5,787,505. On March 5, 1997, Dr. Malone received a second advance from a wholly
owned subsidiary of the Company in the amount of $5,813,755. The terms of the
advances were memorialized by a promissory note entered into by Dr. Malone. The
interest rate on such loans is 1% over the one-month LIBOR rate compounded
annually. As of April 1, 1997, $58,451 of interest was accrued on the note.
Principal outstanding on the note is due March 31, 1999 and interest is payable
annually on March 1 of each year. Dr. Malone used the proceeds of the advances
to purchase shares of SATCo Series A 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 Annual 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 financial statements are hereby incorporated by reference to
the Company's 1996 Annual Report to Stockholders: (i) the combined financial
statements of the TCI Group as of December 31, 1996 and December 31, 1995, and
for each of the years in the three-year period ended December 31, 1996, and (ii)
the combined financial statements of the Liberty Media Group as of December 31,
1996 and December 31, 1995, and for each of the years in the three-year period
ended December 31, 1996.
All information appearing in this Proxy Statement is qualified in its
entirety by the financial statements (including notes thereto) incorporated
herein by reference.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
filed with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the following Regional Offices of the SEC:
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
STOCKHOLDERS PROPOSALS
Proposals by stockholders for which consideration is desired at the 1998
annual meeting of stockholders must be received by the Company by April 29, 1998
in order to be considered for inclusion in proxy materials for the 1998 annual
meeting.
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ANNEX I
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
@Home....................................................... 25
@Home Cable Partners........................................ III-46
@Home IPO................................................... III-45
@Home Principal Cable Stockholders.......................... III-46
@Home Principal Stockholders................................ III-51
@Home Stockholders Agreement................................ III-51
@Network.................................................... III-45
1988 Agreement.............................................. 9
1992 Cable Act.............................................. III-42
1994 Plan................................................... 89
1995 Plan................................................... 89
1996 Act.................................................... III-28
1996 Plan................................................... 89
ABN......................................................... III-7
Acclaim..................................................... III-56
ADC......................................................... III-9
Adjustable Options.......................................... II-A-30
Adjusted Liberty Media Group Outstanding Interest
Fraction.................................................. II-A-28
Adjusted Outstanding Shares of Liberty Media Group Common
Stock..................................................... II-A-4
Adjusted Outstanding Shares of TCI Ventures Group Common
Stock..................................................... II-A-6
Adjusted TCI Ventures Group Outstanding Interest Fraction... II-A-28
Affiliated Franchises....................................... III-8
Affiliated LCO.............................................. III-47
</TABLE>
Amended Charter............................................. 23
America Online.............................................. III-50
Ameritech................................................... III-38
Annual Meeting.............................................. 1
Antec....................................................... III-56
APC......................................................... III-21
Appraisal Date.............................................. II-A-29
Appraiser................................................... II-A-29
Aster City.................................................. III-7
At-Large Directors.......................................... III-51
AT&T........................................................ III-50
ATM......................................................... 103
Available Shares............................................ 72
BBC......................................................... III-10
BBC Joint Ventures.......................................... III-7
BBC Worldwide............................................... III-7
BIP Poland.................................................. III-7
BIP-Chile................................................... III-13
BizTel...................................................... III-27
BSkyB....................................................... III-18
BT.......................................................... III-9
BTA......................................................... III-21
I-1
<PAGE> 123
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
Business Line Restructuring................................. 26
Cablevision................................................. III-13
CALEA....................................................... III-34
Canal +..................................................... III-12
CAPs........................................................ III-2
CareerTrack................................................. III-54
Carrier Services............................................ III-31
CERFnet..................................................... III-27
Certificate of Amendment.................................... 23
Chile Restructuring Agreements.............................. III-13
CIT......................................................... III-39
Class A Preferred Stock..................................... 79
Class B Preferred Stock..................................... 1
CLEC........................................................ III-19
CMRS........................................................ III-33
Code........................................................ 50
Comcast..................................................... 25
COMFER...................................................... III-13
Committed Acquisition Shares................................ II-A-29
Common Stock................................................ 1
Communications Act.......................................... III-32
Company..................................................... 1
Company Charter............................................. 1
Company Earnings (Loss) Attributable to the Liberty Media
Group..................................................... 70
Company Earnings (Loss) Attributable to the TCI Group....... 71
Company Earnings (Loss) Attributable to the TCI Ventures
Group..................................................... 55
Compensation Committee...................................... 97
CompuServe.................................................. III-50
Consumer Purpose............................................ III-47
Contingent TCI Shares....................................... 104
Contributed Systems......................................... III-13
Conversion Date............................................. II-A-29
Convertible Securities...................................... II-A-29
Copyright Act............................................... III-43
Cordillera.................................................. III-13
Corporation Earnings (Loss) Attributable to the Liberty
Media Group............................................... II-A-29
Corporation Earnings (Loss) Attributable to the TCI Group... II-A-29
Corporation Earnings (Loss) Attributable to the TCI Ventures
Group..................................................... II-A-29
Cox......................................................... 25
Cox PCS..................................................... III-21
CTC......................................................... III-13
DBS......................................................... 110
Deadlock Event.............................................. III-25
DGCL........................................................ 37
Digital Satellite Business.................................. 27
DigiVentures................................................ III-56
Director Stock Option Plan.................................. 102
Disposition................................................. II-A-30
Distribution Date........................................... 108
</TABLE>
I-2
<PAGE> 124
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
Dow Jones................................................... III-17
DTH satellite............................................... III-7
DTH Ventures................................................ III-14
ECO......................................................... III-33
ECP......................................................... 103
Election of Directors Proposal.............................. 1
ESMR........................................................ III-23
ESPP........................................................ 5
Estate Sale................................................. 9
Estate Swap................................................. 8
Estate Transactions......................................... 9
ETC......................................................... 20
Exchange Act................................................ 46
Exchange Offers............................................. II-A-30
FCC......................................................... III-20
First Appraiser............................................. II-A-30
Fisher Communications....................................... 103
Flextech.................................................... III-7
FM Cubed.................................................... III-42
GCI......................................................... III-20
GDI......................................................... III-12
GE Americom................................................. 110
GE-2........................................................ 110
Group....................................................... 29
Hallmark Entertainment...................................... III-11
HCI......................................................... 103
HCLP........................................................ 103
HCP......................................................... 103
Headend in the Sky.......................................... III-53
HFC......................................................... III-8
Higher Appraised Amount..................................... II-A-30
HITS........................................................ III-53
HKP......................................................... III-7
ICM I Transaction........................................... 104
ICM III..................................................... 104
ICM III Transaction......................................... 104
ICM IV...................................................... 104
ICM IV Transaction.......................................... 104
ICM VI...................................................... 104
ILECs....................................................... III-26
Imedia Technology........................................... 111
Independent Committee....................................... II-A-30
Initial Ventures Options.................................... II-A-30
Inter-Group Interest........................................ 23
Interconnection Orders...................................... III-37
InterLATA services.......................................... III-38
InterMedia Transactions..................................... 105
International............................................... III-1
International Plan.......................................... 89
</TABLE>
I-3
<PAGE> 125
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
International Programming Opportunity....................... 52
International Sports Territory.............................. III-15
Internet Option............................................. 90
IP I........................................................ 104
IP I Interest............................................... 104
IP VI....................................................... 104
IP VI Effective Date........................................ 104
ISDN........................................................ III-49
ISPs........................................................ III-49
ITC......................................................... III-8
IXCs........................................................ III-26
JPC......................................................... III-12
Jupiter..................................................... III-15
K-1 Notes................................................... 108
Kansas City Fiber Network................................... III-19
Kbps........................................................ III-46
Kearns-Tribune.............................................. 2
Kearns-Tribune Merger....................................... 2
KPCB........................................................ III-45
Lehman...................................................... 9
Liberty..................................................... 18
Liberty Group Stock Dividend................................ 10
Liberty Media Group......................................... II-A-30
Liberty Media Group Amendment Proposal...................... 2
Liberty Media Group Available Dividend Amount............... II-A-31
Liberty Media Group Common Stock............................ 1
Liberty Media Group Common Stock Per Share Value............ II-A-4
Liberty Media Group Distribution............................ II-A-32
Liberty Media Group Inter-Group Interest Fraction........... II-A-32
Liberty Media Group Net Proceeds............................ II-A-32
Liberty Media Group Optional Conversion Ratio............... II-A-4
Liberty Media Group Outstanding Interest Fraction........... II-A-32
Liberty Media Group Private Market Value.................... II-A-32
Liberty Media Group Proposal................................ 27
Liberty Media Group Subsidiaries............................ II-A-11
License Agreement........................................... 110
LLC......................................................... III-15
LMDS........................................................ III-50
Lower Appraised Amount...................................... II-A-33
Market Capitalization....................................... II-A-33
Market Value................................................ II-A-33
Maximum..................................................... 23
Mbps........................................................ III-46
Media One................................................... III-28
Melita...................................................... III-6
Merrill Lynch............................................... 9
Metropolis-Intercom......................................... III-13
Microsoft................................................... III-47
milestones.................................................. III-8
</TABLE>
I-4
<PAGE> 126
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
MMDS........................................................ III-17
MPT......................................................... III-16
MSN......................................................... III-50
MSOs........................................................ 49
MTAs........................................................ III-20
MultiThematiques............................................ III-12
Mutually Appraised Amount................................... II-A-33
Mutually Designated Appraiser............................... II-A-33
NDTC........................................................ 25
NDTC Video Services......................................... III-53
Netlink..................................................... III-41
Netscape.................................................... III-52
New ICM I................................................... 104
New Tax Sharing Agreement................................... 51
News Corp. ................................................. III-7
Nonresident Alien........................................... 78
Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest................................ II-A-33
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest................................ II-A-34
Old ICM I................................................... 104
Old Tax Sharing Agreement................................... 50
OSPs........................................................ III-49
PCIA........................................................ III-34
PCS......................................................... 25
PCS Ventures................................................ 25
Percentage Interest......................................... III-24
Permitted Transaction....................................... III-25
Phase I Closing Date........................................ 104
PhillieCo................................................... 25
PMP......................................................... III-17
Pops........................................................ III-20
Pre-Distribution Convertible Securities..................... II-A-35
Pre-Exchange Offer Securities............................... II-A-35
Prevue Networks............................................. III-39
PrimeCo..................................................... III-23
PRIMESTAR Partners.......................................... 108
Princes..................................................... III-6
Principal Joint Venture..................................... III-10
Programming Companies....................................... III-19
Programming Distributors.................................... III-40
Proposal No. 4.............................................. 2
PTO......................................................... III-9
PUCs........................................................ III-34
Purchaser................................................... III-26
Qualifying Subsidiary....................................... II-A-35
RBOCs....................................................... III-37
Record Date................................................. 2
Redemption Date............................................. II-A-35
</TABLE>
I-5
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<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
Reimbursement of Certain Satellite Expenses................. 108
Related Business Transaction................................ II-A-35
Representatives............................................. III-24
Reserved Property........................................... 62
Restricted Business......................................... III-47
Revolving Credit Facility................................... 42
RF.......................................................... III-35
Rogers...................................................... III-45
SARs........................................................ 91
SATCo Option................................................ 87
SATCo Satellites............................................ 108
SATCo Series A Stock........................................ 80
Satellite................................................... 22
Satellite Distribution...................................... 87
Satellite Note.............................................. 108
SBU......................................................... 27
SEC......................................................... 27
Second Appraiser............................................ II-A-36
Second Joint Venture........................................ III-10
Securities Act.............................................. III-4
Selection Date.............................................. II-A-36
Series A Directors.......................................... III-51
Series A Liberty Media Group Common Stock................... II-A-1
Series A Maximum............................................ 23
Series A Number............................................. II-A-40
Series A TCI Group Common Stock............................. II-A-1
Series A TCI Group Exchange Offer........................... 23
Series A TCI Ventures Group Common Stock.................... II-A-1
Series A Telephony Group Common Stock....................... 22
Series B Directors.......................................... III-51
Series B Liberty Media Group Common Stock................... II-A-1
Series B Maximum............................................ 23
Series B Number............................................. II-A-40
Series B TCI Group Common Stock............................. II-A-1
Series B TCI Group Exchange Offer........................... 23
Series B TCI Ventures Group Common Stock.................... II-A-1
Series B Telephony Group Common Stock....................... 22
Series C Preferred Stock.................................... 1
Series D Preferred Stock.................................... 79
Series E Preferred Stock.................................... 79
Series F Preferred Stock.................................... 79
Series G Preferred Stock.................................... 1
Series H Preferred Stock.................................... 1
Service..................................................... 32
share distribution.......................................... II-A-7
Shaw........................................................ III-45
SHVA........................................................ III-44
Sky Network................................................. III-7
SMATV....................................................... III-17
</TABLE>
I-6
<PAGE> 128
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
SMG......................................................... III-11
SNG......................................................... III-41
SONET....................................................... III-28
SpaceCom.................................................... III-39
Sports Venture.............................................. III-14
Sprint...................................................... 25
Sprint Communications....................................... III-23
Sprint PCS.................................................. 25
Sprint PCS Parents.......................................... III-19
Sprint PCS Partners......................................... III-19
Sprint PCS Partnership Agreement............................ III-21
Sprint PCS Partnership Board................................ III-24
Sprint PCS Partnerships..................................... 25
Sprint Spectrum............................................. III-22
Sprint Spectrum Notes....................................... III-22
Sprint Spectrum Registration Statement...................... III-26
StarSight................................................... III-40
STE......................................................... III-11
Subsidiary.................................................. II-A-36
Sumitomo.................................................... III-15
SUMMITrak................................................... 25
Superstar................................................... III-39
TCG......................................................... 25
TCG Reorganization.......................................... III-27
TCI......................................................... 1
TCI Board................................................... 87
TCI Group................................................... II-A-36
TCI Group Available Dividend Amount......................... II-A-37
TCI Group Common Stock...................................... 1
TCI Group Series A Option................................... 88
TCI Internet................................................ 20
TCI Music................................................... 21
TCI Options................................................. 87
TCI Plans................................................... 87
TCI SARs.................................................... 87
TCI Shares.................................................. 104
TCI Telephony............................................... 25
TCI Ventures Group.......................................... II-A-38
TCI Ventures Group Available Dividend Amount................ II-A-39
TCI Ventures Group Common Stock............................. 1
TCI Ventures Group Common Stock Per Share Value............. II-A-6
TCI Ventures Group Inter-Group Interest Fraction............ II-A-39
TCI Ventures Group Net Proceeds............................. II-A-39
TCI Ventures Group Optional Conversion Ratio................ II-A-5
TCI Ventures Group Outstanding Interest Fraction............ II-A-40
TCI Ventures Group Preferred Interest....................... II-A-40
TCI Ventures Group Private Market Value..................... II-A-40
TCI Ventures Group Stock Proposal........................... 1
TCI Ventures Group Subsidiaries............................. II-A-19
</TABLE>
I-7
<PAGE> 129
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
TCI Wireline................................................ 20
TCI-Estates Agreement....................................... 9
TCI-KT Agreement............................................ 9
TCI.NET..................................................... 20
TCI-UA Notes................................................ II-A-38
TCIC........................................................ 21
TCIC Revolving Loans........................................ 111
TCINV....................................................... 103
TCIU........................................................ 103
TeleCable Nacional.......................................... III-14
Telephone Option............................................ 90
Telephony Business.......................................... 23
Telephony Group Common Stock................................ 1
Teleport.................................................... 25
Teleport Cable Stockholders................................. III-29
Teleport Class A Stock...................................... III-27
Teleport Stockholders Agreement............................. III-30
Telewest.................................................... III-6
Tempo....................................................... 108
Tempo Cable................................................. 103
Tevel....................................................... III-6
Time Warner................................................. III-50
TIN......................................................... 78
TINTA Common Stock.......................................... III-5
TINTA Series A Stock........................................ 12
TINTA Series B Stock........................................ 12
Torneos..................................................... III-15
TPAC........................................................ 21
TPZS........................................................ III-12
Trading Day................................................. II-A-41
TTS-Delaware................................................ 20
TW Holdings................................................. III-6
U.K......................................................... III-5
UII......................................................... III-12
UKGL........................................................ III-10
UKLL........................................................ III-10
United States Real Property Interest........................ 78
United Video................................................ 21
UPC......................................................... III-12
US.......................................................... III-5
US WEST..................................................... III-8
UVSG........................................................ 21
UVTV........................................................ III-39
Video Services.............................................. III-32
Voting Securities........................................... II-A-41
</TABLE>
I-8
<PAGE> 130
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
---- ---------------
<S> <C>
WCS......................................................... III-33
WestMarc.................................................... 20
WestMarc Preferred Stock.................................... 20
Wireless Business........................................... III-26
Wireline Option............................................. 90
WTCI........................................................ 25
WTO......................................................... III-33
xDSL........................................................ III-49
</TABLE>
I-9
<PAGE> 131
ANNEX II-A
PROPOSED AMENDMENTS
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
(IMPLEMENTING THE TCI VENTURES GROUP STOCK PROPOSAL)
SECTION E OF ARTICLE IV OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS PROPOSED TO BE AMENDED PURSUANT TO THE TCI VENTURES GROUP STOCK
PROPOSAL 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 TCI VENTURES GROUP COMMON STOCK AND
SERIES B TCI VENTURES 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 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
TeleCommunications, Inc. Series A TCI Ventures Group Common Stock (the "Series A
TCI Ventures 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 TCI Ventures Group Common Stock (the "Series B TCI Ventures 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 TCI Ventures Group Common Stock and each share of
Series B TCI Ventures 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
II-A-1
<PAGE> 132
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 TCI
Ventures Group Common Stock shall be entitled to one vote for each share of such
stock held, and holders of Series B TCI Ventures 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 TCI Ventures Group Common Stock, the holders of
shares of Series B TCI Ventures 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 TCI Ventures Group Common Stock, the holders of
shares of Series B TCI Ventures Group Common Stock, or the holders of shares of
any such class or series of Preferred Stock shall be required for the approval
of any such matter.
2. Conversion Rights.
(a) CONVERSION OF SERIES B TCI GROUP COMMON STOCK INTO SERIES A TCI GROUP
COMMON STOCK. Each share of Series B TCI Group Common Stock shall be
convertible, at the option of the holder thereof, into one share of Series A TCI
Group Common Stock. Any such conversion may be effected by any holder of Series
B TCI Group Common Stock by surrendering such holder's certificate or
certificates for the Series B TCI Group Common Stock to be converted, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
B TCI Group Common Stock, together with a written notice to the Corporation at
such office that such holder elects to convert all or a specified number of
shares of Series 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
II-A-2
<PAGE> 133
Common Stock, together with a written notice to the Corporation at such of rice
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 TCI VENTURES GROUP COMMON STOCK INTO SERIES A
TCI VENTURES GROUP COMMON STOCK. Each share of Series B TCI Ventures Group
Common Stock shall be convertible, at the option of the holder thereof, into one
share of Series A TCI Ventures Group Common Stock. Any such conversion may be
effected by any holder of Series B TCI Ventures Group Common Stock by
surrendering such holder's certificate or certificates for the Series B TCI
Ventures Group Common Stock to be converted, duly endorsed, at the office of the
Corporation or any transfer agent for the Series B TCI Ventures 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 Ventures 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 Ventures 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 Ventures 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 Ventures Group Common
Stock issuable on such conversion shall be treated for all purposes as the
record holder or holders of such Series A TCI Ventures Group Common Stock on
that date. A number of shares of Series A TCI Ventures Group Common Stock equal
to the number of shares of Series B TCI Ventures Group Common Stock outstanding
from time to time shall be set aside and reserved for issuance upon conversion
of shares of Series B TCI Ventures Group Common Stock. Shares of Series A TCI
Ventures Group Common Stock shall not be convertible into shares of Series B TCI
Ventures 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 converted into a number (or fraction)
of fully paid and nonassessable shares of Series A TCI Group Common Stock equal
to the Liberty Media Group Optional Conversion Ratio, and (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-A-3
<PAGE> 134
(ii) For purposes of this paragraph 2(d), the "Liberty Media Group Optional
Conversion Ratio" shall mean the quotient (calculated to the nearest five
decimal places) obtained by dividing (A) the Liberty Media Group Common Stock
Per Share Value by (B) the average Market Value of one share of Series A TCI
Group Common Stock over the 20-Trading Day period ending on the Trading Day
preceding the Appraisal Date.
(iii) In the event that the Corporation determines to establish the Liberty
Media Group Private Market Value, the Corporation shall designate the First
Appraiser, and the independent Committee shall designate the Second Appraiser.
Not later than 20 days after the Selection Date, the First Appraiser and the
Second Appraiser shall each determine its initial view as to the private market
value of the Liberty Media Group as of the Appraisal Date and shall consult with
one another with respect thereto. Not later than the 30th day after the
Selection Date, the First Appraiser and the Second Appraiser shall each have
determined its final view as to such private market value. If the Higher
Appraised Amount is not more than 120% of the Lower Appraised Amount, the
Liberty Media Group Private Market Value (subject to any adjustment provided in
subparagraph (iv) of this paragraph 2(d)) shall be the average of those two
amounts. If the Higher Appraised Amount is more than 120% of the Lower Appraised
Amount, the First Appraiser and the Second Appraiser shall agree upon and
jointly designate the Mutually Designated Appraiser to determine such private
market value. The Mutually Designated Appraiser shall not be provided with any
of the work of the First Appraiser and Second Appraiser. The Mutually Designated
Appraiser shall, no later than the 20th day after the date the Mutually
Designated Appraiser is designated, determine the Mutually Appraised Amount, and
the Liberty Media Group Private Market Value (subject to any adjustment provided
in subparagraph (iv) of this paragraph 2(d)) shall be (A) if the Mutually
Appraised Amount is between the Lower Appraised Amount and the Higher Appraised
Amount, (I) the average of (1) the Mutually Appraised Amount and (2) the Lower
Appraised Amount or the Higher Appraised Amount, whichever is closer to the
Mutually Appraised Amount, or (II) the Mutually Appraised Amount, if neither the
Lower Appraised Amount nor the Higher Appraised Amount is closer to the Mutually
Appraised Amount, or (B) if the Mutually Appraised Amount is greater than the
Higher Appraised Amount or less than the Lower Appraised Amount, the average of
the Higher Appraised Amount and the Lower Appraised Amount. For these purposes,
if any such Appraiser expresses its final view of the private market value of
the Liberty Media Group as a range of values, such Appraiser's final view of
such private market value shall be deemed to be the midpoint of such range of
values.
(iv) Following the determination of the Liberty Media Group Private Market
Value, the Appraiser or Appraisers whose final views of the private market value
of the Liberty Media Group were used in the calculation of the Liberty Media
Group Private Market Value shall determine the Adjusted Outstanding Shares of
Liberty Media Group Common Stock together with any further appropriate
adjustments to the Liberty Media Group Private Market Value resulting from such
determination. The "Adjusted Outstanding Shares of Liberty Media Group Common
Stock" shall mean a number, as determined by such Appraiser(s) as of the
Appraisal Date, equal to the sum of the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock
outstanding, the Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest, the number of Committed Acquisition Shares issuable,
the number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock issuable upon the conversion, exercise or
exchange of all Pre-Distribution Convertible Securities and the number of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock issuable upon the conversion, exercise or exchange of those
Convertible Securities (other than Pre-Distribution Convertible Securities and
other than Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares) the holders of which would derive
an economic benefit from conversion, exercise or exchange of such Convertible
Securities which exceeds the economic benefit of not converting, exercising or
exchanging such Convertible Securities. The "Liberty Media Group Common Stock
Per Share Value" shall mean the quotient obtained by dividing the Liberty Media
Group Private Market Value by the Adjusted Outstanding Shares of Liberty Media
Group Common Stock, provided that if such Appraiser(s) do not agree on the
determinations provided for in this subparagraph (iv), the Liberty 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.
II-A-4
<PAGE> 135
(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 TCI VENTURES GROUP COMMON STOCK INTO SERIES A
TCI GROUP COMMON STOCK AND SERIES B TCI VENTURES 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
TCI Ventures Group Common Stock shall be converted into a number (or fraction)
of fully paid and nonassessable shares of Series A TCI Group Common Stock equal
to the TCI Ventures Group Optional Conversion Ratio, and (B) all shares of
Series B TCI Ventures 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 TCI Ventures Group Optional Conversion Ratio.
(ii) For purposes of this paragraph 2(e), the "TCI Ventures Group Optional
Conversion Ratio" shall mean the quotient (calculated to the nearest five
decimal places) obtained by dividing (A) the TCI Ventures 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 TCI
Ventures 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 TCI Ventures 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 TCI
Ventures 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 TCI Ventures 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
II-A-5
<PAGE> 136
expresses its final view of the private market value of the TCI Ventures 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 TCI Ventures Group Private Market
Value, the Appraiser or Appraisers whose final views of the private market value
of the TCI Ventures Group were used in the calculation of the TCI Ventures Group
Private Market Value shall determine the Adjusted Outstanding Shares of TCI
Ventures Group Common Stock together with any further adjustments to the TCI
Ventures Group Private Market Value resulting from such determination. The
"Adjusted Outstanding Shares of TCI Ventures 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 TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock outstanding, the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest, the number
of shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock issuable upon the conversion, exercise or exchange of all
Pre-Exchange Offer Securities and the number of shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock issuable upon
the conversion, exercise or exchange of those Convertible Securities (other than
Pre-Exchange Offer Securities) the holders of which would derive an economic
benefit from conversion, exercise or exchange of such Convertible Securities
which exceeds the economic benefit of not converting, exercising or exchanging
such Convertible Securities. The "TCI Ventures Group Common Stock Per Share
Value" shall mean the quotient obtained by dividing the TCI Ventures Group
Private Market Value by the Adjusted Outstanding Shares of TCI Ventures Group
Common Stock, provided that if such Appraiser(s) do not agree on the
determinations provided for in this subparagraph (iv), the TCI Ventures 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 TCI
Ventures Group Common Stock into Series A TCI Group Common Stock and shares of
Series B TCI Ventures Group Common Stock into Series B TCI Group Common Stock at
the TCI Ventures Group Optional Conversion Ratio, such conversion 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 TCI Ventures Group Common
Stock Per Share Value as of a subsequent date.
(vi) The Corporation shall not convert shares of Series A TCI Ventures
Group Common Stock into shares of Series A TCI Group Common Stock without
converting shares of Series B TCI Ventures Group Common Stock into shares of
Series B TCI Group Common Stock, and the Corporation shall not convert shares of
Series B TCI Ventures Group Common Stock into shares of Series B TCI Group
Common Stock without converting shares of Series A TCI Ventures Group Common
Stock into shares of Series A TCI Group Common Stock. The Series A TCI Ventures
Group Common Stock and the Series B TCI Ventures Group Common Stock shall also
be convertible at the option of the Corporation in accordance with paragraph
6(b)(iii) of this Section E.
3. Dividends.
(a) DIVIDENDS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B TCI GROUP
COMMON STOCK. Dividends on the Series A TCI Group Common Stock and the Series B
TCI Group Common Stock may be declared and paid only out of the lesser of (i)
assets of the Corporation legally available therefor and (ii) the TCI Group
Available Dividend Amount. Subject to paragraph 4 of this Section E, whenever a
dividend is paid to the holders of Series A TCI Group Common Stock, the
Corporation shall also pay to the holders of Series B TCI Group Common Stock a
dividend per share equal to the dividend per share paid to the holders of Series
A TCI Group Common Stock, and whenever a dividend is paid to the holders of
Series B TCI Group Common Stock, the Corporation shall also pay to the holders
of Series A TCI Group Common Stock a dividend per share equal to the dividend
per share paid to the holders of Series B TCI Group Common Stock.
(b) DIVIDENDS ON SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND SERIES B
LIBERTY MEDIA GROUP COMMON STOCK. Dividends on the Series A Liberty Media Group
Common Stock and the Series B Liberty Media Group Common Stock may be declared
and paid only out of the lesser of (i) assets of the Corporation
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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 TCI VENTURES GROUP COMMON STOCK AND SERIES B TCI
VENTURES GROUP COMMON STOCK. Dividends on the Series A TCI Ventures Group Common
Stock and the Series B TCI Ventures 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 Ventures 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 TCI Ventures Group Common Stock,
the Corporation shall also pay to the holders of Series B TCI Ventures Group
Common Stock a dividend per share equal to the dividend per share paid to the
holders of Series A TCI Ventures Group Common Stock, and whenever a dividend is
paid to the holders of Series B TCI Ventures Group Common Stock, the Corporation
shall also pay to the holders of Series A TCI Ventures Group Common Stock a
dividend per share equal to the dividend per share paid to the holders of Series
B TCI Ventures 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 TCI Ventures Group Common Stock and
Series B TCI Ventures 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 TCI Ventures
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 TCI
Ventures Group Common Stock and the Series B TCI Ventures 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 TCI Ventures Group Common Stock, Series B TCI Ventures Group Common
Stock or any other securities of the Corporation or any other Person
(hereinafter sometimes called a "share distribution") to holders of the Common
Stock only in accordance with the provisions of this paragraph 4.
(a) DISTRIBUTIONS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B TCI GROUP
COMMON STOCK. If at any time a share distribution is to be made with respect to
the Series A TCI Group Common Stock or Series B TCI Group Common Stock, such
share distribution may be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI Group
Common Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series B TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock, on an
equal per share basis; or consisting of shares of Series A TCI Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series A TCI Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
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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 TCI
Ventures Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock, on an equal per share basis; or consisting of
shares of Series B TCI Ventures Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares of
Series B TCI Ventures Group Common Stock) to holders of Series A TCI Group
Common Stock and Series B TCI Group Common Stock, on an equal per share
basis; or consisting of shares of Series A TCI Ventures Group Common Stock
(or Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A TCI Ventures Group Common Stock) to holders of
Series A TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Ventures Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B TCI
Ventures Group Common Stock) to holders of Series B TCI Group Common Stock;
provided that the sum of (A) the aggregate number of shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock to
be so distributed (or the number of such shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures 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
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock that are subject to issuance upon conversion, exercise or exchange of
any Convertible Securities then outstanding that are attributed to the TCI
Group (other than Pre-Exchange Offer Securities), is less than or equal to
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest.
(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 TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series A TCI Group Common Stock, Series B TCI Group Common Stock,
Series A Liberty Media Group Common Stock, Series B Liberty Media Group
Common Stock, Series A TCI Ventures Group Common Stock or Series B TCI
Ventures Group Common Stock), either on the basis of a distribution of
identical securities, on an equal per share basis, to holders of Series A
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
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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 TCI Ventures Group
Common Stock or Series B TCI Ventures 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
TCI Ventures Group Common Stock or Series B TCI Ventures Group Common
Stock) either on the basis of a distribution of identical securities, on an
equal per share basis, to holders of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock or on the basis of a
distribution of one class or series of securities to holders of Series A
Liberty Media Group Common Stock and another class or series of securities
to holders of Series B Liberty Media Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of Convertible
Securities, the securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable) do not
differ an 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
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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 TCI VENTURES GROUP COMMON STOCK AND SERIES B
TCI VENTURES GROUP COMMON STOCK. If at any time a share distribution is to be
made with respect to the Series A TCI Ventures Group Common Stock or Series B
TCI Ventures 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 TCI Ventures
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, on an equal per share basis; or
consisting of shares of Series B TCI Ventures Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable for
shares of Series B TCI Ventures Group Common Stock) to holders of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock, on an equal per share basis; or consisting of shares of Series A TCI
Ventures Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group
Common Stock) to holders of Series A TCI Ventures Group Common Stock and,
on an equal per share basis, shares of Series B TCI Ventures Group Common
Stock (or like Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Ventures Group Common Stock) to
holders of Series B TCI Ventures Group Common Stock; and
(ii) a share distribution consisting of any class or series of
securities of the 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 TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock, or on the basis of a
distribution of one class or series of securities to holders of Series A
TCI Ventures Group Common Stock and another class or series of securities
to holders of Series B TCI Ventures Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of Convertible
Securities, the securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable) do not
differ in any respect other than their relative voting rights and related
differences in designation, conversion, redemption and share distribution
provisions, with holders of shares of Series B TCI Ventures Group Common
Stock receiving the class or series having the higher relative voting
rights (without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series
A TCI Ventures Group Common Stock and the Series B TCI Ventures Group
Common Stock), provided that if the securities so distributed constitute
capital stock of a Subsidiary of the 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
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the Series A TCI Ventures Group Common Stock and the Series B TCI Ventures
Group Common Stock, and provided in each case that such distribution is
otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Series A TCI
Ventures Group Common Stock without reclassifying, subdividing or combining the
Series B TCI Ventures Group Common Stock, on an equal per share basis, and the
Corporation shall not reclassify, subdivide or combine the Series B TCI Ventures
Group Common Stock without reclassifying, subdividing or combining the Series A
TCI Ventures Group Common Stock, on an equal per share basis.
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 amy 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.
[Note: If both the TCI Ventures Group Stock Proposal and the Liberty Media Group
Amendment Proposal are approved by stockholders, paragraph 5(a) will instead be
amended to read in its entirety as set forth in Annex II-B.]
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF DISPOSITION OF
LIBERTY MEDIA GROUP ASSETS. In the event of the Disposition, in one transaction
or a series of related transactions, by the Corporation and its subsidiaries of
all or substantially all of the properties and assets of the Liberty Media Group
to one or more persons, entities or groups (other than (w) in connection with
the Disposition by the Corporation of all of the Corporation's properties and
assets in one transaction or a series of related transactions in connection with
the liquidation, dissolution or winding up of the Corporation within the meaning
of paragraph 7 of this Section E, (x) a dividend, other distribution or
redemption in accordance with any provision of paragraph 3, paragraph 4,
paragraph 5(a) or paragraph 7 of this Section E, (y) to any person, entity or
group which the
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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
(iii) convert (A) each outstanding share of Series A Liberty 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).
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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 convened 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 notice or any other action on
the part of the Corporation or its Board of Directors or the holder of such
share of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, be converted into (in case all such outstanding shares were
converted) or redeemed in exchange for (in case all such outstanding shares were
redeemed) the kind and amount of shares of capital stock, cash and/or other
securities or property that a holder of such Pre-Distribution Convertible
Securities or any Convertible Securities which are convertible into or
exercisable or exchangeable for Committed Acquisition Shares would have been
entitled to receive pursuant to the terms of such securities had such terms
provided that the conversion, exercise or exchange privilege in effect
immediately prior to any such conversion or redemption of all outstanding shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock would be adjusted
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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 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
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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 (other than
Pre-Distribution Convertible Securities or Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares), a statement to the effect that holders of such Convertible Securities
shall be entitled to participate in such redemption only if such holders
appropriately convert, exercise or exchange such Convertible Securities on or
prior to the Redemption Date referred to in clause (B) of this sentence and a
statement as to what, if anything, such holders shall be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable,
paragraph 5(c) of this Section E if such holders convert, exercise or exchange
such Convertible Securities following such Redemption Date. Such notice shall be
sent by first-class mail, postage prepaid, not less than 35 Trading Days nor
more than 45 Trading Days prior to the Redemption Date, at such holder's address
as the same appears on the transfer books of the Corporation.
(iv) If the Corporation determines to undertake a redemption of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock following a Disposition of substantially all (but not all) of the
properties and assets of the Liberty Media Group pursuant to clause (ii)(B) of
paragraph 5(b) of this Section E, the Corporation shall, not later than the 30th
Trading Day following the consummation of such Disposition, cause to be given to
each holder of record of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock, and to each holder
of Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(A) a date not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition which shall be the
date on which shares of the Series A
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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) statement that all
outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock shall be converted, (B) the Conversion Date
(which shall not be more than 85 Trading Days following the consummation of such
Disposition in the event of a conversion pursuant to paragraph 5(b) and which
shall not be more than 120 days after the Appraisal Date in the event of a
conversion pursuant to paragraph 2(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
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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
(other than Pre-Distribution Convertible Securities or Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares), a statement to the effect that holders of such Convertible
Securities shall be entitled to participate in such redemption only if such
holders appropriately convert, exercise or exchange such Convertible Securities
on or prior to the Redemption Date referred to in clause (B) of this sentence
and a statement as to what, if anything, such holders shall be entitled to
receive pursuant to the terms of such Convertible Securities or, if applicable,
paragraph 5(c) of this Section E if such holders convert, exercise or exchange
such Convertible Securities following the Redemption Date. Such notice shall be
sent by first-class mail, postage prepaid, not less than 35 Trading Days nor
more than 45 Trading Days prior to the Redemption Date, at such holder's address
as the same appears on the transfer books of the Corporation.
(vii) Neither the failure to mail any notice required by this paragraph
5(d) to any particular holder of Series A Liberty Media Group Common Stock,
Series B Liberty Media Group Common Stock or of Convertible Securities nor any
defect therein shall affect the sufficiency thereof with respect to any other
holder of outstanding shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock or of Convertible Securities, or the
validity of any conversion or redemption.
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(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 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.
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(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 TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock.
(a) REDEMPTION IN EXCHANGE FOR STOCK OF TCI VENTURES GROUP SUBSIDIARIES. At
any time at which all of the assets and liabilities attributed to the TCI
Ventures Group have become and continue to be held directly or indirectly by any
one or more Qualifying Subsidiaries (the "TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock in exchange for an aggregate number of outstanding fully paid
and nonassessable shares of common stock of each TCI Ventures Group Subsidiary
equal to the product of the Adjusted TCI Ventures Group Outstanding Interest
Fraction and the number of outstanding shares of common stock of such TCI
Ventures Group Subsidiary held by the Corporation. Any such redemption shall
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occur on a Redemption Date set forth in a notice to holders of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock in exchange for shares of separate
classes or series of common stock of each TCI Ventures Group Subsidiary with
relative voting rights and related differences in designation, conversion,
redemption and share distribution provisions not greater than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, with holders of shares of Series B TCI
Ventures Group Common Stock receiving the class or series having the higher
relative voting rights, or (ii) redeem shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock in exchange for shares
of a single class of common stock of each TCI Ventures Group Subsidiary without
distinction between the shares distributed to the holders of the Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock.
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF DISPOSITION OF
TCI VENTURES 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 TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI
Ventures 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 TCI Ventures Group Outstanding Interest Fraction as of
the record date for determining the holders entitled to receive such
dividend and the TCI Ventures Group Net Proceeds of such Disposition; or
(ii) provided that there are assets of the Corporation legally
available therefor and the TCI Ventures 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 TCI Ventures Group, redeem all
outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock in exchange for cash and/or
securities or other property (other than Common Stock) in an aggregate
amount equal to the product of the Adjusted TCI Ventures Group
Outstanding Interest Fraction as of the date of such redemption and the
TCI Ventures Group Net Proceeds, such aggregate amount to be allocated
(subject to the last sentence of this paragraph 6(b)) to shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock in the ratio of the number of shares of each such series
outstanding (so that the amount of consideration paid for the redemption
of each share of Series A TCI Ventures Group Common Stock and each share
of Series B TCI Ventures Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets of the TCI Ventures Group, apply an aggregate
amount of cash and/or securities or other property (other than Common
Stock) equal to the product of the TCI Ventures Group Outstanding
Interest
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Fraction as of the date shares are selected for redemption and the TCI
Ventures Group Net Proceeds to the redemption of outstanding shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock, such aggregate amount to be allocated (subject to the last
sentence of this paragraph 6(b)) to shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock in the
ratio of the number of shares of each such series outstanding, 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 TCI Ventures Group Common
Stock during the ten-Trading Day period beginning on the 16th Trading
Day following the consummation of such Disposition and (y) the number of
shares of such series outstanding (so that the amount of consideration
paid for the redemption of each share of Series A TCI Ventures Group
Common Stock and each share of Series B TCI Ventures Group Common Stock
is the same);
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 TCI Ventures
Group Common Stock into a number (or fraction) of fully paid and
nonassessable shares of Series A TCI Group Common Stock and (B) each
outstanding share of Series B TCI Ventures Group Common Stock into a number
(or fraction) of fully paid and nonassessable shares of Series B TCI Group
Common Stock, in each case equal to 110% of the average daily ratio
(calculated to the nearest five decimal places) of the Market Value of one
share of Series A TCI Ventures Group Common Stock to the Market Value of
one share of Series A TCI Group Common Stock during the ten-Trading Day
period referred to in clause (ii)(B) of this paragraph 6(b).
For purposes of this paragraph 6(b):
(x) as of any date, "substantially all of the properties and assets of
the TCI Ventures 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
TCI Ventures 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 TCI
Ventures 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 TCI Ventures
Group Common Stock and another class or series of securities to holders of
Series B TCI Ventures Group Common Stock, provided that such securities
(and, if such securities are convertible or exercisable or exchangeable for
shares of another class or series of securities, the securities so issuable
upon such conversion, exercise or exchange) do not differ in any respect
other than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions, with
holders of shares of Series B TCI Ventures Group Common Stock receiving the
class or series having the higher relative voting rights (without regard to
whether such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A TCI
Ventures Group Common Stock and the Series B TCI Ventures Group Common
Stock), provided that if such securities constitute capital stock of a
Subsidiary of the Corporation, such rights shall not
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differ to a greater extent than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution
provisions between the Series A TCI Ventures Group Common Stock and Series
B TCI Ventures 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 TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock.
(c) CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless the
provisions of any class or series of Pre-Exchange Offer Securities provide
specifically to the contrary, after any Conversion Date or Redemption Date on
which all outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock were converted or redeemed, any share
of Series A TCI Ventures Group Common Stock that is issued on conversion,
exercise or exchange of any Pre-Exchange Offer 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 TCI Ventures 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-Exchange Offer Securities would have been
entitled to receive pursuant to the terms of such securities had such terms
provided that the conversion, exercise or exchange privilege an effect
immediately prior to any such conversion or redemption of all outstanding shares
of Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock would be adjusted so that the holder of any such Pre-Exchange Offer
Securities 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 exchanged immediately prior thereto. Unless the
provisions of any class or series of Convertible Securities (other than
Pre-Exchange Offer Securities) which are or become convertible into or
exercisable or exchangeable for shares of Series A TCI Ventures Group Common
Stock or Series B TCI Ventures Group Common Stock provide specifically to the
contrary, after any Conversion Date or Redemption Date on which all outstanding
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock were converted or redeemed, any share of Series A TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock that is
issued on conversion, exercise or exchange of any such Convertible Securities
will, immediately upon issuance pursuant to such conversion, exercise or
exchange and without any notice or any other action on the part of the
Corporation or its Board of Directors or the holder of such share of Series A
TCI Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Net Proceeds
of such Disposition, (B) the number of outstanding shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock, (C)
the number of shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock into or for which Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities constitute Pre-Exchange Offer Securities), (D) the TCI Ventures Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, and (E) the Adjusted TCI Ventures Group Outstanding Interest Fraction as
of a recent date preceding the date of such notice. Not earlier than the 26th
Trading Day and not later than the 30th Trading Day following the consummation
of such Disposition, the 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
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Disposition, cause to be given to each holder of outstanding shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock,
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 TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock, (D) the TCI Ventures Group Net
Proceeds of such Disposition, (E) the TCI Ventures Group Outstanding Interest
Fraction as of a recent date preceding the date of such notice, (F) the number
of outstanding shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock and the number of shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof and (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 TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock following a Disposition of all (not merely substantially all) of the
properties and assets of the TCI Ventures 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 TCI Ventures Group Common Stock
and Series B TCI Ventures 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 sorting forth (A) a statement that all
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
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 TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock outstanding on the Redemption Date, (D) the TCI Ventures
Group Net Proceeds of such Disposition, (E) the Adjusted TCI Ventures 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 TCI
Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock and the number of shares of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures Group Common Stock into or for
which outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities constitute Pre-Exchange
Offer Securities), and (H) in the case of a notice to holders of Convertible
Securities (other than Pre-Exchange Offer 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.
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(iv) If the Corporation determines to undertake a redemption of shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock following a Disposition of substantially all (but not all) of the
properties and assets of the TCI Ventures 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 TCI Ventures Group
Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series
B TCI Ventures 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 TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock selected for redemption, (D)
the TCI Ventures Group Net Proceeds of such Disposition, (E) the TCI Ventures
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice, (F) the number of outstanding shares of Series A TCI Ventures Group
Common Stock and Series B TCI Ventures Group Common Stock and the number of
shares of Series A TCI Ventures Group Common Stock and Series B TCI Ventures
Group Common Stock into or for which outstanding Convertible Securities are then
convertible, exercisable or exchangeable and the conversion 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 TCI Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock to be so redeemed, a notice setting forth (A) the number of shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock held by such holder to be redeemed, (B) a statement that such shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures
Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock to be redeemed shall be
redeemed by the Corporation pro rata among the holders of Series A TCI Ventures
Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures
Group
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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 TCI Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B
TCI Ventures Group Common Stock, including details as to the calculation
thereof, (D) the place or places where certificates for shares of Series A TCI
Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock and the number of shares of Series A TCI Ventures Group Common
Stock and Series B TCI Ventures Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (F) in the case of a notice
to holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities shall be entitled to participate in such conversion
only if such holders appropriately convert, exercise or exchange such
Convertible Securities on or prior to the Conversion Date referred to in clause
(B) of this sentence and a statement as to what, if anything, such holders shall
be entitled to receive pursuant to the terms of such Convertible Securities or,
if applicable, paragraph 6(c) of this Section E if such holders convert,
exercise or exchange such Convertible Securities following such Conversion Date.
Such notice shall be sent by first-class mail, postage prepaid, not less than
35 Trading Days nor more than 45 Trading Days prior to the Conversion Date, at
such holder's address as the same appears on the transfer books of the
Corporation.
(vi) If the Corporation determines to redeem shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures 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 TCI Ventures Group Common Stock and
Series B TCI Ventures 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 sensing forth (A) a statement
that all outstanding shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock shall be redeemed in exchange for
shares of common stock of the TCI Ventures Group Subsidiaries, (B) the
Redemption Date, (C) the Adjusted TCI Ventures 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 TCI Ventures Group Common Stock
and Series B TCI Ventures 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 TCI
Ventures Group Subsidiaries, (E) the number of outstanding shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common Stock and
the number of shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the conversion,
exercise or exchange prices thereof (and stating which, if any, of such
Convertible Securities constitute Pre-Exchange Offer Securities), and (F) in the
case of a notice to holders of Convertible Securities (other than Pre-Exchange
Offer 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 convey, 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
6(d) to any particular holder of Series A TCI Ventures Group Common Stock,
Series B TCI Ventures 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 TCI Ventures Group Common Stock or
Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI Ventures
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 TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock held at
the relevant time by such holder of record. If the number of shares of any class
of capital stock or the amount of securities remaining to be issued or delivered
to any holder of Series A TCI Ventures Group Common Stock or Series B TCI
Ventures 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 TCI Ventures Group Common
Stock or Series B TCI Ventures Group Common Stock; provided, however, that if
the Conversion Date or the Redemption Date with respect to the Series A TCI
Ventures Group Common Stock or Series B TCI Ventures 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
TCI Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common
Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI Ventures
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 TCI Ventures Group Common
Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI
Ventures Group Common Stock deliver to the person for whose account shares of
Series A TCI Ventures Group Common Stock or Series B TCI Ventures 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
TCI Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock not redeemed. The
Corporation shall not be required to register a transfer of (1) any shares of
Series A TCI Ventures Group Common Stock or Series B TCI Ventures Group Common
Stock for a period of 15 Trading
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Days next preceding any selection of shares of Series A TCI Ventures Group
Common Stock or Series B TCI Ventures Group Common Stock to be redeemed or (2)
any shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
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 TCI Ventures Group Common Stock or
Series B TCI Ventures Group Common Stock that were converted or redeemed shall
cease except for the right, upon surrender of the certificates representing
shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
Group Common Stock, to receive certificates representing shares of the kind and
amount of capital stock or cash and/or securities or other property for which
such shares were converted or redeemed, together with any payment for fractional
securities 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 TCI Ventures Group Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI
Ventures Group Common Stock, represented shares of Series A TCI Ventures Group
Common Stock or Series B TCI Ventures 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 TCI Ventures Group
Common Stock or Series B TCI Ventures Group Common Stock was converted or
redeemed until surrender of such holder's certificate for a certificate or
certificates representing shares of such kind of capital stock. Upon 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 TCI Ventures Group Common Stock or Series B TCI Ventures Group Common Stock,
the Corporation shall, however, be entitled to treat the certificates for shares
of Series A TCI Ventures Group Common Stock or Series B TCI Ventures Group
Common Stock that have not yet been surrendered for conversion or redemption as
evidencing the ownership of the number of whole shares of the kind or kinds of
capital stock for which the shares of Series A TCI Ventures Group Common Stock
or Series B TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI
Ventures 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 TCI Ventures Group Common
Stock or Series B TCI Ventures 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
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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 TCI
Ventures Group Common Stock and the holders of the Series B TCI Ventures 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 TCI Ventures Group Common
Stock and the Series B TCI Ventures Group Common Stock, and Z is the aggregate
Market Capitalization of the Series A TCI Group Common Stock, the Series B TCI
Group Common Stock, the Series A Liberty Media Group Common Stock, the Series B
Liberty Media Group Common Stock, the Series A TCI Ventures Group Common Stock
and the Series B TCI Ventures Group Common Stock. Neither the consolidation or
merger of the Corporation with or into any other corporation or corporations nor
the sale, transfer or lease of all or substantially all of the assets of the
Corporation shall itself be deemed to be a liquidation, dissolution or winding
up of the Corporation within the meaning of this paragraph 7.
8. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision in
this Section E shall be final and binding on all stockholders of the
Corporation, except as may otherwise be required by law. The Corporation shall
prepare a statement of any such determination by the Board of Directors
respecting the fair market value of any properties, assets or securities and
shall file such statement with the Secretary of the Corporation.
9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph
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.
"Adjusted TCI Ventures Group Outstanding Interest Fraction," as of any
date, shall mean a fraction the numerator of which is the aggregate number
of shares of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock outstanding on such date and the denominator of
which is the sum of (a) such aggregate number of shares of Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock
outstanding on such date, (b) the Number of Shares Issuable with Respect to
the TCI Ventures Group Inter-Group Interest as of such date, and (c) the
aggregate number of shares of Series A TCI Ventures Group Common Stock
issuable, determined as of such date, upon conversion, exercise or exchange
of Pre-Exchange Offer Securities.
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"Appraisal Date" with respect to any determination of the Liberty
Media Group Private Market Value or the TCI Ventures 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 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 TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock,
as the case may be, as set forth in a notice to holders of the applicable
series of Common Stock pursuant to paragraph 5(d) or 6(d), as applicable,
of this Section E.
"Convertible Securities" shall mean any securities of the Corporation
(other than any series of Common Stock) or any Subsidiary thereof that are
convertible into, exchangeable for or evidence the right to purchase any
shares of any series of Common Stock, whether upon conversion, exercise,
exchange, pursuant to antidilution provisions of such securities or
otherwise.
" 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 TCI Ventures Group"
for any period, shall mean the net earnings or loss of the TCI Ventures
Group for such period determined on a basis consistent with the
determination of the net earnings or loss of the TCI Ventures Group for
such period as presented in
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the combined financial statements of the TCI Ventures Group for such
period, including income and expenses of the Corporation attributed to the
operations of the TCI Ventures Group on a substantially consistent basis,
including without limitation, corporate administrative costs, net interest
and income taxes.
"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.
"Exchange Offers" means those certain offers made by the Corporation
to exchange shares of Series A TCI Ventures Group Common Stock for shares
of Series A TCI Group Common Stock, and to exchange shares of Series B TCI
Ventures Group Common Stock for shares of Series B TCI Group Common Stock,
on the terms and subject to the conditions set forth in the Offering
Circular, dated , and the related Letter of Transmittal.
"First Appraiser" means, with respect to any determination of the
Liberty Media Group Private Market Value or the TCI Ventures 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 TCI Ventures Group Private
Market Value, shall mean 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.
"Initial Ventures Options" means those certain options to purchase
shares of Series A TCI Ventures Group Common Stock that are issued
effective upon the consummation of the Exchange Offers, in connection with
the adjustment of the Adjustable Options. For purposes of this definition,
the term "Adjustable Options" means those options to purchase shares of
Series A TCI Group Common Stock that are outstanding immediately prior to
the consummation of the Exchange Offers under any Existing Stock Plan (as
defined below), which options the Board of Directors and, if applicable,
the committee of the Board of Directors charged with the administration of
such Existing Stock Plan, determined to adjust for the effects of the
Exchange Offers by the issuance, in substitution for and in cancellation of
each such Adjustable Option effective upon the consummation of the Exchange
Offers, of an Initial Ventures Option to purchase a number of shares of
Series A TCI Ventures Group Common Stock initially equal to 30% (rounded up
to the next whole number) of the number of shares of Series A TCI Group
Common Stock that would have been issuable upon exercise of such Adjustable
Option immediately prior to the consummation of the Exchange Offers, and an
option to purchase a number of shares of Series A TCI Group Common Stock
equal to 70% (rounded down to the next whole number) of the number of
shares of Series A TCI Group Common Stock that would have been issuable
upon exercise of such Adjustable Option immediately prior to the
consummation of the Exchange Offers, together with such other securities as
were then issuable upon exercise of such Adjustable Option (and in each
case, having such other terms consistent with the terms of the Adjustable
Option for which they are exchanged as the Board of Directors or the
committee, as applicable, determines.) The term "Existing Stock Plans"
means each of the following: the Tele-Communications, Inc. 1994 Stock
Incentive Plan, the Tele-Communications, Inc. 1995 Employee Stock Incentive
Plan and the Tele-Communications, Inc. 1996 Incentive Plan.
"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,
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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 Liberty Media Corporation
or any of its subsidiaries (or a successor as described in clause (a) of
this sentence),
(c) all assets and properties contributed or otherwise transferred
to the Liberty Media Group from the TCI Group, and
(d) the interest of the Corporation or any of its subsidiaries in
the businesses, assets and liabilities acquired by the Corporation or
any of its subsidiaries for the Liberty Media Group, as determined by
the Board of Directors;
provided that (i) from and after any dividend or other distribution with
respect to any shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock (other than a dividend or other
distribution payable in shares of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock, with respect to which
adjustment shall be made as provided in clause (a) of the definition of
"Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest," or in other securities of the Corporation attributed
to the Liberty Media Group for which provision shall be made as set forth
in the penultimate sentence of this definition), the Liberty Media Group
shall no longer include an amount of assets or properties equal to the
aggregate amount of such kind of assets or properties so paid in respect of
shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock multiplied by a fraction the numerator of which is
equal to the Liberty Media Group Inter-Group Interest Fraction in effect
immediately prior to the record date for such dividend or other
distribution and the denominator of which is equal to the Liberty Media
Group Outstanding interest Fraction in effect immediately prior to the
record date for such dividend or other distribution and (ii) from and after
any transfer of assets or properties from the Liberty Media Group to the
TCI Group, the Liberty Media Group shall no longer include the assets or
properties so transferred. If the Corporation shall pay a dividend or make
any other distribution with respect to shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock payable in
securities of the Corporation attributed to the Liberty Media Group other
than Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, the TCI Group shall be deemed to hold an amount of such
other securities equal to the amount so distributed multiplied by the
fraction specified in clause (i) of this definition (determined as of a
time immediately prior to the record date for such dividend or other
distribution), and to the extent interest or dividends are paid or other
distributions are made on such other securities so distributed to the
holders of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock, the Liberty Media Group shall no longer include a
corresponding ratable amount of the kind of assets paid as such interest or
dividends or other distributions in respect of such securities so deemed to
be held by the TCI Group. The Corporation may also, to the extent any such
other securities constitute Convertible Securities which are at the time
convertible, exercisable or exchangeable, cause such Convertible Securities
deemed to be held by the TCI Group to be deemed to be convened, 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
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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.
"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 TCI Ventures Group), (b) any transaction costs,
including, without limitation, any legal, investment banking and accounting
fees and expenses and (c) any liabilities and other obligations (contingent
or otherwise) of, or attributed to, the Liberty Media Group, including,
without limitation, any indemnity or guarantee obligations incurred in
connection with the Disposition or any liabilities for future purchase
price adjustments and any preferential amounts plus any accumulated and
unpaid dividends and other obligations (without duplication of amounts
allocated for the satisfaction of the 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.
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"Lower Appraised Amount," with respect to any determination of the
Liberty Media Group Private Market Value or the TCI Ventures Group Private
Market Value, shall mean the lower of the respective final views of the
First Appraiser and the Second Appraiser as to such private market value.
"Market Capitalization" of any class or series of capital stock of the
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.
"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 TCI Ventures Group Private
Market Value, shall mean the determination by the Mutually Designated
Appraiser of such private market value.
"Mutually Designated Appraiser" shall mean, if required with respect
to any determination of the Liberty Media Group Private Market Value or the
TCI Ventures 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
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Common Stock issued or delivered by the Corporation as a dividend or
distribution to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock, (iv) the aggregate number of shares of Series A
Liberty Media Group Common Stock issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities (other
than Pre-Distribution Convertible Securities and Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares) issued or delivered by the Corporation after the
Liberty Media Group Distribution as a dividend or distribution or by
reclassification or exchange to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock and (v) the aggregate number
of shares of Series A Liberty Media Group Common Stock (rounded, if
necessary, to the nearest whole number), equal to the aggregate fair
value (as determined by the Board of Directors) of assets or properties
attributed to the Liberty Media Group that are 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 TCI Ventures Group
Inter-Group Interest" shall initially be 204,927,700 and, immediately following
the consummation of the Exchange Offers and the attribution of the TCI Ventures
Group Preferred Interest to the TCI Group, shall be zero and thereafter shall
from time to time, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by stock split or
otherwise) and combinations (by reverse stock split or otherwise) of the
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock and dividends or distributions of shares of Series A TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock to
holders of Series A TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock and other reclassifications of the Series A TCI
Ventures Group Common Stock and Series B TCI Ventures Group Common Stock,
(b) decreased (but not to less than zero) by (i) the aggregate number
of shares of Series A TCI Ventures Group Common Stock or Series B TCI
Ventures Group Common Stock issued or sold by the Corporation after the
consummation of the Exchange Offers the proceeds of which are attributed to
the TCI Group, (ii) the aggregate number of shares of Series A TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock issued or
delivered upon conversion, exercise or exchange of Convertible Securities
(other than Pre-Exchange Offer Securities), the proceeds of which are
attributed to the TCI Group, (iii) the aggregate number of shares of Series
A TCI Ventures Group
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Common Stock or Series B TCI Ventures 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 TCI Ventures Group Common Stock
or Series B TCI Ventures Group Common Stock issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities (other than
Pre-Exchange Offer Securities) issued or delivered by the Corporation after
the consummation of the Exchange Offers as a dividend or distribution or by
reclassification or exchange to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock and (v) the aggregate number of shares
of Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group
Common Stock (rounded, if necessary, to the nearest whole number), equal to
the aggregate fair value (as determined by the Board of Directors) of
assets or properties attributed to the TCI Ventures Group that are
transferred from the TCI Ventures Group to the TCI Group in consideration
of a reduction in the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest, divided by the Market Value of one
share of Series A TCI Ventures Group Common Stock as of the date of such
transfer, and
(c) increased by (i) the aggregate number of any shares of Series A
TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock which are retired or otherwise cease to be outstanding following
their purchase with funds attributed to the TCI Group, (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 TCI
Ventures Group in consideration of an increase in the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest,
divided by the Market Value of one share of Series A TCI Ventures Group
Common Stock as of the date of such contribution and (iii) the aggregate
number of shares of Series A TCI Ventures Group Common Stock and Series B
TCI Ventures Group Common Stock into or for which Convertible Securities
are deemed to be converted, exercised or exchanged pursuant to the last
sentence of the definition of "TCI Group" in this paragraph 9.
Whenever a change in the Number of Shares Issuable with Respect to the TCI
Ventures 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.
"Pre-Exchange Offer Securities" shall mean the TCI-UA Notes and the Initial
Ventures Options.
"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 TCI
Ventures Group Common Stock and Series B TCI Ventures 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.
[Note: If both the TCI Ventures Group Stock Proposal and the Liberty Media Group
Amendment Proposal are approved by stockholders, the definition of "Qualifying
Subsidiary" will instead be amended to read as set forth in Annex II-B.]
"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 TCI Ventures Group Common Stock and
Series B TCI Ventures 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
TCI Ventures Group, as the case may be, in which the Corporation receives as
proceeds of such Disposition primarily equity securities (including, without
limitation, capital
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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 TCI Ventures 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 TCI Ventures
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 TCI Ventures Group, as the case may be, prior to such
Disposition, as determined in good faith by the Board of Directors.
"Second Appraiser" means, with respect to any determination of the Liberty
Media Group Private Market Value or the TCI Ventures 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 TCI Ventures 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 TCI Ventures 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 TCI Ventures Group equal to the TCI Ventures 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 TCI Ventures Group Common Stock or Series B TCI Ventures
Group Common Stock (other than a dividend or other distribution payable in
shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
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 TCI Ventures Group Inter-Group Interest," or in other
securities of the Corporation attributed to the TCI Ventures Group, for
which provision shall be made as set forth in the penultimate sentence of
this definition), an amount of
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assets or properties theretofore included in the TCI Ventures Group equal
to the aggregate amount of such kind of assets or properties so paid in
respect of such dividend or other distribution with respect to shares of
Series A TCI Ventures Group Common Stock or Series B TCI Ventures Group
Common Stock multiplied by a fraction the numerator of which is equal to
the TCI Ventures Group Inter-Group Interest Fraction in effect immediately
prior to the record date for such dividend or other distribution and the
denominator of which is equal to the TCI Ventures Group Outstanding
Interest Fraction in effect immediately prior to the record date for such
dividend or other distribution;
(f) any assets or properties transferred from the Liberty Media Group
or the TCI Ventures Group to the TCI Group; and
(g) the TCI Ventures Group Preferred Interest;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group or the TCI Ventures
Group, the TCI Group 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 TCI
Ventures 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 TCI Ventures
Group Common Stock or Series B TCI Ventures Group Common Stock payable in other
securities of the Corporation attributed to the TCI Ventures 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 TCI Ventures Group Common Stock and Series B TCI Ventures
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 TCI Ventures 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.
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"TCI-UA Notes" shall mean those certain convertible notes due December 12,
2021 issued by TCI-UA, Inc., a Subsidiary of the Corporation, which notes were,
prior to the consummation of the Exchange Offers, exchangeable for shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common Stock.
"TCI Ventures Group" shall mean, as of any date that any shares of Series A
TCI Ventures Group Common Stock or Series B TCI Ventures Group Common Stock have
been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its subsidiaries in
any of the following Persons or any of their respective subsidiaries
(including any successor thereto by merger, consolidation or sale of all or
substantially all of its assets, whether or not in connection with a
Related Business Transaction) and their respective properties and assets:
TCI Ventures Group, LLC, Tele-Communications International, Inc., TCI
Telephony Holdings, Inc., New Jersey Fiber Technologies, L.P., Louisville
Lightwave, Western Tele-Communications, Inc., TCI GCI, Inc., TCI UVSG,
Inc., Acclaim Entertainment, Inc., TCI TSX, Inc., Intessera, Inc.,
TCI-TVGOS, Inc., TCI MCNS Holdings, Inc., TCI ETC Holdings, Inc., TCI
Internet Holdings, Inc., TCI Online Sports Holdings, Inc., TCI Online
Village Holdings, Inc., TCI INZ Sports Holdings, Inc., TCI Netscape
Holdings, Inc., TCI Java, Inc., National Digital Television Center, Inc.,
TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, LLC., DigiVentures, LLC, Kitty
Hawk Capital Limited Partners, II, New Enterprise Associates IV, Limited
Partnership, Venture First II, L.P., TVSM, Inc.,
(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 any of the Persons named in
clause (a) or any of their respective subsidiaries (or any successor as
described in clause (a) of this sentence),
(c) the proceeds of exercise of the Initial Ventures Options and the
expense of exercise of any related stock appreciation rights,
(d) all assets and properties contributed or otherwise transferred to
the TCI Ventures Group from the TCI Group, and
(e) 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 TCI Ventures Group, as determined by the Board of
Directors;
provided that (i) from after any dividend or other distribution with respect to
any shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
Group Common Stock (other than a dividend or other distribution payable in
shares of Series A TCI Ventures Group Common Stock or Series B TCI Ventures
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 TCI Ventures Group Inter-Group Interest," or in other securities of the
Corporation attributed to the TCI Ventures Group for which provision shall be
made as set forth in the penultimate sentence of this definition), the TCI
Ventures Group 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 TCI Ventures Group Common Stock or Series B TCI Ventures
Group Common Stock multiplied by a fraction the numerator of which is equal to
the TCI Ventures Group Inter-Group Interest Fraction in effect immediately prior
to the record date for such dividend or other distribution and the denominator
of which is equal to the TCI Ventures Group Outstanding Interest Fraction in
effect immediately prior to the record date for such dividend or other
distribution and (ii) from and after any transfer of assets or properties from
the TCI Ventures Group to the TCI Group, the TCI Ventures Group shall no longer
include the assets or properties so transferred. If the Corporation shall pay a
dividend or make any other distribution with respect to shares of Series A TCI
Ventures Group Common Stock or Series B TCI Ventures Group Common Stock payable
in securities of the Corporation attributed to the TCI Ventures Group other than
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock, the TCI Group shall be deemed to hold an amount of such other securities
equal to the amount so
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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 TCI Ventures Group Common Stock and Series B TCI
Ventures Group Common Stock, the TCI Ventures 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 convened, exercised or exchanged (and to the
extent the terms of such Convertible Securities require payment or delivery of
consideration in order to effect such conversion, exercise or exchange, the TCI
Ventures Group shall in such case include an amount of the kind of properties or
assets required to be paid or delivered as such consideration for the amount of
the Convertible Securities deemed converted, exercised or exchanged as if such
Convertible Securities were outstanding), in which case such Convertible
Securities shall no longer be deemed to be held by the TCI Group or attributed
to the TCI Ventures Group.
"TCI Ventures Group Available Dividend Amount," as of any date, shall mean
the product of the TCI Ventures Group Outstanding Interest Fraction and either:
(a) the excess of (i) an amount equal to the total assets of the TCI Ventures
Group less the total liabilities (not including preferred stock) of the TCI
Ventures Group as of such date over (ii) the aggregate par value of, or any
greater amount determined to be capital in respect of, all outstanding shares of
Series A TCI Ventures Group Common Stock, Series B TCI Ventures Group Common
Stock, each class or series of Preferred Stock attributed to the TCI Ventures
Group and the TCI Ventures Group Preferred Interest or (b) in case there is no
such excess, an amount equal to the Corporation Earnings (Loss) Attributable to
the TCI Ventures Group (if positive) for the fiscal year in which such date
occurs and/or the preceding fiscal year.
"TCI Ventures Group Inter-Group Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest as of such date and the
denominator of which is the sum of (a) such Number of Shares Issuable with
Respect to the TCI Ventures Group Inter-Group Interest as of such date and (b)
the aggregate number of shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock outstanding as of such date.
"TCI Ventures Group Net Proceeds" shall mean, as of any date, with respect
to any Disposition of any of the properties and assets of the TCI Ventures
Group, an amount, if any, equal to the gross proceeds of such Disposition after
any payment of, or reasonable provision for, (a) any taxes payable by the
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 TCI
Ventures Group, including, without limitation, any indemnity or guarantee
obligations incurred in connection with the Disposition or any liabilities for
future purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends and other obligations (without duplication of
amounts allocated for the satisfaction of the Corporation's obligations with
respect to Pre-Exchange Offer Securities which are included in the determination
of the Adjusted TCI Ventures Group Outstanding Interest Fraction) in respect of
Preferred Stock attributed to the TCI Ventures Group and in respect of the TCI
Ventures Group Preferred Interest. For purposes of this definition, any
properties and assets of the TCI Ventures Group remaining after such Disposition
shall constitute "reasonable provision" for such amount of taxes, costs and
liabilities (contingent or otherwise) as can be supported by such properties and
assets. To the extent the proceeds of any Disposition include any securities or
other property other than cash, the Board of Directors shall determine the value
of such securities or property, including for the purpose of determining the
equivalent value thereof if the Board of Directors determines to pay a dividend
or redemption price in cash or securities or other property as provided in
clause (z) of paragraph 6(b) of this Section E.
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"TCI Ventures Group Outstanding Interest Fraction," as of any date, shall
mean a fraction the numerator of which is the aggregate number of shares of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock outstanding on such date and the denominator of which is the sum of (a)
such aggregate number of shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock outstanding on such date and (b) the
Number of Shares Issuable with Respect to the TCI Ventures Group Inter-Group
Interest as of such date.
"TCI Ventures Group Preferred Interest" means the preferred equity interest
in the TCI Ventures Group that shall be attributed to the TCI Group following
the consummation of the Exchange Offers if the number of shares of Series A TCI
Group Common Stock validly tendered pursuant to the Exchange Offers and not
withdrawn is less than 188,661,300 (the amount of such shortfall being the
"Series A Number"), or if the number of shares of Series B TCI Group Common
Stock validly tendered pursuant to the Exchange Offers and not withdrawn is less
than 16,266,400 (the amount of such shortfall being the "Series B Number"). The
stated liquidation value of the TCI Ventures Group Preferred Interest, if any,
shall equal the product of (x) the sum of the Series A Number and the Series B
Number, multiplied by (y) the Market Value of the Series A TCI Group Common
Stock on the last Trading Day preceding the consummation of the Exchange Offers.
The TCI Group will be entitled to receive cumulative dividends on the TCI
Ventures Group Preferred Interest, which shall accrue at the rate of 5% per
annum of the Liquidation Preference thereof, from the date the Exchange Offers
are consummated to and including the date that the TCI Ventures Group makes the
Liquidation Preference available to the TCI Group. Accrued dividends on the TCI
Ventures Group Preferred Interest shall accumulate and compound annually (but
not be payable currently) until the fifth anniversary of the closing of the
Exchange Offers. On and after such fifth anniversary, accrued dividends shall be
payable annually on each anniversary of the closing of the Exchange Offers and
will accumulate and compound to the extent not paid on any such anniversary.
When dividends become payable currently they could be paid (i) through the
transfer of cash or other assets from the TCI Ventures Group to the TCI Group,
(ii) through the reduction of amounts owed by the TCI Group to the TCI Ventures
Group, (iii) through the deemed transfer of taxable losses of the TCI Ventures
Group to the TCI Group pursuant to the tax sharing agreement among the TCI
Ventures Group, the TCI Group and the Liberty Media Group, effective for periods
after October 1, 1997 (in an amount equal to the highest corporate tax rate in
effect at the time of the dividend multiplied by the amount of taxable losses
deemed transferred), but only if such taxable losses have not been utilized in
any calculation under such tax sharing agreement or (iv) through the
cancellation of amounts owed by the TCI Group under such tax sharing agreement
with respect to utilized tax benefits of the TCI Ventures Group. The Liquidation
Preference of the TCI Ventures Group Preferred Interest as of any relevant date
shall be an amount equal to the sum of (a) the stated liquidation value of the
TCI Ventures Group Preferred Interest plus (b) an amount equal to all dividends
accrued thereon as of any annual dividend payment date that have not been paid
on such date (which dividends shall remain a part of the Liquidation Preference
until such accrued dividends and all dividends accrued thereon have been paid in
full), plus (c) for purposes of determining the amounts payable with respect to
the TCI Ventures Group Preferred Interest upon redemption thereof or the
liquidation, dissolution and winding up of the TCI Ventures Group, an amount
equal to all unpaid dividends accrued on the sum of the amounts specified in
clauses (a) and (b) during the period from the immediately preceding dividend
payment date to such date. The TCI Ventures Group Preferred Interest shall be
redeemed in full on the fifteenth (15th) anniversary of the consummation of the
Exchange Offers, and may be redeemed, in whole or in part, at the discretion of
the Board of Directors at any time prior thereto, for a redemption price,
payable in cash, equal to the Liquidation Preference thereof as of the
redemption date.
"TCI Ventures Group Private Market Value" shall mean an amount equal to the
private market value of the TCI Ventures 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 TCI
Ventures Group as of the Appraisal Date based upon the amount a willing
purchaser would pay to a willing seller, in an arm's length transaction, if it
were acquiring the TCI Ventures Group, as if the TCI Ventures Group were a
publicly traded non-controlled corporation and the purchaser was acquiring all
of the capital stock of such corporation, and without consideration of any
potential regulatory constraints limiting the potential purchasers of the TCI
Ventures Group other than that which would have existed if the TCI Ventures
Group were a publicly traded non-controlled entity.
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"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."
SECTION C OF ARTICLE V OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS PROPOSED TO BE AMENDED PURSUANT TO THE TCI VENTURES GROUP STOCK
PROPOSAL 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 TCI Ventures Group Common Stock,
Series B TCI Ventures 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."
SECTION A OF ARTICLE VIII OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS PROPOSED TO BE AMENDED PURSUANT TO THE TCI VENTURES GROUP STOCK
PROPOSAL 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 TCI Ventures Group Common Stock, the Series B TCI Ventures 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."
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ANNEX II-B
PROPOSED AMENDMENTS
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
(IMPLEMENTING THE LIBERTY MEDIA GROUP AMENDMENT PROPOSAL)
PARAGRAPH 5(A) OF SECTION E OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS PROPOSED TO BE AMENDED PURSUANT TO THE LIBERTY MEDIA GROUP
AMENDMENT PROPOSAL TO READ IN ITS ENTIRETY AS FOLLOWS:
"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 Qualifying Subsidiaries (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 unto 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.
THE DEFINITION OF QUALIFYING SUBSIDIARY IN PARAGRAPH 9 OF SECTION E OF THE
RESTATED CERTIFICATE OF INCORPORATION OF THE CORPORATION IS PROPOSED TO BE
AMENDED PURSUANT TO THE LIBERTY MEDIA GROUP AMENDMENT PROPOSAL TO READ AS
FOLLOWS:
"Qualifying Subsidiary" shall mean a Subsidiary of the Corporation in which
(i) the Corporation's ownership and voting interest is sufficient to satisfy the
requirements of the Internal Revenue Service for (x), in the case of a
Subsidiary that holds assets attributed to the Liberty Media Group, a
distribution of the Corporation's interest in such Subsidiary to the holders of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock that is tax free to such holders or (y), in the case of a
Subsidiary that holds assets attributed to the TCI Ventures Group, a
distribution of the Corporation's interest in such Subsidiary to the holders of
Series A TCI Ventures Group Common Stock and Series B TCI Ventures Group Common
Stock that is tax free to such holders or (ii) the Corporation owns, directly or
indirectly, all of the issued and outstanding capital stock.
<PAGE> 173
ANNEX III
DESCRIPTION OF TCI VENTURES GROUP
GENERAL
The TCI Ventures Group would initially consist principally of the following
assets and their related liabilities: (i) TCI's 85% equity interest
(representing a 92% voting interest) in Tele-Communications International, Inc.
(including its consolidated subsidiaries, "International"), which is the
Company's primary vehicle for the conduct of its international cable, telephony
and programming businesses (other than those international programming
businesses attributed to the Liberty Media Group), (ii) TCI's principal
interests in the Telephony Business, consisting primarily of the Company's
investment in a series of partnerships formed to engage in the business of
providing wireless communications services, using the radio spectrum for PCS, to
residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.), the Company's
investment in TCG, a competitive local exchange carrier, and the Company's
wholly owned subsidiary WTCI, which provides long distance transport of video,
voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing a 85% voting interest) in UVSG, which provides
satellite-delivered video, audio, data and program promotion services to cable
television systems, satellite dish owners, radio stations and private network
users, primarily throughout North America, (iv) TCI's 39% equity interest
(representing a 72% voting interest) in @Home, a provider of high speed
multimedia Internet services, and TCI's interest in other Internet-related
assets and (v) other assets, including NDTC, a wholly owned subsidiary of the
Company that provides digital compression and authorization services to
programming suppliers and to video distribution outlets, ETC, an 80% owned
subsidiary of the Company which is a developer and distributor of for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C., wholly owned subsidiaries of the
Company that provide an integrated network-based information management system
currently to certain of TCI's cable systems with plans to expand its service to
include third parties. (Percentage equity and voting interests provided above
and elsewhere in this Annex III have been rounded to the nearest whole number
and calculated as of June 30, 1997, except for percentage interests in entities
that are not consolidated subsidiaries which have been calculated as of March
31, 1997 and except that the percentage equity and voting interests in @Home
have been adjusted to reflect the closing of its initial public offering on July
11, 1997.) The stocks of International, TCG, UVSG and @Home are traded on the
National Market tier of The Nasdaq Stock Market.
The TCI Ventures Group 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 TCI Ventures Group and such other businesses, assets and
liabilities as TCI or any of its subsidiaries may in the future acquire for the
TCI Ventures Group, as determined by the Board of Directors. It is currently the
intention of the Company that any businesses, assets and liabilities so
attributed to the TCI Ventures Group in the future would not include assets and
liabilities of the Company's domestic programming businesses and investments or
its domestic cable operations (including its businesses which utilize its cable
facilities to distribute domestic telephony and Internet services).
The following table lists the entities the Company's interest in which
would be attributed to the TCI Ventures Group and sets forth, as of June 30,
1997 (except for unconsolidated entities which are as of March 31, 1997 and
except for @Home which has been adjusted to reflect its initial public
offering), the TCI Ventures Group's direct or indirect equity interest in such
entities (rounded to the nearest whole number) and the businesses currently
conducted by such entities. The table excludes certain direct and indirect
wholly owned subsidiaries of TCI, the sole assets of which consist of interests
in the listed entities. Such subsidiaries (such as TCI Telephony Holdings, Inc.)
would also be attributed to the TCI Ventures Group. The Company's interests in
certain other of the listed entities are owned through subsidiaries that also
own assets which are not attributed to the TCI Ventures Group (such as the
ownership by TCI Internet Services, Inc. of both @Home which is in the TCI
Ventures Group, and subsidiaries that are engaged in the business of
distributing the @Home service to customers over TCI's cable plant, which
business is in the TCI Group). Such subsidiaries
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are not attributed to the TCI Ventures Group. Certain of the listed entities
operate through subsidiaries and affiliates. In such cases, the listed entity's
interest in its subsidiaries and affiliates would also be attributed to the TCI
Ventures Group. With respect to listed entities that are partnerships or the
interest in which is held through a partnership or similar structure, the
Company's voting rights and rights to participate in the earnings of affiliates
may differ from the equity interests indicated in the table below.
INTERNATIONAL CABLE, TELEPHONY AND PROGRAMMING
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
Tele-Communications International, 85% equity International cable, telephony and
Inc.(2)...............................
92% voting programming interests and operations
</TABLE>
DOMESTIC TELEPHONY
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
Sprint PCS Partnerships................. 30% PCS under the "Sprint" brand name
PhillieCo, L.P.......................... 35% PCS under the "Sprint" brand name
Teleport Communications Group, Inc...... 30% equity Competitive Local Exchange Carrier
37% voting
Kansas City Fiber Network, L.P.......... 50%(3)(4) Competitive Access Provider ("CAP") serving
the Kansas City metropolitan area
NHT Partnership......................... 40%(4) CAP serving the Buffalo metropolitan area
New Jersey Fiber Technologies, L.P...... 79%(4) CAP serving the Morristown and New Brunswick,
NJ metropolitan area
Louisville Lightwave.................... 43%(4)(5) CAP serving the Louisville and Lexington, KY
metropolitan area
Western Tele-Communications, Inc........ 100% Provider of microwave and wireline transport
of telecommunications services
General Communication, Inc.............. 3%(6) Telecommunications provider
</TABLE>
DIVERSIFIED SATELLITE COMMUNICATIONS
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
United Video Satellite Group, Inc....... 40% equity Satellite distribution of video, audio, data
85% voting and program promotion services
</TABLE>
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<PAGE> 175
INTERNET SERVICES
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
At Home Corporation..................... 39% equity High-speed multimedia Internet services
72% voting
Sportsline USA, Inc..................... 7% Internet provider of branded interactive
sports information, programming and
merchandise
iVillage, Inc........................... 12% Developer of, and Internet and on-line
provider of, branded communities and
information services pertaining to
parenting, careers and personal health
Interzine Productions, Inc.............. 15% Internet provider of interactive sports
communities and information services
KPCB Java Fund, L.P..................... 7% Investor in Java application development
</TABLE>
OTHER
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
National Digital Television Center, 100% Television production and provider of digital
Inc................................... compression and transmission and
authorization services to programmers,
cable systems and other video distributors
ETC w/tci, Inc.(7)...................... 80% Developer and distributor of for-profit
education, training and communication
services and products
CareerTrack, Inc.(8).................... 76% Provider of business and educational seminars
and related publications
National School Conference Institute, 64% Provider of conference and satellite-
Inc.(8)............................... delivered staff development programming for
educators
Ingenius(TM)(8)(9)...................... 40% Developer of educational software products
designed to facilitate classroom learning
The Lightspan Partnership, Inc.(8)...... 9% Developer of educational programming
Academic Systems Corporation(8)......... 8% Provider of higher education multimedia
instruction materials
SUMMITrak(10)........................... 100% Integrated information management system
DigiVentures, LLC....................... 99% Leases digital set-top box equipment
Acclaim Entertainment, Inc.............. 9% Publisher of entertainment software
Antec Corporation(11)................... 16% Manufacturer of products for hybrid
fiber/coax broadband networks
Intessera, Inc.......................... 100% Provider of database management software
</TABLE>
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<PAGE> 176
<TABLE>
<CAPTION>
TCI VENTURES
GROUP'S DIRECT OR
COMPANY INDIRECT INTEREST(1) BUSINESS
------- -------------------- --------
<S> <C> <C>
TCI TVGOS, Inc.......................... 100% Holds an undivided interest in certain
intellectual property rights of TV Guide on
Screen, a joint venture which has been
dissolved
MCNS Holdings, L.P...................... 25% Developer of multimedia communications
network and associated technologies.
Kitty Hawk Capital Limited Partnership, 3% Venture capital fund
II....................................
New Enterprise Associates IV, L.P....... 1% Venture capital fund
Venture First II, L.P................... 1% Venture capital fund
TVSM., Inc.............................. 10% Publishing company of various cable
television programming guides
</TABLE>
- ---------------
(1) For indirect equity and voting interests, the percentage in the table is
calculated by multiplying TCI's percentage interest in the holding company
by the holding company's percentage interest in the listed company.
(2) For a description of the businesses in which International has interests,
see the chart under "International Cable, Telephony and
Programming -- International" below.
(3) The other 50% interest in Kansas City Fiber Network, L.P. is owned by
Kansas City Cable Partners, a partnership that owns and operates cable
systems in the Kansas City area, in which the TCI Group holds a 50%
interest.
(4) TCI is negotiating to sell its interests in these partnerships for cash.
There can be no assurance that any such sale will occur on terms
satisfactory to TCI, or at all; however, if a sale is consummated, the
proceeds will be attributed to the TCI Ventures Group.
(5) TCI's indirect interest in Louisville Lightwave will increase to 50% upon
the closing of its acquisition of the balance of the other partner's
interest in TCI-TKR of Kentucky, Inc., which owns, among other assets, the
interest in Louisville Lightwave.
(6) The Company has exercised certain registration rights with respect to its
equity interest in GCI, and GCI has filed a registration statement under
the Securities Act of 1933, as amended (the "Securities Act") with the SEC
with respect to all of the shares of GCI held by the Company. If declared
effective and if such shares are sold by the Company, the proceeds of any
such sale would be attributed to the TCI Ventures Group.
(7) The Company is considering certain strategic alternatives with respect to
its investment in ETC, including, among other things, additional
investments from unrelated entities and a restructuring of the ownership of
ETC's assets that could result in a change in control. There can be no
assurance that any such transaction would occur on terms satisfactory to
the Company or at all. Any proceeds of any such transaction, in the form of
cash, capital stock or assets, would be attributed to the TCI Ventures
Group.
(8) Held through ETC.
(9) ETC had reached an agreement in principle to acquire the remaining 50% of
Ingenius(TM) which it did not already own, however the negotiations for a
definitive agreement for such transaction are currently in abeyance while
certain strategic alternatives with respect to the Company's interest in
ETC are being considered.
(10) TCI is considering certain strategic alternatives with respect to
SUMMITrak, including a sale of the assets of SUMMITrak or the contribution
of the stock or assets of SUMMITrak to a joint venture with another
investor. There can be no assurance that any such transaction could be
accomplished on terms satisfactory to TCI or at all. The proceeds of any
such sale or joint venture interest, if applicable, will be attributed to
the TCI Ventures Group. Any such transaction may also include a
simultaneous agreement with the purchaser or joint venture to provide
information system services to the TCI Group's cable systems. If any such
transaction included a service agreement with the TCI Group, there can be
no
III-4
<PAGE> 177
assurance that the terms of such transaction would be as favorable to the
TCI Ventures Group as the terms it could have negotiated had such
transaction not included such a service agreement.
(11) This interest was previously represented by TCI's interest in TSX
Corporation which merged with Antec Corporation in February 1997.
The principal assets attributed to the TCI Ventures Group are described in
greater detail below.
INTERNATIONAL CABLE, TELEPHONY AND PROGRAMMING -- INTERNATIONAL
OVERVIEW
International, through its subsidiaries and affiliates, operates
multi-channel video and telecommunications distribution networks in, and
provides diversified programming services to, selected markets outside the
United States ("U.S."). International's activities are concentrated in Europe,
Latin America and The Caribbean, and Asia, Australia and New Zealand, with
particular focus at present on the United Kingdom ("U.K."), Argentina and Japan.
International has ownership interests in companies operating broadband networks
that, at December 31, 1996, provided cable television service to an aggregate of
approximately 2.9 million basic subscribers and, in the U.K., provided telephone
service over approximately 947,000 telephone lines (a customer may have multiple
telephone lines). As of December 31, 1996, International also had ownership
interests in or managed 39 cable and satellite programming services which were
received by subscribers in various countries outside the U.S.
All of TCI's interests in International would be attributed to the TCI
Ventures Group. As of June 30, 1997, TCI owned 86.25 million shares of TINTA
Series A Common Stock and all of the outstanding shares of TINTA Series B Common
Stock (collectively, the "TINTA Common Stock"). Such shares represented
approximately 85% of the outstanding shares of TINTA Common Stock and, due to
TCI's ownership of all of the TINTA Series B Common Stock (which has greater per
share voting rights), approximately 92% of the combined voting power of the
outstanding shares of TINTA Common Stock.
The following table sets forth as of March 31, 1997, the name of each of
the operating companies in which International has a direct or indirect equity
interest, the amount of such interest (based generally on the ownership interest
in capital stock and rounded to the nearest whole number) in each such operating
company, and the businesses currently conducted by such operating company. With
respect to Cablevision S.A. and TCI Cablevision of Puerto Rico, Inc.,
International's two consolidated subsidiaries, the information is as of June
30,1997. International's interests in the following operating companies are
often held through
III-5
<PAGE> 178
holding companies and its voting rights and rights to participate in the
earnings of affiliates may differ from the equity interests indicated in the
table below.
<TABLE>
<CAPTION>
INTERNATIONAL'S
DIRECT OR INDIRECT
COUNTRY OPERATING COMPANY INTEREST(1) BUSINESS
------- ----------------- ------------------ --------
<S> <C> <C> <C>
EUROPE
- ------------------------
United Kingdom.......... Telewest Communications plc 27%(2) Cable/Telephony
Flextech p.l.c. 46%(3) Programming
DMX Inc. 18%(4) Music Programming
Israel.................. Tevel Israel International 23% Cable/Programming
Communications Ltd.
("Tevel")
Ireland................. Princes Holdings Ltd. 25% Cable/MMDS
("Princes")
Malta................... Melita Cable TV Ltd. 33% Cable
("Melita")
Poland.................. Aster City Cable Sp. Zo.o. 22%(5) Cable
Regionale Telewizja Kablowa 44%
Autocom Sp. Zo.o.
Katowicka Telewizja Kablowa 34%
S.A.
Przedsiebiorstwo Rozwoju 44%
Handlui TeleKomunikacji
Sp. Zo.o.
Telefonia Polska Zachod Sp. 29% Telephony
Zo.o.
France.................. MultiThematiques, S.A. 33% Programming
Videopole S.A. 7% Cable
LATIN AMERICA AND THE CARIBBEAN
- -----------------------------------------------------
Argentina............... Cablevision S.A. 51%(6) Cable
Chile................... Metropolis-Intercom S.A. 24% Cable
Dominican Republic...... TeleCable Nacional, CXA 49% Cable
Puerto Rico............. TCI Cablevision of Puerto 100% Cable
Rico, Inc.
Various................. The Sports Venture(7) 25% Programming
DTH Ventures(8) 10% DTH Satellite
ASIA, AUSTRALIA AND NEW ZEALAND
- ---------------------------------------------------------------------------
Japan................... Jupiter Telecommunications, 40% Cable
Co., Ltd.
Jupiter Programming Co., 50% Programming
Ltd
Singapore............... Asia Business News 49%(9) Programming
(Singapore) Private
Australia............... Australis Media Ltd. 1% MMDS/DTH Satellite
The Premium Movie 17% Programming
Partnership
New Zealand............. Sky Network Television 13%(10) UHF Subscription/
Limited Programming
</TABLE>
- ---------------
(1) For indirect equity interests, the percentage in the table is calculated by
multiplying International's percentage interest in the holding company by
the holding company's percentage interest in the operating company.
(2) International's interest in Telewest Communications plc ("Telewest") is
held through its 50% interest in TW Holdings, L.L.C. ("TW Holdings") which
has a majority interest in Telewest.
III-6
<PAGE> 179
(3) In April 1997, Flextech p.l.c. ("Flextech") and BBC Worldwide Limited ("BBC
Worldwide") formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions that resulted in, among other
things, International having ownership and voting interests in Flextech of
36% and 50%, respectively. See "-- United Kingdom -- Cable and Satellite
Programming Services."
(4) On July 11, 1997, DMX Inc. merged with TCI Music. As a result of such
merger, International currently owns 4% of TCI Music and entities
attributed to the TCI Group and the Liberty Media Group own 84% and 2%,
respectively, in TCI Music. TCI Music operates both in the U.S. and the
U.K.
(5) International's interest in Aster City Cable Sp. Zo.o. ("Aster City") is
held through its 44% interest in Bresnan International Partners (Poland),
L.P. ("BIP Poland"), which owns a 49% interest in Aster City. In May 1997,
BIP Poland executed agreements to acquire the remaining 51% interest in
Aster City not already owned by it. This transaction is expected to close
in the third quarter of 1997, although no assurance can be given that such
transaction will be consummated. International is currently in discussions
to swap its 44% interest in BIP Poland with the parent company of the other
partner in BIP Poland for certain cash and other assets, including such
entity's 20% interest in Bresnan International Partners (Chile), L.P.
(6) International has an option to purchase an additional 29-39% equity
interest in Cablevision, exercisable at any time on or before October 30,
1997. See "-- Latin America and The Caribbean-Argentina." However, as part
of a reevaluation of its global strategy, International has been
considering various ways to monetize a substantial portion of its
investment in Cablevision.
(7) Represents a joint venture, including a number of partnerships or other
entities under common ownership, formed by International, Liberty, a wholly
owned subsidiary of TCI, and News Corporation Limited ("News Corp."), which
venture currently operates sports services in Latin America and Australia
and intends to operate new sports services throughout the world (excluding
the U.S., Canada and certain other geographic areas). See "-- Latin America
and The Caribbean--Strategic Ventures."
(8) Represents various joint ventures for the development and operation of
direct-to-home satellite ("DTH satellite") service in Brazil, Mexico and
various Central and South American countries. See "-- Latin America and The
Caribbean--Strategic Ventures."
(9) International has exercised an option which entitles it to acquire an
additional interest in Asia Business News (Singapore) Private ("ABN") which
would increase its interest in ABN to 50%. International is also in
discussions, however, regarding a proposed sale of its interest in ABN to
the other major shareholder of ABN and a third party. See "--Asia -- Other
Asian Programming."
(10) International's interest in Sky Network Television New Zealand Ltd. ("Sky
Network") is held through its 25.5% interest in HKP Partners of New Zealand
("HKP"). The partners of HKP, including International, are currently in
discussions with regard to a proposed sale of their interest in HKP to a
third party.
Merely for convenience, the following discussion in some instances contains
translations of the local functional currency of International's subsidiaries
and equity affiliates into U.S. currency at the applicable spot rate (as
published in The Wall Street Journal) in effect on March 31, 1997, unless
otherwise specified. No representation is made that any of such local functional
currencies have been, could have been or could be converted into U.S. dollars at
such rates. With respect to translations of sums which have already been paid,
such translations indicate the actual U.S. dollar amount paid. The applicable
rates at March 31, 1997 for the U.K. pound sterling ("L" or "pounds") and the
Japanese yen ("Y") were $1.6395 per L1.00 and Y123.75 per $1.00, respectively.
At July 15, 1997, such applicable rates were $1.6795 per L1.00 and Y115.45 per
$1.00, respectively.
UNITED KINGDOM
International's U.K. operating companies (i) own broadband fiber
optic/coaxial networks that provide combined cable television and cable
telephony services and (ii) own and manage cable and satellite programming
services.
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<PAGE> 180
Cable Television and Telephony. International owns, through a joint venture
with US WEST, Inc. ("US WEST"), an indirect 27% interest in Telewest, a leading
provider of cable television and cable telephony services in the United Kingdom.
Telewest's ordinary shares trade on the London Stock Exchange and are
represented by American Depositary Receipts in the United States, where they
trade on the National Market tier of The Nasdaq Stock Market. Telewest provides
cable television services over a broadband (i.e., high capacity) network and
uses such network, together with twisted-pair copper wire connections for final
delivery to the customer premises, to provide telephony services to its
customers. The broadband network enables Telewest to deliver a variety of both
television and telephony services to its customers and will enable Telewest to
provide customers with a range of interactive and integrated entertainment,
telecommunications and information services as they become available in the
future. In 1996, Telewest began offering home access to the Internet to a
majority of its franchise areas.
Telewest provided, as of December 31, 1996, cable and telephony service to
26 owned and operated franchises (containing a total of approximately 3.9
million homes and .2 million businesses) and within such franchises provided
cable television service to 528,000 basic subscribers and telephony service to
641,000 residential and business customers at that date. (An additional
franchise covering 30,000 homes was awarded to Telewest on March 20, 1997.)
Telewest also had, as of December 31, 1996, minority interests in three U.K.
cable operators owning at that date a total of seven additional cable franchises
(the "Affiliated Franchises"), which included approximately 1.2 million homes
and approximately 84,000 businesses. Through the Affiliated Franchises, Telewest
served at December 31, 1996, on an equity basis, approximately 72,000 basic
cable subscribers and 68,000 residential and business telephony customers. "On
an equity basis" means the total number of subscribers or customers served
multiplied by Telewest's indirect percentage equity interest in the franchise.
Telewest believes that its franchises (including the Affiliated Franchises)
included more than 24% of the U.K. homes in areas covered by cable licenses at
December 31, 1996. According to Telewest, more than 49% of its customers
subscribe for both cable television and cable telephony services.
As of December 31, 1996, construction of broadband cable networks which
"passed" (i.e., could be connected to) approximately 65% of the homes in
Telewest's owned and operated franchises and 80% of the homes in the Affiliated
Franchises had been completed and approximately L1.6 billion had been invested
in the construction of the network of its owned and operated franchises and
approximately L665 million had been invested in the construction of the networks
of the Affiliated Franchises. Telewest expects that the remaining construction
of the networks in all of its franchises will be substantially completed by the
end of the year 2000. In addition to the construction of a hybrid fiber coaxial
("HFC") network in each of its franchises, Telewest is developing a broadband
inter-franchise network to carry voice, data and video traffic between its
franchises (including the Affiliated Franchises), which is expected to reduce
interfranchise connection charges. The inter-franchise network is scheduled to
be 75% complete by the end of 1997, with full completion planned for the middle
of 1998.
Telewest is required to have two principal licenses to operate its cable
television and telephony businesses: (i) a cable television license which
permits the holder to provide cable television service to a specific franchise
area, and (ii) a telecommunications license which allows the holder to construct
and operate the physical network necessary to provide cable television and
telephony services. The current regulatory policy of the U.K.'s Independent
Television Commission (the "ITC"), the agency which awards and enforces U.K.
cable television licenses, is to grant only one broadband cable license within a
franchise area. Accordingly, Telewest does not compete for subscribers with
other cable operators within its franchises. This exclusivity is not written
into the license itself and the ITC may change its policy at any time, although
it has indicated that it does not intend to do so for the foreseeable future.
Cable television licenses are subject to ownership and transfer restrictions. A
telecommunications license, which is awarded by the Department of Trade and
Industry and enforced by the Office of Telecommunications, gives the holder the
nonexclusive right to offer telephony services in its franchise areas, and
therefore cable operators are subject to competition with respect to telephony
in their franchise areas. Telecommunications licenses are subject to
restrictions on transfer and to build obligations that require the licensee to
construct its network according to a set timetable ("milestones"). Telewest
failed to meet certain of its 1996 build obligations, but has initiated
discussions with the agency which regulates milestone compliance regarding the
modification of Telewest's past and future milestone obligations. Telewest
believes that it will be able to obtain the necessary modifications to its
obligations,
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<PAGE> 181
although there can be no assurance it will be successful in so doing. Telewest's
cable licenses have remaining terms of approximately 3 to 16 years and its
telecommunications licenses have remaining terms of approximately 11 to 20
years. Both the cable television licenses and the telecommunications licenses
require the payment of annual fees, with the fees payable with respect to one
form of license being based on a percentage of "qualifying revenues" and with
respect to the other licenses being based upon the administrative costs of the
relevant government agency.
A cable operator providing telephony service will need to interconnect its
system with that of a public telephone operator ("PTO") or other telephone
company for calls that do not originate and terminate on the cable operator's
network. PTOs are obliged under their licenses to enter into interconnection
agreements upon request with other PTOs, including cable operators. If the
parties are unable to agree upon the financial terms of the interconnection
agreement, the Director General of Telecommunications will make such
determination upon request of either party. In the case of interconnection with
British Telecommunications plc ("BT"), specific regulations and a standard form
of interconnection agreement apply. Operators who interconnect with BT are
required to pay an Access Deficit Contribution ("ADC") designed to compensate BT
for the losses which it incurs in providing local services throughout the U.K.
under certain price cap regulations. A cable operator that provides telephony
service may also be required to provide "equal access", a concept whereby local
telephone systems are required to offer customers access to each fixed link
trunk system, thereby enabling the customer to choose over which PTO's network
to route its calls. Cable television and cable telephony services are not
currently subject to specific government price control in the United Kingdom.
International's interest in Telewest is held through TW Holdings, a limited
liability company in which International and US WEST, through their respective
subsidiaries, each holds an indirect 50% interest. TW Holdings holds a majority
interest in Telewest. The operating agreement which governs the operations of TW
Holdings, as well as certain other agreements to which International and US WEST
are subject, contain restrictions regarding, among other things, the voting and
disposition of the Telewest shares and the acquisition by TCI, US WEST or their
respective controlled affiliates (including International) of cable television
or cable telephony systems in the U.K. other than through Telewest. The Telewest
charter provides that so long as both International and US WEST each
beneficially own at least 25% of the outstanding Telewest ordinary shares, each
will be entitled to appoint two of the 12-member Telewest board of directors.
International and US WEST have agreed that on any matter requiring shareholder
or board of directors approval they will cause TW Holdings or their respective
director designees (subject to such directors' fiduciary duties), as applicable,
to vote in such manner as may be agreed by them or, in the absence of such
agreement, in such manner as would be most likely to continue the status quo. As
a result of the foregoing arrangements, International and US WEST will generally
be able to determine the outcome of any matter requiring approval of Telewest's
shareholders (other than matters which require approval by 75% of the
stockholders), including the election or removal of directors and the creation
and issuance of shares, and will have significant influence on decisions made by
Telewest's board of directors (including a veto right as to matters requiring
more than a 2/3 vote of the board). International and US WEST have agreed with
Telewest that, so long as they collectively beneficially own more than 50% or
individually own more than 30% of the outstanding Telewest ordinary shares, they
will use their respective best efforts to ensure that a majority of the
directors of Telewest are "independent" (within the meaning of the Listing Rules
of the London Stock Exchange) of International and US WEST. The Listing Rules of
the London Stock Exchange require that a majority of the directors of listed
companies be independent. International and US WEST have each also agreed to
subject transfers of their respective beneficial interests to a right of first
refusal by the other party; not to reduce their respective beneficial interests
in Telewest to 25% or less without the consent of the other party (except for
sales after November 1999 in the public market, subject to the right of first
refusal), and that in the event of a change of control of such party, the other
party will have the right to consent to such change or to require the initiation
of certain buy-sell procedures. International and US WEST have also agreed to
certain restrictions on their acquisition of additional equity interests in
Telewest other than pursuant to the exercise of preemptive rights or certain
options.
Cable and Satellite Programming Services. International and its
predecessors have been actively involved in the development of cable and
satellite programming in the U.K. since 1988, and International has created an
integrated programming enterprise through the operations of Flextech, a
36%-owned subsidiary at April 30,
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1997 (such interest representing 50.0% of the voting power of Flextech at that
date). Flextech's ordinary shares trade on the London Stock Exchange. Through
its subsidiaries and affiliates, Flextech creates, packages and markets
entertainment and information programming for distribution on cable television
and DTH satellite systems throughout the U.K. and, to a lesser extent, parts of
continental Europe. Flextech also owns interests in a terrestrial broadcast
network and a production company. By acquiring interests in and establishing
alliances among providers of a variety of entertainment programming, Flextech
has been able to achieve significant economies of scale and establish itself as
a major low-cost provider of television programming. At March 31, 1997,
Flextech's ownership of programming services included interests in the entities
which operate the following programming services (with its percentage interest
set forth in parenthesis): Bravo (100%); TCC (formerly The Children's Channel)
(100%); Challenge TV (100%); HSN Direct International (63%); Playboy TV (51%);
Sell-A-Vision (50%); KinderNet Channel (31%); UK Living (31%); European Business
News (30%) and UK Gold (25%). In April 1997, upon the consummation of certain
transactions described below, Flextech increased its interest in UK Living and
UK Gold to 100% and 65%, respectively. At March 31, 1997, Flextech had interests
in 14 cable and satellite channels of which 13 are distributed in the U.K.
market.
In addition to managing its four wholly owned programming services,
Flextech provides management services to the BBC Joint Ventures and to Discovery
Channel Europe, Discovery Home & Leisure (formerly The Learning Channel), The
Parliamentary Channel, Playboy TV and Home Shopping Networks Direct (an indirect
49% interest in The Discovery Channel Europe and Discovery Home & Leisure is
attributed to the Liberty Media Group). Flextech receives for such services a
management fee and, in some cases, a percentage of the programming company's
gross revenue. Flextech received a total of L3.8 million in management fees in
1996 from its two management contracts with third parties unaffiliated with
Flextech -- Discovery Communications, Inc. and CPP1 Partnership (the entity
which owns Parliamentary Channel). The contract with Discovery Communications,
Inc. has a remaining term of 8 years and the contract with CPP1 Partnership must
be renewed annually.
In April 1997, Flextech (i) formed the BBC Joint Ventures with BBC
Worldwide and (ii) acquired all of the share capital in U.K. Living Limited
("UKLL") and U.K. Gold Television Limited ("UKGL") (the producers of UK Living
and UK Gold, respectively) not already owned by Flextech. One of the joint
ventures with BBC Worldwide (the "Principal Joint Venture") will operate and
launch a number of new subscription television channels for distribution in the
U.K. and Ireland. Flextech and BBC Worldwide each have a 50% interest in this
venture. The Principal Joint Venture has committed to the launch of at least
four new theme channels by September 30, 1998. The other joint venture (the
"Second Joint Venture") acquired 65% of the share capital of UKGL (following
Flextech's acquisition of all of the UKGL share capital), with put and call
arrangements over the remaining 35% of such share capital. The Second Joint
Venture will operate and develop UKGL, and both Flextech and BBC Worldwide have
a 50% interest in that venture. An affiliate of the British Broadcasting
Corporation ("BBC") will be responsible for the scheduling, programming and
presentation of the channels to be operated by the BBC Joint Ventures, while
Flextech will be responsible for providing distribution, air-time sales, off-air
marketing and management services to the two joint ventures. The BBC Joint
Ventures have entered into program license agreements with BBC pursuant to which
they are entitled to acquire licenses to broadcast programs originated by BBC
after their initial airing. The license agreements will have initial terms of 15
years, and will be extended automatically for an additional 15 years, unless
both Flextech and the BBC agree not to extend the term. A failure to extend
after the initial term will result in BBC Worldwide having the right to acquire
channel brands owned by the Principal Joint Venture for fair value.
Alternatively, Flextech may require that BBC Worldwide purchase its interest in
the Principal Joint Venture for fair value. The BBC Joint Ventures will not be
limited to BBC programming material.
Flextech has undertaken to finance the working capital requirements of the
Principal Joint Venture which financing comprises L22 million ($36 million) of
equity financing, a primary credit facility of up to L88 million ($144 million)
and, subject to certain restrictions, a standby credit facility of up to L30
million ($49 million). Flextech has also agreed to make available to the Second
Joint Venture, if required, funding of up to L10 million ($16 million). To
support its funding obligations, Flextech has obtained a revolving credit
facility with current borrowing availability of up to L85 million ($139
million), with a term of up to five years. International has undertaken to
fulfill Flextech's financial obligations to the Principal Joint Venture in the
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event of Flextech's default. If International is required to fulfill such
financial obligations of Flextech, it will automatically acquire Flextech's
interest in the Principal Joint Venture for L1.00, subject to certain "claw
back" rights of Flextech. Subject to certain conditions and exceptions, both
International and TCI have agreed not to compete, and not to own more than a 20%
equity interest in any entity that competes, with the channels of the BBC Joint
Ventures.
Flextech acquired the share capital of UKGL and UKLL for shares of Flextech
stock. As a result of these issuances and the conversion of certain Flextech
convertible preference shares to ordinary shares upon consummation of the
formation of the BBC Joint Ventures, International's equity interest in Flextech
declined from approximately 46% to 36%. International's voting power would have
fallen below 50% as a result of these transactions; however, upon consummation
of the BBC Joint Ventures, International acquired a "special voting share" which
enabled International to maintain its voting power at 50%. The special voting
share, when combined with International's other share capital in Flextech, will
generally permit International to cast a number of votes equal to 50% of all
votes attributable to the outstanding share capital of Flextech at any meeting
of Flextech's stockholders. The special voting share, which does not participate
in dividends and has only a nominal liquidation preference, will terminate upon
the occurrence of the earliest of (i) April 14, 2000, (ii) any transfer of
Flextech shares by International outside a specified affiliated group or (iii)
International's interest in Flextech falling below 30%.
Flextech holds a 20% interest in Scottish Media Group plc ("SMG"), a
publicly traded company in the U.K. that is the terrestrial channel broadcast
licensee for Channel 3 in central Scotland. SMG's broadcast signal reaches
approximately 1.5 million U.K. homes. SMG's subsidiary, Scottish Television
Enterprises ("STE"), is a U.K. production company. In connection with the
acquisition of its interest in SMG, Flextech acquired the license rights to over
125 hours of drama and documentary features from SMG's program library. Flextech
also entered into a production output agreement with STE under which Flextech
has agreed to commission television programs from STE over a two year period,
subject to agreement on budgets and other items for each program. Flextech also
owns a 100% interest in Maidstone Studios, a production company which creates
and produces Challenge TV, among other programming, having acquired in April
1997 the 61% interest in Maidstone Studios not previously owned by it. Flextech
also has commitments to acquire distribution and exhibition rights for a variety
of programming under license agreements with Hallmark Entertainment, Inc.
("Hallmark Entertainment"), a subsidiary of Hallmark Cards Incorporated. The
rights are limited to the U.K. and certain other European markets and have a
term of ten years once the license period commences. Through March 31, 1997,
programming with an aggregate contractual value of L20 million ($33 million) had
been delivered to Flextech under the agreements with Hallmark Entertainment.
The ITC regulates programming in the U.K. through imposing obligations on
broadcast licensees with respect to the programming broadcast or otherwise
provided by them. Broadcast licensees are required to abide by certain codes and
directions issued by the ITC from time to time. These codes include the
Programme Code, the Code of Advertising Standards and Practice, Rules on
Advertising Breaks and the Code of Programme Sponsorship. The Broadcasting Act
of 1996 also restricts the extent to which certain sporting events of national
interest (designated by the Secretary of State for National Heritage as "listed
events") may be broadcast live on television on an exclusive basis within the
United Kingdom.
International currently has three appointees on Flextech's 13-member board
of directors. Flextech's Articles of Association provide that for so long as
International owns in excess of 50% of the voting power of Flextech or owns the
special voting share, (i) International will be entitled to appoint up to three
directors, and one of such directors must sit on each committee of the board and
(ii) International will have veto rights over the appointment of certain
officers of Flextech. If the voting power of International and its subsidiaries
in Flextech declines to between 25% and 50% of its outstanding share capital,
then International will be entitled to appoint up to two directors and if it
declines to between 5% and 25%, International will be entitled to appoint only
one director. The disposal by International of its interest in Flextech is
subject to certain tag-along rights of certain other Flextech shareholders and
in the event that either (i) Flextech shares cease to be traded on the London
Stock Exchange as a result of International's exercise of any rights as a
shareholder of Flextech or (ii) the aggregate amount of International and such
other shareholders' holdings in Flextech exceed 75% of Flextech's outstanding
stock, such shareholders can require International to purchase their
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interest in Flextech at the higher of market value or the price paid to any
third party by International for Flextech shares in the preceding twelve months.
The subsidiary of International that holds the Flextech interest has agreed with
Flextech that so long as it owns at least 30% of Flextech's outstanding voting
stock, Flextech will have a right of first refusal with respect to all offers
made to such subsidiary relating to English language cable and satellite
programming in the United Kingdom and Europe.
CONTINENTAL EUROPE
Cable Television and Telephony. Through United International Investments
("UII"), a partnership between International and United and Phillips
Communications B.V. ("UPC"), International owns interests in Tevel, Princes and
Melita, operating companies that own cable systems in Israel, Ireland and Malta,
respectively. At March 31, 1997, International had a 50% interest in UII with
respect to UII's 47% ownership interest in Tevel, a 56% interest in UII with
respect to UII's 45% ownership interest in Princes and a 44% interest in UII
with respect to UII's 76% ownership interest in Melita. As of December 31, 1996,
these operating companies provided multi-channel service to a total of
approximately 405,000 basic subscribers in service areas consisting of
approximately 820,000 homes passed in the aggregate for the three countries.
Under the partnership agreement of UII, each of International and UPC has agreed
that, subject to certain exceptions, for so long as it remains a partner in the
partnership and for a period of three years thereafter, it will not participate
in any business that distributes television broadcast signals through cable or
other means, that provides certain programming services, or that otherwise
competes with an operating company of UII, in each case, in any country where an
operating company of UII does business without first offering the opportunity to
UII. International is also subject to certain transfer restrictions with respect
to its investment in UII.
International also has a 44% interest in BIP Poland which has either a
majority interest or is the controlling shareholder in four Polish cable
television operators serving an aggregate of approximately 283,000 basic
subscribers in Poland as of December 31, 1996, in service areas consisting of an
aggregate of 532,000 homes passed. BIP Poland also owns a 65% interest in
Telefonia Polska Zachod Sp. Zo.o. ("TPZS"), which has been granted two licenses
to provide commercial telephony services to two provinces in Poland with an
aggregate population of approximately 1,120,000. TPZS expects to begin providing
telephony services in such provinces in 1997. The BIP Poland partnership
agreement provides that most significant transactions require the approval of
each partner that has at least a 20% ownership interest. The term of the
partnership expires in 2020. International is currently in negotiations to swap
its 44% interest in BIP Poland with the parent company of the other partner in
BIP Poland for certain cash and noncash assets, including such entity's 20%
interest in Bresnan International Partners (Chile), L.P.
Programming. In late 1995, International and two of France's leading media
companies, Canal + S.A. ("Canal +") and Generale d'Images S.A. ("GDI"), formed
MultiThematiques, S.A. ("MultiThematiques"), a Paris-based cable and satellite
programming company. Each company owns a one-third interest in MultiThematiques.
MultiThematiques develops thematic programming for distribution on cable
television and DTH satellite systems throughout continental Europe, and
programming developed by MultiThematiques may be used to support International's
distribution interests in other regions, particularly Japan and Latin America.
As of March 31, 1997, MultiThematiques offered six programming services which
are distributed throughout France (five channels) and Spain (one channel) by
cable television operators and DTH satellite providers and on June 21, 1997,
MultiThematiques launched four television channels in Germany. MultiThematiques
has also secured carriage on DTH satellite platforms in Italy and Scandinavia.
In February 1997, MultiThematiques announced that it had signed an agreement
with International's Japanese programming company, Jupiter Programming Co., Ltd.
("JPC"), to create two thematic channels for cable and satellite distribution in
Japan. As of March 31, 1997, International had contributed FF 328.1 million
(approximately $64.6 million) to MultiThematiques and agreed to contribute an
additional FF 164.0 million (approximately $29.1 million) by no later than
December 13, 1997. Canal + and GDI contributed to MultiThematiques their
respective equity interests in an aggregate of five programming services. Each
of International, Canal + and GDI have equal representation on MultiThematiques'
board of directors. International's interest in MultiThematiques is subject to
certain restrictions on dispositions. MultiThematiques represents
International's
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most significant effort to date to create programming designed specifically for
television audiences in continental Europe.
LATIN AMERICA AND THE CARIBBEAN
International currently operates in the Caribbean and Central and South
America (collectively referred to herein as Latin America) through its interests
in cable television and programming companies operating in Argentina, Chile,
Puerto Rico, Mexico, Brazil and the Dominican Republic, as described below.
Argentina. International's most significant operation in Latin America is
conducted through its 51% owned subsidiary, Cablevision S.A. (collectively with
certain affiliated companies, "Cablevision"), which it acquired in April 1995.
Cablevision is one of the three largest cable television operators in Argentina,
based on the number of basic subscribers it served at December 31, 1996, with
operations concentrated in the Federal District of Buenos Aires and the greater
Buenos Aires metropolitan area. As of December 31, 1996, Cablevision's
approximately 4,500 miles of cable plant passed approximately 1,534,000 homes
and provided cable television service to approximately 578,000 basic
subscribers.
International currently has the right to appoint a majority of
Cablevision's eight directors. All matters brought to the Cablevision board are
decided by the vote of a simple majority. International has an option to acquire
an additional 29-39% interest in Cablevision, exercisable at any time on or
before October 30, 1997. The purchase price contemplated by such option is
significant and International would need to arrange financing before this
transaction could be consummated. However, as part of a reevaluation of its
global strategy, International has been considering various ways to monetize a
substantial portion of its investment in Cablevision.
Cable television and broadcast companies in Argentina are required to
obtain a non-exclusive broadcast license from the Comite Federal de
Radiodifusion ("COMFER"). Since the Argentine government does not grant
exclusive broadcast licenses to cable operators, Cablevision competes, in
certain areas of Buenos Aires, with other cable operators. A license is granted
for a 15-year term and the licensee has the right to a 10-year extension at the
end of the initial term. Cablevision's broadcast licenses have remaining terms
of 11 to 22 years (inclusive of the 10-year extension period). Licenses may be
revoked for breach of regulations pertaining to broadcast licenses, or if such
revocation would be in the "public interest." There is no regulation of cable
subscription rates in Argentina. Although Argentine regulations do not currently
permit cable operators to offer voice telephony services, the exclusive licenses
granted to two Argentine public telephone companies to provide telephony service
in Argentina are scheduled to expire in 1997, but may be extended for an
additional three-year period if the licensees have met certain requirements. No
assurance can be given, however, that cable operators in Argentina will be
permitted to offer telephony services in 1997, in 2000 or at any other time in
the future. The two public telephone companies are not permitted to provide
cable television service on a commercial basis over their networks while their
licenses are exclusive. Delivery of telephony services by Cablevision would
require upgrading portions of its cable system. New construction by Cablevision,
however, is expected to consist of the installation of a fiber backbone and high
capacity coaxial cable which will permit the delivery of voice telephony
services in the future.
The multi-channel television industry in Argentina is extremely
competitive. Cablevision decreased its rates in 1996 in response to increased
competition. If and when Cablevision provides telephony over its broadband
network, it will compete with the existing public telephone companies and
possibly other cable operators.
Chile. International owns an indirect 40% interest in Cordillera
Communicaciones, Limitada ("Cordillera"), through its 80% interest in Bresnan
International Partners (Chile), L.P. ("BIP-Chile") and BIP-Chile's 50% interest
in Cordillera. Cordillera was Chile's largest cable television company, based on
its number of basic subscribers, at the time International acquired its indirect
interest therein. On February 7, 1996, Cordillera and Compania de
Telecomunicaciones de Chile S.A. ("CTC") (a subsidiary of the Spanish telephone
company Telefonica de Espana S.A.) entered into agreements (the "Chile
Restructuring Agreements") that resulted in, among other things, the
contribution of substantially all of the cable distribution assets and the
associated cable subscribers within each party's cable systems (the "Contributed
Systems") to Metropolis-Intercom S.A. ("Metropolis-Intercom"), a recently formed
Chilean corporation. Cordillera owns
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60% of the voting securities of Metropolis-Intercom while CTC and two other
corporations own, in the aggregate, the remaining 40% of the voting securities
of Metropolis-Intercom. Under the Chile Restructuring Agreements, the cable
distribution assets (excluding headends) contributed by Cordillera were sold to
CTC, and CTC entered into a long-term lease agreement with Metropolis-Intercom
(expiring in 2026, with an option to renew) for use of CTC's cable plant. CTC
services Metropolis-Intercom's analog channels (or their equivalent) and
provides technical support to Metropolis-Intercom. International, BIP-Chile and
Cordillera have each agreed not to compete with Metropolis-Intercom and not to
pursue telephony opportunities in Chile; and CTC has agreed to refrain from
pursuing cable-related opportunities in Chile (other than through
Metropolis-Intercom). BIP-Chile and its partner in Cordillera each designate
one-half of the managers of Cordillera and all actions by such managers require
the consent of representatives of each partner. Certain transactions require the
approval of both partners. Six of the ten members of the board of directors of
Metropolis-Intercom are designated by Cordillera. All material matters require
the affirmative vote of the representatives of both CTC and Cordillera.
International is currently in negotiations to swap its 44% interest in BIP
Poland with the parent company of the other partner in BIP Poland for certain
cash and non cash assets, including such entity's 20% interest in BIP-Chile,
which would give International an indirect 50% interest in Cordillera. There can
be no assurance that this transaction will be consummated.
Metropolis-Intercom operates the Contributed Systems and is one of Chile's
largest cable operators based on its 217,000 basic subscribers at December 31,
1996, operating cable systems in six of the most densely populated cities within
Chile. At December 31, 1996, Metropolis-Intercom's network covered approximately
5,000 miles and passed an aggregate of approximately 900,000 homes. The present
cable plant is composed of fiber and coaxial cable.
Cable television companies in Chile are required to obtain a broadcast
license to provide cable service. Only non-exclusive franchises are granted in
Chile. Consequently, competition in the more populated regions of Chile is
intense. A portion of Metropolis-Intercom's customer base is passed by at least
one other cable operator, in addition to the local telephone company. Telephone
companies in Chile are permitted to offer cable television services over their
own networks or the networks of cable operators that they acquire.
The Caribbean. In Puerto Rico, as of June 30, 1997, a wholly owned
subsidiary of International owned 100% of and operated 41 cable franchises. As
of December 31, 1996, such franchises in Puerto Rico passed approximately
255,000 homes and served approximately 101,000 basic subscribers.
In the Dominican Republic, International owns a 49% interest in TeleCable
Nacional, CXA ("TeleCable Nacional"), that country's largest cable operator
based on the number of its subscribers at December 31, 1996. On that date,
TeleCable Nacional passed approximately 65,000 homes and served approximately
32,000 basic subscribers. TeleCable Nacional has received a license to provide
telephony services over its cable network in the Dominican Republic. The
delivery of such services would require certain upgrades to TeleCable Nacional's
cable network, and TeleCable Nacional has not yet determined whether it will
seek to offer such services. International has the right to appoint half of the
directors and officers of TeleCable Nacional. The affirmative vote of 75% of the
members of the board of directors is required to take any action requiring board
approval.
Strategic Ventures. International, along with News Corp. and two of Latin
America's leading media companies, Globo Comunicacoes e Participacoes Ltda. and
Grupo Televisa, S.A., intend to form strategic partnerships for the development
and operation of a DTH satellite service for Brazil, Mexico, and various other
Latin American countries (collectively, the "DTH Ventures"). International
anticipates that it will own a 10% interest in the DTH Ventures. The DTH
Ventures launched (i) a Brazilian platform, NetSat, in October 1996 providing 40
digital satellite channels throughout Brazil and (ii) a Mexican platform,
Innova, in December 1996 providing 64 digital satellite channels throughout
Mexico. The final platform, Multi-Country, will be launched in 1997 and will
provide DTH Satellite services to various other Latin American countries.
Through March 31, 1997, International had contributed $18.0 million to the DTH
Ventures. It is anticipated that International could be required to make cash
contributions totaling $45.8 million over the next three years in connection
with the DTH Ventures.
International, Liberty and News Corp. have formed a joint venture, which
includes a number of partnerships and other entities under common ownership (the
"Sports Venture"), to operate currently existing
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sports services in Latin America and Australia and a variety of new sports
services throughout the world, excluding the United States, Canada and certain
other defined geographic areas (collectively, the "International Sports
Territory"). News Corp. owns a 50% interest in the Sports Venture with the
remaining 50% owned by Liberty/TINTA LLC, a limited liability company owned in
equal parts by subsidiaries of International and Liberty (the "LLC"). (As
described in "MANAGEMENT AND ALLOCATION POLICIES," an International Programming
Opportunity in respect of foreign sports programming may be pursued by TCI
through either International or the Liberty Media Group.) News Corp. is entitled
to nominate the principal officers of the Sports Venture, who are subject to
approval by the LLC. All matters not in the ordinary course of the business of
the Sports Venture are to be determined by the unanimous vote of the partners.
Prior to November 1, 2000, News Corp. and the LLC cannot transfer their
interests in the Sports Venture other than to certain of their respective
affiliates. Thereafter, any transfer to a non-affiliate is subject to a right of
first refusal in favor of the non-transferring partner. In addition, each of
News Corp., Liberty and International has agreed that the Sports Venture will be
the exclusive vehicle through which they will engage in international sports
programming businesses in the International Sports Territory, subject to certain
exceptions. As of March 31, 1997, International had contributed to the LLC $56.3
million in cash and its 35% equity interest in Torneos y Competencias S.A.
("Torneos"), an Argentinean sports programming production company, and Liberty
had contributed to the LLC its interests in Latin American and Australian sports
programming services and its rights under various television sports programming
agreements. The LLC contributed the non-cash assets contributed to it by
International and Liberty to the Sports Venture. News Corp. contributed various
international sports rights and certain trademark rights in exchange for its 50%
interest in the Sports Venture. As of March 31, 1997, International may make
additional cash contributions totaling $29 million to the LLC to fund the
operations of the Sports Venture.
In April 1996, International, Torneos and certain stockholders of Torneos
entered into an agreement whereby International agreed to make minimum periodic
payments from 1996 through 2004 aggregating $235.2 million to acquire certain
rights and considerations, including the exploitation rights to all sports
rights owned by Torneos with the exception of any rights which at that time had
been contractually committed to any third party. In particular, International
acquired worldwide distribution rights outside of Argentina for Clasico del
Domingo and worldwide distribution rights (excluding Buenos Aires) for Futbol de
Primera and Torneos de Verano (Summer Games). The rights and obligations under
this agreement were assumed by the Sports Venture.
ASIA
International's presence in Asia currently consists of its interests in
cable and programming companies in Japan and Singapore. International and its
predecessors have been exploring opportunities in Japan since 1992. Management
of International believes that the Japanese market offers opportunities to adapt
elements of the strategy, which has been implemented by International through
its subsidiaries and affiliates in the U.K., of building an integrated group of
(i) broadband cable networks capable of delivering both cable television
services and cable telephony and (ii) thematic cable and satellite channels,
specifically targeted at the particular nation's cable subscribers, supported by
a multi-channel programming management company.
Cable and Telephony Distribution in Japan. At the beginning of 1995,
International and Sumitomo Corporation ("Sumitomo") formed Jupiter
Telecommunications Co., Ltd. ("Jupiter"). At the time of its formation, Jupiter
was the first MSO in Japan. International owns 40% and Sumitomo owns the
remaining 60% of Jupiter. As of December 31, 1996, Jupiter had ownership
interests in 20 companies that own franchises clustered in three main areas:
Tokyo, Osaka and Kyushu, and Jupiter operated and managed 18 of the 20
companies. At December 31, 1996, Jupiter's franchises covered approximately
3,103,000 franchise homes, its cable plant passed approximately 1,309,000 homes,
and it served approximately 134,000 basic cable subscribers.
Personnel seconded by International to Jupiter have been working with
Sumitomo's secondees and Jupiter's staff to: (i) train Jupiter's management team
in MSO management and operational practices, (ii) continue to develop a business
plan to, among other things, determine the likely costs and revenue associated
with the provision of cable telephony and determine targeted cable penetration
levels and
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(iii) continue to plan and implement a strategy to increase the number of
Jupiter's operating systems through acquisitions and the development of new
systems in areas for which franchises are granted to Jupiter.
As of March 31, 1997, International had contributed Y7.4 billion ($71.3
million) and Sumitomo had contributed Y11.1 billion ($106.9 million) to Jupiter.
In connection with the formation of Jupiter and Sumitomo's transfer of its cable
systems interests to Jupiter, International agreed to pay Sumitomo Y200 million
($1.6 million), which payment was made on March 31, 1997. As a result of a
number of developments that management of International believes are favorable
to Jupiter, International and Sumitomo are in the process of revising its
original business plan to increase the rate at which Jupiter would acquire
additional franchises and develop its network. In addition, Jupiter began
providing telephony services over its cable system on a commercial basis in its
Suginami franchise on July 1, 1997. Management of International estimates that
if Jupiter's business plan is accelerated in the manner currently under
discussion, Jupiter will require additional funding over the commitments of
International and Sumitomo provided for in Jupiter's original business plan,
which additional funding may be significant. No assurance can be given that
Jupiter's business plan will be revised as currently proposed, or at all.
The cable plant of each of Jupiter's cable systems, other than the Suginami
system, consists primarily of coaxial cable. The architecture of the Suginami
system, which includes a fiber optic backbone or "trunk," has been designed to
be state-of-the-art, with the specific goal of being telephone capable. To the
extent economically feasible, Jupiter intends to expand its cable networks, and
rebuild its existing cable systems, with the same network architecture as that
which currently exists in its Suginami system.
Sumitomo appoints a majority of the members of Jupiter's board of
directors; however, for so long as International owns directly or indirectly at
least 30% of Jupiter's shares, certain extraordinary actions require the consent
of its director designees. Pursuant to a shareholders agreement, subject to
certain exceptions, neither Sumitomo nor International may transfer its interest
in Jupiter prior to March 31, 2000, at which time either party may transfer
shares to a publicly-quoted third party, subject to a right of first offer to
the other party. In addition, Sumitomo and International have agreed not to
invest in, or otherwise participate to the extent of 10% or more of the equity
of, any cable television or telephony business in Japan without first offering
such opportunity to Jupiter.
Programming in Japan. In February 1996, International and Sumitomo formed
JPC, Japan's first multi-channel programming company. JPC is owned equally
(50/50) by International and Sumitomo. At March 31, 1997, each of International
and Sumitomo had made aggregate contributions to JPC of Y1.4 billion ($13.4
million). Additionally, International and Sumitomo contributed their respective
18% and 82% ownership interests in Cable Soft Network to JPC. International made
an equalizing payment of Y444 million ($4.0 million) in connection with such
contribution. As of December 31, 1996, JPC had ownership interests in and
management control of three other channels in addition to Cable Soft Network. In
addition to the above channels, JPC expects to launch at least four new channels
in 1997 (including two thematic channels being created with MultiThematiques)
and on February 18, 1997, JPC announced its acquisition of the distribution
rights for all of Japan's premier soccer league matches.
Government Regulation in Japan. Cable television franchise licenses are
granted by the Ministry of Post and Telecommunications (the "MPT"). The MPT
generally only grants one franchise license per franchise area; however, it has
the authority to issue multiple franchise licenses in a franchise area.
Franchise licenses are generally indefinite in duration, and no royalties are
payable to the Japanese government. Cable companies may apply to the MPT for a
"Type 1 Carrier" License, which permits carriage of telephony services on a
commercial basis over their cable networks.
The Japanese government does not generally regulate the amount of foreign
programming that may be shown on Japanese television. Foreign ownership of
broadcast and DBS program services is restricted, while ownership of
cable-exclusive program services is not.
Japan currently allows foreign ownership of up to a maximum 33- 1/3% of a
Japanese company that provides direct cable television or telephony services.
(International can own a 40% interest in Jupiter due to the presence of minority
third party investors in many of Jupiter's cable systems.) In 1996, the Japanese
government announced its intention of more fully deregulating foreign ownership
restrictions over time.
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Other Asian Programming. International has a 49% interest in ABN, a joint
venture of which Dow Jones Broadcasting (Asia), Inc. ("Dow Jones") is the other
major shareholder (49%). The first dedicated financial business news channel to
launch in Asia, ABN is targeted at affluent business people across the Asian
region, many of whom use English as a common language in business. ABN, whose
presenters are all from the Asian region, broadcasts primarily in English but
also features a daily half-hour of original Mandarin-language programming. As of
December 31, 1996, ABN's programming was available to approximately 53 million
homes across Southeast Asia, China and parts of India. International and Dow
Jones have exercised an option to purchase an equal part of the remaining
interest from the ABN minority shareholders which would give each of
International and Dow Jones a 50% interest in ABN. This transaction is expected
to close in 1997, but the parties are currently in negotiations over the
purchase price for the remaining interest and thus there is no assurance that
such acquisition will be consummated. International is also in discussions
regarding a proposed sale of its interest in ABN to Dow Jones and a third party.
There can be no assurance that such sale will be consummated.
As part of the formation of the Sports Venture, the LLC is entitled to
receive from News Corp. 7.5% of the outstanding stock of STAR Television
Limited, which operates a satellite-delivered television platform in Asia. Upon
delivery of such stock, News Corp. is entitled to receive from the LLC up to
$20.0 million and rights under various Asian sports programming agreements.
AUSTRALIA AND NEW ZEALAND
International owns a 17% interest in Premium Movie Partnership ("PMP"), a
partnership with Australis Movies Pty Limited and four movie studios formed to
provide two movie channels, Showtime and Encore, for the Australian market.
Although these services carry the same name as the services in the U.S., their
programming is unique. Each of the partners in PMP holds an approximate 17%
interest in the partnership and each has mandatory capital commitments to PMP of
approximately $3.3 million. As of March 31, 1997, International had funded
approximately $2.1 million of its capital commitment. The Company has also
provided financial guaranties in the amount of $55 million at March 31, 1997 to
the movie studios for the payment by PMP of studio license fees. PMP's movie
channels were launched on March 3, 1995 and served approximately 365,000
subscribers as of March 31, 1997. No partner may transfer an interest in PMP
prior to July 1, 2000, other than to an affiliate of such partner, without the
unanimous consent of the partners committee which exercises general management
control of PMP.
In New Zealand, International indirectly owns a 13% interest in Sky
Network, which owns an encrypted UHF pay television service that, as of December
31, 1996, offered five programming services to approximately 260,000 subscribers
in New Zealand. International's indirect interest in Sky Network is held through
its 25.5% interest in HKP Partners of New Zealand, a New Zealand general
partnership among International, Ameritech International, Inc., Time Warner
Entertainment Company, L.P., and Bell Atlantic International, Inc. HKP has a
management committee in which decisions are made by the affirmative vote of
representatives of partners that collectively own greater than 74% of HKP except
that certain extraordinary actions require unanimous consent. International's
interest in HKP is subject to certain transfer restrictions and restrictions on
its ability to make investments in other pay television or broadcasting services
in New Zealand. The partners of HKP, including International, are currently in
discussions with regard to a proposed sale of their interest in HKP to a third
party. There can be no assurance that such sale will be consummated.
COMPETITION
Cable and other Multi-Channel Television. The various cable operators in
which International has interests directly compete for customers and advertisers
in local markets with other providers of entertainment, news and information.
Their competitors include broadcast television and radio, newspapers, magazines
and other printed material, motion picture theaters, video cassette rental
stores and other sources of entertainment and information. Such cable operators
also compete with companies who use alternative methods of distributing the same
or similar video programming offered by cable television systems such as
terrestrial (over the air) broadcast stations, multi-channel multi-point
distribution systems ("MMDS"), DTH satellite services, satellite master antenna
television systems ("SMATV") and in some instances, digital terrestrial services
and certain narrowband providers. The most significant competition for cable
operators,
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including Telewest, in the U.K. multi-channel television market currently comes
from providers of DTH satellite television services and, in particular, British
Sky Broadcast Group plc ("BSkyB"). DTH satellite services are widely available
in the U.K. and are increasing in popularity there. In those countries where, by
regulation or policy, cable operators do not have an exclusive franchise,
International's cable operators compete with other cable operators, and if
permitted by regulation or policy, with telephone companies providing video
services in their franchises. The extent of competition with the services
provided by International's cable subsidiaries or affiliates in any particular
market depends, among other factors, on price (including up-front and service
costs), the amount and quality of the programming offered, customer satisfaction
and quality of the system network. The full extent to which other media or home
delivery services will compete with cable television systems may not be known
for some time and there can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future. International
also competes with similar operators of broadband distribution networks for
franchises, the acquisition of existing cable operators and financing.
Cable television has a limited operating history in many regions of the
world outside the United States. Although International operates cable systems
in markets where it believes there is consumer demand for multi-channel
television services, International is unable to predict with certainty how
consumer demand for the services provided by its cable television subsidiaries
and affiliates will develop over time. International's prospects depend in large
part on the development of consumer preference for cable television over other
in-home entertainment alternatives in the markets where International competes.
Certain of International's cable systems, particularly in the United Kingdom,
have experienced significant churn in their franchise areas. There can be no
assurance that churn rates will decrease over time, or that International's
cable systems will not experience higher churn rates in the future. Higher
levels of churn could have a material adverse effect on International.
Cable Telephony. The Company believes that it is preferable for
International's cable subsidiaries and affiliates to offer a wide range of cable
services, including telephony services where permitted under the applicable
statutory and regulatory framework and where business conditions permit.
Currently the U. K. and Japan are the only countries in which International is
providing both television and telephony services to subscribers through the
broadband distribution networks of its cable subsidiaries and affiliates. In the
U.K., such services are being provided through Telewest. In Japan, Jupiter
commenced offering telephony services commercially in July 1997 in its Suginami
franchise. Although no assurances can be given, International anticipates that
legal restrictions on the provision of telephony services by its cable
subsidiaries and affiliates in certain other countries will be relaxed or
eliminated over the next few years. In markets in which International is allowed
to offer cable telephony services, the primary competitor is the national public
telephone company. International believes that the established PTOs generally
benefit from their long-standing relationships with customers, substantial
technical and financial resources and established ubiquitous networks. The
success of the telephony operations of a cable operator is dependent upon its
ability to convince long-time customers of the national public telephone
providers to switch to its telephony network. Telewest and Jupiter are both
relatively new entrants to the telephony business, and have sought to compete
with the more well established telephone operators by pricing cable telephony
call charges below those of the established telephone operators. In both the
U.K. and Japan, the ability of the established PTOs to respond to such price
competition has been restricted by their license obligation not to show undue
preference to or unduly discriminate against different classes of customers and
to offer uniform rates nationally. There can be no assurance that either
Telewest or Jupiter will be able to continue to price their telephony services
below those charged by the national public telephone providers, or that future
price reductions will not adversely impact the profitability of such companies'
telephony operations.
The ability to provide viable cable telephony services is also dependent on
the ability of International's cable subsidiaries and affiliates to interconnect
with the local telephony network of the public telephone company in order to
complete calls that originate from a customer on the cable network of such
subsidiary or affiliate but terminate off its network, or that originate from a
caller off its cable network and terminate on its network. Regulations in the
U.K. provide a unique means by which disputes over pricing and other terms of
interconnection can be determined by a government representative. In Japan,
under interim rules the national public telephone provider currently is required
to enter into interconnection agreements. There can be no
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assurance that similar rights will be afforded to cable operators in other
countries that eventually permit the delivery of cable telephony services. The
inability to obtain interconnection at reasonable rates could prevent
International's subsidiaries or affiliates from offering telephony services at
competitive rates. No assurance can be given that International's experience
with offering telephony services in the United Kingdom can or will be replicated
in Japan or in any of the other countries in which International's subsidiaries
and affiliates eventually provide telephony services.
Programming. The business of distributing programming for cable television
is highly competitive. International's programming subsidiaries and affiliates
(the "Programming Companies") directly compete with other programming services
for distribution on a limited number of cable television channels and, when
distribution is obtained, the programming offered by the Programming Companies
competes, in varying degrees, for viewers and advertisers with other cable
programming services and off-air broadcast television programming services, as
well as with other entertainment media described above under "-- Cable and other
Multi-Channel Television." The Company believes that important competitive
factors include the prices charged for programming, the quantity, quality and
variety of the programming offered and effectiveness of marketing efforts. With
the advent of new compression technologies, which are intended to increase
channel capacity, competition for channel capacity may substantially decrease,
although additional competitors may have the opportunity to enter the
marketplace. No predictions can be made with respect to the viability of these
technologies or the extent to which they will ultimately impact the availability
of new channels. In addition to competition for cable distributors, viewers and
advertisers, the Programming Companies also compete, to varying degrees, for
product with other programming companies that distribute similar types of
programs, many of which have greater financial resources than International and
its Programming Companies.
ADDITIONAL INFORMATION
Each of International and Telewest is subject to the information
requirements of the Exchange Act, and, in accordance therewith, files reports
and other information with the SEC (under SEC file numbers 0-26264 and 0-26840,
respectively), all of which are available from the SEC in the manner described
above under "Available Information." The TINTA Series A Common Stock is traded
in the National Market tier of The Nasdaq Stock Market under the symbol "TINTA."
Information contained herein regarding Telewest is based upon, and is qualified
in its entirety by reference to, information contained in such filings and other
publicly available information. Although believed by TCI to be reliable, there
can be no assurance as to the accuracy of such information.
DOMESTIC TELEPHONY
OVERVIEW
The TCI Ventures Group's telephony assets consist primarily of (a) TCI's
investments, held through TCI Telephony, in the PCS Ventures, a series of
partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband PCS, to
residential and business customers nationwide under the Sprint(R) brand (a
registered trademark of Sprint Communications Company, L.P.), and in Teleport,
which is a competitive local exchange carrier ("CLEC") and (b) WTCI, a wholly
owned subsidiary of the Company that provides long distance transport of video,
voice and data traffic and other telecommunications services on a wholesale
basis in a 12 state region. The PCS Ventures include the Sprint PCS Partnerships
and PhillieCo. The partners (collectively, the "Sprint PCS Partners") of each of
the Sprint PCS Partnerships are subsidiaries of Sprint, Comcast, Cox and the
Company (collectively, the "Sprint PCS Parents"). The partners of PhillieCo are
subsidiaries of Sprint, Cox and the Company. Through TCI Telephony, the Company
has a 30% interest as a partner in each of the Sprint PCS Partnerships and a 35%
interest as a partner in PhillieCo. As of March 31, 1997, the Company, through
TCI Telephony, had a 30% equity interest (representing a 37% voting interest) in
the outstanding common stock of TCG.
In addition, the TCI Ventures Group would be attributed a 50% partnership
interest in Kansas City Fiber Network, L.P. ("Kansas City Fiber Network") and a
40% partnership interest in NHT Partnership, each owned through TCI Telephony,
and an approximate 79% interest in New Jersey Fiber Technologies, L.P., and a
43% interest in Louisville Lightwave, each owned through members of the TCI
Group. The foregoing companies are competitive access providers serving the
metropolitan areas of Kansas City, Buffalo, Morris-
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town and New Brunswick, New Jersey, and Louisville and Lexington, Kentucky,
respectively. The other 50% interest in Kansas City Fiber Network is owned by
Kansas City Cable Partners, a partnership that owns and operates cable systems
in the Kansas City area, in which the TCI Group holds a 50% interest. TCI's
indirect interest in Louisville Lightwave will increase to 50% upon the closing
of its acquisition of the balance of the other partner's interest in TCI-TKR of
Kentucky, Inc., which owns, among other assets, the interest in Louisville
Lightwave. TCI is negotiating to sell its interests in all of these CAP
partnerships for cash. There can be no assurance that any such sale will occur
on terms satisfactory to TCI, or at all; however, if a sale is consummated, the
proceeds will be attributed to the TCI Ventures Group. The TCI Ventures Group
would also include TCI's 3% interest in General Communication, Inc. ("GCI"), a
diversified telecommunications provider with a leading position in facilities
based long-distance service in the state of Alaska using fiber optic, digital
microwave, PCS and satellite transmission. The Company has exercised certain
registration rights with respect to its equity interest in GCI, and GCI has
filed a registration statement under the Securities Act with the SEC with
respect to all of the shares of GCI held by the Company. If declared effective
and if the Company sells such shares of GCI, the proceeds of any such sale would
be attributed to the TCI Ventures Group. GCI's stock is traded on the National
Market tier of The Nasdaq Stock Market under the symbol "GNCMA."
SPRINT PCS
General. Sprint PCS has announced its intention to become a leading
provider of wireless communications products and services in the United States.
Sprint PCS believes that it is the largest broadband wireless PCS company in the
United States in terms of total license coverage of "Pops," with licenses
(including those owned by licensees that have affiliated or intend to affiliate
with Sprint PCS, including PhillieCo) to provide service in 33 Major Trading
Areas ("MTAs") ( including eight of the nation's ten largest MTAs) covering over
190 million Pops at December 31, 1996. The term "Pops" refers to the population
of a geographic area covered by a license or group of licenses and, as used in
this Proxy Statement, is based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of a geographic area.
Broadband PCS systems differ from traditional analog cellular telephone
service principally in that PCS systems operate at a higher frequency band
(1850-1900 MHz radio spectrum), have more spectrum allotted and have different
license areas. Sprint PCS was the successful bidder for 29 PCS licenses in the A
Block and B Block PCS auction conducted by the Federal Communications Commission
("FCC") which concluded in March 1995. Additionally, on February 6, 1997, Cox
contributed to Sprint PCS a PCS license for the Omaha MTA that Cox separately
purchased in the same PCS auction. Sprint PCS's 30 wholly owned markets include,
among others, the New York City, San Francisco, Detroit, Dallas/Fort Worth and
Boston/ Providence MTAs, and cover 152 million Pops. In order to increase its
Pop coverage, Sprint PCS has affiliated and expects to continue to affiliate
with other PCS providers, including those in which Sprint PCS or affiliates of
the Sprint PCS Partners have an interest. Each affiliated PCS service provider
will be included in Sprint PCS's national network and will use the Sprint brand
name pursuant to affiliation agreements. Any reference herein to an
"affiliation" with, or "affiliate" of, Sprint PCS does not necessarily imply
that Sprint PCS exercises or has the power to exercise control over the
management and policies of such entity.
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The table below presents the owned and affiliated Pops of Sprint PCS as of
March 31, 1997:
<TABLE>
<CAPTION>
DIRECT OR INDIRECT NET POPS
1995 OWNERSHIP INTEREST ATTRIBUTED TO
POPULATION ATTRIBUTED TO TCI VENTURES
# OF IN MTA(S) TCI VENTURES GROUP(2)
OWNED/AFFILIATED(1) MTAS (MILLIONS) GROUP (MILLIONS)
------------------- ---- ---------- ------------------ -------------
<S> <C> <C> <C> <C>
Owned by Sprint PCS............................ 30 152 30% 45.6
Affiliated:
APC (Baltimore/Washington)(3)................ 1 8.3 15% 1.2
Cox PCS (Los Angeles/San Diego)(4)........... 1 21.5 15% 3.2
PhillieCo (Philadelphia)(5).................. 1 9.1 35% 3.2
-- ----- ----
Total................................ 33 190.9 53.2
== ===== ====
</TABLE>
- ---------------
(1) Does not give effect to the purchase of any 10 MHz BTA PCS licenses by an
affiliate of Sprint in the D and E Block auctions which were granted to such
affiliate in April 1997. Sprint PCS has not yet entered into an affiliation
agreement with such affiliate, and no assurance can be given that such an
agreement will be entered into.
(2) Represents aggregate Pops covered by the PCS licenses held by the applicable
PCS licensee multiplied by the direct or indirect percentage equity interest
in such licensee attributed to the TCI Ventures Group. Such number is not
necessarily indicative of the number of Pops that are or will be served by
the applicable licensee's PCS network in such license area or the actual or
expected number of customers using such PCS network. In addition, the number
of Pops attributed to the TCI Ventures Group is not intended to imply that
TCI has any actual ownership interest in or right to acquire such an
interest in, or other rights with respect to, such Pops or the applicable
PCS license(s), including upon liquidation or dissolution of the applicable
PCS licensee.
(3) Sprint PCS owns a 49% limited partnership interest in American PCS, L.P.
("APC"), which indirectly owns a PCS license for and operates a broadband
PCS system in the Baltimore/Washington D.C. MTA and has entered into an
affiliation agreement with Sprint PCS.
(4) Sprint PCS owns a 49% limited partnership interest in Cox Communications
PCS, L.P. ("Cox PCS"), which was formed to hold a PCS license for and
operates a broadband PCS system in the Los Angeles/ San Diego MTA and has
entered into an affiliation agreement with Sprint PCS.
(5) Owned by subsidiaries of Sprint, TCI and Cox. Sprint PCS expects to sign a
services and affiliation agreement with PhillieCo.
Pursuant to an agreement among the Sprint PCS Partners, SprintCom, Inc., an
affiliate of Sprint, participated in the D and E Block PCS auctions conducted by
the FCC for additional 10 MHz Basic Trading Area ("BTA") PCS licenses, which
auctions concluded in January 1997. On April 28, 1997, the FCC granted
SprintCom, Inc. D and E block licenses for 139 BTAs covering an aggregate of
approximately 70 million additional Pops, none of which BTAs are within any of
the MTAs represented by the PCS licenses held by Sprint PCS, Cox PCS, APC or
PhillieCo. In accordance with such agreement and the Amended and Restated
Agreement of Limited Partnership of Sprint Spectrum Holding Company L.P., dated
as of January 31, 1996 (the "Sprint PCS Partnership Agreement"), Sprint is
required to offer to enter into an affiliation agreement with Sprint PCS with
respect to such BTA licenses pursuant to which Sprint's PCS systems in such
areas would be included in Sprint PCS's national PCS network. If such an
affiliation agreement were entered into, Sprint PCS, together with SprintCom,
Inc. and the other PCS licensees that have affiliated (or, in the case of
PhillieCo, are expected to affiliate) with Sprint PCS, would have licenses to
provide service to nearly 260 million Pops in all 50 states, Puerto Rico and the
U.S. Virgin Islands. No assurance can be given, however, that Sprint and Sprint
PCS will be able to reach a mutually acceptable agreement as to the terms of any
such affiliation agreement. Sprint PCS has been engaged in the build-out of the
network infrastructure for SprintCom, Inc. in certain BTA markets pursuant to
interim authorizations of the Sprint PCS Partnership Board and is compensated on
a direct and allocated cost basis. TCI is also negotiating to acquire a minority
equity interest in a limited partnership that would operate a PCS system
utilizing C Block PCS licenses for
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eight BTAs covering an aggregate of approximately 2.2 million Pops as an
affiliate of the Sprint PCS network, although no assurance can be given that TCI
will acquire such interest or that such partnership will enter into an
affiliation agreement with Sprint PCS.
APC launched its PCS service in November 1995 in the Baltimore/Washington
MTA and was the nation's first commercially operational PCS system. Cox PCS
initiated the commercial launch of its PCS service in San Diego in December 1996
and in Orange County in May 1997. PhillieCo launched PCS service in
Philadelphia, PA in April 1997. Sprint PCS commenced initial commercial PCS
operations late in the fourth quarter of 1996. As of July 15, 1997, Sprint PCS
had launched service in over 50 cities in the U.S., including Dallas/Fort Worth,
Austin and San Antonio, TX; Oklahoma City and Tulsa, OK; New Orleans, LA;
Toledo, OH; Little Rock, AR; Fresno and Sacramento, CA; Milwaukee, WI; Portland,
OR; New York City, Albany, Rochester, Buffalo and Syracuse, NY; Pittsburgh, PA;
Spokane, WA; Salt Lake City, UT; Des Moines, IA; Wichita, KS; Louisville, KY;
Denver and Boulder, CO; Lincoln and Omaha, NE; Nashville, TN; Indianapolis, IN;
Phoenix and Tucson, AZ; Birmingham, AL; Minneapolis, MN; Miami, FL; and Kansas
City and St. Louis, MO. Additional markets, including San Francisco, Boston, and
Seattle, will be launched on a market-by-market basis during the remainder of
1997 and thereafter. Upon completion of the first phase of its PCS launch, which
management of Sprint PCS expects to be completed by the end of 1997, Sprint PCS
service will be available in 65 cities in the U.S., including 35 of the top 50
U.S. markets. Thereafter, Sprint PCS will evaluate further coverage expansion on
a market-by-market basis, taking into account, among other things, population
and traffic density, FCC coverage requirements and the ability to cluster groups
of markets. The timing of launch in individual markets will be determined by
various factors, principally zoning and microwave relocation, equipment delivery
schedules, completion of network testing and optimization and local market and
competitive considerations. Zoning restrictions have resulted in delays in the
launch of Sprint PCS's service in several of its markets. Sprint PCS is in the
development stage and has minimal revenue from operations.
Sprint PCS will require significant funds for development, construction,
testing and deployment of its PCS network. To date, total financing commitments
made to Sprint PCS are approximately $10 billion. The Sprint PCS Partners have
agreed to contribute up to an aggregate of $4.2 billion of equity to Sprint PCS
from inception through fiscal 1999 (of which approximately $3.0 billion had been
contributed as of March 31, 1997) if and to the extent required by the annual
budgets of Sprint PCS for fiscal years in such period approved by the Sprint PCS
Partners or requested during such period by the affirmative vote of general
partners with percentage interests in Sprint PCS of 75% or more in the
aggregate. The Company currently expects that the remaining approximately $1.2
billion of equity contributions by the Sprint PCS Partners will be made by the
end of the first quarter of 1998 (although there can be no assurance that any
additional capital will be contributed by the Sprint PCS Partners). As of June
30, 1997, TCI Telephony had contributed a total of approximately $954.5 million
to Sprint PCS. Sprint PCS's subsidiary, Sprint Spectrum L.P. ("Sprint
Spectrum"), has obtained approximately $3.1 billion in secured vendor financing
in the aggregate from certain equipment vendors, entered into a $2.0 billion
secured credit facility with a group of banks and received net proceeds of
approximately $520 million from a public offering of senior notes and senior
discount notes (the "Sprint Spectrum Notes") with a principal amount at maturity
of $750 million. The Sprint PCS Parents provided certain financial guaranties to
the secured creditors in such debt financings, of which TCI Telephony's
remaining contingent liability at March 31, 1997 was approximately $150 million.
Assuming all of the foregoing debt and equity financing amounts are made
available to Sprint PCS, Sprint PCS currently believes that such amounts would
be sufficient to meet its currently anticipated capital requirements (other than
obligations in respect of Sprint PCS's interest in APC and Cox PCS) through
mid-1998 (based on Sprint PCS's current plans for its network buildout in its
current license areas).
Sprint PCS is implementing what it believes to be a state-of-the-art PCS
network using a frequency management technology or "protocol" called CDMA (or
Code Division Multiple Access). The FCC has not mandated a universal digital
protocol for PCS systems. Currently, various vendors have proposed three
principal competing, incompatible protocols for use in PCS systems: CDMA, GSM
and TDMA (IS-136). The GSM protocol is an updated up-banded version of the
TDMA-based protocol now in use in Europe. APC's PCS system uses the GSM
protocol. TDMA (IS-136) is an up-banded version of the TDMA-based digital
cellular protocol now used by cellular operators in the U.S. TDMA (IS-136) is
being deployed by
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AT&T Wireless Services, Inc., a competitor of Sprint PCS, in its PCS systems.
CDMA is a first-generation technology that is just beginning to be commercially
deployed in the United States. Sprint PCS selected the CDMA technology rather
than the other technologies because it believes it will have increased
subscriber capacity, higher quality of transmission and lower infrastructure and
ongoing support costs. Sprint PCS believes that CDMA provides the following
benefits: performance, cost effectiveness, functionality, security and capacity.
Sprint PCS believes that the CDMA protocol will be the most widely adopted PCS
protocol in the United States. While several major PCS providers have publicly
announced that they intend to deploy CDMA-based PCS systems, there can be no
assurance that such providers will do so. As of June 30, 1997, PCS PrimeCo, L.P.
("PrimeCo") and GTE Wireless Inc. were the only PCS providers other than Sprint
PCS that had commercially deployed a 1900 MHz CDMA system in the United States.
The trademarks Sprint(R) and Sprint PCS(R) are licensed to Sprint PCS on a
royalty-free basis pursuant to a trademark license agreement between Sprint
Communications Company, L.P. ("Sprint Communications") and Sprint Spectrum.
Sprint Communications may terminate this agreement (i) upon the dissolution and
winding up of Sprint PCS, (ii) upon the bankruptcy of Sprint PCS, (iii) upon the
failure of Sprint PCS to perform in accordance with the material terms of the
agreement or for breach of its representations and warranties or (iv) if Sprint
PCS challenges Sprint Communications' rights to the Sprint trademark and the
associated logo. Sprint PCS may terminate the agreement (i) if Sprint
Communications abandons or fails to support its trademark and associated logo,
(ii) upon the bankruptcy of Sprint Communications, (iii) if Sprint
Communications takes action that conflicts with Sprint PCS's rights to use the
trademark and associated logo or (iv) if Sprint Communications breaches its
covenant to license the trademark and associated logo to additional licensees in
accordance with the terms of the agreement. Subject to certain conditions, each
of Sprint PCS and Sprint Communications may terminate the agreement if a
controlled affiliate of Sprint ceases to own any equity interest in Sprint PCS.
Within 30 days of termination, or in certain circumstances on a specified
termination date, Sprint PCS's rights to use the trademark and associated logo
will cease.
Competition. The wireless telecommunications industry is experiencing
significant technological change, as evidenced by the increasing pace of
improvements in the capacity and quality of digital technology, shorter cycles
for new products and enhancements and changes in consumer preferences and
expectations. Sprint PCS has stated its expectation that competition in the
wireless telecommunications industry will be dynamic and intense as a result of
the entrance of new competitors and the development of new technologies,
products and services. The Company anticipates that market prices for two-way
wireless services generally will decline in the future based upon increased
competition.
Each of the markets in which Sprint PCS competes will be served by other
two-way wireless service providers, including cellular and PCS operators and
resellers. Many of these competitors have been operating for a number of years,
currently serve a substantial subscriber base and have significantly greater
financial and technical resources than those available to Sprint PCS. Certain of
Sprint PCS's competitors are operating, or planning to operate, through joint
ventures and affiliation arrangements, wireless telecommunications systems that
encompass most of the United States. Sprint PCS will also face competition from
other current or developing technologies, such as paging, enhanced specialized
mobile radio ("ESMR") and satellite networks. ESMR operators have begun to
design and deploy digital mobile networks that increase the channel capacity of
ESMR systems to a level that may be competitive with that of cellular systems.
In addition, several entities have received and several others are seeking FCC
authorization to construct and operate global satellite networks to provide
domestic and international mobile communications services from geostationary and
low earth orbit satellites.
Continuing technological advances in telecommunications and FCC policies
that encourage the development of new spectrum-based technologies make it
impossible to predict the extent of future competition. The 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
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portion of the spectrum that is reallocated will be used to create new
land-mobile services or to expand existing land-mobile services.
Sprint PCS will directly compete with several other PCS providers in each
of its PCS markets, including AT&T Wireless Services, Inc., BellSouth
Telecommunications, Inc., Omnipoint Corporation, Pacific Bell Mobile Services,
Inc., PrimeCo and Western Wireless Corporation. Sprint PCS also expects that
existing analog wireless service providers in the PCS markets, all of which have
been operational for a number of years and many of which have significantly
greater financial and technical resources than those available to Sprint PCS,
will upgrade their systems to provide comparable services in competition with
its PCS system. These cellular competitors include AirTouch Communications,
Inc., AT&T Wireless Services, Inc., BellSouth Mobility, Inc., Ameritech Mobile
Communications, Inc., Bell Atlantic NYNEX Mobile, Southwestern Bell Mobile
Systems, GTE Mobilnet, Inc. and U.S. Cellular Corp.
Because Sprint PCS's network operates at a different frequency and uses a
different technology than cellular systems, Sprint PCS's network will not
directly connect with existing cellular networks. In order for Sprint PCS's
subscribers to use their handsets in areas outside Sprint PCS's network, another
CDMA-based PCS provider must operate in such area or the subscriber must have a
dual-mode, dual-band handset which would allow access to analog cellular or
other digital cellular or PCS systems and, in either case, as with other
wireless carriers, Sprint PCS or its subscribers, on an individual basis, must
have arrangements with such other cellular or PCS providers permitting Sprint
PCS's subscribers to access their respective services. Although Sprint PCS
expects to enter into affiliation agreements with SprintCom, Inc. and PhillieCo
which would give Sprint PCS nationwide coverage, Sprint PCS currently does not
have a license or any affiliation agreement enabling it to provide coverage for
27% of the Pops in the United States, including those in several major cities
and surrounding regions. Further, dual-mode, dual-band handsets are not
currently available. Sprint PCS currently expects dual-mode, dual-band
telephones to be commercially available in September 1997 (although sufficient
quantities may not be commercially available until the fourth quarter of 1997).
There can be no assurance that such dual-mode, dual-band handsets will be
available. This lack of interoperability may impede Sprint PCS's ability to
attract current cellular subscribers or potential new wireless communications
subscribers that desire the ability to access different service providers in the
same market. Initially, the cost to Sprint PCS of PCS handsets may not be
competitive with the cost to analog operators of analog cellular handsets. While
Sprint PCS believes that its PCS handsets will be competitively priced as
compared to digital cellular handsets of comparable size, weight and features,
cellular operators may subsidize the sale of digital handset units at prices
below those with which Sprint PCS can compete through Sprint PCS's handset
subsidies. Although Sprint PCS has entered into a few roaming agreements, there
also can be no assurance that, should Sprint PCS determine that it desires
roaming agreements with other providers, such agreements can be obtained on
terms acceptable to Sprint PCS.
Management. Pursuant to the Sprint PCS Partnership Agreement, the general
partners of Sprint PCS conduct the business and affairs of Sprint PCS through
their representatives (the "Representatives") on the Sprint PCS partnership
board (the "Sprint PCS Partnership Board"). The Sprint PCS Partnership Board
currently has six voting Representatives, three of whom are currently designated
by Sprint and one of whom is currently designated by each of Comcast, Cox and
TCI Telephony. The Representative(s) designated by each Sprint PCS Partner have
an aggregate voting power equal to the percentage interest in Sprint PCS (as to
each Sprint PCS Partner, its "Percentage Interest") of the Sprint PCS Partner
appointing him or them. As of March 31, 1997, the aggregate voting power of the
Representative(s) of each of Sprint, TCI Telephony, Cox and Comcast was 40%,
30%, 15% and 15%, respectively.
Except for certain actions requiring a unanimous vote of the Sprint PCS
Partnership Board or of all general partners, substantially all actions required
or permitted to be taken by the Sprint PCS Partnership Board must be approved by
the affirmative vote of Representatives having voting power of 75% or more of
the Percentage Interests of the Sprint PCS Partners whose Representatives are
entitled to vote on such action (other than those required to abstain pursuant
to the terms of the Sprint PCS Partnership Agreement). As a result, subject to
certain exceptions and based on TCI Telephony's 30% voting Percentage Interest
at this time, no action may be taken by the Sprint PCS Partnership Board without
the consent of TCI Telephony's Representative (other than any action with
respect to which such Representative is required to abstain).
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Liquidating Events. Sprint PCS will be dissolved upon the earliest to occur
of (i) the sale of all or substantially all of the property of Sprint PCS, (ii)
a unanimous vote of the Sprint PCS Partnership Board to dissolve, wind up, and
liquidate Sprint PCS in accordance with the terms of the Sprint PCS Partnership
Agreement, (iii) the failure of the general partners to resolve a Deadlock Event
and (iv) the withdrawal of a general partner, the assignment by a general
partner of its entire interest or any other event that causes a general partner
to cease to be a general partner under Delaware limited partnership law;
provided, that upon the occurrence of the events set forth in clause (iv) above,
Sprint PCS will not be dissolved or required to be wound up if (x) at the time
of such event there is at least one remaining general partner, or (y) if there
is not at least one remaining general partner, within 90 days after such event
all remaining Sprint PCS Partners agree in writing to continue the business of
Sprint PCS and to the appointment, effective as of the date of such event, of
one or more additional general partners. A "Deadlock Event" is deemed to occur
(i) if the Sprint PCS Partnership Board fails to approve a proposed annual
budget or business plan for two consecutive fiscal years or (ii) if the position
of chief executive officer remains vacant for 60 days after a candidate has been
proposed by at least two Sprint PCS Partners having an aggregate of at least 33%
of the voting percentage interests.
Upon the occurrence of the events described in clauses (ii), (iii) and (iv)
above, and subject to the satisfaction of certain conditions, the Sprint PCS
Partnership Agreement provides for buy/sell arrangements pursuant to which a
multiple round auction will be conducted whereby the general partner or group of
general partners that submits the highest bid (on a per 1% Percentage Interest
basis) will purchase for cash all of the partnership interests of the other
Sprint PCS Partners. In the event such procedures fail to cause the sale of such
partnership interests in accordance with the buy/sell provisions (including in
the event that no general partner or group of general partners submits a bid
equal to or greater than the aggregate adjusted net equity of the other Sprint
PCS Partners' partnership interests (on a per 1% Percentage Interest basis)),
the Sprint PCS Partnership Board shall be responsible for overseeing the
dissolution and winding up of Sprint PCS, shall cause Sprint PCS's property to
be liquidated and shall apply and distribute the proceeds therefrom in
accordance with the terms of the Sprint PCS Partnership Agreement.
Restrictions on Transfer of Interests. The Sprint PCS Partnership Agreement
generally restricts any transfer or other disposition of an interest in Sprint
PCS, whether directly or indirectly (including in a transaction as a result of
which a Sprint PCS Partner ceases to be a subsidiary of its Sprint PCS Parent),
except as otherwise permitted by the Sprint PCS Partnership Agreement. Subject
to certain restrictions, a Sprint PCS Partner may at any time transfer all or a
portion of its interest (i) to any controlled affiliate of such Sprint PCS
Partner, (ii) in connection with a Permitted Transaction involving such Sprint
PCS Partner, (iii) to the administrator or trustee of such Sprint PCS Partner to
whom such interest is transferred in an involuntary bankruptcy, (iv) pursuant to
and in compliance with certain provisions of the Sprint PCS Partnership
Agreement, including right of first refusal provisions, right of first offer and
registration rights provisions, certain buy-sell arrangements, and "tag-along"
rights in certain circumstances and (v) with the prior written consent of the
other Sprint PCS Partners.
"Permitted Transaction" with respect to a Sprint PCS Partner means a
transaction or series of related transactions in which (i) such Sprint PCS
Partner ceases to be a subsidiary of its Sprint PCS Parent or such Sprint PCS
Partner transfers its partnership interest to a person that is not a controlled
affiliate of such Sprint PCS Partner and (ii) the new corporate parent of such
Sprint PCS Partner or the corporate parent of the transferee of such Sprint PCS
Partner's partnership interest after giving effect to such transaction, or the
last transaction in a series of related transactions, owns, directly and
indirectly through its controlled affiliates, all or a Substantial Portion of
the cable television system assets (in the case of Cox, Comcast or TCI) or long
distance telecommunications business assets (in the case of Sprint) owned by the
Sprint PCS Parent of such Sprint PCS Partner, directly and indirectly through
its controlled affiliates, immediately prior to the commencement of such
transaction or series of transactions. A "Substantial Portion" means (x) in the
case of a Cox, Comcast or TCI, cable television systems serving 75% or more of
the aggregate number of basic subscribers served by cable television systems in
the United States of America (including its territories and possessions other
than Puerto Rico) owned by such Sprint PCS Parent, directly and indirectly
through its controlled affiliates, and (y) in the case of Sprint, long distance
telecommunications business assets serving 75% or more of the aggregate number
of customers served by the long distance telecommunications business
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in the U.S. (including its territories and possessions other than Puerto Rico)
owned by Sprint, directly and indirectly through its controlled affiliates.
After March 1, 2000, a Sprint PCS Partner may transfer all or any portion
of its partnership interest to a person that is not a controlled affiliate of
such Sprint PCS Partner (a "Purchaser"), provided, that such Sprint PCS Partner
first offers to sell such partnership interest or portion thereof to the other
Sprint PCS Partners. If such Purchaser, together with its controlled affiliates,
after any such transfer (including an indirect transfer resulting in a Sprint
PCS Partner becoming a controlled affiliate of such Purchaser) would own more
than 55% of the Percentage Interests, then the transfer will not be permitted
unless such Purchaser offers to purchase the entire interest of any other Sprint
PCS Partner wishing to sell its interest at a price equal (on a per 1%
Percentage Interest basis) to the price paid by such Purchaser to such Sprint
PCS Partner in such transfer (or the adjusted net equity of such other Sprint
PCS Partner(s) in the case of an indirect transfer).
Competitive Activities. Subject to certain exceptions, the Sprint PCS
Partnership Agreement restricts any Sprint PCS Partner and its controlled
affiliates from bidding on, acquiring or, directly or indirectly, owning,
managing, operating, joining, controlling or financing, or participating in the
management, operation, control or financing of, or being connected as a
principal, agent, representative, consultant, beneficial owner of an interest in
any person or entity, or otherwise with, or using or permitting its name to be
used in connection with, any business or enterprise that engages in any Wireless
Business or in the bidding for or acquisition of any Wireless Business license
or that provides, offers, promotes or brands wireless communications services
that use radio spectrum for cellular, PCS, paging or other voice or data
wireless services. A "Wireless Business" includes, subject to certain
exceptions, all wireless communications services conducted in the U.S. that use
radio spectrum for cellular, PCS, ESMR, paging, mobile telecommunications and
any other voice or data wireless services, whether fixed or mobile. In addition,
pursuant to an agreement with Sprint, the ability of TCI and its controlled
affiliates (including the TCI Ventures Group) to offer or promote, act as a
sales agent for, or package certain of its cable television services with,
certain local or long distance telephony services offered under the brand of
certain incumbent local exchange carriers ("ILECs") and interexchange carriers
("IXCs") (such as AT&T Corporation and MCI Communications Corporation) other
than Sprint is restricted. Such agreement also limits the ability of TCI and its
controlled affiliates to make its cable plant available to such ILECs and IXCs
for the provision of local telephony services on an exclusive basis without
making such facilities similarly available to Sprint on comparable terms. Such
agreement has a five-year term that commenced January 31, 1996; however, under
certain circumstances such agreement may terminate on January 31, 1999.
Additional Information. Sprint Spectrum, a subsidiary of Sprint PCS through
which Sprint PCS conducts substantially all of its operations other than the
ownership of its 49% partnership interest in APC and its 49% partnership
interest in Cox PCS, filed with the SEC a registration statement pursuant to
which it completed an underwritten public offering of the Sprint Spectrum Notes
in August 1996 (the "Sprint Spectrum Registration Statement"). Since such
offering Sprint Spectrum has been subject to the information requirements of
Section 15(d) of the Exchange Act, pursuant to which it files reports and other
information with the SEC (under SEC file number 333-06609-01). The Sprint
Spectrum Registration Statement and such reports are available from the SEC in
the manner described above under "Available Information." Information contained
herein regarding Sprint PCS is based upon, and is qualified in its entirety by
reference to, information contained in such filings and other publicly available
information. Although believed by the Company to be reliable, there can be no
assurance as to the accuracy of such information.
TELEPORT AND OTHER WIRELINE INVESTMENTS
General. Teleport, the largest CLEC (or competitive local exchange carrier)
in the United States as measured by route miles, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. Teleport
competes with ILECs as "The Other Local Phone Company"(R) (a registered service
mark of Teleport) by providing high quality, integrated local telecommunications
services, primarily over fiber optic digital networks, to meet the voice, data,
and video transmission needs of its customers. TCG's customers are principally
telecommunications-intensive businesses, hospitals and educational institutions,
governmental agencies, long distance carriers and resellers, Internet service
providers, disaster recovery service providers and wireless communications
companies. While Teleport's carrier business has continued to grow, in
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1996 all other customers (including resellers) accounted for approximately 62%
of Teleport's pro forma revenue (after giving effect to the restructuring of
Teleport's operations in connection with its initial public offering in June
1996 (the "TCG Reorganization") as if such restructuring had occurred at the
beginning of 1996).
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. As of March 31, 1997, Teleport operated
high-capacity state-of-the-art digital networks in 53 metropolitan markets,
including 18 of the 20 largest metropolitan areas. Such markets include
metropolitan New York City/New Jersey, Los Angeles, Chicago, San Francisco,
Boston, Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft.
Lauderdale, Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver,
Milwaukee, Indianapolis, Hartford, Omaha, Providence, Cleveland, Portland
(Oregon), Salt Lake City, Philadelphia and Wilmington (Delaware). As of such
date, Teleport was also developing networks in Atlanta, Birmingham, Charlotte,
Chattanooga, Cincinnati, Columbus (Ohio), Knoxville, Minneapolis/St. Paul,
Nashville, Orlando, Sacramento and Tampa. As of December 31, 1996, Teleport's
networks spanned over 6,700 route miles, contained over 345,000 fiber miles and
served approximately 7,765 buildings.
In addition, in February 1996 Teleport acquired a minority interest in
BizTel Communications, Inc. ("BizTel"), which, as of March 31, 1997, held FCC
licenses to provide telecommunications services utilizing 38 GHz digital
milliwave transmission in 160 geographic areas in the United States with a
population of approximately 184 million people, including more than 90 of the
100 largest metropolitan areas and all of the markets where TCG currently
operates. As of March 31, 1997, BizTel also had applications for 44 additional
licenses pending FCC approval in geographic areas which have a population of an
additional 31 million people. The 38 GHz milliwave facilities can be used by TCG
to economically connect customers to its networks, to provide network
redundancy, diverse routing or quick temporary installations and to provide
stand-alone facilities where Teleport does not have networks. TCG holds an
option, effective July 15, 1997, to acquire the remaining equity interest in
BizTel in exchange for approximately 1.7 million shares of Class A Common Stock
of Teleport ("Teleport Class A Stock"). TCG granted the majority stockholders of
BizTel a reciprocal option to put such remaining equity interest in BizTel to
TCG in exchange for such shares. The closing of any such purchase would be
subject to regulatory approvals, including approval of the FCC.
In February 1997, TCG acquired CERFnet Services Inc. ("CERFnet"), a leading
regional provider of Internet-related services to businesses (including dial-up
and dedicated Internet access, Web hosting and co-location services, and
Internet training), in exchange for approximately 2.1 million shares of Teleport
Class A Stock. CERFnet operates an advanced nationwide backbone network,
maintains state-of-the-art Internet server facilities, has established and
maintains direct peering relationships with other Internet service providers,
and as of March 31, 1997 served over 6,000 customers located primarily in
California and Arizona. TCG has indicated that it expects to upgrade CERFnet's
backbone, to accelerate the expansion of CERFnet's services on a nationwide
basis and to achieve marketing synergies by packaging CERFnet's Internet
services with TCG's complementary telecommunications services.
In April 1997, TCG entered into a master communications services agreement
with @Home to provide targeted co-location facilities and local telephone
circuits for infrastructure and subscriber connectivity at promotional and
standard pricing over a five-year term. The agreement provides @Home with the
option to co-locate certain of its equipment in TCG premises in which event
@Home will incur certain obligations to use TCG's services. The Internet
services being or to be offered by @Home may compete with those being or to be
offered by TCG through CERFnet.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a pro
forma basis, after giving effect to the TCG Reorganization, Teleport's revenue
grew from approximately $184.9 million for 1995 to approximately $283.4 million
for 1996, substantially all of which were derived from the provision of local
telecommunications services.
TCG estimates that total revenue from the local telecommunications market
in the United States was approximately $100 billion in 1996, based on published
FCC data for 1995. In the past, competitive access providers, including
Teleport, were limited to serving only the dedicated services portion of this
market, which TCG estimates (based on such FCC data) was approximately $5.5
billion in 1996, whereas TCG estimates
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(on such basis) that the local switched services portion of this market for
business customers was approximately $60 billion. Teleport has expanded into the
switched services market in a number of states over the last five years by
constructing switched networks and obtaining the necessary regulatory
authorizations and interconnection arrangements. Teleport has stated its belief
that, with the passage of the Telecommunications Act of 1996 (the "1996 Act"),
it is well positioned to address a significantly larger portion of the local
telecommunications market and to improve its operating margins in the switched
and dedicated services markets by expanding its networks, installing additional
high capacity digital switches and offering new products and services.
Teleport provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, Internet services, dedicated services, high-speed
switched data services, disaster avoidance services and video channel
transmission services. Switched voice services offered by Teleport primarily use
high-capacity digital switches to route voice transmissions anywhere on the
public switched telephone network. Teleport's Internet services are primarily
provided through CERFnet described above. TCG's dedicated services, which
include private line and special access services, use high-capacity digital
circuits to carry voice, data and video transmissions from point-to-point in
multiple configurations. Teleport provides its media industry customers with
point-to-point, broadcast-quality video channels for video transmissions between
two or more locations, including video link services to all the major television
networks as well as to other programmers. Teleport also provides private network
management and systems integration services for businesses that require
combinations of various dedicated and switched telecommunications services.
Teleport believes that it uses the latest technologies and network
architectures to develop a highly reliable infrastructure for delivering
high-speed, quality digital transmission of voice, data and video
telecommunications. The basic transmission platform consists primarily of
optical fiber equipped with high-capacity synchronous optical network ("SONET")
equipment deployed in self-healing rings. These SONET rings give TCG the
capability of routing customer traffic simultaneously in both directions around
the ring thereby eliminating loss of service in the event of damage to the fiber
optic network. Teleport extends SONET rings or point-to-point links from rings
to each customer's premises over its own fiber optic cable, unbundled facilities
obtained from ILECs, microwave (including 38 GHz milliwave) transmission
facilities (primarily provided by BizTel) and other technologies. TCG also
installs diverse building entry points where a customer's network security needs
require such redundancy. TCG then places necessary customer-dedicated or shared
electronic equipment at a location near or in the customer's premises to
terminate the link.
Teleport has substantial business relationships with a few large customers,
including the major long distance carriers. During 1996, TCG's top 10 customers
accounted for approximately 52% of TCG's total revenue on a pro forma basis
after giving effect to the TCG Reorganization. Sprint accounted for more than
10% of such revenue; no customer accounted for 15% or more of such revenue. A
significant reduction in the level of services TCG performs for any of these
customers could have a material adverse effect on Teleport's results of
operations or financial condition. Most of Teleport's customer arrangements are
subject to termination on short notice and do not provide TCG with guaranties
that service quantities will be maintained at current levels, and there can be
no assurance that such arrangements will be continued at the same service
quantity levels. TCG believes that certain of the major long distance carriers
are pursuing alternatives to their current practices with regard to obtaining
local telecommunications services, including construction of their own
facilities and/or acquisitions of CLECs. This type of activity could accelerate
as a result of the 1996 Act, which limits the authority of states to impose
legal restrictions that have the effect of prohibiting a company, including an
IXC, from providing any telecommunications service.
As of March 31, 1997, TCI Telephony owned 48,779,388 shares of Teleport
Class B Stock, each of which is entitled to ten votes per share on each matter
to be voted on by the holders of the common stock of Teleport and each of which
is convertible into one share of Teleport Class A Stock. TCI Telephony also owns
an additional 1,011,528 shares of Teleport Class A Stock. At March 31, 1997,
such shares of Teleport Class B Stock and Teleport Class A Stock in the
aggregate represented approximately 30% of the outstanding common stock of
Teleport and approximately 37% of the aggregate voting power of such securities.
In addition, as of March 31, 1997, subsidiaries of Cox, Comcast and Media One,
Inc. ("Media One" (formerly
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Continental Cablevision, Inc.), or, together with TCI, Cox and Comcast, the
"Teleport Cable Stockholders") owned shares of Teleport Class B Stock and
Teleport Class A Stock representing approximately 24%, 17% and 8%, respectively,
of the outstanding common stock of Teleport (representing approximately 30%, 20%
and 11%, respectively, of the aggregate voting power of such securities).
Because certain provisions in the Sprint PCS Partnership Agreement restrict TCI
and its controlled affiliates from engaging in any Wireless Business, TCI may
determine not to acquire additional interests in Teleport that would result in
Teleport becoming a controlled affiliate of TCI to avoid a potential breach of
such agreement if Teleport determines to engage in a Wireless Business. However,
subject to certain exceptions, Teleport currently may not engage in the business
of providing certain wireless communications services without the affirmative
vote of holders of a majority of the Teleport Class B Stock until the earlier of
June 2001 and the date on which the Teleport Class B Stock ceases to represent
at least 50% of the voting power of the outstanding common stock of Teleport.
TCG has benefited substantially from its relationships with the Teleport
Cable Stockholders, which are among the largest cable television companies in
the United States. Through such relationships, Teleport has been able to utilize
rights-of-way, obtain fiber optic facilities and share the cost of building new
fiber optic networks, thereby allowing Teleport to achieve significant economies
of scale and scope through capital efficiencies in extending its networks in a
rapid, efficient and cost-effective manner. Teleport has the indefeasible right
to use certain fiber optic and cable transmission facilities of the Company for
compensation based on the cost of construction of such facilities. In general,
such arrangements were entered into with Teleport by the Company and other MSOs
that are stockholders of Teleport prior to Teleport's initial public offering in
June 1996.
Competition. Teleport faces substantial competition in each of the
metropolitan areas it serves or plans to serve from entities that offer services
similar to those offered by TCG, including ILECs such as Ameritech Corporation,
Bell Atlantic Corporation, BellSouth Corp., NYNEX Corporation, SBC
Communications Inc., US WEST and GTE Corporation. Teleport believes that ILECs
generally benefit from their long-standing relationships with customers,
substantial technical and financial resources, established ubiquitous networks
and federal and state regulations that are likely to provide them with increased
pricing flexibility as competition increases. In most of the metropolitan areas
in which Teleport currently operates, at least one, and sometimes several, other
CLECs also offer substantially similar services at substantially similar prices
to those of Teleport. In addition to CLECs and ILECs (including ILECs entering
new geographic markets), cable television companies, electric utilities, long
distance carriers, microwave carriers, wireless telephone system operators and
private networks built by large end users may offer services similar to those
offered by Teleport. The current trend of actual and proposed business
combinations, strategic investments and alliances in the telecommunications and
related industries, which include mergers between ILECs, between IXCs and
international carriers and between IXCs and CLECs, may create significant new
competitors or strengthen existing competitors to Teleport.
Teleport has stated that it believes that the 1996 Act will provide
increased business opportunities and potentially better margins by opening local
markets to competition and requiring ILECs to provide improved direct
interconnection between the facilities of CLECs and the public-switched
telephone network at lower cost. However, under the 1996 Act, the FCC and some
state regulatory authorities may provide ILECs with increased flexibility to
reprice their services as competition develops and as ILECs allow competitors to
interconnect to their networks. In addition, some new entrants in the local
market may price certain services to particular customers or for particular
routes below the prices charged by Teleport for services to those customers or
for those routes, just as Teleport may itself underprice those new entrants. If
the ILECs and other competitors lower their rates and can sustain significantly
lower prices over time, this may adversely affect revenue and operating results
of TCG. If regulatory decisions permit the ILECs to charge CLECs substantial
fees for interconnection to the ILECs' networks or afford ILECs other regulatory
relief, such decisions could also have a material adverse effect on Teleport.
However, Teleport has stated that it believes that the following factors may
offset the negative effects of the 1996 Act: (i) the increased revenue available
as a result of being able to address a significantly larger portion of the local
telecommunications market; (ii) mutual reciprocal compensation with the ILEC
that results in TCG terminating its local exchange traffic on the ILEC's network
at little or no net cost to TCG; (iii) obtaining access to off-network customers
through more reasonably priced expanded interconnection with ILEC networks; and
(iv) a shift by IXCs to purchase
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access services from CLECs instead of ILECs. There can be no assurance, however,
that these anticipated results will offset completely the effects of increased
competition as a result of the 1996 Act.
Management. The Teleport Cable Stockholders and Teleport are parties to a
stockholders agreement ("Teleport Stockholders Agreement") which provides for,
among other things, the corporate governance of Teleport, certain registration
rights and certain transfer restrictions, rights of first refusal and rights of
first offer relating to sales and conversions of shares of Teleport Class B
Stock. Under the Teleport Stockholders Agreement, (i) ten of the thirteen
members of the Teleport board of directors are designated by the holders of the
Teleport Class B Stock and (ii) a holder of Teleport Class B Stock generally is
entitled to designate one director nominee for each 9% of the outstanding shares
of Teleport Class B Stock held by it and its affiliates. As a result of its
merger with US WEST, Media One currently does not have the right to designate
any of such directors under the terms of the Teleport Stockholders Agreement. At
March 31, 1997, TCI Telephony, Cox, Comcast and Media One owned 38%, 31%, 20%
and 11%, respectively, of the outstanding Teleport Class B Stock. As a result,
TCI is currently entitled to designate four directors for election to the board
of directors of Teleport. In addition, the Teleport Stockholders Agreement
provides that the chief executive officer and two independent directors will
continue to be designated for election to Teleport's board of directors.
The Teleport Stockholders Agreement prohibits any transfer of Teleport
Class B Stock held by the parties thereto, unless expressly permitted under the
terms thereof. Parties to the Teleport Stockholders Agreement have certain
rights of first offer and rights of first refusal thereunder with respect to
proposed sales of the Teleport Class B Stock.
Each holder of Teleport Class B Stock has the right to sell all or a part
of its Teleport Class B Stock upon receiving a bona fide offer from an
unaffiliated third party, subject to giving notice to the other holders of
Teleport Class B Stock who have designated at least one director, which notice
shall contain an offer to sell such stock to such other holders of Teleport
Class B Stock on the terms and conditions set forth in the offer from the third
party. Subject to certain limitations, the non-selling holders of Teleport Class
B Stock have the right to purchase pro rata all, but not less than all, of the
Teleport Class B Stock offered. If the non-selling holders of Teleport Class B
Stock do not purchase all of the Teleport Class B Stock offered, the offering
holders of Teleport Class B Stock may sell the Teleport Class B Stock to the
third party on the terms contained in the offer made to the other holders of
Teleport Class B Stock. However, unless the amount of Teleport Class B Stock
being transferred is sufficient to entitle the transferee to designate a nominee
for director under the Teleport Stockholders Agreement (i.e., the total
percentage of Teleport Class B Stock that would be held by the transferee and
certain of its affiliates is at least 9%) and the transferee agrees to become a
party to the Teleport Stockholders Agreement, any Teleport Class B Stock
included in the stock being sold must be converted to Teleport Class A Stock
prior to such transfer.
If any party desires to convert Teleport Class B Stock to Teleport Class A
Stock, it must first offer that stock to the other holders of Teleport Class B
Stock who have designated at least one director. If such other holders do not
elect to buy such stock, then such stock can be converted to Teleport Class A
Stock and sold by the selling stockholder free of restrictions under the
Teleport Stockholders Agreement.
The Teleport Stockholders Agreement will terminate when the aggregate
voting power of the Teleport Class B Stock represents less than 30% of the
aggregate voting power of all outstanding common stock of Teleport.
Additional Information. Teleport is subject to the information requirements
of the Exchange Act and, in accordance therewith, files reports, proxy and
information statements and other information with the SEC (under SEC file number
0-20913), all of which are available from the SEC in the manner described above
under "Available Information." In addition, the Teleport Class A Stock is quoted
on the National Market tier of The Nasdaq Stock Market under the symbol "TCGI."
Information contained herein regarding Teleport is based upon, and is qualified
in its entirety by reference to, information contained in such filings and other
publicly available information. Although believed by the Company to be reliable,
there can be no assurance as to the accuracy of such information.
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Other Investments. In addition to its interest in Teleport, the TCI
Ventures Group's wireline telephony investments also include a 50% partnership
interest in Kansas City Fiber Network, L.P., 40% partnership interest in NHT
Partnership, an approximately 79% interest in New Jersey Fiber Technologies,
L.P., and a 43% interest in Louisville Lightwave, which are CAPs serving the
metropolitan areas of Kansas City, Buffalo, Morristown and New Brunswick, New
Jersey, and Louisville and Lexington, Kentucky, respectively. The other 50%
interest in Kansas City Fiber Network is owned by Kansas City Cable Partners, a
partnership that owns and operates cable systems in the Kansas City area, in
which the TCI Group holds a 50% interest. TCI's indirect interest in Louisville
Lightwave will increase to 50% upon the closing of its acquisition of the
balance of the other partner's interest in TCI-TKR of Kentucky, Inc., which
owns, among other assets, the interest in Louisville Lightwave. TCI is
negotiating to sell its interests in all of these CAP partnerships for cash.
There can be no assurance that any such sale will occur on terms satisfactory to
TCI, or at all; however, if a sale is consummated, the proceeds will be
attributed to the TCI Ventures Group.
WTCI
General. WTCI is a regional carrier of long distance telephony services,
providing primarily high-speed point-to-point private line, frame relay
communications services on a wholesale basis capable of offering audio, video
and data transmission to customers in a 12 state area in the northwestern region
of the United States. WTCI has the capability to expand its service to include
two additional states with minimal capital expenditures should its customer base
dictate the need. WTCI's customers are principally long distance carriers and
other telecommunications companies for whom WTCI primarily supplies digital
point-to-point private line, frame relay and data transport services. WTCI's
customers also include over 56 cable companies (including TCI) for whom WTCI
provides primarily video analog transmission services. WTCI had aggregate
revenue of approximately $32 million in 1996. Of this amount, approximately 85%
came from WTCI's voice and data carrier customers; video transmission customers
accounted for approximately 8% of such revenue. The remaining revenue
principally came from video conferencing, data, and Internet services.
WTCI uses a diversified high-speed telecommunications network
infrastructure, consisting primarily of its 16,000 route mile owned and operated
digital microwave network, together with fiber transmission capacity leased by
WTCI from other carriers. WTCI's network enables WTCI to provide its customers
with a wide array of telecommunications services, including carrier services,
enhanced switched services, data services, video channel transmission services
(including video conferencing) and Internet services.
Carrier Services. WTCI provides broadband radio frequency channels for the
use of its customers, primarily for transmission of long distance telephone
service ("Carrier Services"). WTCI's Carrier Services provide the majority of
its revenue.
WTCI has master service contracts with approximately 80 customers to
provide Carrier Services. These agreements provide for transmission services,
including varying levels of digital service, pursuant to individual service
orders. The initial terms of service orders generally range from 1 to 3 years.
After an initial term, service orders generally continue on a month to month
basis and may be canceled by the customer upon 30 days prior written notice. As
a general rule, the master service contracts expire when the last service order
in effect thereunder has terminated. WTCI's six largest customers' master
service contracts all contain many service orders (in some cases, in excess of
100 service orders) with remaining terms varying from 1 month to approximately
15 months.
In particular, WTCI's largest carrier customer has the right to terminate
its contract for use of the entire capacity of a core backbone of WTCI's network
between the Seattle and Denver areas in October 1997, subject to certain
conditions. Although this area has been overbuilt with fiber, management of WTCI
does not believe such termination would have a material adverse effect on WTCI
because it believes that it is likely that it would be able to re-lease all of
such capacity based on current demand in the area for Carrier Services.
WTCI's customers historically have been primarily IXCs, as well as ILECs
and other telecommunications companies. For the year ended December 31, 1996,
WTCI's six largest customers were all Carrier Services customers, accounting in
the aggregate for approximately 70% of consolidated gross revenue. A significant
reduction in the level of services WTCI provides for any of these customers
could have a material
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adverse effect on WTCI's results of operations or financial condition, unless
WTCI located replacement customers willing to lease the vacated channels on
similar terms.
Video Services. WTCI's services to cable television system operators
consist of transmitting broadcast television signals to the cable operator
headends for further distribution to their subscribers ("Video Services"). At
December 31, 1996, WTCI provided Video Services to 56 cable television systems
which, based on information available to WTCI from standard industry sources,
had approximately 432,252 subscribers. Forty-seven of these systems, having
approximately 285,203 subscribers, are owned or operated by TCI and its
affiliates. Video Services rendered to TCI and its affiliates accounted for
approximately 5% of WTCI's revenue in 1996. Video Services rendered to cable
television systems have declined as system operators have increasingly relied on
satellite systems, rather than terrestrial microwave systems, for the delivery
of broadcast signals from independent network television stations. This trend is
expected to continue.
The vast majority of WTCI's Video Services, including the services provided
to the TCI Group, are rendered in accordance with tariffs filed with the FCC.
Under WTCI's tariffs, Video Services generally are provided for initial terms of
five years, and thereafter may be terminated by the customer upon 90 days
notice. Approximately 10% of WTCI's Video Services contracts can currently be
terminated on 90 days notice.
Other Services. WTCI's wholly owned subsidiary, Western
Tele-Communications/Retail Sales Group, is a start-up business, developing and
offering "one-stop shopping," state-of-the-art broadband telecommunications
services, including switched services, to retail customers in the previously
underserved, more remote, second and third tier communities in its service
region. Its suite of services includes video conferencing, server-based
information depositories, data networking, and on-line broadband facilities and
services for internal communications requirements as well as long distance
traffic to its customers, including state governments and educational
institutions.
Competition. WTCI faces growing competition from long distance carriers
using fiber optic cable. Traditionally, the area served by WTCI was remote and
sparsely populated and consequently fiber optic cables have only recently been
laid in the region. However, during the last few years, the network has been
largely overbuilt with fiber by MCI Communications Corporation. A second
overbuild by various IXCs is currently underway. According to current plans,
such second overbuild of the network will likely be completed by the end of the
second quarter of 1998. Such fiber optic networks are expected to compete
directly with WTCI's network for many of the same customers along a significant
portion of the same routes. The recurring operating costs associated with
maintaining WTCI's microwave network facilities are greater than those
associated with a fiber optic network. In response to the competitive pressures
from long distance carriers using fiber optic networks to transmit their
customers' services, WTCI has begun developing (i) more cost effective methods
of conducting its business, (ii) new uses for its microwave facilities and (iii)
lines of business outside of its traditional base long distance operations such
as those described above under "-- Other Services." Additionally, WTCI's
microwave facilities can be redeployed into even more remote, sparsely populated
communities, either ahead or in lieu of the expanding fiber networks. However,
there can be no assurance that these efforts will be successful or that the
increased competition from other long distance carriers overbuilding the region
with fiber will not have a material adverse effect on the business, financial
condition, results of operations and prospects of WTCI.
GOVERNMENT REGULATION
Regulation of PCS and Other Wireless Activities. PCS licensees are subject
to regulation at the federal and, in certain respects, at the state and local
level. The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States under the Communications Act of 1934, as amended (including 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) establish access and universal funding
provisions, (vi) impose fines and forfeitures for violations of any of the FCC's
rules and (vii) regulate the technical standards of PCS networks.
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The FCC has established service areas for PCS throughout the United States
and its possessions and territories based upon the Rand McNally market
definition of 51 MTAs and 493 smaller BTAs. At least two BTAs are contained
within each MTA. The FCC has allocated 120 MHz of radio spectrum in the 1850 to
1990 MHz band, divided into six separate spectrum blocks, for licensed broadband
PCS services. The A and B Blocks are 30 MHz each and are allocated to the 51
MTAs. The FCC sponsored auctions for the A and B Blocks that ended in March
1995, and the FCC granted the A and B Block licenses in June 1995. The remaining
blocks, C (30 MHz), D (10 MHz), E (10 MHz), and F (10 MHz), are allocated to the
493 BTAs. The C Block auctions ended on May 6, 1996. The D, E, and F Block
auctions concluded on January 14, 1997. Sprint PCS did not participate in the C
Block or F Block auctions, as these licenses were available only to small
businesses and other designated entities.
On April 25, 1997, the FCC completed the auction of licenses in the 2 GHz
band for a new wireless communication service ("WCS"). While WCS licensees will
determine for themselves which services they will offer, the FCC has stated that
it believes that wide area, full mobility systems and services of the sort
provided by cellular and PCS licensees likely will be infeasible for the
foreseeable future, due to technological limitations adopted by the FCC to
protect other FCC licensees from harmful interference.
The FCC currently has two ongoing rulemaking proceedings addressing issues
relating to the allocation and use of spectrum in the 38 GHz band which is
utilized by BizTel, in which Teleport holds a minority interest. The first
involves the establishment of licensing and technical rules for spectrum in the
37.0 - 40.0 GHz band allocated to fixed, terrestrial wireless services. While
the rules to be adopted in this proceeding primarily address the assignment and
use of currently unassigned frequencies, certain proposals advanced by the FCC
and commenting parties could affect the operations of existing 38 GHz licensees,
including BizTel. The second proceeding involves the allocation of spectrum
between terrestrial wireless and satellite services. In its Notice of Proposed
Rulemaking, the FCC has proposed deletion of satellite allocations in the 38 GHz
band. However, the FCC's proposal has been contested by several parties, some of
whom seek to eliminate the terrestrial wireless allocation in the 39.5 - 40.0
GHz band. Action taken by the FCC in this proceeding could have an impact on the
availability of spectrum for use by BizTel, which could affect its provision of
facilities and services to TCG and other customers.
The Communications Act restricts foreign investment in and ownership of
certain FCC radio licensees, including PCS licensees. Non-United States citizens
or their representatives, foreign governments or their representatives, or
corporations organized under the laws of a foreign country may not own more than
20% of a common carrier PCS licensee directly or more than 25% of the parent of
a common carrier PCS licensee. If it would serve the public interest, the FCC
has the authority to permit the parent of a licensee to exceed the 25% limit.
However, the FCC lacks the authority to permit a licensee itself to exceed the
20% limit on direct foreign ownership. If an entity fails to comply with the
foreign ownership requirements, the FCC may order the entity to divest alien
ownership to bring the entity into compliance with the Communications Act. Other
potential sanctions include fines, a denial of renewal, or revocation of the
license. Pursuant to a multi-lateral agreement negotiated under the auspices of
the World Trade Organization ("WTO"), the United States government has agreed
that it will allow up to 100% indirect foreign ownership of common carrier radio
licenses. The WTO agreement takes effect on January 1, 1998. In making
determinations as to whether to permit additional indirect foreign ownership of
PCS and other commercial mobile radio service ("CMRS") licensees in excess of
the 25% statutory benchmark, the FCC currently undertakes as part of its public
interest determination an evaluation of the extent to which the home countries
of the foreign investors extend reciprocal treatment, i.e., "equivalent
competitive opportunities" ("ECO"), to U.S. entities. In a recent Notice of
Proposed Rulemaking, the FCC has proposed to discontinue application of the ECO
requirement in determining whether to allow additional foreign investment by
common carrier licensees or applicants with foreign investment from WTO member
countries. On March 13, 1997, the Sprint PCS Partners filed a petition with the
FCC seeking clarification regarding the application of the foreign ownership
restrictions to Sprint PCS and PhillieCo.
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's buildout requirements. Pursuant to the FCC's buildout
requirements, all 30 MHz broadband PCS licensees must construct facilities that
offer coverage to one-third of the population of their service area(s) within
five
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years of their initial license grant(s) and to two-thirds of the population
within 10 years. Holders of 10 MHz PCS licenses in the D, E, and F Blocks must
provide coverage to one-quarter of the population in their licensed area (or
make a showing of "substantial service" in their licensed area) within five
years of their initial license grant. Licensees that fail to meet the buildout
requirements may be subject to license forfeiture. Rule violations could result
in license revocations, forfeitures or fines.
PCS systems must comply with FCC regulations, including, among others,
regulations with respect to PCS license renewal, relocation of incumbent
microwave facilities operating at the same frequency as the PCS, and
interconnection with local exchange carriers' networks. Under the 1996 Act, both
the FCC and state Public Utility Commissions ("PUCs") regulate the terms of
interconnection between broadband PCS networks and the networks of local
exchange carriers. PCS systems also must comply with certain FCC and 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.
In May 1997, the FCC released an order establishing a significantly
expanded federal telecommunications subsidy regime. For example, the FCC
established new subsidies for services provided to qualifying schools and
libraries with an annual cap of $2.25 billion and for services provided to rural
health care providers with an annual cap of $400 million. Pursuant to the 1996
Act and the FCC's implementing regulations, all telecommunications carriers that
provide interstate telecommunications services, including PCS, as well as
certain other entities, are required to make an "equitable and
non-discriminatory contribution" to the support of federal universal service
programs. Contributions will be calculated on the basis of each carrier's
interstate and, for certain programs, intrastate end-user telecommunications
revenue. In addition, any telecommunications carrier, including a cellular or
PCS provider, that meets the criteria for eligibility established in the 1996
Act, is eligible to receive universal service support. Several parties have
appealed the FCC's May 1997 order. These appeals have been consolidated and
transferred to the United States Court of Appeals for the Fifth Circuit where
they are currently pending. In addition, on July 3, 1997, several ILECs filed a
petition for stay of the order with the FCC. That petition is also pending. The
1996 Act also requires all telecommunications carriers, including PCS licensees,
to ensure that their services are accessible to and useable by persons with
disabilities, if readily achievable. These regulations are also applicable to
Teleport and TCI's other wireline telephony activities.
The FCC has adopted rules prohibiting broadband PCS licensees and other
CMRS providers from unreasonably restricting or disallowing resale of their
services or unreasonably discriminating against resellers, and currently is
considering whether wireless providers should be required to offer unbundled
communications capacity to resellers who intend to operate their own switching
facilities. The FCC's resale requirements currently are scheduled to expire five
years after the last group of initial licenses for broadband PCS has been
awarded. The FCC also requires broadband PCS and other CMRS providers to provide
"manual" roaming service that allows customers of one wireless provider to
obtain service while roaming in another wireless provider's service area, and is
considering whether broadband PCS and other CMRS providers should be required to
offer "automatic" roaming agreements on a non-discriminatory basis that would
allow customers to roam by simply turning on their handsets in a host market.
Other FCC rules require all broadband PCS and other CMRS providers to implement
enhanced emergency 911 capabilities on a phased basis over a five-year period
beginning October 1996 and to implement certain number portability requirements
by June 30, 1999.
On May 22, 1997, the Personal Communications Industry Association ("PCIA")
filed a petition requesting that the FCC exercise authority granted under the
1996 Act and forbear from imposing non-discrimination requirements, mandatory
resale obligations, and certain other regulatory requirements on broadband PCS
licensees. PCIA's petition is currently awaiting action by the FCC.
In addition, the Communications Assistance for Law Enforcement Act of 1994
("CALEA") requires all telecommunications carriers, including wireless carriers,
as of October 1998, to ensure that their equipment is capable of permitting the
government, pursuant to a court order or other lawful authorization, to
intercept any wire and electronic communications carried by the carrier to or
from its subscribers and to access certain call-identifying information that is
reasonably available to the carriers. These regulations are also applicable to
Teleport and TCI's other wireline telephony activities.
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Media reports have suggested that certain radio frequency ("RF") emissions
from wireless telephones or facilities might be linked to certain forms of
cancer or other health problems. Concerns over the potential health effects of
RF emissions may have the effect of discouraging the use of wireless telephones
and other wireless communications services, including PCS. In August 1996, the
FCC adopted revised guidelines and methods for evaluating the environmental
effects of RF transmitters, including cellular and PCS antennas and telephones,
based on recommendations by several federal agencies, including the
Environmental Protection Agency and the Food and Drug Administration. The new
rules generally are more stringent than the requirements in effect prior to the
FCC's action for cellular operations (previously exempt from some environmental
evaluation obligations now applicable) and for PCS (the requirements for which
previously in effect permitted fractionally higher levels of exposure). The
owners of facilities and manufacturers of telephones are responsible for
compliance with the regulatory requirements. In response to requests by the PCIA
and other affected industry groups, the FCC in December 1996 issued an order
extending the transition period for applicants and station licensees to conform
with the FCC's new requirements. For most radio services, including CMRS, the
old requirements will apply to station applications filed prior to September 1,
1997; the new guidelines and methods will apply to applications filed
thereafter. The new guidelines and requirements for evaluation of hand-held
devices are already in effect. The FCC has issued a draft revision of its OET
Bulletin No. 65 describing in greater detail the procedures to be used in
determining compliance with the new requirements. The FCC is currently
considering petitions for reconsideration seeking further clarification of the
compliance obligations of wireless carriers, and requesting that the deadline
for compliance with the new guidelines be extended until one year after the
final version of the FCC's revised OET Bulletin No. 65 is released.
Certain interest groups have requested that the FCC investigate claims that
wireless communications technology poses health concerns and causes interference
with hearing aids and other medical devices. One group studying the matter,
which group was founded with funds from the wireless industry, has released
results from the first phase of its study (which focused on worst case
(operation at full-power) interaction) that indicate that the three wireless
technologies tested, including CDMA, caused interference in some instances, but
not all, with hearing aids. Phase II of this research study is expected to be
completed by January 1998. In addition, the PCIA has been undertaking an
industrywide study to gather information on possible PCS interference with
medical devices for all PCS protocols, and results from researchers working
under the guidance of the Wireless Technology Research LLC indicate that
wireless telephones cause interference to some users of cardiac pacemakers and
that the risk of clinically significant interference is greater for
pacemaker-dependent patients who use digital (as opposed to analog) telephones.
There can be no assurance that the findings of any of the foregoing studies will
not lead to additional governmental regulations that will have an adverse effect
on Sprint PCS.
PCS licensees may use common carrier point-to-point microwave and
traditional landline facilities to connect cell sites and to link them to their
respective main switching offices. The FCC separately licenses these microwave
facilities, as well as the microwave transmission facilities of WTCI, and
regulates the technical parameters and service requirements of these facilities.
In providing interstate transmission services to its non-carrier customers, WTCI
also is subject to the streamlined tariffing and other requirements applicable
to "nondominant carriers" under the current federal regulatory regime, as
described below. See "-- Regulation of Wireline Telephony Activities." WTCI's
provision of intrastate transmission services may also be subject to regulatory
requirements at the state level, similar to those described in the discussion of
"-- Regulation of Wireline Telephony Activities" below. In addition, WTCI's
placement of facilities is subject to applicable state and local laws and
regulations.
Pursuant to Section 332(c)(3) of the 1996 Act, state and local governments
generally are not permitted to regulate the entry of or rates charged by any
commercial mobile service, including PCS. States may petition the FCC for
authority to regulate commercial mobile service rates, which authority is to be
granted only in circumstances where the state demonstrates that market
conditions fail to protect subscribers adequately from unjust and unreasonable
rates or rates that are unjustly or unreasonably discriminatory. States are not
prohibited from regulating other terms and conditions for PCS and other
commercial mobile services, so long as such regulations are consistent with the
provisions of the Communications Act. In particular, state and local governments
can manage public rights of way and require compensation for the use of such
rights of way by
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telecommunications carriers, including PCS providers, so long as the
compensation is fair and reasonable, imposed on a competitively neutral and
non-discriminatory basis, and publicly disclosed by the governmental entity. The
FCC currently is considering a number of requests for federal preemption of
various state and local requirements which allegedly constitute unlawful
barriers to entry, discrimination, or other violations of the Communications
Act.
Under the 1996 Act, states and localities cannot regulate the placement of
certain types of wireless facilities, including facilities used to provide PCS,
cellular, and common carrier wireless exchange access services, so as to
prohibit the provision of such services or to discriminate among providers of
such services. In addition, so long as such a wireless system complies with the
FCC's rules, the 1996 Act prohibits states and localities from using
environmental effects as a basis to regulate the placement, construction or
operation of wireless facilities. Since the enactment of the 1996 Act, Sprint
PCS has been involved in a number of legal proceedings concerning tower sites,
including various disputes concerning the imposition of moratoria on the
processing or approval of permits for wireless telecommunications towers or
denial of applications for permits. There can be no assurance that such
litigation will not, in the aggregate, have a material adverse effect on Sprint
PCS and the TCI Ventures Group's interest therein. The FCC is currently
considering a Petition for Declaratory Ruling filed by the Cellular
Telecommunications Industry Association seeking federal preemption of moratoria
regulation imposed by state and local governments with regard to the siting of
telecommunications facilities.
Regulation of Wireline Telephony Activities. The wireline telephony
activities of Teleport and the CAPs in which TCI has an interest are subject to
regulation at the federal, state, and local level. Nationally, the recent trend
has been for federal and state legislators and regulators to permit and promote
additional competition in the local telecommunications industry. However,
because these developments require numerous implementation actions by the FCC,
individual state regulatory commissions, and federal and state courts, and are
subject to particular legal, political and economic conditions, it is not
possible to predict the extent to which or the pace at which such liberalization
will occur.
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
However, states retain jurisdiction under the 1996 Act to adopt regulations
necessary to preserve universal service, protect public safety and welfare,
ensure the continued quality of telecommunications services, and safeguard the
rights of consumers. States also are responsible for mediating and arbitrating
interconnection arrangements between new entrants (CLECs) and established
telephone companies (ILECs) if voluntary arrangements are not reached. The
precise jurisdictional responsibilities of the FCC and the states under the
Communications Act are currently being litigated.
At the federal level, the FCC has established different levels of
regulation for "dominant carriers" and "nondominant carriers." For domestic
interstate telecommunications purposes, only the ILECs are classified as
dominant carriers, and all other carriers are classified as nondominant
carriers. On April 18, 1997, the FCC released an order which provides that ILEC
long distance affiliates will be regulated as nondominant carriers in the
provision of interstate, domestic, long distance services. The FCC's order does
not alter the FCC's classification of ILECs as dominant carriers in the
provision of interstate access services. Pursuant to a June 1997 FCC order,
nondominant carriers, such as TCG, are permitted, but not required, to file
tariffs for interstate access services with the FCC. The rules applicable to
such tariffs are generally less restrictive than those imposed on ILECs which
offer similar services. Tariffs filed with the FCC must contain the rates, terms
and conditions under which service is generally available from Teleport. An
October 1996 FCC ruling required federal tariffs for domestic interstate,
interexchange services to be canceled by September 22, 1997. The FCC's order has
been temporarily stayed pending judicial review and a number of parties have
filed petitions with the FCC seeking reconsideration of the FCC's decision. As a
result, the tariff obligation remains applicable to any TCG interstate long
distance services. TCG must offer its interstate services on a nondiscriminatory
basis, at just and reasonable rates and subject to the complaint provisions of
the Communications Act. TCG is not subject to rate of return or price cap
regulation by the FCC and may install and operate digital facilities for the
transmission of interstate communications without prior FCC authorization.
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The 1996 Act imposes a number of access and interconnection requirements on
all local exchange carriers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act requires CLECs and ILECs to first attempt to
resolve interconnection issues through negotiation for at least 135 days. During
these negotiations, the parties may submit disputes to state regulators for
mediation and, after the negotiation period has expired, the parties may submit
outstanding disputes to state regulators for arbitration.
Under the 1996 Act, all local exchange carriers (including TCG), must
interconnect with other carriers, make their services available for resale by
other carriers, provide non-discriminatory access to rights of way, offer
reciprocal compensation for termination of traffic, and provide dialing parity
and telephone number portability. ILECs have certain additional duties,
including the duty to (i) interconnect at any technically feasible point and
provide service equal in quality to that provided to their customers or the ILEC
itself, (ii) provide unbundled access to network elements at any technically
feasible point, and (iii) offer retail services at wholesale prices for the use
of competitors. The 1996 Act includes various provisions addressing the pricing
of certain of these services.
On August 8, 1996, the FCC released several orders (collectively the
"Interconnection Orders") establishing new policies and rules implementing the
local interconnection and access provisions of the 1996 Act. However, on July
18, 1997, the U.S. Court of Appeals for the Eighth Circuit overturned a number
of the rules adopted by the FCC, including the pricing rules and "pick and
choose" rule established in one of the FCC's orders, which would have allowed
CLECs to receive the benefit of the most favorable provisions contained in an
ILEC's agreements with other carriers. While certain FCC rules applicable to
CMRS remain unaffected by the Court of Appeals' decision, the court's order
substantially limits the FCC's role in implementing and enforcing the
interconnection and access provisions of the 1996 Act with respect to wireline
carriers such as TCG. As a result of the Court of Appeals' ruling, a number of
significant issues affecting the terms and conditions under which TCG and other
CLECs obtain interconnection and access to ILEC facilities and services will be
resolved on a state-by-state basis by state public utility commissions, whose
decisions may then be subject to review by federal and/or state courts. The
adoption of unfavorable and/or inconsistent rulings by state commissions and
reviewing courts could have a significant adverse impact on TCG's business and
the value of the TCI Ventures Group's investment therein.
The FCC's Interconnection Orders represent the first part of a trilogy of
actions that the FCC contends will promote competition in the local
telecommunications market. The second part involves reform of the system for
funding and providing universal service support, as described above in
"-- Regulation of PCS and other Wireless Activities." The third part of the
FCC's trilogy of actions involves the reform of the FCC's rules for establishing
interstate interexchange access charges. In December 1996, the FCC made several
changes to the interstate access charge system, removed certain restrictions on
ILECs' ability to lower access prices, and relaxed the regulation of new
switched access services in those markets where there are other providers of
access services. In May 1997, the FCC issued an order adopting additional
changes to its existing rules that are designed to move ILEC interstate access
charges, over time, to more economically efficient levels and rate structures.
The FCC has stated that it will rely on marketplace forces in the first instance
to drive ILEC interstate access prices to competitive levels, and will in a
subsequent order provide detailed rules for implementing the FCC's market-based
approach, which will give ILECs progressively greater flexibility in setting
rates as competition develops. The FCC also plans to establish a "backstop"
mechanism for mandating lower prices in instances where a market-based approach
proves to be inadequate. Several parties have appealed the FCC's May 1997 order.
Those appeals have been consolidated and transferred to the United States Court
of Appeals for the Eighth Circuit, where they are currently pending. In a
separate order, the FCC has adopted changes to its price cap rules that are
expected to result in significant reductions in ILEC access charge levels.
Several parties have appealed the FCC's price cap order. Those appeals have been
consolidated and transferred to the United States Court of Appeals for the Tenth
Circuit, where they are currently pending.
Under the 1996 Act, ILECs have a statutory duty to negotiate
interconnection and access arrangements with CLECs in good faith. The regional
Bell operating companies ("RBOCs"), in particular, must satisfy certain
"checklist" requirements, designed to facilitate the development of
facilities-based competition for business and residential users, in order to
enter the interLATA long distance markets (as described below) within their
regions. TCG has been able to reach negotiated agreements with certain of the
ILECs, and has
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had to resort to state mediation and arbitration in order to obtain
interconnection agreements with other ILECs. During the pendency of the
negotiation and contract approval process, TCG is able to operate under either
interim interconnection agreements or interim state regulatory policies and
rules.
The 1996 Act establishes procedures under which an RBOC can provide
interLATA services within its telephone service area under certain
circumstances, with the FCC's approval. "InterLATA services" are
telecommunications which originate in one and terminate in another local access
and transport area. Under the 1996 Act, the FCC is required to approve or deny
the requested authorization within 90 days following its receipt of such an
application. Authorization to provide in-region interLATA services will enable
the RBOCs to provide customers with a full range of local and long distance
telecommunications services and information services. The provision of interLATA
services by RBOCs may reduce the market share of the major long distance
carriers, which are among TCG's largest customers, but TCG believes it will also
encourage IXCs to use TCG's and other CLECs' services instead of RBOC services
wherever possible. On April 11, 1997, SBC Communications Inc. filed an
application requesting authority to provide in-region, interLATA service in the
State of Oklahoma. On May 21, 1997, Ameritech Michigan ("Ameritech") filed an
application to provide in-region interLATA service in the State of Michigan.
Ameritech's application is currently pending before the FCC. On June 26, 1997,
the FCC released an order rejecting SBC's application. On July 3, 1997, SBC
filed an appeal of the FCC's order with the United States Court of Appeals for
the District of Columbia. That appeal is currently pending. In addition, on July
2, 1997, SBC filed a lawsuit in the United States District Court for the
Northern District of Texas, challenging the restrictions imposed on the RBOCs
under the 1996 Act, including the interLATA restriction, on constitutional
grounds. SBC's suit is currently pending before the District Court.
The 1996 Act contains other provisions that potentially could affect TCG's
business, which may be subject to FCC rulemaking and judicial interpretation,
including a provision that limits the ability of a cable television operator and
its affiliates to acquire more than a 10% financial interest or any management
interest in a local exchange carrier which provides local exchange service in
such cable operator's franchise area. Any construction or application of this
provision by the FCC or the courts which limits TCG's ability to acquire
interests in existing CLECs could have an adverse impact on TCG and the value of
the TCI Ventures Group's investment therein. The 1996 Act also requires all
telecommunications carriers, including CLECs and CAPs, to ensure that their
services are accessible to and useable by persons with disabilities, if readily
achievable.
In addition, Teleport's and TCI's other wireline activities will be subject
to certain requirements of CALEA described above under "-- Regulation of PCS and
other Wireless Activities."
Most state PUCs require TCG and other carriers that wish to provide local
and other jurisdictionally intrastate common carrier services to be authorized
to provide such services. TCG's operating subsidiaries and affiliates are
authorized as common carriers in a number of states. The authority held by TCG's
subsidiaries and affiliates varies in the scope of the intrastate services
permitted. TCG has filed or expects to file applications for authority to
provide local exchange service in all of its markets in which it does not have
such authority. TCG typically is not subject to price regulation or to rate of
return regulation for its intrastate services. In most states, TCG is required
to file tariffs setting forth the terms, conditions and prices for its
intrastate services. In some jurisdictions, the tariff can list a rate range for
intrastate services. TCG may be subject to additional regulatory burdens in some
states, such as quality of service requirements and universal service
contributions. State PUCs also are actively involved in the mediation and
arbitration of disputes between ILECs and TCG and other CLECs concerning local
interconnection and access arrangements, and will play an expanded role in this
area, as a result of the Court of Appeals' recent decision overturning many of
the rules adopted by the FCC in its Interconnection Orders.
TCG may be required to obtain from municipal authorities street opening and
construction permits and other rights of way to install and expand its digital
networks in certain cities. In some cities, TCG's affiliates or subcontractors
may already possess the requisite authorizations to construct or expand TCG's
networks. In certain of the metropolitan areas where TCG provides network
services, TCG pays license or franchise fees based on a percent of gross
revenue. There can be no assurance that municipalities that do not currently
impose fees will not seek to impose fees in the future, nor is there any
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. Under the 1996 Act, such fees must be "fair and
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reasonable," applied on a "competitively neutral and non-discriminatory basis,"
and be "publicly disclosed" by the relevant governmental entity. There can be no
assurance, however, that municipalities that currently favor the ILECs will
conform their practices in a timely manner or without legal challenges by TCG,
or another CAP or CLEC. If any of TCG's existing franchise or license agreements
for a particular metropolitan area were terminated prior to its expiration date
and TCG were forced to remove its fiber optic cables from the streets or abandon
its network in place, even with compensation, such termination could have a
material adverse effect on TCG's operations in that metropolitan area and on the
TCI Ventures Group's investment in TCG.
DIVERSIFIED SATELLITE COMMUNICATIONS
UNITED VIDEO SATELLITE GROUP, INC.
General. UVSG provides satellite-delivered video, audio, data and program
promotion services to cable television systems, DTH satellite dish users, radio
stations and private network users primarily throughout North America and
software development and systems integration services to commercial entities,
the federal government and defense related agencies in locations throughout the
United States.
UVSG operates the following related satellite transmission businesses: (i)
Prevue Networks, Inc. ("Prevue Networks"), a wholly owned subsidiary that
develops and distributes on-screen television program promotion and guide
services, including Prevue Channel, the leading electronic programming guide in
the North American market, (ii) Superstar Satellite Entertainment ("Superstar"),
a division that markets and distributes programming to C-band DTH satellite dish
owners in North America; (iii) UVTV ("UVTV"), a division that distributes three
superstations, including WGN, primarily to cable operators and (iv) SpaceCom
Systems, Inc. ("SpaceCom"), a wholly owned subsidiary that provides audio and
data satellite transmission services to the paging industry and others. UVSG
also has a 70% interest in SSDS, which provides information technology
consulting and software development services to large organizations with complex
computer needs.
In January 1996, UVSG became a consolidated subsidiary of the Company
through the merger of a subsidiary of the Company into UVSG. As of June 30,
1997, the Company owned approximately 40% of the shares of outstanding common
stock of UVSG, representing approximately 85% of the voting power of UVSG. Five
of UVSG's ten directors are also employees, officers and/or directors of the
Company or its affiliates.
UVSG's Satellite Transmission Infrastructure. UVSG owns and operates the
Chicago International Teleport (the "CIT"), an uplink transmitter facility near
Chicago with seven transmit/receive antennas by which most of its services are
transmitted to satellites. The CIT also has 26 receive-only antennas. UVSG
believes the CIT is one of the largest such facilities in the United States.
UVSG also operates an uplink in Tulsa, Oklahoma for its Prevue Channel which
allows real-time promotional inserts into the video portion of its service. In
addition, UVSG leases uplink station facilities in other cities as needed. The
State of Illinois has asserted that certain uplinking services performed by the
CIT are subject to the state's Telecommunications Excise Tax Act and that UVSG
should have collected $1.5 million in excise taxes from its customers on behalf
of the state from past services performed during the period August 1985 through
June 1994. UVSG is disputing the assertion and continues not to collect such
taxes.
UVSG leases a total of ten transponders on several different satellites
owned and operated by various satellite companies. Lease payments for a single
transponder range from $33,000 to $200,000 per month, depending upon the
location of the satellite, the satellite's footprint, the date of the lease and
the power of the satellite. Certain of the transponder leases are for fixed
terms while others have terms through the operational life of the applicable
satellite. The transponder leases are expected to expire between 2000 and 2005.
UVSG has contracted for backup transponder space for two of its primary
transponders, should they fail. These primary transponders are also
contractually protected from pre-emption. The remainder of UVSG's transponder
space is subject to pre-emption, although no pre-emption has occurred to date.
UVSG believes there is a reasonably sufficient quantity of appropriate
transponder space available to satisfy its needs for the foreseeable future.
Program Promotion and Guide Services. UVSG has developed and markets
satellite-delivered on-screen program promotion and guide services to cable
television systems and other multi-channel video programming
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distributors such as DBS and telephone companies ("Programming Distributors").
Such services include the Prevue Channel, offered through Prevue Networks, and
Sneak Prevue, offered through Sneak Prevue LLC, a joint venture owned 72% by
Prevue Networks. These services provide continuously updated on-screen video and
text information customized for each Programming Distributor, to promote the
Programming Distributor's programs and provide program schedule information to
its subscribers. The Prevue Channel is a comprehensive information source for
all of a system's channel offerings, while Sneak Prevue exclusively promotes a
system's pay-per-view offerings. As of December 31, 1996, the Prevue Channel was
carried by approximately 2,000 systems with subscribers totaling approximately
44.4 million in the United States, and Sneak Prevue was carried by over 900
systems with subscribers totaling approximately 34.4 million subscribers in the
United States.
Prevue Networks has been expanding sales of the Prevue Channel and Sneak
Prevue services in the international marketplace. As of December 31, 1996,
Prevue Networks operated in 22 countries spanning three continents. At such
time, Prevue services reached over 350 systems and approximately 1.7 million
subscribers in Canada and, through its Prevue Channel product branded Prevue
Latino, 75 systems and approximately 1.2 million subscribers in Mexico and
Central and South America. As of December 31, 1996, Prevue Networks reached over
48 million homes with satellite-delivered services globally.
UVSG generates both license fees and advertising revenue from the Prevue
Channel, while Sneak Prevue and other products currently generate only license
fees. During 1996, approximately 48% of Prevue Networks' $49.4 million in
revenue was attributable to the Prevue Channel and Sneak Prevue fees paid by
U.S. systems, and approximately 46% came from advertising sales in the United
States.
The Company believes that, as a result of the maturing U.S. cable
television industry's slowing subscriber growth and increasing competition from
DBS, there is a strong demand by cable operators for services such as the Prevue
Channel and Sneak Prevue to promote subscriber purchases of higher-margin
program packages and pay-per-view services. In addition, the Company believes
that as cable television channel capacity increases and the number of channels
offered by other Programming Distributors increases, the demand for program
promotion and guide services will also increase.
Through Prevue Networks, UVSG also develops and markets interactive program
guide services and software applications for use by cable television system
operators and other Programming Distributors that enable customers to review
program schedules and retrieve selected programing information on demand. These
services provide continuously updated, on-screen text and graphic information,
customized to deliver system-specific schedule and program promotion information
to subscribers. Prevue Networks' ongoing interactive operations, excluding the
cost of patent litigation described below, consists primarily of software
development to achieve compatibility with new advanced analog and digital
set-top converter platforms. Prevue Networks generated no significant
interactive revenue in 1996 ($218,000) and incurred operating expenses
(excluding depreciation and amortization) of $5.7 million ($1.3 million of which
is attributable to the StarSight patent litigation referred to below).
The Company believes that, if and when third-party manufacturers complete
the design and begin the manufacture of a significant number of set-top
converter boxes capable of delivering interactive programming services, the
demand for interactive program guide services has the potential to increase
significantly. However, at this time, the development and deployment by third
parties of the hardware which will be required to operate Prevue Networks'
interactive technology cannot be predicted. In addition, the response of
Programming Distributors and their subscribers to Prevue Networks' interactive
technology, and the likelihood of competitors succeeding with the same general
concept, but differing technology, is difficult to predict at this time.
Furthermore, UVSG's competitors or other parties may have developed or obtained,
or may develop or obtain in the future, intellectual property rights, including
patents, that UVSG may need to implement its interactive technology. The impacts
of the existence of these intellectual property rights and the ability of and
cost to UVSG to gain access to or acquire these intellectual property rights may
be significant, but cannot be ascertained at this time. UVSG is currently
engaged in litigation with StarSight Telecast, Inc. ("StarSight") with respect
to certain patents held by StarSight relating to certain functions performed by
interactive program guide services. If this litigation is resolved in
StarSight's favor, it could have a material adverse effect on the business
prospects of UVSG's interactive operations.
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Prevue Networks' Prevue Channel and Sneak Prevue services compete with
other programmers for limited cable television system channel slots. Prevue
Networks believes that its Prevue services currently are the leading
satellite-delivered cable television promotion and program guide products in the
North American market. Prevue Networks continues to face competition from
Programming Distributors that have and are operating single-system program
guides or pay-per-view promotional channels similar to the Prevue services. To
some extent, Prevue Networks also indirectly competes with printed program
guides. Prevue Networks' interactive products, along with new interactive
program guides being developed by UVSG's competitors, may create competition for
Prevue Networks. Although the Company believes that UVSG is currently the market
leader in providing interactive program guide, sports and weather information,
it anticipates that the market for such interactive services will be
characterized by intense competition in the next few years.
Home Satellite Dish Services. UVSG's Superstar division markets and
distributes programming to the C-band DTH satellite dish subscriber market
through Superstar/Netlink Group LLC ("SNG"), a joint venture formed effective
April 1, 1996 to combine the retail C-band DTH satellite businesses of UVSG's
Superstar division and Liberty's subsidiary Netlink USA ("Netlink"). Each of
Netlink and Superstar own 50% of SNG. Liberty, whose assets are not part of the
TCI Ventures Group, is a wholly owned subsidiary of the Company.
As of December 31, 1996, approximately 1.0 million C-band DTH satellite
dish owners, or 42% of the estimated authorized C-band home satellite dish
subscriber market of 2.3 million subscribers at that date, subscribed to
programming directly through SNG. The Company believes that SNG is the largest
marketer of satellite entertainment programming in the C-band DTH satellite dish
industry in terms of number of subscribers. It currently markets several
different packages featuring more than 100 channels of programming as well as
pay-per-view movies and events to the C-band DTH satellite dish market.
Through its business services division, Superstar provides software and
subscriber management system services, functions as a service agent in the DBS
market and markets ESPN to commercial establishments, such as bars and
restaurants. The current contract governing commissions earned as a service
agent in the DBS market expired on June 30, 1997; however, commissions on
subscribers serviced pursuant to such agreement prior to its termination will
continue to be earned through the year 2000.
Superstar also markets UVTV's satellite-transmitted WGN, WPIX and KTLA
superstations to other packagers and marketers of programs to the home satellite
dish industry through its wholesale division. As of December 31, 1996,
approximately 1.8 million C-band home satellite dish households subscribed to
one or more of UVTV's three superstations through home satellite dish packages
offered by SNG and other home satellite dish packaging and marketing companies.
Liberty, through Netlink, also conducts wholesale operations in the C-band DTH
satellite industry and thus competes with Superstar's wholesale operations.
Effective January 1, 1997, UVSG began reporting the operating results of
Superstar's wholesale division with those of UVTV, as they are in the same line
of business.
Superstar's revenue in 1996 was $189.2 million and its operating income was
$26.8 million (in each case, after excluding Liberty's 50% interest in SNG).
SNG competes with several other large C-band DTH satellite dish program
packagers, some of which are affiliated with well-known, large programmers and
cable television system operators. Because a significant portion of SNG's sales
is generated through home satellite dish dealers, SNG also competes for dealer
relationships on the basis of commission rates and quality of service offered to
the dealer and its customers. In addition, the C-band DTH satellite dish market
faces competition from cable television as well as technologies such as DBS
services, which were launched in 1994. With the continued expansion of cable
systems and the emergence of DBS systems, the C-band DTH industry is no longer
growing. UVSG has reported that during the twelve month period ended March 31,
1997, the industry decreased by 136,000 subscribers or 6%. DBS uses Ku-band
frequencies that can be received by significantly smaller and less expensive
receive terminals than those home satellite dishes that receive C-band
frequencies. Because of the smaller dish size, DBS is more widely accepted than
C-band DTH satellite dish systems, particularly in urban markets. In addition,
the FCC recently preempted most zoning and other restrictions by state and local
governments, as well as by certain private associations, regarding the placement
of DBS video reception equipment. This preemption does not extend, however, to
the larger C-band dishes. The Company believes that the entry of DBS will serve
to
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decrease the size of the C-band market in the short-term and long-term. The
Company also believes that for the near future more programming will be
available for the C-band DTH satellite dish market than the DBS market because
the majority of programming for cable television systems is transmitted on
C-band frequencies. Given the initial investment costs and life of a C-band DTH
satellite dish system, the Company believes that a significant portion of
current C-band DTH satellite dish owners will continue to use home satellite
dish services rather than invest in a DBS system.
Satellite Distribution of Video Entertainment Services. UVTV markets and
distributes to Programming Distributors video and audio services such as
superstations WGN (Chicago), WPIX (New York) and KTLA (Los Angeles), three of
the five independent satellite-delivered television superstations in the United
States. As of December 31, 1996, television channels transmitted by UVTV served
an aggregate of approximately 42 million subscribers, approximately 94% of which
were attributable to WGN, the country's second largest superstation in terms of
the number of subscribers. UVTV's revenue for 1996 was $26 million. Domestically
the number of WGN subscribers decreased by 3.5 million or 9% from March 1996 to
March 1997, primarily due to the impact from TCI's discontinuing WGN in certain
of its wholly owned systems (4.5 million subscribers), partially offset by new
system launches and existing system subscriber growth aggregating approximately
1.1 million subscribers. The country's largest superstation in terms of the
number of subscribers is WTBS (Atlanta), which is distributed by a subsidiary of
Liberty.
UVTV faces competition from over 100 cable network suppliers, including
other superstations, for limited channel capacity on cable television systems.
Cable television systems must make copyright payments to the Copyright Office
when they receive and distribute satellite-transmitted television broadcasts,
such as WGN and other superstations, which is a separate, less controllable cost
than the bundled fee incurred and paid directly to the copyright holder when
distributing a cable television network. These and other factors can influence a
cable television system's decision as to whether to select UVTV's superstations
for distribution. Since no exclusive rights are granted for the transmission of
superstations, UVTV also faces potential direct competition from other operators
who may decide to transmit stations currently being marketed by UVTV. Because a
significant number of UVTV's customers have entered into service agreements
generally with a three-year initial term, UVTV believes its customers would not
be able to change immediately to another company transmitting those
superstations. In addition, while the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") generally requires all
Programming Distributors to obtain the prior consent of broadcast stations,
including superstations, before retransmitting their signals, this requirement
does not apply to those superstation signals that were on a satellite prior to
May 1, 1991. All of UVTV's superstations were being retransmitted prior to that
time, and thus UVTV is exempt from retransmission consent requirements. UVTV
believes that these provisions of the 1992 Cable Act may create a barrier to the
emergence of new superstations because it may be difficult to obtain
retransmission consent from the stations at an economically feasible price.
Satellite Transmission Services for Private Networks. SpaceCom provides
point-to-multipoint audio and data satellite transmission services for various
customers throughout North America, primarily to paging network operators, radio
programmers and financial information providers. SpaceCom leases two C-band and
two Ku-band satellite transponders, subdivides the capacity of these
transponders into a number of smaller channel units and resells these units
using its value-added transmission methods and proprietary technology.
As of December 31, 1996, SpaceCom's two C-band transponders were occupied
to approximately 70% of capacity; one of its Ku-band transponders was filled to
approximately 68% of capacity, and the other, which uses a newer, superior (in
terms of reliability, flexibility and security) proprietary transmission
technology (the "FM Cubed" technology), was operating at approximately 100% of
capacity. SpaceCom believes these transponders will satisfy its capacity
requirements through 1997 and is focusing on selling and implementing a new
proprietary technology which has the same characteristics as the FM Cubed
technology, but at half its price with higher priced receivers.
SpaceCom generated $15.6 million in revenue in 1996. Approximately 52% of
SpaceCom's 1996 revenue was attributable to paging customers; SpaceCom serves 8
of the 10 largest paging companies in the United States.
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SpaceCom competes with a number of other companies in the one-way
point-to-multipoint satellite distribution business. Many of these competitors
have duplicated and use SpaceCom's original proprietary technology. SpaceCom's
newer FM Cubed technology is difficult and expensive to reverse engineer. In
addition, SpaceCom has two patents covering certain aspects of its FM Cubed
technology, although there can be no assurances that these patents will afford
SpaceCom significant protection against competitors with similar products or
technology. SpaceCom also competes with two-way satellite communication network
service providers as well as telephone companies, although it believes its
point-to-multipoint technology is less expensive for customers with a large
number of sites that do not require two-way communication capabilities.
SpaceCom's customers typically sign contracts for initial terms of five years or
greater, often through the end of the life of the satellite. Historically,
SpaceCom has retained the majority of its significant customers at the time a
contract is renewed, however some customers have transitioned to competing
services.
Software Development and Systems Integration Services. UVSG owns a 70%
interest in SSDS, which provides information technology consulting, integration
and software development services to organizations that are using or migrating
to distributed, open computing environments. Open systems computing environments
are created from various components, which may include networks of personal
computers, file servers, information storage and retrieval devices,
communications and video equipment and the software necessary to perform desired
functions and to link the various components of the systems. SSDS provides
technology consulting and software development to its customers to design,
integrate and manage open systems components within an enterprise-wide
environment.
SSDS currently markets its services to three primary market segments: (a)
commercial, (b) public sector (consisting of federal, state and local government
agencies, other than defense-related agencies), and (c) defense-related
agencies. During the year ended December 31, 1996, the commercial, public sector
and defense market segments represented 37%, 19% and 44%, respectively, of
SSDS's total revenues. SSDS's revenue for 1996 was $36.2 million.
Generally, SSDS's larger contracts in the public sector and defense
segments of its business range in duration from one to seven years, subject to,
in certain cases, the right of the other party, exercisable annually, not to
renew the contract. Its contracts in the commercial segment of its business are
generally of shorter duration (one day to one year).
The information technology and systems integration field is highly
fragmented and competitive and is comprised of a substantial number of
participants, many of which are much larger than SSDS. In addition, the
competitive market includes many large consulting and computer equipment
companies that offer professional services. For its higher-end services, such as
business process analysis or strategic system architecture, SSDS competes
primarily on its technical capabilities and timeliness. For its other services,
such as complex system design, implementation, integration and migration, SSDS
competes primarily on superior experience and quality.
Agreements with TCI. The TCI Group has agreements with UVSG for the
carriage of UVSG's Prevue Networks and superstation programming on certain of
the cable systems attributed to the TCI Group and for UVSG's subscriber
management services, and UVSG purchases programming from companies attributed to
the Liberty Media Group. Many of these contracts were entered into prior to the
Company's acquisition of an equity interest in UVSG.
Regulation. The satellite transmission, cable and telecommunications
industries are subject to federal regulation, including FCC licensing and tariff
requirements. The cable and telecommunications industries are also subject to
extensive regulation by local and/or state authorities. While most cable and
telecommunications industry regulations do not apply directly to UVSG, they
affect Programming Distributors, the primary customers for UVSG's products and
services. In the past, uncertainty about proposed or even rumored regulations
has occasionally caused UVSG's Programming Distributor customers to postpone
purchasing decisions and actions.
Under the "cable compulsory license" provisions of the Copyright Act of
1976 (the "Copyright Act"), Programming Distributors are required to pay
copyright fees that arise from their reception and retransmission of
satellite-transmitted television broadcasts such as WGN and other superstations.
These compulsory copyright fees (which are paid to the Copyright Office and then
distributed by the Copyright Royalty Tribunal
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to copyright owners) are in lieu of separately negotiated copyright payments
between the programmers and the Programming Distributors. These provisions also
grant an exemption which allows UVTV and other "passive carriers" to transmit
and market its superstations without agreements with, or copyright payments to,
the broadcast station transmitted.
The Copyright Act and U.S. Copyright Office regulations generally impose a
significantly higher copyright fee on cable television systems in certain
markets for carrying more than two distant independent television stations. This
copyright fee structure limits the extent to which cable television systems are
able to carry superstations. A reduction in the number of competitive
superstations within the industry could increase distribution for UVTV's
superstations, as a replacement product, without increasing a cable operator's
overall copyright payments.
The Satellite Home Viewer Act of 1988 (the "SHVA") provides for a "home
satellite dish compulsory copyright license" for the retransmission of network
and superstation signals and programming directly to subscribers with a home
satellite dish. Under the terms of the SHVA, satellite carriers, such as
Superstar, are responsible for paying compulsory copyright fees to the Copyright
Office for the sale of superstation signals. Currently, a proceeding regarding a
potential change in the compulsory copyright fees under SHVA is pending before
the Copyright Arbitration Royalty Panel, with a decision expected sometime this
Fall. Any change in such rates could be applied retroactively as of July 1,
1997. The Satellite Home Viewer Act of 1994 extended the home satellite dish
compulsory license through the end of 1999.
Legislation has been introduced from time to time to repeal the cable
compulsory license provision, although no such legislation has been passed by
Congress. Similar legislation will likely be introduced in the near future to
consider "reform" of both the cable and satellite compulsory license. At
Congress' request, the Copyright Office is currently conducting a review of
compulsory licensing for both the cable and satellite industries and will
develop legislative recommendations. The Copyright Office's report is expected
to cover many issues, including: (1) possible extension of the satellite
compulsory license under SHVA beyond December 31, 1999; (2) potential
harmonization of the cable and satellite compulsory licenses; and (3) extension
of compulsory licenses to new technologies, such as satellite carriers
retransmitting local broadcast signals in the broadcaster's local area, open
video systems and the Internet. The Copyright Office conducted hearings on these
issues on May 6-9, 1997 and is expected to issue its report and legislative
proposals to Congress by August 1, 1997. If reform legislation is adopted, it
could hinder or prevent UVTV from marketing superstation services such as WGN.
The 1992 Cable Act, which established substantial rate regulation for
certain services and equipment provided by most cable television systems in the
United States, may impair UVSG's ability to offer competitive rates and volume
discounts on certain of its products and services and may affect the rates
charged by Superstar to home satellite dish programming packagers and other
Programming Distributors. For example, the FCC's "program access" rules prohibit
certain satellite programmers which are "affiliated" (under the FCC's
affiliation rules) with certain types of Programming Distributors (such as cable
operators) from, among other things: (1) discriminating in prices, terms, or
conditions between various Programming Distributors; and (2) entering into
agreements with certain Programming Distributors which provide for exclusivity,
except in limited circumstances. To the extent UVSG's programming is deemed to
be affiliated with Programming Distributors covered by these rules, such
programming is also subject to these pricing and marketing limitations.
Currently pending and upcoming FCC proceedings under the 1992 Cable Act
could further restrict channel capacity on DBS and cable systems. Currently
pending before the FCC is a rulemaking to implement provisions of the 1992 Cable
Act that require DBS providers to devote 4-7% of their channel capacity to
informational and educational programming. In addition, the FCC has indicated
that it plans to initiate a proceeding to determine whether cable operators are
required to carry any or all of the digital signals delivered by local
broadcasters using the additional 6 MHz of spectrum recently awarded to
broadcasters by the FCC. To the extent the FCC's decisions in either or both of
these proceedings reduce the number of available channels for which cable or DBS
operators can select programming, the ability of UVSG programming to gain or
maintain carriage on such systems could be affected.
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The 1996 Act requires the closed captioning of all video programming other
than programming which has received an exemption from the FCC. A proceeding is
currently underway at the FCC to establish closed captioning rules and to
determine which classes of program services will receive exemptions. Prevue
Networks requested such an exemption for the Prevue Channel and Sneak Prevue,
based on the primarily textual and promotional nature of the programming. If the
FCC denies Prevue Networks' exemption request, implementation of closed
captioning could add significant annual costs to Prevue Networks' business. The
FCC is required to issue its closed captioning rules by August 8, 1997.
The 1996 Act will also affect UVSG indirectly by creating more competition
and less regulation within the video services marketplace. For example, the 1996
Act authorized local exchange carriers to own and program video distribution
systems in their telephone service areas. At the same time, the 1996 Act
provides cable operators with greater pricing flexibility, deregulates cable
rates more quickly than under prior law, and adds a mechanism for aggregating
the costs for customer equipment in order to facilitate deployment of digital
technology. These legislative developments, in turn, could increase the number
of homes capable of receiving video services which would result in an increase
in the potential market for UVSG services.
Additional Information. UVSG is subject to the information requirements of
the Exchange Act and, in accordance therewith, files reports, proxy and
information statements and other information with the SEC (under SEC file number
0-22662), all of which are available from the SEC in the manner described above
under "Available Information." In addition, the UVSG Class A Common Stock is
quoted on the National Market tier of The Nasdaq Stock Market under the symbol
"UVSGA."
INTERNET SERVICES
@HOME
General. @Home, which provides Internet services over the cable television
infrastructure to consumers and businesses, was founded by the Company and
Kleiner, Perkins, Caufield & Byers ("KPCB"), a venture capital firm, in March
1995. In August 1996, Comcast and Cox became investors in @Home, and in April
1997, Rogers Cablesystems Limited ("Rogers") and Shaw Cablesystems Ltd. ("Shaw")
became investors in @Home. On July 11, 1997 @Home consummated an initial public
offering of @Home's Series A Common Stock (the "@Home IPO"). After giving effect
to the @Home IPO, the Company's equity interest and voting power in @Home was
approximately 39% and 72%, respectively. @Home's stock is traded on the National
Market tier of The Nasdaq Stock Market under the symbol "ATHM."
@Home began commercial operation of the @Home service in September 1996 and
currently offers two Internet services, @Home for residential consumers and
@Work for businesses. @Home's primary offering, the @Home service, allows
residential subscribers to connect their personal computers via cable modem to a
new high-speed network developed and managed by @Home. This service enables
subscribers to receive the "@Home Experience," which includes Internet service
over HFC cable at peak data transmission speeds 300 times faster than typical
dial-up connections, "always on" availability and rich multimedia programming
through an intuitive graphical user interface. The technology foundation of the
@Home Experience is @Home's scalable, distributed, intelligent network
architecture (the "@Network"), a "parallel Internet" that optimizes traffic
routing, improves security and consistency of service, and facilitates
end-to-end network management, enhancing @Home's ability to address performance
bottlenecks before they affect the user experience. The content foundation of
the @Home Experience is provided by @Home's @Media group, which aggregates
content, sells advertising to businesses and will provide premium services to
@Home subscribers. For businesses, @Home's @Work services provides a platform
for Internet, intranet and extranet connectivity solutions and networked
business applications over both cable infrastructure and leased digital
telecommunications lines. By combining the @Network's distributed architecture
with cable, telephone and technology relationships, the @Work services provide a
compelling platform for nationwide delivery of network-based business
applications.
@Home was founded on the premise that the cable infrastructure could enable
the fastest, most cost-effective delivery mechanism for residential Internet
services and that the creation of a "parallel Internet" would enable @Home to
avoid the fundamental architectural drawback of the Internet, which would limit
the actual speed of these services. As a result, @Home assembled a team of
industry experts to develop an
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advanced network architecture and the custom hardware and software products that
would address these limitations. As of June 30, 1997, @Home had expended more
than $77.5 million on capital expenditures and operating costs and expenses
(including deferred compensation) to design and build the @Network and the
corporate infrastructure necessary to support the rollout of the @Home and @Work
services. As of June 30, 1997, @Home had developed a nationwide backbone,
designed and implemented a Network Operations Center with end-to-end management
capabilities, deployed regional data centers in 14 geographic areas, implemented
an integrated customer management system including billing and support,
implemented a customized browser and aggregated the initial multimedia content
required to deliver the @Home service to subscribers.
The @Network is a scalable, distributed, intelligent network architecture
that combines a private high-speed nationwide backbone with distributed caching.
Caching moves frequently accessed information close to the user to avoid
multiple transmissions of the same data over the backbone. The @Network is an
end-to-end network solution, enabling @Home to manage the network 24 hours a day
from a central Network Operations Center and enhancing its ability to address
performance bottlenecks before they affect the user experience. All elements of
the @Network are readily scalable, enabling it to provide sustainable high
performance as usage increases.
@Home Service. The @Home service is a comprehensive Internet solution that
leverages the two-way HFC cable television infrastructure and @Home's
technological and programming capabilities to provide the "@Home Experience,"
which @Home believes is the most compelling consumer Internet experience
currently available. By connecting via a cable modem to the @Network through the
local cable infrastructure, @Home subscribers' personal computers can achieve a
peak data transmission speed over two-way HFC cable of 10 megabits per second
("Mbps") (10,000 kilobits per second ("Kbps")), over 300 times faster than the
peak data transmission speed of a 28.8 Kpbs modem. This high bandwidth is
critical for enabling sophisticated multimedia applications, advertising, online
commerce and online interactive games. In addition, the two-way cable
infrastructure is "always on," providing instantaneous access to the Internet
and eliminating the need for a tedious dial-up procedure using the telephone
network.
@Home's programming services, provided by the @Media group, enhance the
@Home Experience by aggregating high-quality and compelling multimedia content
available on the Internet and delivering this content through an intuitive
graphical user interface. The cornerstone of this programming is the @Home
Guide, the user's guide to the high-quality multimedia content on the Web. The
@Home Guide is organized around a series of "channels," which are defined by
both topical subjects (such as news, technology, sports or popular culture) and
audiences (such as children, game players or shoppers). With the @Home Guide,
@Home generates and directs regular audience traffic to @Media and content
providers' offerings. @Home believes the @Home Guide broadens the appeal of
online services beyond technology enthusiasts to the mass market by simplifying
navigation, increasing the subscriber's knowledge of Internet resources,
presenting compelling high-bandwidth content with animated graphics,
near-CD-quality audio and video clips, and stimulating persistent usage by
promoting current events and interesting new services.
@Home has entered into distribution arrangements for the @Home service with
seven leading cable companies in North America: TCI, Comcast, Cox, Rogers, Shaw,
Marcus Cable Operating Company, L.P. and InterMedia Partners IV L.P. These seven
cable companies (collectively, the "@Home Cable Partners") operate cable systems
which pass approximately 44 million homes in North America. @Home believes that
approximately two million of these homes are currently passed by upgraded
two-way HFC cable. Subject to certain exceptions, TCI, Comcast and Cox (the
"@Home Principal Cable Stockholders") have granted @Home the exclusive right to
be the provider of high-speed residential consumer Internet services over their
cable systems for an agreed period. (The TCI entity which will be the
distributor of the @Home services will continue to be a member of the TCI Group,
and the assets and business of such entity will not be included in the TCI
Ventures Group). In March 1997, @Home entered into exclusive arrangements for
the distribution of its @Home service under the name "Wave@Home" in Canada
through Rogers and Shaw, two of the leading cable system operators in Canada.
Through Rogers and Shaw, which have the right to redistribute the Wave@Home
service to other cable system operators in Canada, @Home expects to expand the
distribution of its service to Canada.
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Transmission of the @Home service over cable is dependent on the
availability of high speed two-way HFC cable infrastructure. The @Home Cable
Partners have announced plans to complete the upgrade to two-way HFC of a
majority of the homes passed in their cable systems within five years. However,
cable system operators have limited experience with these upgrades, and the
investments in cable plant necessary to upgrade the cable infrastructure to
two-way HFC cable have placed a significant strain on the financial, managerial,
operating and other resources of the @Home Cable Partners and other cable system
operators, most of which are already highly leveraged. Thus, these upgrades have
been, and @Home expects they will continue to be, subject to change, delay or
cancellation. Although @Home's commercial success depends on the successful and
timely completion of these infrastructure upgrades, the @Home Cable Partners are
under no obligation to @Home to upgrade systems or to roll out, market or
promote @Home's services. In addition, none of the @Home Cable Partners has
agreed to any specific schedule for rolling out two-way HFC cable infrastructure
improvements, and the @Home Cable Partners are not contractually required to
achieve any specific rollout schedule. Although there are no contractual
obligations relating to the upgrade of their cable systems, TCI, Comcast and Cox
have agreed, subject to certain exceptions, that @Home will be their exclusive
provider of high-speed residential consumer Internet access services during the
period ending June 4, 2002.
Specifically, each @Home Principal Cable Stockholder on behalf of itself
and its controlled affiliates has agreed not to conduct, participate in or have
a material beneficial ownership interest in any business within the United
States (a "Restricted Business") that involves (a) the provision of a
residential Internet service over the cable television plant of the @Home
Principal Cable Stockholder at data transmission speeds greater than 128 Kbps
and whose primary purpose is the provision to consumers of entertainment,
information content, transactional services or electronic mail, chat and news
groups (a "Consumer Purpose"), (b) the connection by the @Home Principal Cable
Stockholder of its cable television plant directly or indirectly to any Internet
backbone for a Consumer Purpose at data transmission speeds greater than 128
Kbps or (c) the provision of an Internet backbone service. These exclusivity
provisions do not apply to the creation or aggregation of content or, among
other things, the following services: (i) the provision of telephony services,
(ii) the provision of services that are primarily work-related (such as the
@Work services), (iii) the provision of Internet services that do not use the
cable television infrastructures of the @Home Principal Cable Stockholders, (iv)
the provision of any local Internet service that does not require use of an
Internet backbone outside a single metropolitan area, (v) the provision of
services that are utilized primarily to connect students to schools, colleges or
universities, (vi) the provision of Internet telephony, Internet video telephony
or Internet video conferencing, (vii) the provision of certain limited Internet
services for display on a television, (viii) the provision of certain Internet
services that are primarily downstream services where the user cannot send
upstream commands in "real-time," (ix) the provision of streaming video
transmissions that include video segments longer than ten minutes in duration or
(x) limited testing, trials and similar activities of less than six months.
These exclusivity provisions bind TCI and its controlled affiliates, which will
include the TCI Group entity which will be the distributor of the @Home service.
The exclusivity provisions described above may be terminated under the
following circumstances: (i) any local cable operator affiliated with the @Home
Cable Partners (an "Affiliated LCO") may terminate its exclusivity obligations
if @Home fails to roll out the @Home service in such operator's territory by
mutually agreed dates in a schedule set forth in a local cable operator
agreement; (ii) the @Home Principal Cable Stockholders may terminate all
exclusivity obligations upon a change in law that materially impairs certain of
the @Home Principal Cable Stockholders' rights under their distribution
agreement with @Home; (iii) Comcast or Cox may terminate all @Home Principal
Cable Stockholders' exclusivity obligations if there is a change of control of
TCI at any time or if certain subscriber penetration levels for the @Home
services are not achieved by TCI and its affiliates on June 4, 1999 or any
anniversary thereof; and (iv) Comcast may terminate its exclusivity obligations
at its election after June 4, 1999 if it permits a portion of its equity in
@Home to be repurchased by @Home at Comcast's original cost. Comcast has
informed @Home that Comcast has entered into an agreement with Microsoft
Corporation ("Microsoft") pursuant to which Microsoft can require Comcast to
terminate its exclusivity obligations after June 4, 1999. Although Microsoft has
stated in the agreement that it has no present intention to do so, there can be
no assurance that Microsoft will not be more likely than Comcast to terminate
Comcast's exclusivity obligations.
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Until such time as the applicable @Home Principal Cable Stockholder ceases
to be obligated under the exclusivity provisions set forth above or, if the
exclusivity provisions are terminated by reason of TCI's failure to meet
specified subscriber penetration requirements, until June 4, 2002, @Home has
agreed not to (except through such @Home Principal Cable Stockholder) offer or
provide Internet services at data transmission speeds greater than 128 Kbps to
residences in the geographic area served by the cable systems of such @Home
Principal Cable Stockholder that remains in compliance with the exclusivity
provisions, subject to certain conditions.
As of June 30, 1997, @Home had launched the @Home service through TCI,
Comcast, Cox and Intermedia in portions of 13 cities and communities (of which
11 have revenue-paying subscribers) in the United States and had approximately
7,000 subscribers, and @Home was in the process of converting to its @Home
service approximately 5,000 subscribers currently receiving the "Wave"
interactive service provided by Rogers and Shaw in Canada. Subscribers of @Home
subscribe to its services through the local cable operator, and thus the local
cable operator (and not @Home) will substantially control the customer
relationship with the subscriber. The local cable operator generally has
discretion regarding the pricing of the @Home service to subscribers in its
territory (except for certain premium services for which @Home contracts
directly with the subscriber). The @Home service is currently offered to
consumers in the United States for flat monthly fees generally ranging from $35
to $55, including a cable modem provided by the Affiliated LCO. Installation of
the @Home service is provided by the Affiliated LCO at a price generally ranging
from $75 to $175. Under the current arrangement with the United States @Home
Cable Partners, @Home receives 35% of monthly fees and fees for premium
services, and the Affiliated LCO retains the entire installation payment. In
Canada, @Home will receive a smaller percentage of the monthly subscription fees
billed by Rogers, Shaw and their sub-distributors because Rogers and Shaw will
bear the costs of providing additional customer support, data transport,
marketing and programming for the Canadian market which are not borne by the
Affiliated LCOs in the United States. Each @Home Principal Cable Stockholder and
its controlled affiliates are entitled to "most favored nation" terms and
conditions of carriage with respect to the distribution of @Home's services.
To expand distribution, @Home is aggressively seeking to form strategic
relationships with additional United States and international cable companies.
In order to shorten time to market for cable operators, @Home provides a turnkey
solution, which includes not only a technology platform, but also a national
brand, marketing, customer service and billing. In addition, to access
residences that are not upgraded to two-way HFC cable, @Home is also exploring
alternative delivery mechanisms such as the use of one-way HFC cable with
telephone return and the use of high-speed telecommunications services for
multiple dwelling units.
@Work Services. @Work services provide a platform for corporate Internet,
intranet and extranet connectivity solutions and have the ability to provide a
series of networked business applications over both HFC cable and leased digital
telecommunications lines that leverage the @Network. In order to accelerate
deployment of @Work services into metropolitan areas, @Home has established a
strategic relationship with Teleport to provide targeted co-location facilities
and local telephone circuits for infrastructure and subscriber connectivity. By
combining the @Network's distributed architecture with cable, telephone and
technology relationships, the @Work services provide a compelling platform for
nationwide delivery of network-based business applications. @Home has developed
this platform at a low incremental cost by leveraging its existing @Network
investment.
@Home offers @Work Internet service and plans to offer @Work Remote
services. The @Work Internet service delivers dedicated, high-speed, end-to-end
managed Internet connectivity to commercial enterprises over both local
telephone circuits and HFC cable. The @Work Internet service is currently
available in five major metropolitan markets: Chicago, Hartford, San Diego, the
San Francisco Bay Area and Seattle. As of June 30, 1997, @Home was receiving
revenue from 27 @Work Internet customers and had agreements with more than 160
additional business customers to begin to install the service. @Home's @Work
Remote service offers secure, high-speed telecommuting solutions via HFC cable
and virtual private networks among remote users, branch offices and a corporate
local area network. The @Work Remote service includes the network equipment and
software needed to connect the corporate local area network securely to the
@Network via high-bandwidth local telephone circuits. @Home is currently
negotiating arrangements
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with the @Home Cable Partners to offer the @Work Remote service over the cable
infrastructure for telecommuters.
@Media Services and Technologies. In addition to aggregating content and
providing the @Home Guide, the @Media group sells advertising and, in
partnership with content providers, packages advertising-supported transaction
and premium services that it will offer to @Home subscribers. Advertisers and
content providers can utilize @Media technologies that enable them to exploit
the high-bandwidth, multimedia capabilities of the @Network. The @Media division
sells advertising through the "B*box," a broadband audio/video advertising space
located in the @Home Guide. With the B*box, advertisers are not constrained by
the Web banner paradigm and can broaden their creative presentation using video
clips, near-CD-quality audio and animation. @Home has a broad range of
revenue-generating advertisers, including General Motors, Toyota and Unilever.
Advertisers have reported response rates (click-throughs) substantially greater
than they currently experience with traditional Web banner advertisements. @Home
believes that advertisers' ability to present more compelling messages to online
users will lead to advertising rates greater than those charged for banner
advertising on the Web. @Home retains 100% of all U.S. national advertising
revenue delivered on the @Home service through the U.S. @Home Cable Partners,
but Affiliated LCOs of the U.S. @Home Cable Partners retain 100% of revenue
generated from local service offerings that relate to programming within the
designated local areas of the home page for the @Home service, such as revenue
from advertising.
@Home believes that growth in its subscriber base will be critical to
attracting advertisers. In addition to traditional sales and marketing efforts,
@Home has developed a variety of compelling programming services delivered
through the @Home Guide in order to drive incremental subscriber penetration. In
addition to receiving advertising fees, the @Media programming services provide
a variety of revenue sources. Examples of @Media programming services include
real-time news and entertainment services, enhanced search and directory
services, online services, near CD quality digital audio services, the ability
to purchase and download software titles at speeds substantially faster and with
greater reliability than a typical dial-up modem, the ability to download and
play popular Internet games against other online players, and interactive
shopping.
The @Media group offers a series of technologies to assist advertisers and
content providers in delivering multimedia advertising and premium services,
including technologies which enable @Home's content partners to: (i) place
copies of their content and applications locally on the @Network; (ii) connect
directly to @Home's high-speed network without traversing the congested
Internet; and (iii) deliver advertising, content and services such as
continually updated news and sports information, from one source to many
subscribers simultaneously.
Competition. The markets for consumer and business Internet services and
online content are extremely competitive, and the Company expects that
competition will intensify in the future. @Home's most direct competitors in
these markets are Internet service providers ("ISPs"), national long distance
carriers and local exchange carriers, wireless service providers, online service
providers ("OSPs") and Internet content aggregators. Many of these competitors
are offering (or may soon offer) technologies that will attempt to compete with
some or all of @Home's high-speed data service offerings. Such technologies
include Integrated Services Digital Network ("ISDN") and Digital Subscriber Line
("xDSL"). @Home also competes with other cable-based data services that are
seeking to contract with cable system operators to bring their services into
geographic areas that are not covered by an exclusive relationship with @Home.
The bases of competition in these markets include transmission speed,
reliability of service, ease of access, price/performance, ease-of-use, content
quality, quality of presentation, timeliness of content, customer support, brand
recognition, operating experience and revenue sharing. The Company believes that
@Home compares favorably with its competitors with respect to each of these
factors, except brand recognition, which it is starting to build. Many of
@Home's competitors and potential competitors have substantially greater
resources than @Home, and there can be no assurance that @Home will be able to
compete effectively in its target markets.
ISPs, such as Netcom On-Line Communications, Services, Inc. and PSInet
Inc., provide basic Internet access to residential consumers and businesses,
generally using existing telephone network infrastructures. This method is
widely available and inexpensive, but performance is limited. Barriers to entry
are low, resulting in a highly competitive and fragmented market.
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Long distance IXCs, such as AT&T Corp. ("AT&T"), MCI Communications
Corporation, and Sprint, have deployed large-scale Internet access networks and
sell connectivity to business and residential customers. The RBOCs and other
local exchange carriers have also entered this field. Many of such carriers are
offering diversified packages of telecommunications services, including Internet
access service, to residential customers and could bundle such services
together, which could place @Home at a competitive disadvantage.
Wireless service providers, including AT&T and Hughes Network Systems, are
developing wireless Internet connectivity, such as MMDS, local multipoint
distribution service ("LMDS") and DBS.
OSPs include companies such as America Online, Inc. ("America Online"),
CompuServe Corporation ("CompuServe"), and Microsoft's Microsoft Network ("MSN")
that provide, over the Internet and on proprietary online services, content and
applications ranging from news and sports to consumer video conferencing. These
services are designed for broad consumer access over telecommunications-based
transmission media, which enables the provision of data services to the large
group of consumers who have personal computers with modems. In addition, they
provide basic Internet connectivity, ease-of-use and consistency of environment.
Internet content aggregators seek to provide a "one-stop" shop for Internet
and online users. Leading companies in this area include America Online,
CompuServe, Excite, Inc., Microsoft and Yahoo! Inc. In this market, competition
occurs in acquiring both content providers and subscribers. The principal bases
of competition in attracting content providers include quality of demographics,
audience size, cost-effectiveness of the medium and ability to create
differentiated experiences using aggregator tools. The principal bases of
competition in attracting subscribers include richness and variety of content
and ease of access to the desired content. The proprietary online services such
as America Online, CompuServe and MSN have the advantage of a large customer
base, industry experience, many content partnerships and substantial resources.
@Home's competitors in the cable-based services market are those cable
companies that have developed their own cable-based services and market those
services to unaffiliated cable system operators that are planning to deploy data
services. Several cable system operators, including Time Warner Inc. ("Time
Warner") and the Media One subsidiary of US WEST, have deployed high-speed
Internet access services over their existing local HFC cable networks.
Specifically, Time Warner, the second largest cable company in the United
States, has established its own cable-based high-speed data service with
proprietary content, called Road Runner. Time Warner plans to market the Road
Runner service through Time Warner's own cable systems as well as to other cable
system operators nationwide. Media One has developed another service called
Highway One, which offers high-speed Internet services to its existing
customers. Others that have publicly announced limited-area trials for their own
cable-based Internet services include Adelphia Communications Corporation,
BellSouth Corporation and Jones Intercable, Inc. Some of these companies, such
as Time Warner, have their own substantial libraries of multimedia content, and
the other competitors could establish strategic relationships with content
providers, which could provide them with a significant competitive advantage.
Many of @Home's competitors and potential competitors have substantially
greater financial, technical and marketing resources, larger subscriber bases,
longer operating histories, greater name recognition and more established
relationships with advertisers and content and application providers than @Home.
Such competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more resources
to developing Internet services or online content than @Home. There can be no
assurance that @Home will be able to compete successfully against current or
future competitors or that competitive pressures faced by @Home will not
materially adversely affect @Home's business, operating results or financial
condition. Further, as a strategic response to changes in the competitive
environment, @Home may make certain pricing, service or marketing decisions or
enter into acquisitions or new ventures that could have a material adverse
effect on @Home's business, operating results or financial condition.
Government Regulation. Although @Home's services are not directly subject
to current regulations of the FCC or any other federal or state communications
regulatory agency, changes in the regulatory environment relating to the
Internet connectivity market, including regulatory changes that, directly or
indirectly, affect telecommunications costs, limit usage of subscriber-related
information or increase the
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likelihood or scope of competition from the RBOCs or other telecommunications
companies, could affect the prices at which @Home may sell its services. For
example, the FCC has adopted rules requiring discounts on Internet connectivity
rates for qualifying schools and libraries, although @Home may be eligible for
reimbursements from the FCC in the amount of such discounts. In addition,
regulation of cable television rates may affect the speed at which cable
operators who have agreed or will agree in the future to provide the @Home
service will be able to upgrade their cable systems as necessary to carry
@Home's services. Similarly, enactment of proposed privacy legislation currently
pending in Congress, which would restrict the use of subscriber information by
interactive computer services for marketing and other purposes, could adversely
affect the marketing of @Home's services as well as its revenues from
advertising. The @Home Cable Partners have advised @Home that the local cable
operators typically have elected to classify the provision of all or some of the
@Home services as "additional cable services" under their respective local
franchise agreements, and to pay franchise fees in accordance therewith. Local
franchise authorities may attempt to subject cable systems to higher or other
franchise fees or taxes or otherwise seek to require cable operators to obtain
additional franchises, in connection with their distribution of the @Home
service. There are thousands of franchise authorities, and thus it will be
difficult or impossible for @Home or such cable operators to operate under a
unified set of franchise requirements. It is possible that governmental
authorities may attempt to impose some type of additional regulation of cable
systems carrying the @Home services. In the event that the FCC or another
governmental agency were to classify @Home or such cable operators as "common
carriers" of Internet services, or cable operators were to seek such
classification as a means of protecting themselves against liabilities, @Home's
rights as the exclusive Internet service provider over the systems of TCI, Cox
and Comcast could be lost. In addition, if @Home, the @Home Cable Partners or
such cable operators were classified as common carriers, they could be subject
to government-regulated tariff schedules for the amounts they could charge for
their services and would likely be required to pay higher rates to ILECs for
carrying @Home traffic. Alternatively, such local cable operators or federal or
state regulators could attempt to treat the provision of @Home's services as
"information services" under federal law. While the FCC does not, at present,
regulate the provision of information services, such services could, in the
future, be the subject of federal regulation, state regulation and/or special
fees or taxes. Given the close relationship of the information services
classification to the "enhanced services" classification established years ago
in the common carrier context, a classification of @Home as an information
service may also increase the risk that common carrier regulation would be
imposed on cable operators distributing the @Home service. Such regulation could
affect the willingness of such local cable operators to offer @Home's services.
To the extent @Home increases the number of foreign jurisdictions in which it
offers its services, @Home will be subject to additional governmental
regulation.
Management. The Company currently owns approximately 39% of the equity in
@Home. This interest includes ownership of all of the outstanding shares of
@Home's Series B Common Stock, which carries ten votes per share, and
approximately 36% of the outstanding shares of @Home's Series A Common Stock,
giving the Company approximately 72% of the voting power in @Home. Pursuant to
@Home's certificate of incorporation and based on current stock ownership, TCI,
as the holder of all of the @Home Series B Common Stock, has the right to elect
five of the 11 members of @Home's board of directors (the "Series B Directors");
KPCB, as the owner of all of @Home's Series K Common Stock, has the right to
elect one member, and the holders of Series A Common Stock (of which TCI,
together with either Cox or Comcast, holds a majority) have the right to elect
two directors (the "Series A Directors") who are not officers or employees of
@Home and are not affiliates or associates of TCI, Comcast or Cox. The remaining
three directors (the "At-Large Directors") are elected by the holders of all
series of @Home's common stock, voting together as a single class (of which
TCI's shares represent a majority of the voting power). Although the foregoing
would indicate that TCI acting alone has the power to elect eight of the 11
members of @Home's board, pursuant to a stockholders agreement (the "@Home
Stockholders Agreement") among TCI, Comcast, Cox, KPCB and @Home, TCI has ceded
a portion of that authority by agreeing, subject to certain conditions, to vote
for one designee of Comcast and one designee of Cox as two of its five Series B
Directors. In addition, TCI, Cox, Comcast and KPCB (the "@Home Principal
Stockholders") have agreed to vote their shares for the election of the chief
executive officer of @Home and one joint designee of Rogers and Shaw as two of
the three At Large Directors.
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The @Home certificate of incorporation also provides, however, that so long
as TCI continues to own a specified number of shares of Series B Common Stock
and securities representing a majority of the voting power of @Home, there will
be a committee of the @Home board, comprised of those Series B Directors who are
officers, directors or employees of TCI or a subsidiary of TCI, which will have
the sole power exercisable at any time to increase the size of the @Home board
to up to 17 directors and to fill any vacancy created by such increase. In
addition, subject to certain conditions, all actions of the @Home board must be
approved by a majority of the Series B Directors, in addition to a majority of
the members of the board present at a meeting at which a quorum is present (or
by unanimous written consent). TCI's power to control all @Home board decisions
were it to exercise its power to increase the size of the board and fill the
resulting vacancies is subject however to certain supermajority and unanimous
vote requirements and limitations with respect to the approval of related party
transactions.
In addition, subject to certain exceptions, the @Home Stockholders
Agreement restricts transfers of @Home securities by @Home Principal
Stockholders until the earlier to occur of (i) the fifth anniversary of the
termination of any @Home Principal Cable Stockholder's exclusive distribution
arrangements with @Home and (ii) the sixth anniversary of the @Home IPO (July
11, 2003). Following the first anniversary of @Home's IPO (July 11, 1998), each
@Home Principal Stockholder will be permitted to sell its @Home securities in
the public market, subject to a right of first offer of the other @Home
Principal Stockholders. The restrictions on transfer do not apply to the sale of
a controlling interest in @Home, but such sale is subject to certain tag-along
rights of certain other stockholders of @Home. The @Home Stockholders' Agreement
also provides that, if the number of homes passed by an @Home Principal Cable
Stockholder's cable systems that are subject to the exclusive distribution
obligations to @Home falls below a specified level, then such @Home Principal
Cable Stockholder must offer to sell a proportionate amount of its @Home
securities to the other @Home Principal Stockholders. Each @Home Principal
Stockholder also has preemptive rights to purchase its pro rata portion of any
new equity securities offered by @Home, subject to certain conditions and
exceptions, including exceptions for securities issued pursuant to a public
offering.
OTHER INVESTMENTS
In addition to its interests in @Home, the TCI Ventures Group's
Internet-related assets also include: TCI's 7% interest in Sportsline USA, Inc.,
an Internet provider of branded interactive sports information, programming and
merchandise; a 12% interest in iVillage, Inc., a developer of, and Internet and
on-line provider of, branded communities and information services pertaining to
parenting, careers and personal health; a 15% interest in Interzine Productions,
Inc., a provider of interactive sports programming and information services on
the Internet; and a 7% interest in KPCB Java Fund, L.P., a company which invests
in companies that develop Java applications for the Internet and intranets. The
Company's ownership of shares of the common stock of Netscape Communications
Corporation ("Netscape"), a developer of Internet and intranet software, had
also been attributed to the TCI Ventures Group. The Company sold its entire
interest in Netscape in July 1997 for aggregate proceeds of approximately $16
million, all of which is attributed to the TCI Ventures Group.
OTHER ASSETS
OVERVIEW
In addition to the ventures and businesses mentioned above, the TCI
Ventures Group contains other assets of TCI, including (i) NDTC, a wholly owned
subsidiary of TCI, which provides digital compression and authorization services
to programming suppliers and to video distribution outlets, (ii) an 80% interest
in ETC, a developer and distributor of a wide range of for-profit education,
training and communication services and products, and (iii) SUMMITrak, a wholly
owned subsidiary of the Company which provides an integrated network-based
information management system.
NATIONAL DIGITAL TELEVISION CENTER, INC.
General. NDTC, a wholly owned subsidiary of the Company, provides a wide
range of analog and digital television services, including the digital
compression of television and multimedia programming, satellite uplinking,
transponder management, primary origination, production, and post-production
services, and the
III-52
<PAGE> 225
encryption and authorization of transmitted signals, primarily to television
programming suppliers and satellite distributors ("NDTC Video Services"). Using
a combination of these capabilities, NDTC also supplies a package of television
programming signal transport and addressable set-top authorization services
directly to cable systems ("Headend in the Sky" or "HITS"). NDTC's primary
facilities are located in Littleton, Colorado where it has two facilities,
including uplink transmitters, studios and other property and equipment
sufficient to provide the full range of its services. NDTC also has specialized
facilities in New York and, more recently, Hong Kong, which are primarily used
for post-production and origination services and also have uplinking
capabilities, and in Hollywood, which is primarily used for production and
post-production services.
NDTC's customers include television programmers, cable operators, and
satellite distributors, such as PrimeStar Partners L.P., Encore Media
Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery Communications,
Inc. The Liberty Media Group has interests in each of Encore Media Corporation,
Liberty/Fox Regional Sports, L.L.C. and Discovery Communications, Inc. NDTC
derives a substantial portion of its revenue from companies that are affiliated
with TCI. For the year ended December 31, 1996, revenue from services provided
to TCI (including its consolidated subsidiaries, but not other affiliates) was
$25 million, or 34% of NDTC's total revenue for 1996. NDTC has been, and intends
to continue, seeking to expand its customer base to increase the number of
unaffiliated customers over time.
NDTC, working with a variety of new technologies, has implemented
statistical multiplexing of digitally compressed video signals. This technology
significantly increases the number of digital program signals that can be
transmitted simultaneously over a single satellite transponder or 6MHz cable
channel, thus effectively increasing the digital compression ratio. NDTC
believes that one effect of a successful implementation of such technologies may
be to increase and expand NDTC's customer base as the cable industry and other
television service providers (such as owners of SMATV and MMDS systems) seek to
increase the channel capacity of their transmission systems. Additional
technological innovations in the area of statistical multiplexing hold promise
for even higher compression ratios, while maintaining the quality of high
definition pictures; however, there can be no assurance that such additional
technology innovations will be successfully implemented.
NDTC has obtained both long-term and short-term leases for 34 transponders
that are located on various satellites owned and operated primarily by four
satellite companies. Certain of the transponder leases are for fixed terms while
others have terms through the operational life of the respective satellites;
however, all of such transponder leases are expected to expire between 1998 and
2006. In general, the transponder leases are either fully protected or contain
certain preemption rights if a transponder is deemed a failure, as defined in
the contracts. The Company believes there currently is reasonably sufficient
transponder space available to satisfy NDTC's needs for the foreseeable future,
even in the event that a transponder preemption occurs, which the Company
believes is unlikely.
NDTC Video Services. NDTC markets and provides NDTC Video Services
primarily to programming suppliers, which include several in which the Company
holds interests as well as third party content providers. Such services usually
consist of the digital compression and encryption of programming signals,
satellite uplinking, transponder management, and primary origination,
production, and post-production. Customers may contract for one or more NDTC
Video Services or for the full range of services offered. The NDTC Video
Services currently provided to affiliated companies are governed by agreements
which have been negotiated on a basis which approximates arm's-length terms and
the material terms of which are substantially the same as those governing
relationships with third parties, except as appropriate to take into account
volume differences. Generally, NDTC Video Services contracts have a term of six
years and are terminable by the customer upon payment of significant early
termination fees. The majority of the NDTC Video Services contracts have
remaining terms of at least four years.
HITS Services. NDTC's HITS services consist of the transmission of
compressed and encrypted digital programming signals to addressable set-top
boxes and the authorization of such boxes. HITS provides cable operators and
other television service providers with securely encrypted signals and the
ability to control viewer access all the way to the subscriber set-top box from
a single national location, thereby reducing the need for costly local staffing
and headend equipment. HITS enables cable system operators to provide their
subscribers with new digital tiers composed of new cable television networks,
movie multiplexes and pay-per-view services, while maintaining the same analog
service they currently provide.
III-53
<PAGE> 226
During the fourth quarter of 1996, NDTC began offering HITS commercially.
TCIC, which is included in the TCI Group, is presently utilizing HITS in a few
of TCIC's major markets, and TCIC intends to expand its use of HITS to a
substantial number of additional markets by the end of 1997. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC. These negotiations are being carried out on an arm's-length basis (or, in
the case of affiliated customers, on a basis which approximates arm's-length
terms), and it is expected that the material terms made available to the TCI
Group will be substantially the same as those provided to unaffiliated third
parties, but will include pricing on a most favored nations basis due to the
importance to NDTC of the TCI Group's large customer base.
Competition. NDTC Video Services, specifically the transmission, production
and post-production services, are highly competitive. There are a number of
well-established competitors located on both the east and west coasts to both
NDTC's uplinking and satellite transmission services and its production and
post-production services, many of which competitors have been in existence
significantly longer than NDTC and may have an established customer base. NDTC's
HITS authorization and transport services compete with locally operated
authorization controllers, purchased from the same vendor that supplies set-top
terminals to cable operators, and with programmers who provide their own digital
signal transport. There can be no assurance that the HITS service will achieve
significant market penetration beyond the TCI affiliated companies.
Regulatory Environment. While the NDTC Video Services and other services
offered by NDTC are not directly regulated, the NDTC uplink facilities are
operated pursuant to FCC licenses and subject to applicable FCC rules, including
but not limited to the FCC's environmental rules, which establish limits on
human exposure to RF radiation emanating from FCC-licensed facilities. Failure
to comply with applicable FCC rules could result in fines, denial of renewal, or
revocation of the relevant license(s).
ETC W/TCI, INC.
The TCI Ventures Group includes the Company's 80% equity interest in ETC
w/tci, Inc., which is a developer and distributor of a wide range of for-profit
education, training and communication services and products for customers at
school, at work and at home. The TCI Ventures Group also includes (i) the
Company's interest in ETC's Series A Cumulative Redeemable Preferred Stock which
currently has a liquidation value of approximately $36 million and (ii) certain
debt obligations of ETC to TCI in an aggregate amount of approximately $91
million at June 30, 1997. Formed in February 1996 to consolidate the investments
and initiatives the Company has made in the education industry over the past 15
years, ETC manages these investments and initiatives, creates synergies among
them, and develops complementary new businesses which can be distributed across
the Company's existing and developing distribution infrastructure. The Company
is considering certain strategic alternatives with respect to its investment in
ETC, including, among other things, additional investments from unrelated
entities and a restructuring of the ownership of ETC's assets that could result
in a change in control. There can be no assurance that any such transaction
would occur on terms satisfactory to the Company or at all. Any proceeds of any
such transaction, in the form of cash, capital stock or assets, would be
attributed to the TCI Ventures Group.
ETC's current investments include: (i) a 95% interest in CareerTrack, Inc.
("CareerTrack"), a training company which is a leader in the development,
marketing and production of business and educational seminars and related
publications targeting mid-level corporate managers; (ii) an 80% interest in
National School Conference Institute, Inc. , a training company which is a
leading provider of public seminars and satellite-delivered staff development
programming for educators; (iii) a 50% interest in Ingenius, a general
partnership which develops and distributes interactive multimedia current events
programming using satellite, cable television and Internet distribution
channels; (iv) an approximately 11% interest in The Lightspan Partnership, Inc.,
a venture capital-financed, start-up company which develops and markets
innovative, curriculum-based, interactive reading, language arts and mathematics
programming for K-6 schools; and (v) an approximately 10% interest in Academic
Systems Corporation, a venture capital-financed, start-up company which provides
multimedia instructional materials for higher education. ETC had reached an
III-54
<PAGE> 227
agreement in principle to acquire the remaining 50% of Ingenius which it did not
already own; however, the negotiations for a definitive agreement for such
transaction are currently in abeyance while certain strategic alternatives with
respect to the Company's interest in ETC are being considered.
ETC's other major current initiatives include: (i) customized technology
solutions for school customers whereby ETC performs a feasibility study to
assess the needs of such customers and then recommends and implements customized
technology solutions for such customers, which may include wide and local area
networks, hardware, software, programming, Internet connectivity, professional
development, and support and maintenance; and (ii) single and multi-day courses
in educational technology taught at one of ETC's two Educational Technology
Centers located in Denver, Colorado and Washington, D.C.
ETC works closely with the National Education Association, the American
Federation of Teachers, the American Association of School Administrators, the
National School Boards Association and the National Association of Secondary
School Principals in developing and distributing ETC's educational technology
services and products.
ETC's business is divided into two separate divisions, Training and
Education. The Training Division concentrates primarily on the commercial
training market, including vocational and technical training, as well as
continuing adult education. Currently, ETC is structuring the Training Division
around CareerTrack, through which it markets various commercial training
services and products. The Education Division concentrates primarily on the K-12
education market, including both public and private schools, but also plans to
address pre-kindergarten, post-secondary and home-school markets. The services
and products delivered by the Education Division consist of customized
technology solutions, staff development, professional development, software and
programming. In addition, ETC has recently undertaken additional activities to
(i) expand its products and services to focus on the rapidly growing small
business market, a sector which management believes has been underserved by
traditional training companies from an on-going training and education
perspective and (ii) facilitate the delivery of the services and products of ETC
to international customers.
SUMMITRAK
SUMMITrak is wholly owned by TCI and is a development stage business which
is in the process of developing and testing its client server based customer
management and marketing information systems. Such systems are currently
designed to support delivery of cable television and Internet access products
and can be expanded to support telephony products as a future development. The
customer management system includes modules which support customer care,
billing, inventory control, dispatch and workforce management, marketing and
set-top box or converter activation. The marketing information system includes
database and reporting software which supports market analysis as well as
enables generation of lists which are cross-referenced to various factors and
allow marketing campaigns to be tailored to customers' profiles.
SUMMITrak is currently beta testing its customer management system in a
small number of TCI's local cable systems. At present SUMMITrak has no agreement
with the TCI Group. If SUMMITrak is used by the TCI Group on a commercial basis,
it is intended that the TCI Group will purchase such services at market rates
negotiated on a basis that is intended to approximate arm's-length terms. Upon
completion of development and testing, SUMMITrak could also be made available
commercially to non-affiliated customers on an outsourced or service bureau
basis.
TCI is considering certain strategic alternatives with respect to
SUMMITrak, including a sale of the assets of SUMMITrak or the contribution of
the stock or assets of SUMMITrak to a joint venture with another investor. There
can be no assurance that any such transaction could be accomplished on terms
satisfactory to TCI or at all. The proceeds of any such sale or joint venture
interest, if applicable, would be attributed to the TCI Ventures Group. Any such
transaction may also include a simultaneous agreement with the purchaser or
joint venture to provide information system services to the TCI Group's cable
systems. If any such transaction included a service agreement with the TCI
Group, there can be no assurance that the terms of such transaction would be as
favorable to the TCI Ventures Group as the terms it could have negotiated had
such transaction not included such a service agreement.
III-55
<PAGE> 228
DIGIVENTURES, LLC
DigiVentures, LLC ("DigiVentures") is a joint venture formed in December
1996 by the Company and Babcock & Brown Financial Corporation, which venture was
established for the purpose of leasing digital set top boxes from third parties
to sublease such equipment to TCIC. TCIC may further sublease such equipment to
other parties. Currently, DigiVentures leases certain equipment to TCIC which
DigiVentures purchased from General Instruments Corporation of Delaware and
other vendors. In the future, DigiVentures intends to lease equipment from third
parties and then sublease such equipment to TCIC. The lease rates that have been
established and that the parties currently intend to use for future leases
between TCIC and DigiVentures are commensurate with market rates given TCIC's
size and creditworthiness, and as such, approximate the rates that would be
charged by unaffiliated third parties. The Company's 99% interest in
DigiVentures has been attributed to the TCI Ventures Group. Babcock & Brown
Financial Corporation holds a 1% interest in the venture. DigiVentures is not
the TCI Group's exclusive provider or lessor of set-top boxes; the TCI Group may
from time to time acquire or lease set-top boxes from other companies.
OTHER INVESTMENTS
The TCI Ventures Group also contains interests in the following additional
technology-related assets: a 9% interest in Acclaim Entertainment, Inc.
("Acclaim"), a leading publisher of interactive entertainment software; a 16%
interest in Antec Corporation ("Antec"), a communications company specializing
in the design, manufacture and distribution of products for HFC broadband
networks; a 25% interest in MCNS Holdings, L.P., a joint venture established for
the purpose of developing and implementing technologies for upgrades and
expansions to the telecommunications systems of its partners; a 100% interest in
TCI TVGOS, Inc., which holds an undivided interest with one other company to the
intellectual property rights previously owned by TV Guide on Screen, a joint
venture formed to develop programming guides, which has been dissolved; and
Intessera, a wholly owned subsidiary of TCI that develops database management
software and offers back office support to its customers. Each of Acclaim and
Antec are traded on the National Market tier of The Nasdaq Stock Market under
the symbols "AKLM" and "ANTC," respectively.
III-56
<PAGE> 229
ANNEX IV
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of any
Inter-Group Interest in the TCI Ventures Group which the TCI Group may create
following the Exchange Offers, and the application of certain terms of the TCI
Ventures Group Stock Proposal based on the assumptions set forth herein and
using 825 million shares as the number of authorized shares of TCI Ventures
Group Common Stock, 160 million shares as the number of shares of TCI Ventures
Group Common Stock issued in the Exchange Offers (the "Outstanding Shares of TCI
Ventures Group Stock"), zero as the Number of Shares Issuable with Respect to
the TCI Ventures Group Inter-Group Interest immediately following the Exchange
Offers and 30 million shares as the number of TCI Ventures Group Common Stock
issuable upon the conversion, exercise or exchange of Pre-Exchange Offer
Securities. Unless otherwise specified, each illustration below should be read
independently as if none of the other transactions illustrated in this Annex 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 Appendices thereto. Please note that the following illustrations
are purely hypothetical and the numbers used herein (including assumptions of
market values) were chosen to simplify the calculations and are not intended to
represent estimates of actual numbers or values. Capitalized terms used herein
have the respective meanings ascribed to them in the Proxy Statement. See Annex
I -- Index of Certain Defined Terms.
At any given time, the TCI Ventures Group Outstanding Interest Fraction,
which represents the percentage interest in the equity value of the Company
attributable to the TCI Ventures Group that is represented by the outstanding
shares of TCI Ventures Group Common Stock, will be equal to:
<TABLE>
<CAPTION>
Outstanding Shares of TCI Ventures Group Common Stock
-------------------------------------------------------------------------------------------------
<C> <C> <C>
Outstanding Shares of TCI Ventures Group Number of Shares Issuable with Respect to the
Common Stock + TCI Ventures Group Inter-Group Interest
</TABLE>
The balance of the equity of the TCI Ventures Group is represented by the
TCI Group's Inter-Group Interest in the TCI Ventures Group and, at any given
time, the TCI Ventures Group Inter-Group Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the TCI
Ventures Group that is attributed to the TCI Group, will be equal to:
<TABLE>
<CAPTION>
Number of Shares Issuable with Respect to the TCI Ventures Group Common Stock
-------------------------------------------------------------------------------------------------
<C> <C> <C>
Outstanding Shares of TCI Ventures Group Number of Shares Issuable with Respect to the
Common Stock + TCI Ventures Group Inter-Group Interest
</TABLE>
The sum of the TCI Ventures Group Outstanding Interest Fraction and the TCI
Ventures Group Inter-Group Interest Fraction will always equal 100%.
The Adjusted TCI Ventures Group Outstanding Interest Fraction is a measure
that differs from the TCI Ventures Group Outstanding Interest Fraction in that
it takes into account the dilutive effect of certain convertible securities and
options. It is used instead of the TCI Ventures Group Outstanding Interest
Fraction in certain situations and would be equal to:
<TABLE>
<S> <C> <C> <C> <C>
Outstanding Shares of TCI Ventures Group Common Stock
----------------------------------------------------------------------------------------------------------
Outstanding Shares of Number of Shares Issuable with Number of Shares of TCI Ventures Group
TCI Ventures Group + Respect to the TCI Ventures Group + Common Stock Issuable upon Conversion,
Common Stock Inter-Group Interest Exercise or Exchange of Pre-Exchange
Offer Securities
</TABLE>
IV-1
<PAGE> 230
EXCHANGE OFFERS
The following illustration assumes the initial issuance by the Company of
160 million shares of TCI Ventures Group Common Stock in the Exchange Offers.
- Assuming that the Number of Shares Issuable with Respect to the TCI
Ventures Group Inter-Group Interest is zero immediately following the
Exchange Offers, the TCI Ventures Group Outstanding Interest Fraction
will be 100%, calculated as follows:
160 million
----------------
160 million + 0
The TCI Ventures Group Inter-Group Interest Fraction will accordingly
represent an interest of 0% in the TCI Ventures Group.
- In this case, the TCI Group would not be credited, and the TCI Ventures
Group would not be charged, with any amount with respect to any dividend
or other distribution paid on the outstanding shares of TCI Ventures
Group Common Stock.
- Immediately after the Exchange Offers, the Company would have 665 million
authorized and unissued shares of TCI Ventures Group Common Stock
remaining (825 million minus 160 million issued and outstanding).
PURCHASES OF TCI VENTURES GROUP COMMON STOCK
The following two illustrations reflect the purchase by the Company of 80
million shares of TCI Ventures Group Common Stock, which are retired or
otherwise cease to be outstanding following their purchase.
PURCHASE WITH TCI VENTURES GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TCI Ventures Group, with the TCI Ventures Group being charged
with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Shares purchased............................................ 80 million
-----------
Total shares issued and outstanding after purchase.......... 80 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be changed by the purchase of any shares
of TCI Ventures Group Common Stock which are purchased with funds
attributed to the TCI Ventures Group.
- The TCI Ventures Group Outstanding Interest Fraction would be 100%,
calculated as follows:
80 million
---------------
80 million + 0
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 0% in the TCI Ventures Group.
- In this case, the TCI Group would not be credited, and the TCI Ventures
Group would not be charged, with any amount with respect to any dividend
or other distribution paid on the outstanding shares of TCI Ventures
Group Common Stock.
- The Company would have 745 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 80 million issued and
outstanding).
IV-2
<PAGE> 231
PURCHASE WITH TCI GROUP FUNDS
Assume all such shares are identified as having been purchased with funds
attributed to the TCI Group, with the TCI Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Shares purchased............................................ 80 million
-----------
Total shares issued and outstanding after purchase.......... 80 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be increased by the number of shares of TCI
Ventures Group Common Stock which are so purchased with funds attributed
to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter- Group Interest prior to purchase............. 0
Shares purchased............................................ 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest after purchase................. 80 million
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 50%,
calculated as follows:
80 million
------------------------
80 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 50% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 100% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (50%) to the TCI
Ventures Group Outstanding Interest Fraction (50%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities). If, for example, a dividend of $1 per share
were declared and paid on the 80 million shares of TCI Ventures Group
Common Stock outstanding (an aggregate of $80 million), the TCI Group
would be credited with $80 million, and the TCI Ventures Group would be
charged with that amount in addition to the $80 million dividend on the
outstanding shares of TCI Ventures Group Common Stock (a total of $160
million). An example of the effects of a distribution of TCI Ventures
Group Common Stock is set forth under the caption "TCI Ventures Group
Common Stock Dividends."
- The Company would have 745 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 80 million issued and
outstanding).
TRANSFERS OF ASSETS BETWEEN THE TCI GROUP AND THE TCI VENTURES GROUP
CONTRIBUTION OF ASSETS FROM THE TCI GROUP TO THE TCI VENTURES GROUP
The following illustration reflects the contribution by the TCI Group to
the TCI Ventures Group of $1.6 billion of assets attributed to the TCI Group on
a date on which the Market Value of the TCI Ventures Group Common Stock is $20
per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 0
-----------
Total shares issued and outstanding after contribution...... 160 million
===========
</TABLE>
IV-3
<PAGE> 232
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased to reflect the contribution to the TCI Ventures Group
of assets theretofore attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter- Group Interest prior to contribution......... 0
Adjustment to reflect contribution to the TCI Ventures Group
of assets attributed to the TCI Group ($1.6 billion
divided by $20)........................................... 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest after contribution............. 80 million
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 67%,
calculated as follows:
160 million
--------------------------
160 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 33% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 50% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (33%) to the TCI
Ventures Group Outstanding Interest Fraction (67%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities).
- The Company would have 665 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 160 million issued and
outstanding).
TRANSFER OF ASSETS FROM THE TCI VENTURES GROUP TO THE TCI GROUP
The following illustration reflects the transfer by the TCI Ventures Group
to the TCI Group of $800 million of assets attributed to the TCI Ventures Group
on a date on which the Market Value of the TCI Ventures Group Common Stock is
$20 per share and the Number of Shares Issuable with Respect to the TCI Ventures
Group Inter-Group Interest is 80 million.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Shares purchased............................................ 0
-----------
Total shares issued and outstanding after transfer.......... 160 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be decreased to reflect the contribution to
the TCI Group of assets theretofore attributed to the TCI Ventures Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to transfer.................... 80 million
Adjustment to reflect transfer to the TCI Group of assets
attributed to the TCI Ventures Group ($800 million divided
by $20)................................................... 40 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after transfer....................... 40 million
==========
</TABLE>
The TCI Ventures Group will not make transfers of assets to the TCI Group
in reduction of the Inter-Group Interest if the effect would be to reduce the
Number of Shares Issuable with Respect to the TCI
IV-4
<PAGE> 233
Ventures Group Inter-Group Interest to less than zero. The TCI Ventures Group
cannot have an interest in the TCI Group corresponding to the Inter-Group
Interest.
- The TCI Ventures Group Outstanding Interest Fraction would be 80%,
calculated as follows:
160 million
--------------------------
160 million + 40 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 20% in the TCI Ventures Group.
- In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with an amount equal to 25% (representing the ratio of
the TCI Ventures Group Inter-Group Interest Fraction (20%) to the TCI
Ventures Group Outstanding Interest Fraction (80%)) of the aggregate
amount of any dividend or other distribution paid on the outstanding
shares of TCI Ventures Group Common Stock (other than a dividend or other
distribution payable in shares of TCI Ventures Group Common Stock or in
certain other securities).
- The Company would have 665 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 160 million issued and
outstanding).
FUTURE OFFERINGS OF TCI VENTURES GROUP COMMON STOCK
The following illustrations reflect the sale by the Company of 80 million
shares of TCI Ventures Group Common Stock on a date on which the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest is
80 million.
OFFERING FOR THE TCI VENTURES GROUP
Assume all such shares are identified as issued for the account of the TCI
Ventures Group, with the net proceeds credited to the TCI Ventures Group:
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after offering.......... 240 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would not be changed by the issuance of any shares
of TCI Ventures Group Common Stock for the account of the TCI Ventures
Group.
- The TCI Ventures Group Outstanding Interest Fraction would be 75%,
calculated as follows:
240 million
--------------------------
240 million + 80 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 25% in the TCI Ventures Group.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 240 million
issued and outstanding).
OFFERING FOR THE TCI GROUP
Assume all such shares are identified as issued for the account of the TCI
Group with respect to the Inter-Group Interest, with the net proceeds credited
to the TCI Group:
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after offering.......... 240 million
===========
</TABLE>
IV-5
<PAGE> 234
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would decrease by the number of shares of TCI
Ventures Group Common Stock issued for the account of the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to offering.................... 80 million
Shares issued in offering................................... 80 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after offering....................... 0
==========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 100%,
calculated as follows:
240 million
----------------
240 million + 0
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 0% in the TCI Ventures Group.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock (825 million minus 240 million issued and
outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE EXCHANGE OFFERS
If the Company were to issue any debt or preferred stock convertible into
shares of TCI Ventures Group Common Stock, the TCI Ventures Group Inter-Group
Interest Fraction and the TCI Ventures Group Outstanding Interest Fraction would
be unchanged at the time of such issuance. If any shares of TCI Ventures Group
Common Stock were issued upon conversion of such Convertible Security, however,
then the TCI Ventures Group Inter-Group Interest Fraction and the TCI Ventures
Group Outstanding Interest Fraction would be affected in a manner similar to
that shown above under "Offering for the TCI Ventures Group", if such
Convertible Security were attributed to the TCI Ventures Group, or under
"Offering for the TCI Group," if such Convertible Security were attributed to
the TCI Group. The foregoing will not apply to the conversion, exercise or
exchange of Pre-Exchange Offer Securities.
TCI VENTURES GROUP COMMON STOCK DIVIDENDS
The following illustrations reflect dividends of TCI Ventures Group Common
Stock on outstanding TCI Ventures Group Common Stock and outstanding TCI Group
Common Stock, respectively, on a date on which the Number of Shares Issuable
with Respect to the TCI Ventures Group Inter-Group Interest is 80 million.
TCI VENTURES GROUP COMMON STOCK DIVIDEND ON TCI VENTURES GROUP COMMON STOCK
Assume the Company declares a dividend of one-half of one share of TCI
Ventures Group Common Stock on each outstanding share of TCI Ventures Group
Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 80 million
-----------
Total shares issued and outstanding after dividend.......... 240 million
===========
</TABLE>
- The Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would be increased proportionately to reflect the
stock dividend payable in shares of TCI Ventures Group Common Stock to
holders of TCI Ventures Group Common Stock.
IV-6
<PAGE> 235
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to dividend.................... 80 million
Adjustment to reflect dividend of shares on outstanding
shares of TCI Ventures Group Common Stock................. 40 million
-----------
Number of shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after dividend....................... 120 million
===========
</TABLE>
- The TCI Ventures Group Outstanding Interest Fraction would be 67%,
calculated as follows:
240 million
---------------------------
240 million + 120 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 33% in the TCI Ventures Group. The TCI Ventures
Group Outstanding Interest Fraction and the TCI Ventures Group Inter-
Group Interest fraction would be unchanged from the corresponding
percentages prior to the dividend.
- The Company would have 585 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 240 million
issued and outstanding).
TCI VENTURES GROUP COMMON STOCK DIVIDEND ON TCI GROUP COMMON STOCK
Assume an aggregate of 600 million shares of TCI Group Common are
outstanding and the Company declares a dividend of one-tenth of one share of TCI
Ventures Group Common Stock on each outstanding share of TCI Group Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.................... 160 million
Newly issued shares......................................... 60 million
-----------
Total shares issued and outstanding after dividend.......... 220 million
===========
</TABLE>
- Subsequent to the Exchange Offers, any dividend of shares of TCI Ventures
Group Common Stock on the outstanding shares of TCI Group Common Stock
will be treated as a dividend payable from the Number of Shares Issuable
with Respect to the TCI Ventures Group Inter-Group Interest. As a result,
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest would decrease by the number of shares of TCI
Ventures Group Common Stock distributed on the outstanding shares of TCI
Group Common Stock as a dividend.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest prior to dividend...................... 80 million
Shares distributed on outstanding shares of TCI Group Common
Stock..................................................... 60 million
----------
Number of Shares Issuable with Respect to the TCI Ventures
Group
Inter-Group Interest after dividend......................... 20 million
==========
</TABLE>
- The Company will not distribute to holders of TCI Group Common Stock as a
dividend a number of shares of TCI Ventures Group Common Stock exceeding
the Number of Shares Issuable with Respect to the TCI Ventures Group
Inter-Group Interest.
- The TCI Ventures Group Outstanding Interest Fraction would be 92%,
calculated as follows:
220 million
---------------------------
220 million + 20 million
The TCI Ventures Group Inter-Group Interest Fraction would accordingly
represent an interest of 8% in the TCI Ventures Group.
IV-7
<PAGE> 236
- The Company would have 605 million authorized and unissued shares of TCI
Ventures Group Common Stock remaining (825 million minus 220 million
issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the TCI Ventures
Group Common Stock at the option of the Company, (b) mandatory dividend,
redemption or conversion of the TCI Ventures Group Common Stock following the
Disposition of all or substantially all of the properties and assets of the TCI
Ventures Group and (c) redemption of all the TCI Ventures Group Common Stock in
exchange for stock of a subsidiary holding all the assets and liabilities of the
TCI Ventures Group, in each case assuming that (i) the number of outstanding
shares of TCI Ventures Group Common Stock is 90 million and (ii) the Number of
Shares Issuable with Respect to the TCI Ventures Group Inter-Group Interest is
30 million.
CONVERSION AT THE OPTION OF THE COMPANY
Assume that the Company elects to convert the TCI Ventures Group Common
Stock into TCI Group Common Stock at the TCI Ventures Group Optional Conversion
Ratio; the TCI Ventures Group Private Market Value is determined to be $4
billion and the number of shares of TCI Ventures Group Common Stock deemed to be
issued upon the conversion, exercise or exchange of Convertible Securities
(other than Pre-Exchange Offer Securities) is 10 million.
- The Adjusted Outstanding Shares of TCI Ventures Group Common Stock would
be 160 million (representing the sum of (i) the number of outstanding
shares of TCI Ventures Group Common Stock, (ii) the Number of Shares
Issuable with Respect to the TCI Ventures Group Inter-Group Interest,
(iii) the number of shares of TCI Ventures Group Common Stock issuable
upon conversion, exercise or exchange of Pre-Exchange Offer Securities
and (iv) the number of shares of TCI Ventures Group Common Stock deemed
to be issued upon the conversion, exercise or exchange of Convertible
Securities) (other than Pre-Exchange Offer Securities)), calculated as
follows:
90 million + 30 million + 30 million + 10 million
- The TCI Ventures Group Common Stock Per Share Value would be $25
(representing the quotient of the TCI Ventures Group Private Market Value
($4 billion) and the Adjusted Outstanding Shares of TCI Ventures Group
Common Stock (160 million )).
- In this case, assuming that the average Market Value of one share of
Series A TCI Group Common Stock is $15 over the 20-Trading Day period
ending on the Trading Day preceding the date as of which the TCI Ventures
Group Private Market Value is determined, the TCI Ventures Group Optional
Conversion Ratio would be 1.67 (representing the quotient of the TCI
Ventures Group Common Stock Per Share Value ($25) and such average Market
Value of the Series A TCI Group Common Stock ($15)), and each outstanding
share of TCI Ventures Group Common would be converted into 1.67 shares of
TCI Group Common Stock.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF TCI VENTURES GROUP COMMON
STOCK
Assume that a Disposition of all (not merely substantially all) of the
properties and assets of the TCI Ventures Group occurs and the TCI Ventures
Group Net Proceeds from such Disposition equal $4 billion.
- If the Company elected to redeem all outstanding shares of TCI Ventures
Group Common Stock, the aggregate redemption price would be $2.4 billion
(representing the product of the Adjusted TCI Ventures Group Outstanding
Interest Fraction and the TCI Ventures Group Net Proceeds of such
Disposition), calculated as follows:
<TABLE>
<C> <S>
90 million
------------------------------------ X $4 billion
90 million + 30 million + 30 million
</TABLE>
In this case each outstanding share of TCI Ventures Group Common Stock
would be redeemed in exchange for $26.67 per share (representing the
quotient of the aggregate redemption price ($2.4 bil-
IV-8
<PAGE> 237
lion) and the number of outstanding shares of TCI Ventures Group Common
Stock (90 million)). If Pre-Exchange Offer Securities remain outstanding
at the time of any redemption of all outstanding shares of TCI Ventures
Group Common Stock following the disposition of all (not merely
substantially all) of the properties and assets of the TCI Ventures
Group, the proportionate interest in the TCI Ventures Group Net Proceeds
of the Disposition to be distributed to the holders of TCI Ventures Group
Common Stock will be determined on the basis of the Adjusted TCI Ventures
Group Outstanding Interest Fraction, which will result in the allocation
to the TCI Group of a portion of such TCI Ventures Group Net Proceeds, in
addition to the portion attributable to any Inter-Group Interest in the
TCI Ventures Group, sufficient to provide for the delivery of the portion
of the consideration (if any) deliverable by the Company on any
post-redemption conversion, exercise or exchange of Pre-Exchange Offer
Securities that is in substitution for shares of TCI Ventures Group
Common Stock that would have been issuable upon such exchange if it had
occurred prior to the redemption.
- If the Company elected to convert the TCI Ventures Group Common Stock
into TCI Group Common Stock, assuming that the Market Value of one share
of Series A TCI Ventures Group Common Stock on each Trading Day during
the ten-Trading Day period beginning on the 16th Trading Day following
the consummation of such Disposition is $25 and the Market Value of one
share of Series A TCI Group Common Stock on each Trading Day during such
period is $15, the TCI Ventures Group Common Stock would be converted
into TCI Group Common Stock at a ratio of 1.83 (representing 110% of the
average daily ratio during such period of the Market Value of one share
of Series A TCI Ventures Group Common Stock to the Market Value of one
share of Series A TCI Group Common Stock) shares of TCI Group Common
Stock for each share of TCI Ventures Group Common Stock.
Assume that a Disposition of substantially all (but not all) of the
properties and assets of the TCI Ventures Group occurs and the TCI Ventures
Group Net Proceeds from the Disposition equal $3.2 billion.
- If the Company elected to pay a dividend to the holders of TCI Ventures
Group Common Stock, the aggregate amount of the dividend would be $2.4
billion (representing the product of the TCI Ventures Group Outstanding
Interest Fraction and the TCI Ventures Group Net Proceeds of the
Disposition), calculated as follows:
<TABLE>
<C> <S>
90 million
----------------------- X $3.2 billion
90 million + 30 million
</TABLE>
In this case, the TCI Group would be credited, and the TCI Ventures Group
would be charged, with $800 million, an amount equal to 33% (representing
the ratio of the TCI Ventures Group Inter-Group Interest Fraction (25%)
and the TCI Ventures Group Outstanding Interest Fraction (75%)) of the
aggregate amount of such dividend.
- If the Company elected to redeem shares of TCI Ventures Group Common
Stock, the aggregate redemption price would be $2.4 billion (representing
the product of the TCI Ventures Group Outstanding Interest Fraction and
the TCI Ventures Group Net Proceeds of such Disposition), calculated as
follows:
<TABLE>
<C> <S>
90 million
----------------------- X $3.2 billion
90 million + 30 million
</TABLE>
In this case, assuming that the average Market Value of one share of
Series A TCI Ventures Group Common Stock for the ten-Trading Day period
beginning on the 16th Trading Day following the consummation of such
Disposition is $33.33, an aggregate of 72 million (equal to the quotient
of the aggregate redemption price and such average Market Value) shares
of TCI Ventures Group Common Stock would be redeemed in exchange for
$33.33 per share.
- If the Company elected to convert TCI Ventures Group Common Stock into
TCI Group Common Stock, assuming that the Market Value of one share of
Series A TCI Ventures Group Common Stock on each Trading Day during the
ten-Trading Day period referred to in the preceding paragraph was
IV-9
<PAGE> 238
$33.33 and the Market Value of one share of Series A TCI Group Common
Stock on each Trading Day during such period was $15, the TCI Ventures
Group Common Stock would be converted into TCI Group Common Stock at a
ratio of 2.44 (representing 110% of the average daily ratio during such
period of the Market Value of one share of Series A TCI Ventures Group
Common Stock to the Market Value of one share of Series A TCI Group
Common Stock) shares of TCI Group Common Stock for each share of TCI
Ventures Group Common Stock.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
Assume that Company elects to redeem all of the outstanding shares of TCI
Ventures Group Common Stock in exchange for shares of common stock of the TCI
Ventures Group Subsidiary and that the total number of outstanding shares of
common stock of the TCI Ventures Group Subsidiary is 150 million.
- In this case, shares of TCI Ventures Group Common Stock would be redeemed
in exchange for an aggregate number of shares of common stock of the TCI
Ventures Group Subsidiary equal to 90 million (representing the product
of the Adjusted TCI Ventures Group Outstanding Interest Fraction and the
number of shares of common stock of the TCI Ventures Group Subsidiary),
calculated as follows:
<TABLE>
<C> <S>
90 million
------------------------------------ X $150 billion
90 million + 30 million + 30 million
</TABLE>
In this case each outstanding share of TCI Ventures Group Common Stock
would be redeemed in exchange for one share of common stock of the TCI
Ventures Group Subsidiary, and the Company would retain 60 million shares
of common stock of the TCI Ventures Group Subsidiary. Thirty million of
such shares would be held by the Company to be used in connection with
any conversion, exercise or exchange of Pre-Exchange Offer Securities.
IV-10
<PAGE> 239
ANNEX V
FINANCIAL INFORMATION
INDEX TO ANNEX V
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Selected Historical and Pro Forma Financial Data............ V-2
Condensed Pro Forma Combined Financial Statements:
Tele-Communications, Inc.................................. V-5
"TCI Ventures Group"...................................... V-12
"TCI Group"............................................... V-18
Tele-Communications, Inc. and Subsidiaries:
Management's Discussion and Analysis of Financial
Condition Results of Operations, Three months ended
March 31, 1997 and 1996................................ V-25
Consolidated Balance Sheets, March 31, 1997 and December
31, 1996 (unaudited)................................... V-30
Consolidated Statements of Operations, Three month period
ended March 31, 1997 and 1996 (unaudited).............. V-31
Consolidated Statement of Stockholders' Equity, Three
months ended March 31, 1996 (unaudited)................ V-32
Consolidated Statements of Cash Flows, Three months ended
March 31, 1997 and 1996 (unaudited).................... V-33
Notes to Consolidated Financial Statements, March 31, 1997
(unaudited)............................................ V-34
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1996, 1995 and 1994....................... V-44
Independent Auditors' Report.............................. V-57
Consolidated Balance Sheets, December 31, 1996 and 1995... V-58
Consolidated Statements of Operations, Years ended
December 31, 1996, 1995 and 1994....................... V-59
Consolidated Statements of Stockholders' Equity, Years
ended
December 31, 1996, 1995, 1994.......................... V-60
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994....................... V-63
Notes to Consolidated Financial Statements, December 31,
1996, 1995 and 1994.................................... V-64
"TCI Ventures Group":
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Three months ended
March 31, 1997 and 1996................................ V-98
Combined Balance Sheets, March 31, 1997 and December 31,
1996 (unaudited)....................................... V-117
Combined Statements of Operations, Three month period
ended March 31, 1997 and 1996 (unaudited).............. V-118
Statement of Combined Equity, Three months ended March 31,
1997 (unaudited)....................................... V-119
Combined Statements of Cash Flows, Three months ended
March 31, 1997 and 1996 (unaudited).................... V-120
Notes to Combined Financial Statements, March 31, 1997
(unaudited)............................................ V-121
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Years ended
December 31, 1996, 1995 and 1994....................... V-139
Independent Auditors' Report.............................. V-162
Combined Balance Sheets, December 31, 1996 and 1995....... V-163
Combined Statements of Operations, Years ended December
31, 1996, 1995 and 1994................................ V-164
Statements of Combined Equity, Years ended December 31,
1996, 1995, 1994....................................... V-165
Combined Statements of Cash Flows, Years ended December
31, 1996, 1995 and 1994................................ V-166
Notes to Combined Financial Statements, December 31, 1996,
1995 and 1994.......................................... V-167
</TABLE>
V-1
<PAGE> 240
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
TCI VENTURES GROUP
The following table supplementally sets forth selected historical combined
income statement data for the businesses that will initially comprise the TCI
Ventures Group for each of the three fiscal years in the period ended December
31, 1996 and for the three month periods ended March 31, 1997 and 1996.
Additionally, the following table supplementally sets forth selected historical
combined balance sheet data for the TCI Ventures Group as of March 31, 1997,
December 31, 1996 and December 31, 1995. The selected financial data as of March
31, 1997 and for the three months ended March 31, 1997 and 1996 are derived from
unaudited financial statements which have been prepared on the same basis as the
audited financial information and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of the TCI
Ventures Group as of March 31, 1997 and for the three month periods ended March
31, 1997 and 1996. The pro forma loss attributable to common shareholders of the
TCI Ventures Group assumes the Exchange Offers were consummated prior to the
beginning of the periods presented and assumes, solely for the purpose of these
pro forma amounts, that the Exchange Offers were fully subscribed. The pro forma
data does not purport to be indicative of the results of operations or financial
position that may be obtained in the future. The following information is
qualified in its entirety by, and should be read in conjunction with, the
combined financial statements and notes thereto of the TCI Ventures Group and
with the consolidated financial statements and notes thereto of the Company
included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------
PRO PRO
FORMA FORMA
1997 1997 1996 1996 1996 1995 1994
-------- ------- ------- -------- -------- ------- -------
IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue........................ $247,020 247,020 160,262 925,676 925,676 325,991 103,844
Operating income (loss)........ $ (115) (115) 309 (50,557) (50,557) (32,941) (25,543)
Share of losses of Telewest.... $(41,708) (41,708) (30,597) (109,357) (109,357) (70,274) (42,520)
Share of losses of PCS
Ventures..................... $(63,536) (63,536) (19,208) (133,497) (133,497) (33,890) (992)
Share of losses of Teleport.... $(13,768) (13,768) (7,962) (50,543) (50,543) (29,975) (19,366)
Gain on sale of subsidiary
stock........................ $ -- -- -- -- -- 122,660 --
Gain on issuance of stock by
equity investees............. $ -- -- -- -- 12,668 164,900 161,481
Net earnings (loss)............ $(77,252) (77,252) (54,572) (258,422) (258,422) 60,040 12,650
Loss attributable to TCI
Ventures Group common
shareholders................. $(77,252) -- -- (258,422) -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------- ---------------------
PRO FORMA
1997 1997 1996 1995
---------- --------- --------- ---------
IN THOUSANDS
<S> <C> <C> <C> <C>
Summary Balance Sheet Data:
Investment in Telewest.................................. $ 426,810 426,810 488,495 550,216
Investment in PCS Ventures.............................. $ 728,246 728,246 829,651 689,062
Investment in Teleport.................................. $ 262,850 262,850 276,112 244,012
Total assets............................................ $3,863,562 3,863,562 4,259,703 3,447,169
Combined equity......................................... $2,433,997 2,433,997 2,551,516 2,378,722
</TABLE>
V-2
<PAGE> 241
TELE-COMMUNICATIONS, INC.
The following table sets forth selected historical data for the Company for
each of the five fiscal years in the period ended December 31, 1996 and the
three month periods ended March 31, 1997 and 1996. The table also sets forth (i)
selected unaudited pro forma statement of operations data for the year ended
December 31, 1996, giving pro forma effect to the Company's distribution to the
holders of TCI Group common stock of TCI Satellite Entertainment, Inc. (the
"SatCo Spin-off"), the acquisition by the Company of all the common stock of a
subsidiary of Viacom, Inc. (the "VII Cable Acquisition") and the consummation of
the Exchange Offers, and assumes, solely for the purpose of these pro forma
amounts, that the Exchange Offers are fully subscribed, (ii) selected unaudited
pro forma statement of operations data for the three months ended March 31,
1997, giving pro forma effect to the Exchange Offers as if the same had occurred
prior to January 1, 1996, and (iii) selected unaudited pro forma balance sheet
data for the Company as of March 31, 1997 assuming the Exchange Offers were
consummated as of March 31, 1997 and March 31, 1996 are derived from unaudited
financial statements which have been prepared on the same basis as the audited
financial information and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of the
Company as of March 31, 1997 and for the three month periods ended March 31,
1997 and March 31, 1996. The pro forma financial data is not necessarily
indicative of the financial position or results of operations that would have
been obtained had the SatCo Spin-off, the VII Cable Acquisition and the Exchange
Offers been effective at or prior to such assumed dates. The pro forma
information does not purport to be indicative of the results or financial
position that may be obtained in the future. The following information is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements and notes thereto of the Company included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------
PRO PRO
FORMA FORMA
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ----- ----- ----- ----- ----- ----- ----- -----
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations Data:
Revenue.......................................... $1,827 1,827 1,861 7,925 8,022 6,506 4,682 3,977 3,463
Operating, selling, general and administrative
expenses....................................... $1,089 1,089 1,328 5,549 5,746 4,518 2,884 2,119 1,826
Operating income................................. $ 349 349 172 832 632 542 788 916 864
Earnings (loss) from:
Continuing operations.......................... $ (58) (58) (121) 333 278 (171) 62 (5) 8
Discontinued operations........................ -- -- -- -- -- -- -- -- (15)
------ ----- ----- ----- ----- ----- ----- ----- -----
(58) (58) (121) 333 278 (171) 62 (5) (7)
Dividend requirements on preferred stock......... (10) (10) (9) (35) (35) (34) (8) (2) (15)
------ ----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) attributable to common
shareholders................................... $ (68) (68) (130) 298 243 (205) 54 (7) (22)
====== ===== ===== ===== ===== ===== ===== ===== =====
Earnings (loss) attributable to common
shareholders:
TCI Class A and Class B common stock........... $ -- -- -- -- -- (71) 54 (7) (22)
TCI Group Series A and Series B common stock... (7) (84) (145) (500) (813) (107) -- -- --
Liberty Media Group Series A and Series B
common stock................................. 16 16 15 1,056 1,056 (27) -- -- --
TCI Ventures Group Series A and Series B common
stock........................................ (77) -- -- (258) -- -- -- -- --
------ ----- ----- ----- ----- ----- ----- ----- -----
$ (68) (68) (130) 298 243 (205) 54 (7) (22)
====== ===== ===== ===== ===== ===== ===== ===== =====
Primary earnings (loss) from continuing operations
attributable to common shareholders per common
and common equivalent share:
TCI Class A and Class B common stock........... $ -- -- -- -- -- (.11) .10 (.02) (.01)
TCI Group Series A and Series B common stock... $(.01) (.12) (.22) (1.09) (1.22) (.16) -- -- --
Liberty Media Group Series A and Series B
common stock................................. $ .06 .06 .06 3.97 3.97 (.11) -- -- --
TCI Ventures Group Series A and Series B common
stock........................................ $(.38) -- -- (1.26) -- -- -- -- --
Primary weighted average common and common
equivalent shares outstanding:
TCI Class A and Class B common stock........... -- -- -- -- -- 648 541 433 424
TCI Group Series A and Series B common stock... 473 678 659 460 665 656 -- -- --
Liberty Media Group Series A and Series B
common stock................................. 250 250 247 266 249 246 -- -- --
TCI Ventures Group Series A and Series B common
stock........................................ 205 -- -- 205 -- -- -- -- --
</TABLE>
V-3
<PAGE> 242
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------- ------------------------------------------
PRO
FORMA
1997 1997 1996 1995 1994 1993 1992
------- ------ ------ ------ ------ ------ ------
IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet Data:
Property and equipment, net................... $ 7,688 7,688 7,528 7,409 5,876 4,935 4,562
Franchise costs, net.......................... $15,911 15,911 15,436 12,230 9,444 9,197 9,300
Total assets.................................. $30,676 30,676 30,244 25,577 19,276 16,527 16,315
Total debt.................................... $15,049 15,049 14,926 13,211 11,162 9,900 10,285
Stockholders' equity.......................... $ 4,422 4,422 4,253 4,550 2,655 2,116 1,728
Shares outstanding (net of shares held by
subsidiaries):
TCI Class A common stock.................. -- -- -- -- 491 403 382
TCI Class B common stock.................. -- -- -- -- 85 47 48
TCI Group Series A common stock........... 409 598 579 572 -- -- --
TCI Group Series B common stock........... 69 85 85 85 -- -- --
Liberty Media Group Series A common
stock.................................. 229 229 228 225 -- -- --
Liberty Media Group Series B common
stock.................................. 21 21 21 21 -- -- --
TCI Ventures Group Series A common
stock.................................. 189 -- -- -- -- -- --
TCI Ventures Group Series B common
stock.................................. 16 -- -- -- -- -- --
</TABLE>
V-4
<PAGE> 243
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of
Tele-Communications, Inc. ("TCI" or the "Company"), dated as of March 31, 1997,
assumes that the Exchange Offers (see note 1) had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI for the three months ended March 31, 1997 assumes that the
Exchange Offers had occurred as of January 1, 1997.
The following unaudited condensed pro forma combined statement of
operations of TCI for the year ended December 31, 1996 assumes that the Exchange
Offers, the distribution (the "Distribution") by TCI to the holders of shares of
TCI Group common stock of all the issued and outstanding common stock of TCI
Satellite Entertainment, Inc. ("Satellite") (see note 2) and the acquisition of
all the common stock of a subsidiary of Viacom, Inc. ("VII Cable") (the "VII
Cable Acquisition") (see note 3) had occurred as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers, the
Distribution and the VII Cable Acquisition had occurred as of January 1, 1996.
These condensed pro forma combined financial statements of TCI should be read in
conjunction with the historical financial statements and the related notes
thereto of TCI.
V-5
<PAGE> 244
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------
TCI EXCHANGE TCI
HISTORICAL OFFERS(1) PRO FORMA
---------- --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Cash, receivables and other current assets.................. $ 1,191 -- 1,191
Investment in affiliates and Turner Broadcasting System,
Inc., and related receivables............................. 4,935 -- 4,935
Property and equipment, net of accumulated depreciation..... 7,688 -- 7,688
Franchise costs, intangibles and other assets, net of
amortization.............................................. 16,862 -- 16,862
------- ---- ------
$30,676 -- 30,676
======= ==== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals....................................... $ 1,502 -- 1,502
Debt........................................................ 15,049 -- 15,049
Deferred income taxes....................................... 5,946 -- 5,946
Other liabilities........................................... 251 -- 251
------- ---- ------
Total liabilities................................. 22,748 -- 22,748
------- ---- ------
Minority interests.......................................... 1,349 -- 1,349
Redeemable preferred stock.................................. 655 -- 655
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debt securities
of TCIC................................................... 1,502 -- 1,502
Stockholders' equity:
Preferred stock........................................... -- -- --
TCI Group Series A common stock........................... 715 (189) 526
TCI Group Series B common stock........................... 85 (16) 69
Liberty Media Group Series A common stock................. 229 -- 229
Liberty Media Group Series B common stock................. 21 -- 21
TCI Ventures Group Series A common stock.................. -- 189 189
TCI Ventures Group Series B common stock.................. -- 16 16
Additional paid-in capital................................ 3,904 -- 3,904
Cumulative foreign currency translation adjustment........ 5 -- 5
Unrealized holding gains for available-for-sale
securities............................................. 11 -- 11
Accumulated deficit....................................... (234) -- (234)
TCI stock held by subsidiaries............................ (314) -- (314)
------- ---- ------
4,422 -- 4,422
------- ---- ------
$30,676 -- 30,676
======= ==== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-6
<PAGE> 245
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------
TCI EXCHANGE TCI
HISTORICAL OFFERS(1) PRO FORMA
---------- --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Revenue..................................................... $ 1,827 -- 1,827
Operating, cost of sales, selling, general and
administrative expenses and compensation relating to stock
appreciation rights....................................... (1,104) -- (1,104)
Depreciation and amortization............................... (374) -- (374)
------- --- ------
Operating income.......................................... 349 -- 349
Interest expense............................................ (289) -- (289)
Interest and dividend income................................ 21 -- 21
Share of losses of affiliates, net.......................... (156) -- (156)
Other income (expense), net................................. (21) -- (21)
------- --- ------
Earnings (loss) before income taxes....................... (96) -- (96)
Income tax benefit (expense)................................ 38 -- 38
------- --- ------
Net earnings (loss)....................................... (58) -- (58)
Dividend requirement on redeemable preferred stocks......... (10) -- (10)
------- --- ------
Net earnings (loss) attributable to common stockholders... $ (68) -- (68)
======= === ======
Primary earnings (loss) attributable to common stockholders
per common and common equivalent share:
TCI Group Series A and Series B common stock........... $ (.12) (.01)(8)
======= ======
Liberty Media Group Series A and Series B common
stock................................................ $ .06 .06
======= ======
TCI Ventures Group Series A and Series B common
stock................................................ $ -- (.38)(10)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-7
<PAGE> 246
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------
TCI EXCHANGE SATELLITE VII CABLE PRO FORMA TCI
HISTORICAL OFFERS(1) DISTRIBUTION(2) HISTORICAL(3) ADJUSTMENTS(3) PRO FORMA
---------- --------- --------------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $ 8,022 -- (377) 280 -- 7,925
Operating, cost of sales,
selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring charges... (5,774) -- 373 (176) -- (5,577)
Depreciation and
amortization................ (1,616) -- 166 (52) (14)(4) (1,516)
------- ----- ---- ---- --- ------
Operating income (loss)..... 632 -- 162 52 (14) 832
Interest expense.............. (1,096) -- -- (31) (44)(5) (1,171)
Interest and dividend
income...................... 64 -- -- 2 -- 66
Share of earnings (losses) of
affiliates, net............. (473) -- -- -- -- (473)
Gains......................... 1,605 -- -- -- -- 1,605
Other income (expense), net... (192) -- -- 1 (18)(6) (209)
------- ----- ---- ---- --- ------
Earnings (loss) before
income taxes............. 540 -- 162 24 (76) 650
Income tax benefit
(expense)................... (262) -- (53) (13) 11(7) (317)
------- ----- ---- ---- --- ------
Net earnings (loss)......... 278 -- 109 11 (65) 333
Dividend requirement on
redeemable preferred
stocks...................... (35) -- -- -- -- (35)
------- ----- ---- ---- --- ------
Net earnings (loss)
attributable to common
stockholders............. $ 243 -- 109 11 (65) 298
======= ===== ==== ==== === ======
Primary earnings (loss)
attributable to common
stockholders per common and
common equivalent share:
TCI Group Series A and
Series B common
stock.................. $ (1.22) (1.09)(9)
======= ======
Liberty Media Group
Series A and Series B
common stock........... $ 3.97 3.97
======= ======
TCI Ventures Group Series
A and Series B common
stock.................. $ -- (1.26)(11)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-8
<PAGE> 247
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of TCI authorized, subject to
shareholder approval (the "TCI Ventures Group Stock Proposal"), the issuance of
two new series of stock ("TCI Ventures Group Common Stock") which are intended
to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such series outstanding as of June 30, 1997, excluding shares held by
majority owned subsidiaries of the Company)
V-9
<PAGE> 248
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
in the ratio of one share of the applicable series of TCI Ventures Group Common
Stock in exchange for each share of the corresponding series of TCI Group common
stock properly tendered. The Exchange Offers will be subject, among other
conditions, to the approval by stockholders of the TCI Ventures Group Stock
Proposal. If such approval is obtained and other conditions are satisfied, the
Company would consummate the Exchange Offers on or about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) On December 4, 1996, TCI completed the Distribution by TCI to the
holders of shares of the TCI Group common stock of all of the issued and
outstanding common stock of Satellite. At the time of the Distribution,
Satellite was a Delaware corporation and a direct wholly-owned subsidiary of
TCI. The Distribution was effected as a tax-free dividend to, and did not
involve the payment of any consideration by, the holders of TCI Group common
stock. Prior to the Distribution, TCI caused to be transferred to Satellite, or
one or more of Satellite's subsidiaries, certain assets and businesses (and the
related liabilities) of the TCI Group constituting all of TCI's interests in the
business of distributing multichannel programming services in the United States
direct to the home via medium power or high power broadcast satellite, including
the rental and sale of customer premises equipment relating thereto.
(3) On July 31, 1996, pursuant to certain agreements entered into among TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, TCI, Viacom International
Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of VII
Cable which, at the time of such acquisition, owned Viacom's cable systems and
related assets.
The transaction was structured as a tax-free reorganization in which VII
Cable initially transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to a new subsidiary of Viacom ("New
Viacom Sub"). VII Cable also transferred to New Viacom Sub the proceeds (the
"Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged
by TCIC, TCI and VII Cable. Following these transfers, VII Cable retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the VII Cable Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B Common
Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the
"Exchange Offer") a portion of their shares of Viacom Common Stock for shares of
Class A Common Stock, par value $100 per share, of VII Cable ("VII Cable Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from VII Cable shares of VII Cable Class B Common Stock (the "Share
Issuance") in exchange for $350 million (which was used to reduce VII Cable's
obligations under the Loan Facility). At the time of the Share Issuance, the VII
Cable
V-10
<PAGE> 249
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Class A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred
Stock (the "Exchangeable Preferred Stock") of VII Cable with a stated value of
$100 per share.
The cost to acquire VII Cable was approximately $2.326 billion, consisting
of the Loan Proceeds and the $626 million aggregate par value of the VII Cable
Exchangeable Preferred Stock. The accompanying unaudited pro forma condensed
combined statements of operations do not reflect potential cost savings
attributable to (i) economics of scale which may be realized in connection with
purchases of programming and equipment or (ii) consolidation of certain
operating and administrative functions including the elimination of duplicative
facilities and personnel.
(4) Represents depreciation and amortization of VII Cable's allocated
excess purchase price based upon a weighted average life of 12.5 years for
property and equipment and a 40 year life for franchise costs.
(5) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable operations)
incurred by the Company on the borrowings of the Loan Proceeds. Solely for the
purposes of this presentation, the Company has assumed an interest rate of 7.50%
for the year ended December 31, 1996, based upon historical interest rates
adjusted for anticipated terms of the Loan Facility.
(6) Reflects a 5.0% cumulative annual dividend on the $626 million of VII
Cable Exchangeable Preferred Stock included in minority share of losses of
consolidated subsidiaries.
(7) Reflects the estimated income tax effect of the VII Cable pro forma
adjustments. The effective income tax rate on a pro forma basis is adversely
affected by the amortization of excess acquisition costs, which are assumed not
to be deductible for tax purposes.
(8) Reflects loss per common share based upon 473.1 million weighted
average shares of TCI Group at March 31, 1997. Such amount represents the
weighted average shares disclosed in TCI's historical financial statements net
of 204.9 million shares assumed exchanged in the Exchange Offers.
(9) Reflects loss per common share based upon 459.9 million weighted
average shares of TCI Group for the entire period ended December 31, 1996,
respectively. Such amounts represent TCI Group weighted average shares, as
disclosed in its historical financial statements net of 204.9 million shares
assumed exchanged in the Exchange Offers.
(10) Reflects loss per common share for the three months ended March 31,
1997 based upon 204.9 million weighted average shares of TCI Ventures Group
assumed issued in exchange for TCI Group stock in the Exchange Offers.
(11) Reflects loss per common share for the year ended December 31, 1996
based upon 204.9 million weighted average shares of TCI Ventures Group assumed
issued in exchange for TCI Group stock in the Exchange Offers.
V-11
<PAGE> 250
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited pro forma combined balance sheet of TCI Ventures
Group, dated as of March 31, 1996, assumes that the Exchange Offers (see note 1)
had occurred as of such date.
The following unaudited pro forma combined statements of operations of TCI
Ventures Group for the three months ended March 31, 1997 and the year ended
December 31, 1996 assumes that the Exchange Offers had occurred as of January 1,
1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers had
occurred as of January 1, 1996. These pro forma combined financial statements of
TCI Ventures Group should be read in conjunction with the historical financial
statements and the related notes thereto of TCI Ventures Group.
V-12
<PAGE> 251
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Cash, receivables and other current assets............. $ 171,264 -- 171,264
Investment in affiliates and related receivables....... 1,821,126 -- 1,821,126
Property and equipment, net of accumulated
depreciation......................................... 745,393 -- 745,393
Franchise costs, intangibles and other assets, net of
amortization......................................... 1,125,779 -- 1,125,779
---------- -------- ------------
$3,863,562 -- 3,863,562
========== ======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals.................................. $ 307,459 -- 307,459
Capital lease obligations.............................. 193,832 -- 193,832
Debt................................................... 512,757 -- 512,757
Deferred income taxes.................................. 189,107 -- 189,107
Other liabilities...................................... 8,263 -- 8,263
---------- -------- ------------
Total liabilities............................ 1,211,418 -- 1,211,418
---------- -------- ------------
Minority interests..................................... 218,147 -- 218,147
Combined equity:
Combined equity...................................... 2,556,643 -- 2,556,643
Cumulative foreign currency translation adjustment... 4,817 -- 4,817
Unrealized holding gains for available-for-sale
securities........................................ 7,028 -- 7,028
Due from TCI......................................... (134,491) -- (134,491)
---------- -------- ------------
2,433,997 -- 2,433,997
---------- -------- ------------
$3,863,562 -- 3,863,562
========== ======== ============
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-13
<PAGE> 252
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue................................................. $247,020 -- 247,020
Operating, selling, general and administrative expenses
and compensation relating to stock appreciation
rights................................................ (205,991) -- (205,991)
Depreciation and amortization........................... (41,144) -- (41,144)
-------- ------- --------
Operating loss........................................ (115) -- (115)
Interest expense........................................ (14,196) -- (14,196)
Share of losses of affiliates, net...................... (142,120) -- (142,120)
Other income (expense), net............................. 34,809 -- 34,809
-------- ------- --------
Loss before income taxes.............................. (121,622) -- (121,622)
Income tax benefit...................................... 44,370 -- 44,370
-------- ------- --------
Net loss.............................................. $(77,252) -- (77,252)
======== ======= ========
Net loss attributable to common stockholders.......... $ -- (77,252) (77,252)
======== ======= ========
Loss attributable to common stockholders per common
share................................................. $ -- (.38)(2)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-14
<PAGE> 253
"TCI VENTURES GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
TCI VENTURES TCI VENTURES
GROUP EXCHANGE GROUP
HISTORICAL OFFERS(1) PRO FORMA
------------ --------- ------------
AMOUNT IN THOUSANDS
<S> <C> <C> <C>
Revenue................................................ $ 925,676 -- 925,676
Operating, selling, general and administrative
expenses, compensation relating to stock appreciation
rights and restructuring charge...................... (826,944) -- (826,944)
Depreciation and amortization.......................... (149,289) -- (149,289)
--------- -------- --------
Operating income..................................... (50,557) -- (50,557)
Interest expense....................................... (51,128) -- (51,128)
Share of losses of affiliates, net..................... (368,338) -- (368,338)
Gains.................................................. 32,941 -- 32,941
Other income (expense), net............................ 68,315 -- 68,315
--------- -------- --------
Loss before income taxes............................. (368,767) -- (368,767)
Income tax benefit..................................... 110,345 -- 110,345
--------- -------- --------
Net loss............................................. $(258,422) -- (258,422)
========= ======== ========
Net loss attributable to common stockholders......... $ -- (258,422) (258,422)
========= ======== ========
Loss attributable to common stockholders per common
share................................................ $ -- (1.26)(3)
========= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
V-15
<PAGE> 254
"TCI VENTURES GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of Tele-Communications, Inc.
("TCI" or the "Company") authorized, subject to shareholder approval (the "TCI
Ventures Group Stock Proposal"), the issuance of two new series of stock ("TCI
Ventures Group Common Stock") which are intended to reflect the separate
performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such
V-16
<PAGE> 255
"TCI VENTURES GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group common stock properly tendered. The Exchange
Offers will be subject, among other conditions, to the approval by stockholders
of the TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) Reflects loss per common share for the three months ended March 31,
1997 based upon 204.9 million weighted average shares of TCI Ventures Group
assumed issued in exchange for TCI Group Stock in the Exchange Offers.
(3) Reflects loss per common share for the year ended December 31, 1996
based upon 204.9 million weighted average shares of TCI Ventures Group assumed
issued in exchange for TCI Group Stock in the Exchange Offers.
V-17
<PAGE> 256
"TCI GROUP"
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of TCI
Group, dated as of March 31, 1997, assumes that the Exchange Offers (see note 1)
had occurred as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the three months ended March 31, 1997 assumes that
the Exchange Offers had occurred as of January 1, 1997.
The following unaudited condensed pro forma combined statement of
operations of TCI Group for the year ended December 31, 1996 assumes that the
Exchange Offers, the distribution (the "Distribution") by TCI to the holders of
shares of TCI Group common stock of all the issued and outstanding common stock
of TCI Satellite Entertainment, Inc. ("Satellite") (see note 2) and the
acquisition of all the common stock of a subsidiary of Viacom, Inc. ("VII
Cable") (the "VII Cable Acquisition") (see note 3) had occurred as of January 1,
1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Exchange Offers, the
Distribution and the VII Cable Acquisition had occurred as of January 1, 1996.
These condensed pro forma combined financial statements of TCI Group should be
read in conjunction with the historical financial statements and the related
notes thereto of TCI Group.
V-18
<PAGE> 257
"TCI GROUP"
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------------
TCI GROUP TCI VENTURES EXCHANGE TCI GROUP
HISTORICAL GROUP OFFERS(1) PRO FORMA
---------- ------------ --------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
Cash, receivables and other current assets.... $ 733 (171) -- 562
Investment in affiliates and related
receivables................................. 2,333 (1,821) -- 512
Property and equipment, net of accumulated
depreciation................................ 7,678 (745) -- 6,933
Franchise costs, intangibles and other assets,
net of amortization......................... 16,791 (1,127) -- 15,664
------- ------ ------ ------
$27,535 (3,864) -- 23,671
======= ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables and accruals......................... $ 1,439 (443) -- 996
Debt.......................................... 15,049 (571) -- 14,478
Deferred income taxes......................... 5,367 (189) -- 5,178
Other liabilities............................. 229 (8) -- 221
------- ------ ------ ------
Total liabilities................... 22,084 (1,211) -- 20,873
------- ------ ------ ------
Minority interests............................ 1,298 (218) -- 1,080
Redeemable preferred stock.................... 655 -- -- 655
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely subordinated debt securities
of TCIC..................................... 1,502 -- -- 1,502
Combined equity:
Combined equity (deficit)................... 2,039 -- (2,557) (518)
Cumulative foreign currency translation
adjustment............................... 5 (5) -- --
Unrealized holding gains for
available-for-sale securities............ 11 (7) -- 4
Due from Liberty Media Group................ (59) -- -- (59)
Due to TCI Ventures Group................... -- 134 -- 134
Interest in TCI Ventures Group.............. -- (2,557) 2,557 --
------- ------ ------ ------
1,996 (2,435) -- (439)
------- ------ ------ ------
$27,535 (3,864) -- 23,671
======= ====== ====== ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-19
<PAGE> 258
"TCI GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------
TCI GROUP TCI VENTURES TCI GROUP
HISTORICAL GROUP EXCHANGE OFFERS(1) PRO FORMA
---------- ------------ ------------------ ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
Revenue................................ $ 1,791 (247) -- 1,544
Operating, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights.................. (1,088) 206 -- (882)
Depreciation and amortization.......... (373) 41 -- (332)
------- ----- ----- -----
Operating income..................... 330 -- -- 330
Interest expense....................... (289) 14 -- (275)
Share of losses of affiliates, net..... (159) 142 -- (17)
Other income (expense), net............ (6) (35) -- (41)
------- ----- ----- -----
Earnings (loss) before income
taxes............................. (124) 121 -- (3)
Income tax benefit (expense)........... 50 (44) -- 6
------- ----- ----- -----
Earnings (loss) before loss of TCI
Ventures Group.................... (74) 77 -- 3
Loss of TCI Ventures Group............. -- (77) 77 --
------- ----- ----- -----
Net earning (loss)........... (74) -- 77 3
Dividend requirement on preferred
stocks............................... (10) -- -- (10)
------- ----- ----- -----
Net earnings (loss)
attributable to common
stockholders............... $ (84) -- 77 (7)
======= ===== ===== =====
Loss attributable to common
stockholders per common share........ $ (.12) (.01)(8)
======= =====
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-20
<PAGE> 259
"TCI GROUP"
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
TCI TCI
TCI GROUP VENTURES EXCHANGE SATELLITE VII CABLE PRO FORMA GROUP
HISTORICAL GROUP OFFERS(1) DISTRIBUTION(2) HISTORICAL(3) ADJUSTMENTS(3) PRO FORMA
---------- -------- --------- --------------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 6,790 (926) -- (377) 280 -- 5,767
Operating, selling, general and
administrative expenses and
compensation relating to
stock appreciation rights.... (4,689) 827 -- 373 (176) -- (3,665)
Depreciation and
amortization................. (1,555) 149 -- 166 (52) (14)(4) (1,306)
------- ---- --- ---- ---- --- ------
Operating income............. 546 50 -- 162 52 (14) 796
Interest expense............... (1,080) 51 -- -- (31) (44)(5) (1,104)
Share of losses of affiliates,
net.......................... (469) 368 -- -- -- -- (101)
Gains.......................... 68 (33) -- -- -- -- 35
Other income (expense), net.... (149) (68) -- -- 3 (18)(6) (232)
------- ---- --- ---- ---- --- ------
Earnings (loss) before income
taxes...................... (1,084) 368 -- 162 24 (76) (606)
Income tax benefit (expense)... 306 (110) -- (53) (13) 11(7) 141
------- ---- --- ---- ---- --- ------
Earnings (loss) before losses
of TCI Ventures Group...... (778) 258 -- 109 11 (65) (465)
Loss of TCI Ventures Group..... -- (258) 258 -- -- -- --
------- ---- --- ---- ---- --- ------
Net earnings (loss).... (778) -- 258 109 11 (65) (465)
Dividend requirement on
redeemable preferred
stocks....................... (35) -- -- -- -- -- (35)
------- ---- --- ---- ---- --- ------
Net earnings (loss)
attributable to
common
stockholders......... $ (813) -- 258 109 11 (65) (500)
======= ==== === ==== ==== === ======
Loss attributable to common
stockholders per common
share........................ $ (1.22) (1.09)(9)
======= ======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
V-21
<PAGE> 260
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) On May 14, 1997, the Board of Directors of Tele-Communications, Inc.
("TCI" or the "Company") authorized, subject to shareholder approval (the "TCI
Ventures Group Stock Proposal"), the issuance of two new series of stock ("TCI
Ventures Group Common Stock") which are intended to reflect the separate
performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
Prior to August 28, 1997 the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group common stock and 16,266,400 shares of Series B TCI
Group common stock, respectively (representing approximately 30% of the shares
of each such
V-22
<PAGE> 261
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group common stock properly tendered. The Exchange
Offers will be subject, among other conditions, to the approval by stockholders
of the TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group common stock on the last trading day preceding the
closing of the Exchange Offers), a dividend rate of 5% per annum and a mandatory
redemption obligation on the 15th anniversary of the closing of the Exchange
Offers. Accrued dividends on the preferred equity interest would accumulate and
compound annually (but not be payable currently) until the fifth anniversary of
the closing of the Exchange Offers.
Solely for purposes of these pro forma financial statements, it is assumed
that the Exchange Offers were fully subscribed.
(2) On December 4, 1996, TCI completed the Distribution by TCI to the
holders of shares of the TCI Group common stock of all of the issued and
outstanding common stock of Satellite. At the time of the Distribution,
Satellite was a Delaware corporation and a direct wholly-owned subsidiary of
TCI. The Distribution was effected as a tax-free dividend to, and did not
involve the payment of any consideration by, the holders of TCI Group common
stock. Prior to the Distribution, TCI caused to be transferred to Satellite, or
one or more of Satellite's subsidiaries, certain assets and businesses (and the
related liabilities) of the TCI Group constituting all of TCI's interests in the
business of distributing multichannel programming services in the United States
direct to the home via medium power or high power broadcast satellite, including
the rental and sale of customer premises equipment relating thereto.
(3) On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International Inc. and Viacom, TCIC acquired all of the common
stock of VII Cable which, at the time of such acquisition, owned Viacom's cable
systems and related assets.
The transaction was structured as a tax-free reorganization in which VII
Cable initially transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to New Viacom Sub. VII Cable also
transferred to New Viacom Sub the Loan Proceeds of the Loan Facility arranged by
TCIC, TCI and VII Cable. Following these transfers, VII Cable retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither
Viacom nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the VII Cable Acquisition, Viacom offered to
the holders of shares of Viacom Common Stock the opportunity to exchange a
portion of their shares of Viacom Common Stock for shares of VII Cable Class A
Stock. Immediately following the completion of the Exchange Offer, TCIC acquired
from VII Cable shares of VII Cable Class B Common Stock in exchange for $350
million (which was used to reduce VII Cable's obligations under the Loan
Facility). At the time of the Share Issuance, the VII Cable Class A Stock
received by Viacom stockholders pursuant to the Exchange Offer automatically
converted into the Exchangeable Preferred Stock of VII Cable with a stated value
of $100 per share. The terms of the Exchangeable Preferred Stock, including its
dividend, redemption and exchange features, were
V-23
<PAGE> 262
"TCI GROUP"
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
designed to cause the Exchangeable Preferred Stock, in the opinion of two
investment banks, to initially trade at the Stated Value.
The cost to acquire VII Cable was approximately $2.326 billion, consisting
of the Loan Proceeds and the $626 million aggregate par value of the VII Cable
Exchangeable Preferred Stock. The accompanying unaudited pro forma condensed
combined statements of operations do not reflect potential cost savings
attributable to (i) economics of scale which may be realized in connection with
purchases of programming and equipment or (ii) consolidation of certain
operating and administrative functions including the elimination of duplicative
facilities and personnel.
(4) Represents depreciation and amortization of VII Cable's allocated
excess purchase price based upon a weighted average life of 12.5 years for
property and equipment and a 40 year life for franchise costs.
(5) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable operations)
incurred by TCI Group on the borrowings of the Loan Proceeds. Solely for the
purposes of this presentation, TCI Group has assumed an interest rate of 7.50%
for the year ended December 31, 1996, based upon historical interest rates
adjusted for anticipated terms of the Loan Facility.
(6) Reflects a 5.0% cumulative annual dividend on the $626 million of VII
Cable Exchangeable Preferred Stock included in minority share of losses of
consolidated subsidiaries.
(7) Reflects the estimated income tax effect of the pro forma adjustments.
The effective income tax rate on a pro forma basis is adversely affected by the
amortization of excess acquisition costs, which are assumed not to be deductible
for tax purposes.
(8) Reflects loss per common share based upon 473.1 million weighted
average shares. Such amount represents TCI Group's weighted average shares, as
disclosed in its March 31, 1997 historical financial statements net of 204.9
million shares assumed exchanged in the Exchange Offers.
(9) Reflects loss per common share based upon 459.9 million weighted
average shares for the entire period ended December 31, 1996. Such amount
represents TCI Group's weighted average shares as disclosed in its December 31,
1996 historical financial statements net of 204.9 million shares assumed
exchanged in the Exchange Offers.
V-24
<PAGE> 263
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations included herein for the year ended December 31, 1996. The
following discussion focuses on material changes in the trends, risks and
uncertainties affecting the Company's results of operations and financial
condition. Reference should also be made to the Company's consolidated financial
statements included herein.
(1) MATERIAL CHANGES IN FINANCIAL CONDITION:
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming ("TINTA");
and Technology/Venture Capital. Within the Domestic Cable and Communications
line of business, the Company operates three strategic business units: Cable,
Telephony and Internet. The Company's organizational structure provides for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While none
of TINTA, the Technology/Venture Capital unit, the Telephony unit or the
Internet unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in nature
to warrant separate operational focus.
During March 1997, the Company, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial paper
and repay certain other indebtedness.
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of Series A TCI Group common
stock ("TCI Group Stock"), assumed $584 million of TKR Cable's debt and paid
cash of $88 million and shares of Time Warner, Inc. ("Time Warner") common stock
valued at $41 million upon consummation of such acquisition.
On July 31, 1996, TCI Communications, Inc. ("TCIC") consummated the
acquisition (the "Viacom Acquisition") of all of the common stock of a
subsidiary ("Cable Sub") of Viacom, Inc. ("Viacom") which owned Viacom's cable
systems and related assets. The transaction was structured as a tax-free
reorganization in which Cable Sub initially transferred all of its non-cable
assets, as well as all of its liabilities other than current liabilities, to a
new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New
Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
(the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the Loan Proceeds
borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds. For additional
discussion of the Viacom Acquisition, see note 6 to the accompanying
consolidated financial statements.
At March 31, 1997, subsidiaries of the Company had approximately $2.0
billion of availability in unused lines of credit, excluding amounts related to
lines of credit which provide availability to support commercial paper. Although
such subsidiaries of the Company were in compliance with the restrictive
covenants contained in their credit facilities at said date, additional
borrowings under the credit facilities are subject to the subsidiaries'
continuing compliance with the restrictive covenants (which relate primarily to
the maintenance of certain ratios of cash flow to total debt and cash flow to
debt service, as defined in the credit facilities) after giving effect to such
additional borrowings. See note 7 to the accompanying consolidated financial
statements for additional information regarding the material terms of the
subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization, compensation relating to
stock appreciation rights and adjustments to compensation relating to stock
V-25
<PAGE> 264
appreciation rights) ($738 million and $533 million for the three months ended
March 31, 1997 and 1996, respectively) to interest expense ($289 million and
$261 million for the three months ended March 31, 1997 and 1996, respectively),
is determined by reference to the consolidated statements of operations. The
Company's interest coverage ratio was 255% and 204% for the three months ended
March 31, 1997 and 1996, respectively. Management of the Company believes that
the foregoing interest coverage ratio is adequate in light of the relative
predictability of its cable television operations and interest expense, almost
half of which results from fixed rate indebtedness. However, the Company's
current intent is to reduce its outstanding indebtedness such that its interest
coverage ratio could be increased. There is no assurance that the Company will
be able to achieve such objective. Operating Cash Flow is a measure of value and
borrowing capacity within the cable television industry and is not intended to
be a substitute for cash flows provided by operating activities, a measure of
performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net cash
provided by operating activities ($239 million and $317 million for the three
months ended March 31, 1997 and 1996, respectively) reflects net cash from the
operations of the Company available for the Company's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Historically, amounts
expended by the Company for its investing activities have exceeded net cash
provided by operating activities. However, management believes that net cash
provided by operating activities, the ability of the Company and its
subsidiaries to obtain additional financing (including the subsidiaries
available lines of credit and access to public debt markets), issuances and
sales of the Company's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See the Company's consolidated statements of cash flows
included in the accompanying consolidated financial statements.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions, investments and capital
expenditures have exceeded net cash provided by operating activities. The
Company has reevaluated its capital expenditure strategy and currently
anticipates that it will expend significantly less for property and equipment in
1997 than it did in 1996. In this regard, the amount of capital expended by the
Company for property and equipment was $90 million during the three months ended
March 31, 1997, as compared to $423 million during the corresponding period in
1996. The Company currently estimates that it will spend approximately $750
million for capital expenditures during 1997. To the extent that net cash
provided by operating activities exceeds net cash used in investing activities
in 1997, the Company currently anticipates that such excess cash will initially
be used to reduce outstanding debt.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at March 31, 1997, these agreements
require minimum payments aggregating approximately $651 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At March 31, 1997, such
commitments aggregated $215 million.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $252
million at March 31, 1997. Although there can be no assurance, management of the
Company believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they will
not be material to the Company.
V-26
<PAGE> 265
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company (i)
pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.1% to
9.3% and receives variable interest rates on notional amounts of $410 million at
March 31, 1997 and (ii) pays variable interest rates (the "Variable Rate
Agreements") and receives fixed interest rates ranging from 4.8% to 9.7% on
notional amounts of $2,250 million at March 31, 1997. During the three months
ended March 31, 1997 and 1996, the Company's net receipts pursuant to the Fixed
Rate Agreements were $3 million and $5 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $1 million and $8
million, respectively. The Company is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
On March 12, 1997, the TCI stockholders authorized the TCI Board of
Directors to issue two new series of the Company's common stock, par value $1.00
per share, (and a corresponding increase in the total number of authorized
shares of common stock) to be designated Tele-Communications, Inc. Series A
Telephony Group common stock and Tele-Communications, Inc. Series B Telephony
Group common stock (collectively, the "Telephony Group Stock"). The Telephony
Group Stock, if issued, would be intended to reflect the separate performance of
Telephony Group, which initially consists of the Company's investments in
certain entities engaged in the domestic wireline and wireless telephony
businesses. A total of 750 million shares of Series A Telephony Group Stock and
75 million shares of Series B Telephony Group Stock were authorized. As of March
31, 1997, no shares of Telephony Group Stock have been issued.
TCI is considering the creation of a new series of its common stock which
would be intended to reflect the performance of substantially all of TCI Group's
international and non-cable assets. To do this, TCI is contemplating amending
the recently approved Telephony Group Stock to expand that group to track such
assets, including TCI's investments in At Home Corporation, TINTA, United Video
Satellite Group, Inc. and others. The tracking stock may be issued through an
exchange offer whereby the Company's stockholders will have the opportunity to
exchange their TCI Group Stock for tracking stock of the new group.
On April 21, 1997, TCI announced that it had entered into an agreement to
merge Kearns-Tribune Corporation into a wholly-owned TCI subsidiary. The merger
is valued at approximately $627 million. Pursuant to the merger agreement, TCI
would exchange shares of Series A TCI Group Stock for shares of Kearns-Tribune
Corporation which holds 17.9 million shares of TCI Group Stock and 6.7 million
shares of Liberty Group Stock. Liberty Media Group intends to purchase from TCI
Group the 6.7 million shares that would be acquired in such transaction at
market valuations to be determined at the time of the merger closing.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS:
Communications and Programming Services Revenue
The operation of the Company's cable television systems is regulated at the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 and the Telecommunications Act of 1996 (collectively,
the "Cable Acts") established rules under which the Company's basic and tier
service rates and its equipment and installation charges (the "Regulated
Services") are regulated if a complaint is filed or if the appropriate franchise
authority is certified. At March 31, 1997, approximately 79% of the Company's
basic customers were served by cable television systems that were subject to
such rate regulation.
During the three months ended March 31, 1997, 65% of the Company's revenue
from Communications and Programming Services was derived from Regulated
Services. As noted above, any increases in rates charged for Regulated Services
are regulated by the Cable Acts. Moreover, competitive factors may limit the
Company's ability to increase its service rates.
V-27
<PAGE> 266
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with those of the
Company.
Revenue from communications and programming services increased 14% for the
three months ended March 31, 1997, as compared to the corresponding period of
1996. Exclusive of the effects of acquisitions, revenue from the Company's
domestic cable customers accounted for 5% of such increase as a result of an 11%
increase in the Company's average basic rate, a 1% increase in the Company's
average premium rate and a 3% decrease in the number of average premium
subscribers. The number of average basic customers increased less than 1% from
1996 to 1997. The Company's revenue from domestic cable operations aggregated
$1,556 million and $1,333 million for the three months ended March 31, 1997 and
1996, respectively. In addition, the Company's revenue from communications and
programming services increased 15% due to acquisitions and decreased 5% due to
the deconsolidation of the Company's sports programming businesses (see
discussion below) and decreased 5% due to the Satellite Spin-off. Increases in
the Company's domestic programming revenue (from Encore Media Corporation and
QE+), international cable revenue and other revenue accounted for the remaining
4% increase.
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures. In the United
States, Liberty Media Group and News Corp. formed Liberty/Fox U.S. Sports LLC
("Fox Sports") into which Liberty Media Group contributed interests in its
national and regional sports networks and into which News Corp. contributed its
fx cable network and certain other assets. Liberty Media Group received a 50%
interest in Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed Liberty Media Group and TINTA formed a venture ("Fox
Sports International") to operate previously existing sports services in Latin
America and Australia and a variety of new sports services in selected areas
throughout the world. Liberty/TINTA and News Corp. each own 50% of Fox Sports
International. News Corp. contributed various international sports rights and
certain trademark rights. Liberty/TINTA contributed its interests in certain
international sports programming services, various international sports and
satellite transponder rights and cash.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Net Sales From Electronic Retailing Services
As a result of the merger of Home Shopping Network, Inc. ("HSN") with a
subsidiary of Silver King Communications, Inc. in December 1996, HSN is no
longer a consolidated subsidiary of the Company. Accordingly, the Company no
longer reports revenue or cost of sales related to electronic retailing
services. See note 4 to the accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses increased 5% for the three months ended March 31, 1997,
as compared to the corresponding period of 1996. Exclusive of the effects of
acquisitions, net of dispositions, such expenses increased 8%. Programming
expenses accounted for the majority of such increase. The Company cannot
determine whether and to what extent increases in the cost of programming will
affect its future operating costs.
V-28
<PAGE> 267
Selling general and administrative expenses decreased 22% for the three
months ended March 31, 1997, as compared to the corresponding period of 1996.
Exclusive of the effects of acquisitions, net of dispositions, such expenses
decreased 3%. Such decrease is due primarily to a reduction in salaries and
related payroll expenses due to work force reductions in the fourth quarter of
1996, as well as reduced marketing and general overhead expenses.
The decrease in the Company's depreciation expense in 1997 is the result of
the net effect of a decrease due to the Satellite Spin-off partially offset by
increases due to acquisitions and capital expenditures. The increase in
amortization expense in 1997 is due to acquisitions.
The Company records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
Other Income and Expenses
At March 31, 1997, the Company had an effective ownership interest of
approximately 27% in Telewest Communications plc, a company that is currently
operating and constructing cable television and telephone systems in the United
Kingdom ("UK"). Telewest, which is accounted for under the equity method, had a
carrying value at March 31, 1997 of $427 million and comprised $42 million and
$31 million of the Company's share of its affiliates' losses during the three
months ended March 31, 1997 and 1996, respectively. In addition, the Company has
other less significant investments accounted for under the equity method in
video distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $373
million at March 31, 1997 and accounted for $22 million and $18 million of the
Company's share of its affiliates' losses for the three months ended March 31,
1997 and 1996, respectively. Additionally, included in share of losses of
affiliates for the three months ended March 31, 1997 and 1996 is $64 million and
$53 million, respectively, attributable to Sprint Spectrum Holding Company,
L.P., MinorCo, L.P. and PhillieCo, L.P. Such 1996 amount includes $34 million
associated with prior periods.
Minority interests in earnings of consolidated subsidiaries aggregated $38
million for the three months ended March 31, 1997, as compared to minority
interests in losses of consolidated subsidiaries for the corresponding period in
1996. Such change is due primarily to the accrual of dividends on the Trust
Preferred Securities in 1997. See note 8 to the accompanying consolidated
financial statements.
Net Loss
The Company's net loss (before preferred stock dividend requirements) of
$58 million for the three months ended March 31, 1997 represents an improvement
of $63 million, as compared to the Company's net loss (before preferred stock
dividend requirements) of $121 million for the three months ended March 31,
1996. Such change is primarily the net result of an increase in operating income
partially offset by increases in share of losses of affiliates, dividends on the
Trust Preferred Securities reflected as minority interests in earnings of
consolidated subsidiaries and interest expense.
V-29
<PAGE> 268
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN MILLIONS
<S> <C> <C>
Cash and cash equivalents................................... $ 505 394
Trade and other receivables, net............................ 455 448
Prepaid expenses............................................ 84 81
Prepaid program rights...................................... 58 49
Committed film inventory.................................... 89 136
Investments in affiliates, accounted for under the equity
method, and related receivables (note 4).................. 2,898 3,012
Investment in Time Warner, Inc. ("Time Warner") (note 5).... 2,037 2,027
Property and equipment, at cost:
Land...................................................... 76 77
Distribution systems...................................... 10,373 10,078
Support equipment and buildings........................... 1,514 1,541
------- ------
11,963 11,696
Less accumulated depreciation............................. 4,275 4,168
------- ------
7,688 7,528
------- ------
Franchise costs............................................. 18,416 17,875
Less accumulated amortization............................. 2,505 2,439
------- ------
15,911 15,436
------- ------
Other assets, net of amortization........................... 951 1,133
------- ------
$30,676 30,244
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 137 216
Accrued interest............................................ 168 274
Accrued programming expense................................. 372 347
Other accrued expenses...................................... 825 812
Debt (note 7)............................................... 15,049 14,926
Deferred income taxes....................................... 5,946 6,012
Other liabilities........................................... 251 253
------- ------
Total liabilities................................... 22,748 22,840
------- ------
Minority interests in equity of consolidated subsidiaries... 1,349 1,493
Redeemable preferred stocks................................. 655 658
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Preferred
Securities") holding solely subordinated debt securities
of TCI Communications, Inc. ("TCIC") (note 8)............. 1,502 1,000
Stockholders' equity (note 9):
Series Preferred Stock, $.01 par value.................... -- --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value......................... -- --
Tele-Communications, Inc. Series A TCI Group common stock,
$1 par value. Authorized 1,750,000,000 shares; issued
715,058,159 shares in 1997 and 696,325,478 shares in
1996.................................................... 715 696
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value. Authorized 150,000,000 shares; issued
84,647,065 shares in 1997 and 1996...................... 85 85
Tele-Communications, Inc. Series A Liberty Media Group
common stock, $1 par value. Authorized 750,000,000
shares; issued 228,749,797 shares in 1997 and
227,844,437 shares in 1996.............................. 229 228
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value. Authorized 75,000,000
shares; issued 21,187,969 shares in 1997 and 21,189,369
shares in 1996.......................................... 21 21
Tele-Communications, Inc. Series A Telephony Group Stock,
$1 par value. Authorized 750,000,000 shares, no shares
outstanding............................................. -- --
Tele-Communications, Inc. Series B Telephony Group Stock,
$1 par value. Authorized 75,000,000 shares, no shares
outstanding............................................. -- --
Additional paid-in capital................................ 3,904 3,672
Cumulative foreign currency translation adjustment, net of
taxes................................................... 5 26
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 11 15
Accumulated deficit....................................... (234) (176)
------- ------
4,736 4,567
Series A TCI Group common stock, at cost, held by
subsidiaries (116,853,196 shares in 1997 and 1996)...... (314) (314)
------- ------
Total stockholders' equity.......................... 4,422 4,253
------- ------
Commitments and contingencies (note 10)..................... $30,676 30,244
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-30
<PAGE> 269
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS
<S> <C> <C>
Revenue:
Communications and programming services................... $1,827 1,605
Net sales from electronic retailing services (note 4)..... -- 256
------ -----
1,827 1,861
------ -----
Operating costs and expenses:
Operating................................................. 696 662
Cost of sales from electronic retailing services (note
4)..................................................... -- 165
Selling, general and administrative....................... 393 501
Compensation (adjustment to compensation) relating to
stock appreciation rights.............................. 15 (9)
Depreciation.............................................. 241 252
Amortization.............................................. 133 118
------ -----
1,478 1,689
------ -----
Operating income....................................... 349 172
Other income (expense):
Interest expense.......................................... (289) (261)
Interest and dividend income.............................. 21 10
Share of losses of affiliates, net (note 4)............... (156) (115)
Minority interests in losses (earnings) of consolidated
subsidiaries, net...................................... (38) 2
Gain on disposition of assets............................. 19 10
Other, net................................................ (2) 6
------ -----
(445) (348)
------ -----
Loss before income taxes............................... (96) (176)
Income tax benefit.......................................... 38 55
------ -----
Net loss............................................... (58) (121)
Dividend requirements on preferred stocks................... (10) (9)
------ -----
Net loss attributable to common stockholders........... $ (68) (130)
====== =====
Net earnings (loss) attributable to common stockholders:
TCI Group Series A and Series B common stock.............. $ (84) (145)
Liberty Media Group Series A and Series B common stock.... 16 15
------ -----
$ (68) (130)
====== =====
Net earnings (loss) attributable to common stockholders per
common share (note 2):
TCI Group Series A and Series B common stock.............. $ (.12) (.22)
Liberty Media Group Series A and Series B common stock.... $ .06 .06
</TABLE>
See accompanying notes to consolidated financial statements.
V-31
<PAGE> 270
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------
CLASS B TCI GROUP LIBERTY MEDIA GROUP TELEPHONY GROUP ADDITIONAL
PREFERRED ------------------- -------------------- ------------------- PAID-IN
STOCK SERIES A SERIES B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- -------- -------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997..................... $ -- 696 85 228 21 -- -- 3,672
Net loss................. -- -- -- -- -- -- -- --
Issuance of common stock
for acquisition........ -- 16 -- -- -- -- -- 242
Issuance of common stock
upon conversion of
notes.................. -- 3 -- 1 -- -- -- --
Issuance of common stock
to Tele-Communications,
Inc. Employee Stock
Purchase Plan.......... -- -- -- -- -- -- -- 8
Accreted dividends on all
classes of preferred
stock.................. -- -- -- -- -- -- -- (10)
Accreted dividends on all
classes of preferred
stock not subject to
mandatory redemption
requirements........... -- -- -- -- -- -- -- 2
Payment of preferred
stock dividends........ -- -- -- -- -- -- -- (10)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- --
Change in unrealized
holding gains for
available-for-sale
securities............. -- -- -- -- -- -- -- --
------ --- -- --- -- --- -- ------
Balance at March 31,
1997..................... $ -- 715 85 229 21 -- -- 3,904
====== === == === == === == ======
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING
FOREIGN GAINS FOR
CURRENCY AVAILABLE- COMMON
TRANSLATION FOR-SALE STOCK TOTAL
ADJUSTMENT, SECURITIES, ACCUMULATED HELD BY STOCKHOLDERS'
NET OF TAXES NET OF TAXES DEFICIT SUBSIDIARIES EQUITY
------------ ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997..................... 26 15 (176) (314) 4,253
Net loss................. -- -- (58) -- (58)
Issuance of common stock
for acquisition........ -- -- -- -- 258
Issuance of common stock
upon conversion of
notes.................. -- -- -- -- 4
Issuance of common stock
to Tele-Communications,
Inc. Employee Stock
Purchase Plan.......... -- -- -- -- 8
Accreted dividends on all
classes of preferred
stock.................. -- -- -- -- (10)
Accreted dividends on all
classes of preferred
stock not subject to
mandatory redemption
requirements........... -- -- -- -- 2
Payment of preferred
stock dividends........ -- -- -- -- (10)
Foreign currency
translation
adjustment............. (21) -- -- -- (21)
Change in unrealized
holding gains for
available-for-sale
securities............. -- (4) -- -- (4)
--- -- ----- ----- ------
Balance at March 31,
1997..................... 5 11 (234) (314) 4,422
=== == ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-32
<PAGE> 271
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
------- --------
AMOUNTS IN MILLIONS
(SEE NOTE 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (58) (121)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 374 370
Compensation (adjustment to compensation) relating to
appreciation rights................................... 15 (9)
Payments of stock appreciation rights.................. (1) (3)
Share of losses of affiliates.......................... 156 115
Minority interests in earnings (losses)................ 38 (2)
Gain on disposition of assets.......................... (19) (10)
Deferred income tax benefit............................ (66) (57)
Payments of restructuring charges...................... (16) --
Other noncash charges (credits)........................ 3 (1)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................ (16) 25
Change in inventories................................ -- 9
Change in prepaids................................... (32) (10)
Change in accrued interest........................... (112) (54)
Change in other accruals and payables................ (27) 65
----- ------
Net cash provided by operating activities......... 239 317
----- ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (156) (3)
Capital expended for property and equipment............... (90) (423)
Additional investments in and loans to affiliates and
others................................................. (35) (88)
Repayments of loans to affiliates......................... 120 6
Proceeds from disposition of assets....................... 140 41
Cash received in exchanges................................ 22 50
Other investing activities................................ (104) (59)
----- ------
Net cash used in investing activities............. (103) (476)
----- ------
Cash flows from financing activities:
Borrowings of debt........................................ 363 1,588
Repayments of debt........................................ (820) (1,954)
Proceeds from issuance of common stock.................... 4 --
Proceeds from issuance of Trust Preferred Securities...... 490 486
Proceeds from issuance of subsidiary preferred stock...... -- 223
Payment for repurchase of subsidiary common stock......... (7) --
Payment of preferred stock dividends...................... (21) (21)
Payment of dividends on subsidiary preferred stock and
Trust Preferred Securities............................. (34) --
----- ------
Net cash provided (used) by financing
activities....................................... (25) 322
----- ------
Net increase in cash and cash equivalents......... 111 163
Cash and cash equivalents at beginning of
period........................................... 394 118
----- ------
Cash and cash equivalents at end of period........ $ 505 281
===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-33
<PAGE> 272
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) GENERAL
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in TCI's Annual Report on Form 10-K for the year ended
December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective January 13, 1997, the Company issued a stock dividend to holders
of Tele-Communications, Inc. Series A and Series B Liberty Media Group common
Stock ("Liberty Group Stock") consisting of one share of Series A Liberty Group
Stock for every two shares of Series A Liberty Group Stock owned and one share
of Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock
Dividend has been treated as a stock split, and accordingly, all share and per
share amounts have been retroactively restated to reflect the Liberty Group
Stock Dividend.
Certain amounts have been reclassified for comparability with the 1997
presentation.
(2) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"). Statement No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with potentially dilutive securities, such as
convertible debt, options and warrants, diluted EPS. Statement No. 128 is
effective for annual and interim periods ending after December 31, 1997. The
Company does not expect that Statement No. 128 will have a material impact on
the Company's earnings (loss) per share as described below.
TCI Group Series A and Series B Common Stock
The loss attributable to Tele-Communications, Inc. Series A and Series B
TCI Group common stock ("TCI Group Stock") stockholders per common share for the
three months ended March 31, 1997 and 1996 was computed by dividing net loss
attributable to TCI Group Series A and Series B common stockholders by the
weighted average number of common shares outstanding of TCI Group Series A and
Series B common stock during the period (678.0 million and 659.3 million,
respectively). Common stock equivalents were not included in the computation of
weighted average shares outstanding because their inclusion would be anti-
dilutive.
Liberty Media Group Series A and Series B Common Stock
Earnings attributable to Liberty Group Stock stockholders per common share
for the three months ended March 31, 1997 and 1996 was computed by dividing net
earnings attributable to Liberty Media Group Series A and Series B common
stockholders by the weighted average number of common shares outstanding of
Liberty Media Group Series A and Series B common stock during the period (249.7
million and
V-34
<PAGE> 273
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
247.2 million, respectively). Common stock equivalents were not included in the
computation because their inclusion would be anti-dilutive to TCI.
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $401 million and $315 million for the three
months ended March 31, 1997 and 1996, respectively. Cash paid for income taxes
during these periods was not material.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired............................. $1,065 1,130
Liabilities assumed, net of current assets................ (616) (374)
Deferred tax liability recorded in acquisitions........... (34) (240)
Minority interests in equity of acquired entities......... (1) (52)
Common stock and preferred stock issued in acquisitions... (258) (461)
------ -----
Cash paid for acquisitions............................. $ 156 3
====== =====
Cash received in exchanges:
Aggregate cost basis of assets acquired................... $ (294) (193)
Historical cost of assets exchanged....................... 305 222
Gain recorded on exchange of assets....................... 11 21
------ -----
Cash received in exchanges............................. $ 22 50
====== =====
Effect of foreign currency translation adjustment on book
value of foreign equity investments....................... $ 21 7
====== =====
Change in unrealized gains, net of deferred income taxes, on
available-for-sale securities............................. $ 4 24
====== =====
Accrued preferred stock dividends........................... $ 8 7
====== =====
</TABLE>
(4) INVESTMENTS IN AFFILIATES
The Company has various investments accounted for under the equity method.
The following table includes the Company's carrying value and percentage
ownership of the more significant investments at March 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PERCENTAGE CARRYING
OWNERSHIP VALUE
---------- --------
AMOUNTS IN MILLIONS
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P.
and PhillieCo, L.P................................... 30%-35.3% $728
Teleport Communications Group, Inc..................... 31.1% 263
Home Shopping Network, Inc. ("HSN").................... 19.9% 144
BDTV INC. and BDTV II, INC............................. 99% 200
Telewest Communications plc ("Telewest")............... 27% 427
Various foreign equity investments (other than
Telewest)............................................ various 373
Discovery Communications, Inc.......................... 49% 118
QVC, Inc............................................... 43% 110
</TABLE>
V-35
<PAGE> 274
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 1,751 1,308
Operating expenses........................................ (1,642) (1,151)
Depreciation and amortization............................. (282) (149)
------- ------
Operating income (loss)................................ (173) 8
Interest expense.......................................... (171) (108)
Other, net................................................ (152) (31)
------- ------
Net loss.......................................... $ (496) (131)
======= ======
</TABLE>
The Company is a partner in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum Holding Company, L.P.
("Sprint Spectrum") and MinorCo, L.P. (collectively, the "Sprint PCS
Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The
Company has a 30% partnership interest in each of the Sprint PCS Partnerships
and a 35.3% interest as a partner in PhillieCo. During the three months ended
March 31, 1997 and 1996, the Sprint PCS Partnerships contributed $64 million and
$53 million, respectively, to the Company's share of affiliate losses. Such 1996
amount includes $34 million related to prior periods.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents). The Sprint PCS Partnerships' licenses, which cover 29
markets, were acquired in an auction conducted by the Federal Communications
Commission ("FCC") that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which
owns a PCS license for and operates a PCS system in the Baltimore/Washington,
D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS
license for the Los Angeles/San Diego MTA and currently operates a PCS system in
San Diego, California. The Sprint PCS Partnerships may invest in other entities
that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA,
which was acquired at a license cost of $85 million. During December 1996, the
Sprint PCS Partnerships initiated the commercial launch of PCS service in seven
markets.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion). The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. The Company
expects that the remaining approximately $1.2 billion of such amount (of which
the Company's share is approximately $0.4 billion) will be contributed by the
end of the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed). The Company expects that the Sprint PCS
Partnerships will require additional equity thereafter.
V-36
<PAGE> 275
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
Company currently believes that such agreement will not result in the Company's
being required to make any incremental capital contributions in addition to its
pro rata portion of the aforementioned $4.2 billion amount.
Pursuant to an agreement among Liberty Media Corporation ("Liberty"), a
subsidiary of TCI, Barry Diller and certain of their respective affiliates
entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"),
Liberty contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the
"Option") to purchase 2 million shares of Class B common stock of Silver King
Communications, Inc. ("Silver King") (which shares represented voting control of
Silver King at such time) and $3,500,000 in cash, representing the exercise
price of the Option. BDTV-I is a corporation formed by Liberty and Mr. Diller
pursuant to the BDTV Agreement, in which Liberty owns over 99% of the equity and
none of the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the Option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty in Silver
King not exceed 21.37% without the prior approval of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger"). In order to effect the HSN
Merger in compliance with the FCC Order, Liberty agreed to defer receiving
certain shares of Silver King that would otherwise have become issuable to it in
the HSN Merger until such time as it was permitted to own such shares. As a
result, the HSN Merger was structured so that Liberty received (i) 7,809,111
shares of Class B common stock of Silver King, all of which shares Liberty
contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the
"Contingent Right") to be issued up to an additional 2,591,752 shares of Class B
common stock of Silver King from time to time upon the occurrence of certain
events which would allow Liberty to own additional shares in compliance with the
FCC Order (including events resulting in the dilution of Liberty's percentage
equity interest), and (iii) 739,141 shares of Class B common stock and
17,566,702 shares of common stock of HSN (representing approximately 19.9% of
the equity of HSN). BDTV-II is a corporation formed by Liberty and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty and Mr. Diller are substantially the same as their
respective equity ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty and
therefore, the financial results of HSN are no longer consolidated with the
financial results of Liberty. Although Liberty no longer possesses voting
control over HSN, it continues to have an indirect equity interest in HSN
through its ownership of the equity securities of BDTV-I and BDTV-II as well as
a direct interest in HSN which would be exchangeable into shares of Silver King.
Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method.
Telewest is a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). Telewest
contributed $42 million and $31 million of the Company's share of its
affiliates' losses during the three months ended March 31, 1997 and 1996,
respectively. In addition, the Company has other less significant equity method
investments in video distribution and programming businesses located in the UK,
other parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments accounted for $22 million
and $18 million of the Company's share of its affiliates' losses in 1997 and
1996, respectively.
V-37
<PAGE> 276
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general partnership is,
as such, liable as a matter of partnership law for all debts of that partnership
in the event liabilities of that partnership were to exceed its assets.
(5) INVESTMENT IN TIME WARNER
Through October 9, 1996, TCI owned shares of Turner Broadcasting System,
Inc. ("TBS") common stock and shares of TBS preferred stock that were
convertible into TBS common stock. The Company's total holdings represented an
approximate 7.5% voting interest for those matters which preferred and common
voted as a single class. On October 10, 1996, Time Warner and TBS consummated a
merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of
a Time Warner common share for each TBS Class A and Class B common share held,
and each holder of TBS Class C preferred stock received 0.80 of a Time Warner
common share for each of the 6 shares of TBS Class B common stock into which
each share of Class C preferred stock could have been converted.
Time Warner, TBS, TCI and Liberty entered into an Agreement Containing
Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996,
as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC
Consent Decree, among other things, Liberty agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger for shares
of a separate series of Time Warner common stock with limited voting rights (the
"TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one
one-hundredth ( 1/100th) of a vote for each share with respect to the election
of directors. Holders of the TW Exchange Stock will not have any other voting
rights, except as required by law or with respect to limited matters, including
amendments of the terms of the TW Exchange Stock adverse to such holders.
Subject to the federal communications laws, each share of the TW Exchange Stock
will be convertible at any time at the option of the holder on a one-for-one
basis for a share of Time Warner common stock. Holders of TW Exchange Stock are
entitled to receive dividends ratably with the Time Warner common stock and to
share ratably with the holders of Time Warner common stock in assets remaining
for common stockholders upon dissolution, liquidation or winding up of Time
Warner.
In connection with the TBS/Time Warner Merger, the Company received
approximately 50.6 million shares of the TW Exchange Stock in exchange for its
TBS holdings. At March 31, 1997, the Company's investment in Time Warner,
carried at cost, had an aggregate fair value of approximately $2.2 billion based
upon the market value of the marketable common stock into which it is
convertible.
Subject to a number of conditions, including receipt of a ruling from the
Internal Revenue Service ("IRS") that such dividend would be tax free to the
Liberty Group Stock stockholders, TCI agreed in an Agreement Containing Consent
Order (the "FTC Consent Decree") with the FTC that it would distribute in the
form of a stock dividend (the "Spin-Off") to the Liberty Group Stock
stockholders the stock of a new company ("Spinco") which would own, directly or
indirectly, the TW Exchange Stock and the business of Southern Satellite
Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty which
distributes the TBS SuperStation ("WTBS") signal in the United States and
Canada. The IRS has declined to provide the requested ruling and, accordingly,
TCI has canceled plans for the Spin-Off. Pursuant to the FTC Consent Decree, the
level of TCI's ownership in Time Warner is restricted to the lower of 9.2% of
the fully diluted number of shares of Time Warner's common stock and 12.4% of
the aggregate number of outstanding shares of Time Warner's common stock.
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. The agreement provides for the
Contract Option to be granted no later than the fifth business day following the
earlier of May 31, 1997, the receipt of a favorable IRS ruling and the
determination that the IRS ruling will not be
V-38
<PAGE> 277
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obtained, subject to extension for a 30-day period, if the IRS ruling were not
obtained, during which period the parties would seek to negotiate an alternative
structure for the transaction. On the date of grant of the Contract Option, the
agreement provides for Time Warner to issue to Southern, in consideration for
the Contract Option and certain noncompetition covenants, an aggregate of 5.0
million shares of TW Exchange Stock and $66,666,700, payable at Time Warner's
option in cash or TW Exchange Stock. If Time Warner were to exercise the
Contract Option and enter into the Distribution Contract, Time Warner would be
obligated to make quarterly payments to Southern in an amount which, when added
to Southern's net cash flow, would aggregate approximately $213.3 million on a
present value basis discounted to the effective date of the Distribution
Contract. In light of the cancellation of the Spin-Off, Liberty is seeking to
renegotiate the Contract Option to provide instead for an option for Time Warner
to acquire Southern's business.
(6) ACQUISITIONS
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of TCI Group Stock, assumed $584
million of TKR Cable's debt and paid cash of $88 million and shares of Time
Warner common stock valued at $41 million upon consummation of such acquisition.
On July 31, 1996, pursuant to certain agreements entered into among TCIC, a
subsidiary of TCI; TCI; Viacom International, Inc. and Viacom, Inc. ("Viacom"),
TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub")
which owned Viacom's cable systems and related assets (the "Viacom
Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for shares of Class A
Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's obligations
under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred
Stock of Cable Sub with a stated value of $100 per share.
V-39
<PAGE> 278
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN MILLIONS
<S> <C> <C>
Notes payable............................................... $ 9,254 9,308
Bank credit facilities...................................... 5,219 4,813
Commercial paper............................................ 404 638
Convertible notes(a)........................................ 41 43
Other debt.................................................. 131 124
------- ------
$15,049 14,926
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$168 million at March 31, 1997 and $178 million at December 31, 1996, mature
on December 18, 2021. The notes require, so long as conversion of the notes
has not occurred, an annual interest payment through 2003 equal to 1.85% of
the face amount of the notes. During the three months ended March 31, 1997,
certain of these notes were converted into 2,150,000 shares of Series A TCI
Group Stock and 810,000 shares of Series A Liberty Group Stock. At March 31,
1997, the notes were convertible, at the option of the holders, into an
aggregate of 34,933,772 shares of Series A TCI Group Stock and 13,100,153
shares of Series A Liberty Group Stock.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or dividend
payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 116,853,195 shares of Series A TCI Group
Stock held by a subsidiary of the Company. Also, as security for borrowings
under another of the Company's credit facilities, the Company has pledged a
portion of its Time Warner common stock with an estimated market value of $2.2
billion.
The fair value of the debt of the Company's subsidiaries is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of debt, which has a carrying value of $15,049 million, was $15,098
million at March 31, 1997.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.1% to 9.3% and receives variable interest rates on
notional amounts of $410 million at March 31, 1997 and (ii) pays variable
interest rates (the "Variable Rate Agreements") and receives fixed interest
rates ranging from 4.8% to 9.7% on notional amounts of $2,250 million at March
31, 1997. During the three months ended March 31, 1997 and 1996, the Company's
net receipts pursuant to the Fixed Rate Agreements were $3 million and $5
million, respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were $1 million and $8 million, respectively.
V-40
<PAGE> 279
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (dollar amounts in millions):
<TABLE>
<CAPTION>
FIXED RATE AGREEMENTS VARIABLE RATE AGREEMENTS
- ----------------------------------------------- -----------------------------------------------
INTEREST RATE NOTIONAL INTEREST RATE NOTIONAL
EXPIRATION DATE TO BE PAID AMOUNT EXPIRATION DATE TO BE RECEIVED AMOUNT
--------------- ------------- -------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
October 1997......... 7.1%-9.3% $180 April 1997.......... 7.0% $ 200
December 1997........ 8.7% 230 September 1998...... 4.8%-5.4% 450
----
$410 April 1999.......... 7.4% 50
====
February 2000....... 5.8%-6.6% 300
March 2000.......... 5.8%-6.0% 675
September 2000...... 5.1% 75
March 2027.......... 9.7% 300
December 2036....... 9.7% 200
------
$2,250
======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, the Company does
not anticipate that it will incur any material credit losses because it does not
anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
March 31, 1997, taking into consideration current interest rates and the current
creditworthiness of the counterparties. At March 31, 1997, the Company would be
required to pay an estimated $47 million to terminate the Fixed Rate Agreements
and an estimated $7 million to terminate the Variable Rate Agreements.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per
annum on the average unborrowed portion of the total amount available for
borrowings under bank credit facilities.
(8) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF TCIC
In 1996 and 1997, the Company, through certain subsidiary trusts, (the
"Trusts"), issued preferred securities as follows:
<TABLE>
<CAPTION>
SUBSIDIARY TRUST INTEREST RATE FACE AMOUNT
---------------- ------------- -----------
IN MILLIONS
<S> <C> <C>
TCI Communications Financing I.............................. 8.72% $ 500
TCI Communications Financing II............................. 10.00% 500
TCI Communications Financing III............................ 9.65% 300
TCI Communications Financing IV............................. 9.72% 200
------
$1,500
======
</TABLE>
The Trusts exist for the exclusive purpose of issuing the Trust Preferred
Securities and investing the proceeds thereof into Subordinated Deferrable
Interest Notes (the "Subordinated Debt Securities") of TCIC. The Subordinated
Debt Securities have interest rates equal to the interest rate of the
corresponding Trust Preferred Securities and have maturity dates ranging from 30
to 49 years from the date of issuance. The
V-41
<PAGE> 280
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other indebtedness of the
Company. Upon redemption of the Subordinated Debt Securities, the Trust
Preferred Securities will be mandatorily redeemable. TCIC effectively provides a
full and unconditional guarantee of the Trusts' obligations under the Trust
Preferred Securities.
The Trust Preferred Securities are presented together in a separate line
item in the accompanying consolidated balance sheets captioned
"Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely subordinated debt securities of TCI Communications, Inc."
Dividends accrued on the Trust Preferred Securities are included in minority
interests in losses (earnings) of consolidated subsidiaries in the accompanying
consolidated financial statements.
(9) STOCKHOLDERS' EQUITY
In August 1995, TCI issued the Liberty Group Stock which reflects the
separate performance of TCI's business which produces and distributes
programming services ("Liberty Media Group").
As of March 31, 1997, the TCI Group Stock reflects the separate performance
of TCI's subsidiaries and assets not attributed to Liberty Media Group,
including (i) TCI's Cable and Communications unit, (ii) TCI's International
Cable and Programming Unit ("TINTA") and (iii) TCI's Technology/Venture Capital
unit. Such subsidiaries and assets are referred to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group or to Liberty Media Group for purposes of
preparing their combined financial statements, the change in the capital
structure of TCI did not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of
common stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty Group Stock did not affect the rights of creditors of TCI.
On March 12, 1997, the TCI stockholders authorized the TCI Board of
Directors to issue two new series of the Company's common stock, par value $1.00
per share, (and a corresponding increase in the total number of authorized
shares of common stock) to be designated Tele-Communications, Inc. Series A
Telephony Group common stock and Tele-Communications, Inc. Series B Telephony
Group common stock (collectively, the "Telephony Group Stock"). The Telephony
Group Stock, if issued, would be intended to reflect the separate performance of
Telephony Group, which initially consists of the Company's investments in
certain entities engaged in the domestic wireline and wireless telephony
businesses. A total of 750 million shares of Series A Telephony Group Stock and
75 million shares of Series B Telephony Group Stock were authorized. As of March
31, 1997, no shares of Telephony Group Stock have been issued.
Stock Options
Estimated compensation relating to restricted stock awards, stock
appreciation rights ("SARs") and options with tandem SARs awarded by the Company
has been recorded through March 31, 1997, but is subject to future adjustment
based upon market value, and ultimately, on the final determination of market
value when the rights are exercised or the restricted stock awards are vested.
Other
At March 31, 1997, there were 126,384,805 shares of Series A TCI Group
Stock and 30,616,358 shares of Series A Liberty Group Stock reserved for
issuance under exercise privileges related to options, convertible debt
securities and convertible preferred stock. Also, one share of Series A TCI
Group Stock is reserved for each share of Series B TCI Group Stock, and one
share of Series A Liberty Group Stock is reserved for each share of Series B
Liberty Group Stock. Additionally, subsidiaries of TCI own an aggregate of
278,307 shares of TCI Convertible Redeemable Participating Preferred Stock,
Series F ("Series F Preferred Stock"). Each share of Series F Preferred Stock is
convertible into 1,496.65 shares of Series A TCI Group Stock.
V-42
<PAGE> 281
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2017 (the "Film Licensing
Obligations"). Based on customer levels at March 31, 1997, these agreements
require minimum payments aggregating approximately $651 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At March 31, 1997, such
commitments aggregated $215 million.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $252
million at March 31, 1997. Although there can be no assurance, management of the
Company believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they will
not be material to the Company.
Certain key employees of the Company hold restricted stock awards, options
and options with tandem SARs to acquire shares of certain subsidiaries' common
stock. Estimates of the compensation related to the restricted stock awards and
options and/or SARs have been recorded in the accompanying consolidated
financial statements, but are subject to future adjustment based upon the market
value of the respective common stock and, ultimately, on the final market value
when the rights are exercised or the restricted stock awards are vested.
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been recorded in the
accompanying combined financial statements, but is subject to future adjustment
based upon a valuation model derived from such subsidiary's cash flow, working
capital and debt. Effective January 1, 1994, these employees have a put right
that requires such subsidiary to purchase their respective PSARs. The subsidiary
may call the PSARs on or after January 1, 1996.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the opinion
of management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Summary of Operations
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated on
August 4, 1994 and was structured as a tax free exchange of Class A and Class B
shares of both companies and preferred stock of Liberty for like shares of a
newly formed holding company, TCI/Liberty Holding Company. In connection with
the TCI/Liberty Combination, Old TCI changed its name to TCI Communications,
Inc. ("TCIC") and TCI/Liberty Holding Company changed its name to
Tele-Communications, Inc.
On August 3, 1995, the stockholders of TCI authorized the Board to issue
the Liberty Group Stock which reflects the separate performance of Liberty Media
Group. Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock. The issuance of the Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI or any of
its subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution represented one hundred percent of the equity
value attributable to Liberty Media Group. As of December 31, 1996, the TCI
Group Stock reflects the performance of those businesses of the Company not
attributed to Liberty Media Group. Such businesses are referred to herein as
"TCI Group". Liberty Media Group and TCI Group are sometimes herein after
referred to individually as a "Group".
On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share, (and a
corresponding increase in the total number of authorized shares of common stock)
to be designated Tele-Communications, Inc. Series A Telephony Group Common Stock
and Tele-Communications, Inc. Series B Telephony Group Common Stock. The
Telephony Group Stock, if issued, would be intended to reflect the separate
performance of Telephony Group, which initially consists of the Company's
investments in certain entities engaged in the domestic wireline and wireless
telephony businesses. A total of 750 million shares of Series A Telephony Group
Stock and 75 million shares of Series B Telephony Group Stock were authorized.
The Company is organized based upon four lines of business: Domestic Cable
and Communications; Programming; International Cable and Programming ("TINTA");
and Technology/Venture Capital. Within the Domestic Cable and Communications
line of business, the Company operates three strategic business units: Cable,
Telephony and Internet. The Company's organizational structure provides for
financial and operational independence in the four operating units, each under
the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While the
International Cable and Programming unit, Telephony unit, Internet unit or the
Technology/Venture Capital unit is currently significant to the Company as a
whole, the Company believes each unit has growth potential and each unit is
unique enough in nature to warrant separate operational focus.
Notwithstanding the foregoing, the Company currently has significant
operations principally in two industry segments: cable and communications
services and programming services. Home shopping is a programming service which
includes a retail function. Separate amounts for home shopping services have
been provided to enhance the readers understanding of the Company. The
Technology/Venture Capital, Telephony, Internet and the International Cable and
Programming portions of the Company's business have been included with cable and
communications services due to their relative insignificance. The amounts
provided for the Company's programming services segment represent the results of
Liberty Media Group since the date of the TCI/Liberty Combination.
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Cable and Communications Services
The table below sets forth for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of the Company. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
DOLLAR AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. 100% $6,790 100% $5,145 100% $4,043
Operating, selling, general and
administrative expenses(1)........ 69 4,678 61 3,173 56 2,275
Compensation (adjustment to
compensation) relating to stock
appreciation rights............... -- (30) 1 45 -- (5)
Restructuring charges............... -- 41 -- -- -- --
Depreciation and amortization....... 23 1,555 25 1,274 25 992
--- ------ --- ------ --- ------
Operating income............... 8% $ 546 13% $ 653 19% $ 781
=== ====== === ====== === ======
</TABLE>
- ---------------
(1) Includes intercompany programming charges of $107 million, $80 million and
$33 million in 1996, 1995 and 1994, respectively. Such programming charges
eliminate in consolidation.
The operation of the Company's cable television systems is regulated at the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of
1996 (together with the 1992 Cable Act, the "Cable Acts") established rules
under which the Company's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are regulated if a complaint is
filed or if the appropriate franchise authority is certified. At December 31,
1996, approximately 78% of the Company's basic customers were served by cable
television systems that were subject to such rate regulation.
During the year ended December 31, 1996, 61% of the Company's revenue from
Cable and Communications Services was derived from Regulated Services. As noted
above, any increases in rates charged for Regulated Services are regulated by
the Cable Acts. Moreover, competitive factors may limit the Company's ability to
increase its service rates.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar").
Primestar provides programming and marketing support to each of its cable
partners who provide satellite television service to their customers. On
December 4, 1996, the Company distributed (the "Satellite Spin-off") to the
holders of shares of TCI Group Stock all of the issued and outstanding common
stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the
Satellite Spin-off, Satellite's assets and operations included the Company's
interest in Primestar, the Company's business of distributing Primestar
programming and two communications satellites. As a result of the Satellite
Spin-off, Satellite's operations are no longer consolidated with the Company's.
See note 7 to the accompanying consolidated financial statements for the effect
of the Satellite Spin-off on the Company's results of operations and financial
position.
Revenue from Cable and Communications services increased 32% and 27% for
the years ended December 31, 1996 and 1995, respectively, as compared to the
prior years. In the Company's regulated cable systems, the Company implemented
rate increases for its Regulated Services in June 1996. As allowed by Federal
Communications Commission ("FCC") regulations, such rate increases included
amounts intended to recover increased programming costs incurred during the
first five months of 1996 and not previously recovered, as well as interest on
said amounts.
The 1996 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (18%), increases in the rates charged to the
Company's customers due to inflation, programming cost increases as previously
discussed and channel additions (7%), growth in the Company's satellite
customers through the date of the Satellite Spin-off (3%), net growth in basic
customer levels within the Company's
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cable television systems (1%) and an increase in the Company's international
programming revenue, advertising sales and other revenue (3%).
The 1995 increase in revenue from Cable and Communications is due to the
effect of certain acquisitions (13%), growth in the Company's satellite
customers (4%), increases in the rates charged to the Company's customers from
inflation, programming cost increases and channel additions (4%), net growth in
basic customer levels within the Company's cable television systems (4%) and an
increase in the Company's long-distance voice and data service and other revenue
(2%).
Operating, selling, general and administrative expenses increased 47% and
39% for the years ended December 31, 1996 and 1995, respectively, as compared to
the prior year. Exclusive of the effects of acquisitions (21% and 13%) and
Primestar (5% and 8%), such expenses increased 21% and 18%, respectively.
Programming expenses accounted for the majority of such increase. In this
regard, programming expenses, including intercompany programming charges,
represented $1,782 million (38%), $1,331 million (42%) and $936 million (41%) of
operating, selling, general and administrative expenses during 1996, 1995 and
1994, respectively. The Company cannot determine whether and to what extent
increases in the cost of programming will affect its future operating costs.
However, such programming costs have increased at a greater percentage than
increases in revenue of Regulated Services. During the fourth quarter of 1995,
the Company incurred $25 million in expenses related to payment of bonuses to
the majority of its employees.
During the fourth quarter of 1996, the Company restructured certain of its
operating and accounting functions (the "Restructuring"). In connection with the
Restructuring, the Company recognized a charge of $41 million related primarily
to work force reductions. As of December 31, 1996, $8 million of such
restructuring charges had been paid. The Company anticipates that the majority
of the remaining charges will be paid during the six months ended June 30, 1997.
The increase in the Company's depreciation expense in 1996 and 1995 is due
to acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems. The
increase in amortization expense in 1996 and 1995 is due to acquisitions.
The Company records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
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Programming Services
The table below sets forth for the periods presented, the percentage
relationship that certain items bear to revenue. This summary provides trend
data relating to the normal recurring operations of the Company. Other items of
significance are discussed under separate captions below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
DOLLAR AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Electronic Retailing Services:
Net sales......................... 100% $ 984 100% $ 920 100% $ 432
Cost of sales..................... 61 605 66 603 61 263
Operating, selling, general and
administrative expenses........ 31 306 37 342 34 145
Restructuring charges............. -- -- 2 17 -- --
Depreciation and amortization..... 4 37 4 43 3 15
--- ------ --- ------ --- ------
Operating income (loss)........ 4% $ 36 (9)% $ (85) 2% $ 9
=== ====== === ====== === ======
Other Programming Services
Revenue(1)........................ 100% $ 355 100% $ 521 100% $ 240
Operating, selling, general and
administrative expenses........ 74 264 92 480 97 234
Compensation (adjustment to
compensation) relating to stock
appreciation rights............ 5 17 2 12 (1) (3)
Depreciation and amortization..... 7 24 11 55 5 11
--- ------ --- ------ --- ------
Operating income (loss)........ 14% $ 50 (5)% $ (26) (1)% $ (2)
=== ====== === ====== === ======
</TABLE>
- ---------------
(1) Includes intercompany programming revenue of $107 million, $80 million and
$33 million in 1996, 1995 and 1994, respectively. Such programming revenue
eliminates in consolidation.
Electronic Retailing Services
This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination and ceased to be a consolidated subsidiary in December
1996 pursuant to the transactions described below. HSN's primary business is the
sale of merchandise to viewers of the home shopping programming produced and
distributed by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of
HSN.
Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time) and
$3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a
corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV
Agreement, in which Liberty Media Group owns over 99% of the equity and none of
the voting power (except for protective rights with respect to certain
fundamental corporate actions) and Mr. Diller owns less than 1% of the equity
and all of the voting power. BDTV-I exercised the option shortly after its
contribution, thereby becoming the controlling stockholder of Silver King. Such
change in control of Silver King had been approved by the FCC in June 1996,
subject, however, to the condition that the equity interest of Liberty Media
Group in Silver King not exceed 21.37% without the prior approval of the FCC
(the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of
Silver King in December 1996 (the "HSN Merger") where HSN is the surviving
corporation and a subsidiary of Silver King following the HSN Merger. In order
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to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group
agreed to defer receiving certain shares of Silver King that would otherwise
have become issuable to it in the HSN Merger until such time as it was permitted
to own such shares. As a result, the HSN Merger was structured so that Liberty
Media Group received (i) 7,809,111 shares of Class B common stock of Silver
King, all of which shares Liberty Media Group contributed to BDTV II INC.
("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up
to an additional 2,591,752 shares of Class B common stock of Silver King from
time to time upon the occurrence of certain events which would allow Liberty
Media Group to own additional shares in compliance with the FCC Order (including
events resulting in the dilution of Liberty Media Group's percentage equity
interest), and (iii) 739,141 shares of Class B common stock and 17,566,702
shares of common stock of HSN (representing approximately 19.9% of the equity of
HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller
pursuant to the BDTV Agreement, in which the relative equity ownership and
voting power of Liberty Media Group and Mr. Diller are substantially the same as
their respective equity ownership and voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although Liberty
Media Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV-I and BDTV-II as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II
are accounted for using the equity method.
During the year ended December 31, 1996, HSN's net sales increased 7%, as
compared to the prior year. Such increase is due primarily to the net effect of
an 11.5% increase in the number of packages shipped partially offset by an 8.5%
decrease in the average price per unit sold.
Net sales from electronic retailing services increased from $432 million in
1994 to $920 million in 1995. Such increase is due to the consolidation of HSN
in August of 1994 in connection with the TCI/Liberty Combination. However, on an
annualized basis, HSN's net sales decreased approximately 11%. Such annualized
decrease is the net affect of a 19% decrease in the number of packages shipped,
partially offset by a 9% increase in the average price per unit sold.
For the year ended December 31, 1996, cost of sales increased $2 million or
less than 1% as compared to 1995. As a percentage of net sales, cost of sales
decreased from 66% to 61% from 1995 to 1996. Such decrease is due to promotional
events in 1995 which had the effect of lowering revenue but not cost of sales
and to a change in product sales mix in 1996.
Cost of sales increased from $263 million in 1994 to $603 million in 1995.
As a percent of sales, cost of sales increased from 61% in 1994 to 66% in 1995.
The increase in the cost of sales percentages primarily relate to warehouse
sales and other promotional events. Such events included price discounts to (i)
facilitate the restructuring of HSN's distribution center, (ii) make room for
new holiday merchandise and (iii) adjust inventory levels and product mix. In
addition, cost of sales for the year ended December 31, 1995 includes a $12
million increase in HSC's inventory carrying value adjustment related to
products which were inconsistent with HSN's then new sales and merchandise
philosophy.
HSN believes that seasonality does impact its business, but not to the same
extent it impacts the retail industry in general.
Other Programming Services
On April 1, 1996, United Video Satellite Group, Inc. ("UVSG"), a subsidiary
of TCI Group, and Netlink USA ("Netlink"), a subsidiary of Liberty Media Group,
formed Superstar/Netlink Group LLC ("Superstar/Netlink"), a limited liability
company comprised of UVSG's Superstar Satellite Entertainment and Netlink's
retail C-band satellite business. Liberty Media Group and UVSG each own 50% of
Superstar/ Netlink. As of April 1, 1996, Netlink's retail C-band business is no
longer consolidated with the financial results of Liberty Media Group.
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures both of which
are accounted for using the equity method. In
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the United States, Liberty Media Group and News Corp. formed the Liberty/Fox
U.S. Sports LLC ("Fox Sports") into which Liberty Media Group contributed
interests in its national and regional sports networks and into which News Corp.
contributed its fx cable network and certain other assets. Liberty Media Group
received a 50% interest in Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of
Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to
operate previously existing sports services in Latin America and Australia and a
variety of new sports services throughout the world, except in Asia and in the
United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with
News Corp. owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. Liberty/TINTA contributed Prime
Deportiva, a Spanish language sports service distributed in Latin American and
in Hispanic markets in the United States; an interest in Torneos y Competencias
S.A., an Argentinean sports programming and production business; various
international sports and satellite transponder rights and cash. Liberty/TINTA
also contributed its 50% interest in Premier Sports and All-Star Sports. Both
are Australian 24-hour sports services available via multichannel, multipoint
distribution systems or cable television.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/ TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Revenue from the Company's Other Programming Services decreased $166
million or 32% from 1995 to 1996. Such decrease is due to the net effect of the
deconsolidation of (i) the Company's sports programming entities upon the
formation of Fox Sports and Fox Sports International and (ii) Netlink's retail
C-band satellite business offset by a $50 million increase in revenue from
Encore Media Corporation and a $9 million increase from other services.
Revenue from the Company's Other Programming Services increased $281
million or 117% from 1994 to 1995, and operating costs and expenses before
depreciation and amortization increased $246 million or 105%. Such increases are
primarily due to the TCI/Liberty Combination.
Other Income and Expense
The Company's interest expense increased $86 million or 9% during 1996, as
compared to 1995 and $225 million or 29% during 1995, as compared to 1994. The
increase in 1996 is the net result of an increase due to higher debt balances
partially offset by a decrease due to a lower weighted average interest rate.
The 1995 increase is the result of higher interest rates and debt balances. The
Company's weighted average interest rate on borrowings was 7.8%, 8.1% and 7.5%
during 1996, 1995 and 1994, respectively.
During the year ended December 31, 1996, in order to reduce future interest
costs, the Company redeemed certain notes payable which had an aggregate
principle balance of $904 million and fixed interest rates ranging from 7.88% to
10.44% (the "Redemption"). In connection with the Redemption, the Company
recognized a loss on early extinguishment of debt of $62 million. Such loss
related to prepayment penalties amounting to $60 million and the retirement of
deferred loan costs.
Also, during the year ended December 31, 1996, certain subsidiaries of the
Company terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion and refinanced
certain other bank credit facilities. In connection with such termination and
refinancings, the Company recognized a loss on early extinguishment of debt of
$9 million related to the retirement of deferred loan costs.
At December 31, 1996, the Company had an effective ownership interest of
approximately 27% in Telewest Communications plc ("Telewest"), a company that is
currently operating and constructing cable television and telephone systems in
the United Kingdom ("UK"). Telewest, which is accounted for under the equity
method, had a carrying value at December 31, 1996 of $488 million and comprised
$109 million,
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$70 million and $43 million of the Company's share of its affiliates' losses in
1996, 1995, and 1994, respectively. The increase in the Company's share of
losses of Telewest in 1996 and 1995 is due, in part, to an increase in
Telewest's interest expense and foreign currency translation losses related to
the 1995 issuance of U.S. dollar denominated debentures by Telewest. In
addition, the Company has other less significant equity method investments in
video distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $422
million at December 31, 1996 and accounted for $79 million, $62 million and $50
million of the Company's share of its affiliates' losses in 1996, 1995 and 1994,
respectively.
Telewest was formed during the fourth quarter of 1995 upon the merger (the
"TeleWest Merger") of TeleWest Communications plc (formerly TCI/US WEST Cable
Communications Group) ("TeleWest Communications") with SBC (CableComms)(UK).
Prior to the TeleWest Merger, the Company had an effective ownership interest of
approximately 36% in TeleWest Communications, and subsequent to the TeleWest
Merger the Company has an effective ownership interest of approximately 27% in
Telewest. As a result of the TeleWest Merger, the Company recognized a gain of
$165 million (before deducting the related tax expense of $58 million). Such
gain represents the difference between the Company's recorded cost for TeleWest
Communications and the Company's effective proportionate share of Telewest's net
assets. There is no assurance that the Company will realize similar gains in
future periods.
As a result of the TeleWest Communications November 1994 initial public
offering (the "TeleWest IPO") and the associated dilution of the Company's
ownership interest of TeleWest Communications, the Company recognized a gain
amounting to $161 million (before deducting the related tax expense of $57
million) in 1994.
The Company's share of losses of affiliates was $473 million, $193 million
and $112 million (exclusive of share of earnings of Liberty prior to the
TCI/Liberty Combination) in 1996, 1995 and 1994, respectively. The increases in
1996 and 1995 are due in part to the aforementioned share of losses of Telewest
and the Company's other international investments. Additionally, included in
share of losses of affiliates for the year ended December 31, 1996 is $168
million attributable to Sprint Spectrum Holding Company, L.P. ("Sprint
Spectrum"). Such amount includes $34 million associated with prior periods.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9% of
Liberty's 50% general partnership interest in American Movie Classics Company
("AMC"). The gain recognized by Liberty in connection with the disposition of
AMC was $183 million and is included in the Company's share of Liberty's
earnings prior to the TCI/Liberty Combination.
Teleport Communications Group Inc. ("TCG"), a competitive local exchange
carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996 in
which it sold 27,025,000 shares of Class A common stock at $16.00 per share to
the public for aggregate net proceeds of approximately $410,000,000. As a result
of the TCG IPO, the Company's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, the Company recognized a
gain amounting to $12 million (before deducting deferred income tax expense of
approximately $5 million).
During the year ended December 31, 1995, the Company recognized a gain
amounting to $123 million in connection with the sale by TINTA to the public of
20 million shares of TINTA common stock (the "IPO") and the issuance by TINTA of
shares of common stock for an investment in an Argentine programming entity (the
"TYC Acquisition").
Minority interests in earnings of consolidated subsidiaries aggregated $56
million for the year ended December 31, 1996, as compared to minority interests
in losses of consolidated subsidiaries in 1995 and 1994. Such change in 1996 is
due primarily to the accrual of dividends on preferred securities issued by
certain subsidiaries of the Company.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner
Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner
Merger") whereby TBS shareholders received 0.75 of a Time Warner common share
for each TBS Class A and Class B common share held, and each holder of TBS Class
C preferred stock received 0.80 of a Time Warner common share for each of the 6
shares of TBS Class B common stock into which each share of Class C preferred
stock could have been converted. Prior to
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the TBS/Time Warner Merger, the Company owned shares of TBS common stock and
shares of a class of TBS preferred stock that were convertible into TBS common
stock. Time Warner, TBS, TCI and Liberty entered into an Agreement Containing
Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996,
as amended September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC
Consent Decree, among other things, Liberty agreed to exchange the shares of
Time Warner common stock to be received in the TBS/Time Warner Merger for shares
of a separate series of Time Warner common stock with limited voting rights (the
"TW Exchange Stock") in exchange for its TBS common and preferred stock. Holders
of the TW Exchange Stock are entitled to one one-hundredth of a vote for each
share with respect to the election of directors. Holders of the TW Exchange
Stock will not have any other voting rights, except as required by law or with
respect to limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications laws, each
share of the TW Exchange Stock will be convertible at any time at the option of
the holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably with the
Time Warner common stock and to share ratably with the holder of Time Warner
common stock in assets remaining for common stockholders upon dissolution,
liquidation or winding up of Time Warner. In connection with the TBS/Time Warner
Merger, the Company received approximately 50.6 million shares of TW Exchange
Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner
Merger, the Company recognized a pre-tax gain of approximately $1.5 billion in
the fourth quarter of 1996.
Net Earnings
The Company's net earnings (before preferred stock dividend requirements)
of $278 million for the year ended December 31, 1996 represents an increase of
$449 million as compared to the Company's net loss (before preferred stock
dividend requirements) of $171 million for 1995. Such increase is due to the net
effect of the gains recorded in connection with the TBS/Time Warner Merger and
the HSN Merger partially offset by an increase in share of losses of affiliates,
income tax expense and interest expense. Additionally, the Company recognized
gains in 1995 related to the TeleWest Merger and TINTA IPO.
The Company's net loss (before preferred stock dividend requirements) of
$171 million for the year ended December 31, 1995 represents a decrease of $233
million as compared to the Company's net earnings (before preferred stock
dividend requirements) of $62 million for the corresponding period of 1994. Such
decrease is due primarily to a decrease in operating income, a decrease in share
of earnings of affiliates (a significant portion of which results from the gain
recognized in 1994 by Liberty upon the sale of its investment in AMC), and an
increase in interest expense partially offset by the recognition of a gain
resulting from the TINTA IPO.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1996.
Liquidity and Capital Resources
On July 31, 1996, pursuant to certain agreements entered into among TCIC,
TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all
of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's
cable systems and related assets (the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds. The Viacom
Acquisition has been accounted for by the purchase method and accordingly, the
Company recorded Cable Sub's assets and liabilities at fair value.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for
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shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable
Sub Class A Stock"). Immediately following the completion of the Exchange Offer,
TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the
"Share Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share Issuance, the
Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange
Offer automatically converted into 5% Class A Senior Cumulative Exchangeable
Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated
value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock
is exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Series A TCI Group Stock at
an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of
Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is
subject to redemption, at the option of Cable Sub, after the fifth anniversary
of the date of issuance, initially at a redemption price of $102.50 per share
and thereafter at prices declining ratably annually to $100 per share on and
after the eighth anniversary of the date of issuance, plus accrued and unpaid
dividends to the date of redemption. The Exchangeable Preferred Stock is also
subject to mandatory redemption on the tenth anniversary of the date of issuance
at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by Cable Sub in satisfaction of its optional or
mandatory redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of Cable Sub, in shares of Series
A TCI Group Stock, or in any combination of the foregoing.
In addition to the Viacom Acquisition, the Company consummated certain
other acquisitions during 1996. See note 3 to the accompanying consolidated
financial statements for additional information regarding assets acquired and
liabilities assumed in connection with all acquisitions.
During the year ended December 31, 1996, the Company, through certain
subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable Preferred
Stock for net cash proceeds of $223 million, (ii) $500 million in face value of
8.72% Trust Originated Preferred Securities(SM) for net cash proceeds of $486
million (through a special purpose entity formed as a Delaware business trust)
(iii) $500 million in face value of 10% Trust Preferred Securities for net cash
proceeds of $485 million (through a special purpose entity formed as a Delaware
business trust) and (iv) $2.06 billion of publicly-placed senior and medium term
notes with interest rates ranging from 6.1% to 7.9% and maturity dates ranging
through 2026. The Company used the proceeds from the aforementioned debt and
equity issuances to retire commercial paper and to repay certain other
indebtedness.
During March 1997, the Company, through special purpose entities formed as
Delaware business trusts, issued $300 million in face value of 9.65% Capital
Securities and $200 million in face value of 9.72% Trust Preferred Securities.
The Company used the net proceeds from such issuances to retire commercial paper
and repay certain other indebtedness.
Additionally, in February 1996, TINTA issued $345 million (before deducting
offering costs of $9 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
In January 1997, the Company acquired the 50% ownership interest in TKR
Cable Company ("TKR Cable") that the Company did not previously own and certain
additional assets for aggregate consideration of approximately $970 million. The
Company issued approximately 16 million shares of TCI Group Stock, assumed $584
million of TKR Cable's debt and paid cash of $88 million and shares of Time
Warner common stock valued at $41 million upon consummation of such acquisition.
The Company is a holding company and its assets consist almost entirely of
investments in its subsidiaries. As a holding company, the Company's ability to
pay dividends on any classes or series of preferred stock is dependent on the
earnings of, or other funds available to, the Company's subsidiaries and the
distribution or other payment of such earnings or other funds to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company. The Company's subsidiaries are separate and distinct legal entities and
have no obligation, contingent or otherwise, to pay the dividends on any class
or series of preferred stock of TCI or to make any funds available therefor,
whether by dividends, loans or other payments. The payment of dividends or the
making of loans and advances to the Company by its subsidiaries may be subject
to statutory or
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regulatory restrictions, are contingent upon the earnings of those subsidiaries
and are subject to various business considerations. Further, certain of the
Company's subsidiaries are subject to loan agreements that prohibit or limit the
transfer of funds by such subsidiaries to the Company in the form of dividends,
loans, or advances, and require that such subsidiaries' indebtedness to the
Company be subordinate to the indebtedness under such loan agreements. The
amount of net assets of subsidiaries subject to such restrictions exceeds the
Company's consolidated net assets. The Company's subsidiaries currently have the
ability to transfer funds to the Company in amounts exceeding the Company's
dividend requirement on any class or series of preferred stock. Net cash
provided by operating activities of subsidiaries which are not restricted from
making transfers to the parent company have been and are expected to continue to
be sufficient to enable the parent company to meet its cash obligations.
Moreover, almost all of the consolidated liabilities of the Company have
been incurred by its subsidiaries. Therefore, the Company's rights, and the
extent to which the holders of the Company's preferred stocks will be able to
participate in the distribution of assets of any subsidiary upon the latter's
liquidation or reorganization, will be subject to prior claims of the
subsidiary's creditors, including trade creditors, except to the extent that the
Company may itself be a creditor with recognized claims against such subsidiary
(in which case the claims of the Company would still be subject to the prior
claims of any secured creditor of such subsidiary and of any holder of
indebtedness of such subsidiary that is senior to that held by the Company).
During the second quarter of 1996, certain subsidiaries of the Company
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. The Company
does not believe that such terminations will adversely affect its future
liquidity. At December 31, 1996, subsidiaries of the Company had approximately
$1.8 billion in unused lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although such
subsidiaries were in compliance with the restrictive covenants contained in
their credit facilities at said date, additional borrowings under the credit
facilities are subject to the subsidiaries' continuing compliance with such
restrictive covenants (which relate primarily to the maintenance of certain
ratios of cash flow to total debt and cash flow to debt service, as defined in
the credit facilities) after giving effect to such additional borrowings. See
note 8 to the accompanying consolidated financial statements for additional
information regarding the material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization, compensation relating to
stock appreciation rights, adjustment to compensation relating to stock
appreciation rights and restructuring charges) ($2,276 million, $1,988 million
and $1,798 million in 1996, 1995 and 1994, respectively) to interest expense
($1,096 million, $1,010 million and $785 million in 1996, 1995 and 1994,
respectively), is determined by reference to the consolidated statements of
operations. The Company's interest coverage ratio was 208%, 197% and 229% for
1996, 1995 and 1994, respectively. Management of the Company believes that the
foregoing interest coverage ratio is adequate in light of the consistency and
nonseasonal nature of its cable television operations and the relative
predictability of the Company's interest expense, almost half of which results
from fixed rate indebtedness. However, the Company's current intent is to reduce
its outstanding indebtedness such that its interest coverage ratio could be
increased. There is no assurance that the Company will be able to achieve such
objective. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net cash
provided by operating activities ($1,228 million, $957 million and $908 million
in 1996, 1995 and 1994, respectively) reflects net cash from the operations of
the Company available for the Company's liquidity needs after taking into
consideration the aforementioned additional substantial costs of doing business
not reflected in Operating Cash Flow. Amounts expended by the Company for its
investing activities exceed net cash provided by operating activities. However,
management believes
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that net cash provided by operating activities, the ability of the Company and
its subsidiaries to obtain additional financing (including the subsidiaries'
available lines of credit and access to public debt markets), issuances and
sales of the Company's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See the Company's consolidated statements of cash flows
included in the accompanying consolidated financial statements.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Historically, amounts expended for acquisitions and capital expenditures have
exceeded net cash provided by operating activities. In this regard, the amount
of capital expended by the Company for property and equipment was $2,055
million, $1,782 million and $1,264 million in 1996, 1995 and 1994, respectively.
The Company has reevaluated its capital expenditure strategy and currently
anticipates that it will expend significantly less for property and equipment in
1997 than it did in 1996. To the extent that net cash provided by operating
activities exceeds net cash used in investing activities in 1997, the Company
currently anticipates that such excess cash will initially be used to reduce
outstanding debt.
In late April 1996, TCIC was notified by Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit Rating Co. ("Duff and Phelps") that those
rating agencies had downgraded by one level their respective ratings of TCIC's
senior debt to the first level below investment grade. Fitch Investors Service,
L.P. ("Fitch") reaffirmed its rating for TCIC's senior debt at the last level of
investment grade. On October 18, 1996, Standard and Poor's Securities, Inc.
("Standard & Poor's") issued a press release stating that TCIC's senior debt
would be placed on CreditWatch with negative implications. On January 24, 1997,
Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior
debt is currently rated BBB- by Standard & Poor's (the last level of investment
grade) with a negative outlook. These actions are expected to marginally
increase TCIC's cost of borrowings under certain bank credit facilities, and may
adversely affect TCIC's access to the public debt market and its overall cost of
future borrowings.
The Company is a partner in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast, Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company has a 30% partnership interest in each of the Sprint PCS
Partnerships and a 35.3% interest as a partner in PhillieCo and accounts for its
interests in the PCS Ventures by the equity method.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the FCC that ended in March 1995, for an aggregate license cost of
approximately $2.1 billion. The Sprint PCS Partnerships have invested in
(acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which
owns a PCS license for and operates a PCS system in the Baltimore/Washington,
D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS
license for the Los Angeles/San Diego MTA and currently operates a PCS system in
San Diego, California. The Sprint PCS Partnerships may invest in other entities
that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA,
which was acquired at a license cost of $85 million. During December 1996, the
Sprint PCS Partnerships initiated the commercial launch of PCS service in seven
markets.
From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and Cox-California will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships
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<PAGE> 293
to contribute up to an aggregate of approximately $4.2 billion of equity
thereto, from inception through fiscal 1999, subject to certain requirements.
The Company expects that the remaining approximately $1.2 billion of such amount
(of which the Company's share is approximately $0.4 billion) will be contributed
by the end of the second quarter of 1998 (although there can be no assurance
that any additional capital will be contributed). The Company expects that the
Sprint PCS Partnerships will require additional equity thereafter.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $278
million at December 31, 1996. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to meet any of such guarantees, that they
will not be material to the Company.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film Licensing
Obligations"). Based on customer levels at December 31, 1996, these agreements
require minimum payments aggregating approximately $571 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.
The Company has made certain financial commitments related to the
acquisition of foreign sports program rights through 2004. At December 31, 1996,
such commitments aggregated $226 million.
The Company's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by the Company) and
through net cash provided by their own operating activities.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company (i)
pays fixed interest rates ranging from 7.2% to 9.3% and receives variable
interest rates on notional amounts of $310 million at December 31, 1996 (the
"Fixed Rate Agreements") and (ii) pays variable interest rates and receives
fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750
million at December 31, 1996 (the "Variable Rate Agreements"). During the year
ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to
the Fixed Rate Agreements were $14 million, $13 million and $26 million,
respectively; and the Company's net receipts (payments) pursuant to the Variable
Rate Agreements were $15 million, (less than $1 million) and $36 million,
respectively. During the year ended December 31, 1996, the Company terminated
certain Variable Rate Agreements with an aggregate notional amount of $700
million. The Company received $16 million upon such terminations. The Company
will amortize the termination settlement over the remainder of the original
terms of the terminated Variable Rate Agreements. The Company is exposed to
credit losses for the periodic settlements of amounts due under the interest
rate exchange agreements in the event of nonperformance by the other parties to
the agreements. However, the Company does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance by the
counterparties.
At December 31, 1996, after considering the net effect of the
aforementioned interest rate exchange agreements, the Company had $7,349 million
(or 49%) of fixed-rate debt with a weighted average interest rate of 8.5% and
$7,577 million (or 51%) of variable-rate debt with a weighted average interest
rate of 6.3%.
In connection with its investments in certain foreign entities, the Company
is exposed to unfavorable and potentially volatile fluctuations of the U.S.
dollar against the UK pound sterling ("L"), the Japanese yen ("Y"), and various
other foreign currencies that are the functional currencies of the Company's
foreign subsidiaries and affiliates. Any increase (decrease) in the value of the
U.S. dollar against any foreign currency that is the functional currency of an
operating subsidiary or affiliate of TINTA will cause the Company to experience
unrealized foreign currency translation losses (gains) with respect to amounts
already invested in such foreign currencies. The Company is also exposed to
foreign currency risk to the extent that the Company
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<PAGE> 294
or its foreign subsidiaries and affiliates enter into transactions denominated
in currencies other than their respective functional currencies. Because the
Company generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. With respect to funding
commitments that are denominated in currencies other than the U.S. dollar, the
Company historically has sought to reduce its exposure to short-term (generally
no more than 90 days) movements in the applicable exchange rates once the timing
and amount of such funding commitments becomes fixed. Although the Company
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, the Company believes that it
is not possible or practical to completely eliminate the Company's exposure to
unfavorable fluctuations in foreign currency exchange rates.
Approximately twenty-seven percent of the franchises held by the Company,
involving approximately 4.5 million basic customers, expire within five years.
There can be no assurance that the franchises for the Company's systems will be
renewed as they expire, although the Company believes that its cable television
systems generally have been operated in a manner which satisfies the standards
established by the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for
franchise renewal. However, in the event they are renewed, the Company cannot
predict the impact of any new or different conditions that might be imposed by
the franchising authorities in connection with the renewals. To date they have
not varied significantly from the original terms.
During 1996, the Company has experienced a competitive impact from medium
power and high power direct broadcast satellites ("DBS") that use high
frequencies to transmit signals that can be received by dish antennas ("HSDs")
much smaller in size than traditional HSDs. The Primestar partners distribute a
multi-channel programming service via a medium power communications satellite to
HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the
Company provided this satellite service. DirecTv, Inc. ("DirecTv"), United
States Satellite Broadcasting Corporation ("USSB") and EchoStar Communications
Corp. ("EchoStar"), transmit from high power satellites and generally use
smaller dishes to receive their signals. Alphastar, Inc. ("Alphastar") began
offering medium power service in the second quarter of 1996. On February 24,
1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky. The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television on a nationwide basis (not all of which would be
available to each subscriber), Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
households upon the launch of Sky and 75% of all television households by the
end of 1998. DBS operators have the right to distribute substantially all of the
significant cable television programming services currently carried by cable
television systems. Estimated DBS customers nationwide increased from
approximately 2.2 million at the end of 1995 to approximately 4.4 million at the
end of 1996, and the Company expects that competition from DBS will continue to
increase. However, the Company is unable to predict what effect such competition
will have on the Company's financial position.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 24, 1997
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------- ------
AMOUNTS IN MILLIONS
<S> <C> <C>
Cash and cash equivalents................................... $ 394 118
Trade and other receivables, net............................ 448 407
Inventories, net............................................ -- 104
Prepaid expenses............................................ 81 65
Prepaid program rights...................................... 49 47
Committed film inventory.................................... 136 122
Investments in affiliates, accounted for under the equity
method, and related receivables (note 4).................. 3,012 2,372
Investment in Time Warner, Inc. ("Time Warner") (note 5).... 2,027 --
Investment in Turner Broadcasting System, Inc. ("TBS") (note
5)........................................................ -- 955
Property and equipment, at cost:
Land...................................................... 77 88
Distribution systems...................................... 10,078 9,545
Support equipment and buildings........................... 1,541 1,429
------- ------
11,696 11,062
Less accumulated depreciation............................. 4,168 3,653
------- ------
7,528 7,409
------- ------
Franchise costs............................................. 17,875 14,322
Less accumulated amortization............................. 2,439 2,092
------- ------
15,436 12,230
------- ------
Other assets, at cost, net of amortization.................. 1,133 1,748
------- ------
$30,244 25,577
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 216 243
Accrued interest............................................ 274 233
Accrued programming expense................................. 347 318
Other accrued expenses...................................... 812 1,114
Debt (note 8)............................................... 14,926 13,211
Deferred income taxes (note 14)............................. 6,012 4,584
Other liabilities........................................... 253 195
------- ------
Total liabilities................................... 22,840 19,898
------- ------
Minority interests in equity of consolidated subsidiaries... 1,493 651
Redeemable preferred stocks (note 9)........................ 658 478
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust Securities")
holding solely subordinated debt securities of TCI
Communications, Inc. ("TCIC") (note 10)................... 1,000 --
Stockholders' equity (note 11):
Series Preferred Stock, $.01 par value.................... -- --
Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, $.01 par value......................... -- --
Tele-Communications, Inc. Series A TCI Group common stock,
$1 par value. Authorized 1,750,000,000 shares; issued
696,325,478 shares in 1996 and 672,211,009 shares in
1995.................................................... 696 672
Tele-Communications, Inc. Series B TCI Group common stock,
$1 par value. Authorized 150,000,000 shares; issued
84,647,065 shares in 1996 and 84,691,554 shares in
1995.................................................... 85 85
Tele-Communications, Inc. Series A Liberty Media Group
common stock, $1 par value. Authorized 750,000,000
shares; issued 227,844,437 shares in 1996 and
224,942,830 shares in 1995.............................. 228 225
Tele-Communications, Inc. Series B Liberty Media Group
common stock, $1 par value. Authorized 75,000,000
shares; issued 21,189,369 shares in 1996 and 21,196,868
shares in 1995.......................................... 21 21
Additional paid-in capital................................ 3,672 3,986
Cumulative foreign currency translation adjustment, net of
taxes................................................... 26 (9)
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 15 338
Accumulated deficit....................................... (176) (454)
------- ------
4,567 4,864
Series A TCI Group common stock, at cost, held by
subsidiaries (116,853,196 shares and 100,524,364 shares
in 1996 and 1995, respectively)......................... (314) (314)
------- ------
Total stockholders' equity.......................... 4,253 4,550
------- ------
Commitments and contingencies (note 15)
$30,244 25,577
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -----
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C>
Revenue (note 16):
Communications and programming services (note 6).......... $ 7,038 5,586 4,250
Net sales from electronic retailing services.............. 984 920 432
------- ------ -----
8,022 6,506 4,682
------- ------ -----
Operating costs and expenses:
Operating................................................. 2,917 2,161 1,507
Cost of sales from electronic retailing services.......... 605 603 263
Selling, general and administrative....................... 2,224 1,754 1,114
Compensation (adjustment to compensation) relating to
options and stock appreciation rights.................. (13) 57 (8)
Restructuring charges..................................... 41 17 --
Depreciation.............................................. 1,093 899 700
Amortization.............................................. 523 473 318
------- ------ -----
7,390 5,964 3,894
------- ------ -----
Operating income (note 16)............................. 632 542 788
Other income (expense):
Interest expense.......................................... (1,096) (1,010) (785)
Interest and dividend income.............................. 64 52 36
Share of losses of affiliates, net (note 4)............... (473) (193) (112)
Share of earnings of Liberty Media Corporation............ -- -- 128
Loss on early extinguishment of debt (note 8)............. (71) (6) (9)
Minority interests in losses (earnings) of consolidated
subsidiaries, net...................................... (56) 17 2
Gain on sale of subsidiary stock (note 13)................ -- 123 --
Gain on sale of stock by equity investee (note 4)......... 12 165 161
Gain (loss) on disposition of assets...................... 1,593 49 (10)
Other, net................................................ (65) (30) (17)
------- ------ -----
(92) (833) (606)
------- ------ -----
Earnings (loss) before income taxes.................... 540 (291) 182
Income tax benefit (expense) (note 14)...................... (262) 120 (120)
------- ------ -----
Net earnings (loss) (note 16).......................... 278 (171) 62
Dividend requirements on preferred stocks................... (35) (34) (8)
------- ------ -----
Net earnings (loss) attributable to common stockholders
(note 6)............................................... $ 243 (205) 54
======= ====== =====
Net earnings (loss) attributable to common stockholders
(note 2):
TCI Class A and Class B common stock...................... $ -- (71) 54
TCI Group Series A and Series B common stock.............. (813) (107) --
Liberty Media Group Series A and Series B common stock.... 1,056 (27) --
------- ------ -----
$ 243 (205) 54
======= ====== =====
Primary net earnings (loss) attributable to common
stockholders per common and common equivalent share (notes
2 and 6):
TCI Class A and Class B common stock...................... $ -- (.11) .10
TCI Group Series A and Series B common stock.............. $ (1.22) (.16) --
Liberty Media Group Series A and Series B common stock.... $ 3.97 (.11) --
Fully diluted net earnings (loss) attributable to common
stockholders per common and common equivalent share (notes
2 and 6):
TCI Class A and Class B common stock...................... $ -- (.11) .10
TCI Group Series A and Series B common stock.............. $ (1.22) (.16) --
Liberty Media Group Series A and Series B common stock.... $ 3.88 (.11) --
</TABLE>
See accompanying notes to consolidated financial statements.
V-59
<PAGE> 298
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993*.......... $ -- 482 47 -- -- -- -- 2,293
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994..................... -- -- -- -- -- -- -- --
Net earnings.......................... -- -- -- -- -- -- -- --
Conversion of redeemable preferred
stock (note 9)...................... -- 1 -- -- -- -- -- 17
Issuance of common stock upon
conversion of notes (note 8)........ -- 3 -- -- -- -- -- --
Issuance of common stock upon exercise
of stock option..................... -- -- -- -- -- -- -- 3
Acquisition and retirement of common
stock............................... -- -- -- -- -- -- -- (2)
Issuance of common stock for
acquisition......................... -- 85 42 -- -- -- -- 383
Accreted dividends on all classes of
preferred stock..................... -- -- -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- -- -- 4
Foreign currency translation
adjustment.......................... -- -- -- -- -- -- -- --
Issuance of TCI Class A common stock
to subsidiaries of TCI in
Reorganization...................... -- -- -- -- -- -- -- (23)
Issuance of Class A common stock for
investment.......................... -- 6 -- -- -- -- -- 124
Repayment of note receivable from
related party....................... -- -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities....... -- -- -- -- -- -- -- --
--- ---- --- -- -- -- -- ---
Balance at December 31, 1994........... $ -- 577 89 -- -- -- -- 2,791
=== ==== === == == == == ===
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993*.......... (29) -- -- (344) (333) 2,116
Unrealized holding gains for
available-for-sale securities as of
January 1, 1994..................... -- 297 -- -- -- 297
Net earnings.......................... -- -- -- 62 -- 62
Conversion of redeemable preferred
stock (note 9)...................... -- -- -- -- -- 18
Issuance of common stock upon
conversion of notes (note 8)........ -- -- -- -- -- 3
Issuance of common stock upon exercise
of stock option..................... -- -- -- -- -- 3
Acquisition and retirement of common
stock............................... -- -- -- -- -- (2)
Issuance of common stock for
acquisition......................... -- 4 (15) -- (285) 214
Accreted dividends on all classes of
preferred stock..................... -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- 4
Foreign currency translation
adjustment.......................... 25 -- -- -- -- 25
Issuance of TCI Class A common stock
to subsidiaries of TCI in
Reorganization...................... -- -- -- -- 23 --
Issuance of Class A common stock for
investment.......................... -- -- -- -- -- 130
Repayment of note receivable from
related party....................... -- -- 15 -- (15) --
Change in unrealized holding gains for
available-for-sale securities....... -- (207) -- -- -- (207)
-- --- -- --- --- ---
Balance at December 31, 1994........... (4) 94 -- (282) (610) 2,655
== === == === === ===
</TABLE>
V-60
<PAGE> 299
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... $ -- 577 89 -- -- -- -- 2,791
Net loss.............................. -- -- -- -- -- -- -- --
Issuance of common stock in public
offering............................ -- 20 -- -- -- -- -- 381
Issuance of common stock in private
offering............................ -- 1 -- -- -- -- -- 29
Issuance of common stock for
acquisitions and investments (note
6).................................. -- 59 -- -- -- -- -- 1,329
Issuance of Class A common stock to
subsidiary of TCI in
Reorganization...................... -- -- -- -- -- -- -- (6)
Issuance of Class A common stock to
subsidiary in exchange for
investment.......................... -- -- -- -- -- -- -- (1)
Retirement of Class A common stock
previously held by subsidiary....... -- -- -- -- -- -- -- 29
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") (note 9).................... -- (86) (4) -- -- -- -- (542)
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock.................. -- -- -- 101 -- -- -- 213
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders (note 1).... -- -- -- -- -- 225 21 (246)
Costs associated with Distribution to
stockholders........................ -- -- -- -- -- -- -- (8)
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock (note 1)............... -- (571) (85) 571 85 -- -- --
Accreted dividends on all classes of
preferred stock..................... -- -- -- -- -- -- -- (34)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- -- -- 10
Payment of preferred stock
dividends........................... -- -- -- -- -- -- -- (10)
Issuance of common stock by subsidiary
(note 13)........................... -- -- -- -- -- -- -- 51
Foreign currency translation
adjustment.......................... -- -- -- -- -- -- -- --
Change in unrealized holding gains for
available-for-sale securities....... -- -- -- -- -- -- -- --
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries........ -- -- -- -- -- -- -- --
--- ---- --- -- -- -- -- ---
Balance at December 31, 1995........... $ -- -- -- 672 85 225 21 3,986
=== ==== === == == == == ===
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994........... (4) 94 -- (282) (610) 2,655
Net loss.............................. -- -- -- (171) -- (171)
Issuance of common stock in public
offering............................ -- -- -- -- -- 401
Issuance of common stock in private
offering............................ -- -- -- -- -- 30
Issuance of common stock for
acquisitions and investments (note
6).................................. -- -- -- -- -- 1,388
Issuance of Class A common stock to
subsidiary of TCI in
Reorganization...................... -- -- -- -- 6 --
Issuance of Class A common stock to
subsidiary in exchange for
investment.......................... -- -- -- -- 1 --
Retirement of Class A common stock
previously held by subsidiary....... -- -- -- -- (29) --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F Preferred
Stock") (note 9).................... -- -- -- -- 632 --
Conversion of Series F Preferred Stock
held by subsidiary for Series A TCI
Group common stock.................. -- -- -- -- (314) --
Distribution of Series A and Series B
Liberty Media Group common stock to
TCI common stockholders (note 1).... -- -- -- -- -- --
Costs associated with Distribution to
stockholders........................ -- -- -- -- -- (8)
Redesignation of TCI common stock into
Series A and Series B TCI Group
common stock (note 1)............... -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock..................... -- -- -- -- -- (34)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption requirements... -- -- -- -- -- 10
Payment of preferred stock
dividends........................... -- -- -- -- -- (10)
Issuance of common stock by subsidiary
(note 13)........................... -- -- -- -- -- 51
Foreign currency translation
adjustment.......................... (5) -- -- -- -- (5)
Change in unrealized holding gains for
available-for-sale securities....... -- 244 -- -- -- 244
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries........ -- -- -- (1) -- (1)
-- --- -- --- --- ---
Balance at December 31, 1995........... (9) 338 -- (454) (314) 4,550
== === == === === ===
</TABLE>
V-61
<PAGE> 300
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
LIBERTY MEDIA
CLASS B TCI TCI GROUP GROUP ADDITIONAL
COMMON ----------------- ------------------- ------------------- PAID-IN
STOCK CLASS A CLASS B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- ------- ------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... $ -- -- -- 672 85 225 21 3,986
Net earnings................... -- -- -- -- -- -- -- --
Issuance of common stock for
acquisition (note 6)......... -- -- -- 11 -- 4 -- 250
Issuance of common stock upon
conversion of notes.......... -- -- -- 2 -- 1 -- (1)
Issuance of common stock upon
conversion of preferred
stock........................ -- -- -- 1 -- -- -- 15
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock........... -- -- -- (6) -- (2) -- (122)
Contribution of common stock to
subsidiary................... -- -- -- 16 -- -- -- (16)
Spin-off of TCI Satellite
Entertainment, Inc. (note
7)........................... -- -- -- -- -- -- -- (405)
Accreted dividends on all
classes of preferred stock... -- -- -- -- -- -- -- (35)
Accreted dividends on all
classes of preferred stock
not subject to mandatory
redemption requirements...... -- -- -- -- -- -- -- 10
Payment of preferred stock
dividends.................... -- -- -- -- -- -- -- (10)
Foreign currency translation
adjustment................... -- -- -- -- -- -- -- --
Recognition of unrealized
holding gains on
available-for-sale securities
(note 5)..................... -- -- -- -- -- -- -- --
Recognition of unrealized
holding losses on
available-for-sale
securities................... -- -- -- -- -- -- -- --
Change in unrealized holding
gains for available-for-sale
securities................... -- -- -- -- -- -- -- --
--- ---- --- -- -- -- -- ---
Balance at December 31, 1996.... $ -- -- -- 696 85 228 21 3,672
=== ==== === == == == == ===
<CAPTION>
UNREALIZED
HOLDING
GAINS
CUMULATIVE (LOSSES) FOR NOTE
FOREIGN AVAILABLE- RECEIVABLE COMMON
CURRENCY FOR-SALE FROM STOCK TOTAL
TRANSLATION SECURITIES, RELATED ACCUMULATED HELD BY STOCKHOLDERS'
ADJUSTMENT NET OF TAXES PARTY DEFICIT SUBSIDIARIES EQUITY
----------- ------------ ---------- ----------- ------------ -------------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... (9) 338 -- (454) (314) 4,550
Net earnings................... -- -- -- 278 -- 278
Issuance of common stock for
acquisition (note 6)......... -- -- -- -- -- 265
Issuance of common stock upon
conversion of notes.......... -- -- -- -- -- 2
Issuance of common stock upon
conversion of preferred
stock........................ -- -- -- -- -- 16
Exchange of cost investment for
TCI Group and Liberty Media
Group common stock........... -- -- -- -- -- (130)
Contribution of common stock to
subsidiary................... -- -- -- -- -- --
Spin-off of TCI Satellite
Entertainment, Inc. (note
7)........................... -- -- -- -- -- (405)
Accreted dividends on all
classes of preferred stock... -- -- -- -- -- (35)
Accreted dividends on all
classes of preferred stock
not subject to mandatory
redemption requirements...... -- -- -- -- -- 10
Payment of preferred stock
dividends.................... -- -- -- -- -- (10)
Foreign currency translation
adjustment................... 35 -- -- -- -- 35
Recognition of unrealized
holding gains on
available-for-sale securities
(note 5)..................... -- (428) -- -- -- (428)
Recognition of unrealized
holding losses on
available-for-sale
securities................... -- 64 -- -- -- 64
Change in unrealized holding
gains for available-for-sale
securities................... -- 41 -- -- -- 41
-- --- -- --- --- ---
Balance at December 31, 1996.... 26 15 -- (176) (314) 4,253
== === == === === ===
</TABLE>
See accompanying notes to consolidated financial statements.
V-62
<PAGE> 301
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
AMOUNTS IN MILLIONS
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 278 (171) 62
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,616 1,372 1,018
Compensation (adjustment to compensation) relating to
options and stock appreciation rights.................. (13) 57 (8)
Payments of stock appreciation rights................... (3) (9) --
Restructuring charges................................... 41 17 --
Payments of restructuring charges....................... (8) (17) --
Share of losses of affiliates........................... 473 193 112
Share of earnings of Liberty Media Corporation.......... -- -- (128)
Loss on early extinguishment of debt.................... 71 6 9
Minority interests in earnings (losses)................. 56 (17) (2)
Gain on sale of subsidiary stock........................ -- (123) --
Gain on sale of stock by equity investee................ (12) (165) (161)
Loss (gain) on disposition of assets.................... (1,593) (49) 10
Deferred income tax expense (benefit)................... 224 (153) 37
Other noncash charges (credits)......................... 11 (28) (2)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................. (115) (70) 15
Change in inventories................................. (8) 16 (26)
Change in prepaids.................................... (23) (86) (97)
Change in accrued interest............................ 40 45 13
Change in other accruals and payables................. 193 139 56
------- ------ ------
Net cash provided by operating activities.......... 1,228 957 908
------- ------ ------
Cash flows from investing activities:
Cash paid for acquisitions................................ (598) (477) (358)
Capital expended for property and equipment............... (2,055) (1,782) (1,264)
Cash proceeds from disposition of assets.................. 341 166 39
Additional investments in and loans to affiliates and
others.................................................. (798) (1,134) (445)
Repayments of loans to affiliates and others.............. 679 18 148
Other investing activities................................ (38) (135) (15)
------- ------ ------
Net cash used in investing activities.............. (2,469) (3,344) (1,895)
------- ------ ------
Cash flows from financing activities:
Borrowings of debt........................................ 8,163 8,152 4,676
Repayments of debt........................................ (7,969) (6,567) (3,607)
Prepayment penalties...................................... (60) -- --
Proceeds from sale of subsidiary stock.................... 223 445 --
Proceeds from issuances of common stock................... -- 431 1
Proceeds from issuance of Trust Securities................ 971 -- --
Contributions by minority shareholders of subsidiaries.... 319 -- --
Payment of dividends on subsidiary preferred stock and
Trust Securities........................................ (95) (6) (6)
Payment of preferred stock dividends...................... (35) (24) (4)
Costs associated with Distribution to stockholders........ -- (8) --
Other financing activities................................ -- 8 --
------- ------ ------
Net cash provided by financing activities.......... 1,517 2,431 1,060
------- ------ ------
Net increase in cash and cash equivalents.......... 276 44 73
Cash and cash equivalents at beginning of year..... 118 74 1
------- ------ ------
Cash and cash equivalents at end of year........... $ 394 118 74
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-63
<PAGE> 302
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or
the "Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. Preferred stock of TCI which is owned by
subsidiaries of TCI eliminates in consolidation. Common stock of the Company
held by subsidiaries is treated as treasury stock in consolidation.
Industry Segments
The Company currently has significant operations principally in two
industry segments: cable and communications services ("Communications") and
programming services ("Programming"). Programming includes the production,
acquisition and distribution of globally branded entertainment, education and
information programming services and software for distribution through all
available formats and media; and home shopping via television and other
interactive media, direct marketing, advertising sales, infomercials and
transaction processing. Home Shopping is a programming service which includes a
retail function. The Company's cable and communications segment is comprised of
five lines of business: Domestic Cable and Communications (the "Cable Unit");
International Cable and Programming ("TINTA"); Telephony; Internet; and
Technology/Venture Capital. TINTA, Telephony, Internet and Technology/Venture
Capital are not separately reportable segments due to their relative
insignificance. The Company has investments accounted for under the equity
method and the cost method, which also operate in the Communications and
Programming industries. See note 16 for additional segment information.
Targeted Stock
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (the "Board") to issue two new series of stock ("Liberty Group Stock")
which reflect the separate performance of TCI's business which produces and
distributes programming services ("Liberty Media Group"). Additionally, the
stockholders of TCI approved the redesignation of the previously authorized TCI
Class A and Class B common stock into Series A TCI Group and Series B TCI Group
common stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did
not result in any transfer of assets or liabilities of TCI or any of its
subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a
dividend, one share of Liberty Group Stock for each four shares of TCI Group
Stock owned. Such distribution (the "Distribution") represented one hundred
percent of the equity value attributable to the Liberty Media Group.
As of December 31, 1996, the TCI Group Stock reflects the separate
performance of TCI's subsidiaries and assets not attributed to Liberty Media
Group, including TCI's Cable Unit, TINTA, Telephony unit, Internet unit and
Technology/Venture Capital unit. Such subsidiaries and assets are referred to as
"TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense to TCI Group or to Liberty Media Group for purposes of
preparing their combined financial statements, the change in the capital
structure of TCI does not affect the ownership or the respective legal title to
assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI
and its subsidiaries each continue to be responsible for their respective
liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of
common stock of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities. The
issuance of Liberty Group Stock did not affect the rights of creditors of TCI.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for dividends and the
available dividend amount with respect to TCI Group, as
V-64
<PAGE> 303
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined. Determinations to pay dividends on TCI Group Stock will be based
primarily upon the financial condition, results of operations and business
requirements of TCI Group and TCI as a whole.
Dividends on Liberty Group Stock are payable at the sole discretion of the
Board out of the lesser of all assets of TCI legally available for dividends and
the available dividend amount with respect to Liberty Media Group, as defined.
Determinations to pay dividends on Liberty Group Stock will be based primarily
upon the financial condition, results of operations and business requirements of
Liberty Media Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of TCI
that were convertible into or exchangeable for shares of TCI Class A common
stock were, as a result of the operation of antidilution provisions, adjusted so
that there will be delivered upon their conversion or exchange (in addition to
the same number of shares of redesignated Series A TCI Group Stock as were
theretofore issuable thereunder) the number of shares of Series A Liberty Group
Stock that would have been issuable in the Distribution with respect to the TCI
Class A common stock issuable upon conversion or exchange had such conversion or
exchange occurred prior to the record date for the Distribution. Options to
purchase TCI Class A common stock outstanding at the time of the Distribution
were adjusted by issuing to the holders of such options separate options to
purchase that number of shares of Series A Liberty Group Stock which the holder
would have been entitled to receive had the holder exercised such option to
purchase TCI Class A common stock prior to the record date for the Distribution
and reallocating a portion of the aggregate exercise price of the previously
outstanding options to the newly issued options to purchase Series A Liberty
Group Stock.
A number of wholly-owned subsidiaries of the Company which are part of TCI
Group owned shares of TCI Class A common stock and TCI preferred stock
("Subsidiary Shares"). Because the Distribution was made as a dividend to all
holders of TCI's Class A common stock and Class B common stock and, pursuant to
the anti-dilution provisions set forth therein, to the holders of securities
convertible into TCI Class A common stock and Class B common stock upon the
conversion thereof, shares of Liberty Group Stock would otherwise have been
issued and become issuable in respect of the Subsidiary Shares held by these
subsidiaries and would have been attributed to TCI Group. The Liberty Group
Stock issued in connection with the Distribution was intended to constitute 100%
of the equity value thereof to the holders of the TCI Class A common stock and
TCI Class B common stock, and TCI Group did not initially have any interest in
Liberty Media Group represented by any outstanding shares of Liberty Group Stock
(an "Inter-Group Interest"). Therefore, TCI determined to exchange all of the
outstanding Subsidiary Shares for shares of Series F Preferred Stock. See note
9. The rights, privileges and preferences of the Series F Preferred Stock did
not entitle its holders to receive Liberty Group Stock in the Distribution or
upon conversion of the Series F Preferred Stock.
Stock Dividend
Effective January 13, 1997, the Company issued a stock dividend to holders
of Liberty Group Stock consisting of one share of Series A Liberty Group Stock
for every two shares of Series A Liberty Group Stock owned and one share of
Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock
Dividend has been treated as a stock split, and accordingly, all share and per
share amounts have been retroactively restated to reflect the Liberty Group
Stock Dividend.
Telephony Group Stock Proposal
On March 12, 1997, the TCI stockholders authorized the Board to issue two
new series of the Company's common stock, par value $1.00 per share, (and a
corresponding increase in the total number of authorized shares of common stock)
to be designated Tele-Communications, Inc. Series A Telephony Group common stock
and Tele-Communications, Inc. Series B Telephony Group common stock
(collectively, the "Telephony Group Stock"). The Telephony Group Stock, if
issued, would be intended to reflect the separate performance of Telephony
Group, which initially consists of the Company's investments in certain entities
engaged in the
V-65
<PAGE> 304
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
domestic wireline and wireless telephony businesses. A total of 750 million
shares of Series A Telephony Group Stock and 75 million shares of Series B
Telephony Group Stock were authorized. As of March 24, 1997, no shares of
Telephony Group Stock have been issued.
Upon authorization of the Telephony Group Stock and until shares of
Telephony Group Stock are issued, the investments attributed to Telephony Group
will be included in TCI Group. The TCI Group Stock will continue to reflect all
of the assets, liabilities and common stockholders' equity value of the Company
attributable to Telephony Group, in addition to the separate performance of the
Company's domestic cable distribution business; telephony distribution and
communications business (other than the investments attributed to Telephony
Group); international cable, telephony and programming businesses; technology/
venture capital business; and any other business of the Company not attributed
to either Liberty Media Group or Telephony Group. As shares of Telephony Group
Stock are issued and distributed or sold, the percentage of the common
stockholders' equity value of the Company attributable to Telephony Group that
is or is intended to be reflected in the TCI Group Stock will be reduced
accordingly. The composition of Liberty Media Group was not affected by the
authorization, and will not be affected by the issuance, of Telephony Group
Stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents consist of investments which are readily
convertible into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1995 was not material.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
specific number of exhibitions. Committed film inventory and program rights
payable are recorded at the estimated costs of the programs when the film is
available for airing less prepayments. These amounts are amortized on a
film-by-film basis over the specific number of exhibitions.
Investments
All marketable equity securities held by the Company are classified as
available-for-sale and are carried at fair value. Unrealized holding gains and
losses on securities classified as available-for-sale are carried net of taxes
as a separate component of stockholders' equity. Realized gains and losses are
determined on a specific-identification basis.
Other investments in which the ownership interest is less than 20% and are
not considered marketable securities are generally carried at cost. For those
investments in affiliates in which the Company's voting interest is 20% to 50%,
the equity method of accounting is generally used. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the Company's
share of the net earnings or losses of the affiliates as they occur rather than
as dividends or other distributions are received, limited to the extent of the
Company's investment in, advances to and commitments for the investee. The
Company's share of net earnings or losses of affiliates includes the
amortization of the difference between the Company's investment and its share of
the net assets of the investee. Recognition of gains on sales of properties to
affiliates accounted for under the equity method is deferred in proportion to
the Company's ownership interest in such affiliates.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, generally
are recognized as gains or losses in the Company's consolidated statements of
operations.
V-66
<PAGE> 305
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
(a) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including
interest during construction and applicable overhead, are capitalized.
During 1996, 1995 and 1994, interest capitalized was not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 15 years for distribution systems, 3 to 40 years for
support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or
other dispositions of property, the original cost and cost of removal of
such property are charged to accumulated depreciation, and salvage, if any,
is credited thereto. Gains or losses are only recognized in connection with
the sales of properties in their entirety.
(b) FRANCHISE COSTS
Franchise costs include the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible assets.
Such amounts are generally amortized on a straight-line basis over 40
years. Costs incurred by the Company in negotiating and renewing franchise
agreements are amortized on a straight-line basis over the life of the
franchise, generally 10 to 20 years.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 effective January 1, 1996. Such adoption did not have a
significant effect on the financial position or results of operations of the
Company.
Pursuant to Statement No. 121, the Company periodically reviews the
carrying amounts of its long-lived assets, franchise costs and certain other
assets to determine whether current events or circumstances warrant adjustments
to such carrying amounts. The Company considers historical and expected future
net operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets ("Assets"). The Company deems Assets to be impaired if
the Company is unable to recover the carrying value of such Assets over their
expected remaining useful life through a forecast of undiscounted future
operating cash flows directly related to the Assets. If Assets are deemed to be
impaired, the loss is measured as the amount by which the carrying amount of the
Assets exceeds their fair value. The Company generally measures fair value by
considering sales prices for similar assets or by discounting estimated future
cash flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from the Company's financial liabilities
are recognized as interest expense. Gains and losses on early terminations of
derivatives are included in the carrying amount of the related debt and
amortized as yield adjustments over the remaining term of the derivative
financial instruments. The Company does not use such instruments for trading
purposes.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the common equity of those consolidated subsidiaries. Further, the
minority interests' share of losses is not recognized if the minority holders of
common equity of consolidated subsidiaries have the right to cause the Company
to repurchase such holders' common equity.
Included in minority interests in equity of consolidated subsidiaries is
$902 million and $49 million in 1996 and 1995, respectively, of preferred stocks
(and accumulated dividends thereon) of certain subsidiaries. The current
dividend requirements on these preferred stocks aggregate $47 million per annum
and such dividend requirements are reflected as minority interests in the
accompanying consolidated statements of operations.
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement of
operations items are translated at average currency exchange rates. The
resulting translation adjustment is recorded as a separate component of
stockholders' equity.
Net Sales from Electronic Retailing Services
Revenue includes merchandise sales reduced by incentive discounts and sales
returns to arrive at net sales from electronic retailing services. Revenue is
recorded for credit card sales upon transaction authorization, and for check
sales upon receipt of customer payment, which does not vary significantly from
the time goods are shipped. The Company's sales policy allows merchandise to be
returned at the customer's discretion, generally up to 30 days.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. As allowed by Statement No. 123, the Company continues to account
for stock-based employee compensation pursuant to APB Opinion No. 25. The
Company has included the disclosures required by Statement No. 123 in note 11.
Earnings (Loss) Per Common and Common Equivalent Share
(a) TCI CLASS A AND B COMMON STOCK
Loss per common share attributable to common stockholders for the
period from January 1, 1995 through the Distribution was computed by
dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding (648.2 million). Common stock
equivalents were not included in the computation of weighted average shares
outstanding because their inclusion would be antidilutive.
Primary earnings per common and common equivalent share attributable
to common stockholders for the year ended December 31, 1994 was computed by
dividing net earnings attributable to common stockholders by the weighted
average number of common and common equivalent shares outstanding (540.8
million).
Fully diluted earnings per common and common equivalent share
attributable to common stockholders for the year ended December 31, 1994
was computed by dividing earnings attributable to common stockholders by
the weighted average number of common and common equivalent shares
outstanding (540.8 million). Shares issuable upon conversion of the
Convertible Preferred Stock, Series C ("Series C Preferred Stock") (see
note 9) have not been included in the computation of weighted average
shares because their effect would be anti-dilutive.
V-68
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) TCI GROUP STOCK
The loss attributable to TCI Group stockholders per common share for
the year ended December 31, 1996 and for the period from the Distribution
to December 31, 1995 was computed by dividing net loss attributable to TCI
Group Series A and Series B common stockholders by the weighted average
number of common shares outstanding of TCI Group Stock during the period
(664.8 million and 656.4 million, respectively). Common stock equivalents
were not included in the computation of weighted average shares outstanding
because their inclusion would be anti-dilutive.
(c) LIBERTY GROUP STOCK
Primary earnings attributable to Liberty Media Group stockholders per
common and common equivalent share for the year ended December 31, 1996 was
computed by dividing net earnings attributable to Liberty Media Group
Series A and Series B common stockholders by the weighted average number of
common and common equivalent shares outstanding of Liberty Media Group
Series A and Series B common stock during the period, as adjusted for the
effect of the Liberty Group Stock Dividend (266.3 million).
Fully diluted earnings attributable to Liberty Media Group
stockholders per common and common equivalent share for the year ended
December 31, 1996 was computed by dividing earnings attributable to Liberty
Media Group Series A and Series B common stockholders by the weighted
average number of common and common equivalent shares outstanding of
Liberty Media Group Series A and Series B common stock during the period,
as adjusted for the effect of the Liberty Group Stock Dividend (272.4
million). Shares issuable upon conversion of the Series C Preferred Stock,
the Convertible Preferred Stock, Series D (the "Series D Preferred Stock"),
and the Redeemable Convertible Liberty Media Group Preferred Stock, Series
H have been included in the computation of weighted average shares.
The loss attributable to Liberty Media Group stockholders per common
share for the period from the Distribution to December 31, 1995 was
computed by dividing net loss attributable to Liberty Media Group Series A
and Series B common stockholders by the weighted average number of common
shares outstanding of Liberty Group Stock during the period, as adjusted
for the effect of the Liberty Group Stock Dividend (246.1 million). Common
stock equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts have been reclassified for comparability with the 1996
presentation.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $1,056 million, $965 million and $758 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid
for income taxes was $25 million in 1996, $63 million in 1995 and was not
material in 1994.
Significant noncash investing and financing activities are reflected in the
following table. See also note 7 for the impact of the spin-off of TCI Satellite
Entertainment, Inc.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired............................. $ 4,998 3,571 1,921
Liabilities assumed, net of current assets................ (1,811) (445) (648)
Deferred tax liability recorded in acquisitions........... (1,379) (1,083) (190)
Minority interests in equity of acquired entities......... (113) 49 (35)
Note receivable from related party assumed................ -- -- 15
Common stock and preferred stock issued in acquisitions... (457) (1,615) (808)
Preferred stock of subsidiaries issued in acquisitions.... (640) -- --
Common stock issued to subsidiaries....................... -- -- 285
Unrealized gains on available-for-sale securities of
acquired entities...................................... -- -- (182)
------- ------ -----
Cash paid for acquisitions............................. $ 598 477 358
======= ====== =====
Exchange of consolidated subsidiaries for note receivable
and equity investments.................................... $ 894 -- --
======= ====== =====
Conversion of debt into additional minority interest in
consolidated subsidiary................................... $ -- 14 --
======= ====== =====
Assets contributed for interest in limited liability
company................................................... $ -- 3 --
======= ====== =====
Issuance of subsidiary stock for equity investment.......... $ -- 11 --
======= ====== =====
</TABLE>
(4) INVESTMENTS IN AFFILIATES
The Company has various investments accounted for under the equity method.
The following table includes the Company's carrying value and percentage
ownership of the more significant investments at December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
PERCENTAGE CARRYING
OWNERSHIP VALUE
---------- --------------
AMOUNTS IN
MILLIONS
<S> <C> <C>
Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and
PhillieCo, L.P........................................ 30%-35.3% $830
Teleport Communications Group, Inc. ("TCG")............. 31.1% 276
Home Shopping Network, Inc. ("HSN")..................... 19.9% 142
BDTV INC. and BDTV II, INC.............................. 99% 200
Telewest Communications plc ("Telewest")................ 27% 488
Various foreign equity investments (other than
Telewest)............................................. var. 422
Discovery Communications, Inc........................... 49% 118
QVC, Inc................................................ 43% 104
</TABLE>
V-70
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited financial information for affiliates is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Combined Financial Position
Property and equipment, net............................... $ 4,770 3,464
Franchise costs, net...................................... 3,392 1,302
Other assets, net......................................... 13,287 8,127
------- ------
Total assets...................................... $21,449 12,893
======= ======
Debt...................................................... $ 8,657 5,438
Due to TCI................................................ 42 47
Other liabilities......................................... 5,539 1,803
Owners' equity............................................ 7,211 5,605
------- ------
Total liabilities and equity...................... $21,449 12,893
======= ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Combined Operations
Revenue............................................... $ 5,996 4,540 3,033
Operating expenses.................................... (5,488) (3,956) (2,678)
Depreciation and amortization......................... (1,037) (542) (261)
------- ------ ------
Operating income (loss)............................ (529) 42 94
Interest expense...................................... (631) (349) (112)
Other, net............................................ (369) (151) 13
------- ------ ------
Net loss........................................... $(1,529) (458) (5)
======= ====== ======
</TABLE>
The Company is a partner in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residential
and business customers nationwide, using the "Sprint" brand (the "PCS
Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P.
(collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo").
The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint
Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox")
and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and
the Company. The Company has a 30% partnership interest in each of the Sprint
PCS Partnerships and a 35.3% interest as a partner in PhillieCo.
The Sprint PCS Partnerships have licenses, and have affiliated with other
entities (including PhillieCo) that have licenses, to provide PCS service to
MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or
population equivalents), based on the Donnelley Marketing Service estimate of
the December 31, 1995 population of the relevant geographic areas. The Sprint
PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction
conducted by the Federal Communications Commission ("FCC") that ended in March
1995, for an aggregate license cost of approximately $2.1 billion. The Sprint
PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with
American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS
system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P.
("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA
and currently operates a PCS system in San Diego, California. The Sprint PCS
Partnerships may invest in other entities that hold PCS Licenses. PhillieCo
holds the license for the Philadelphia MTA, which was
V-71
<PAGE> 310
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired at a license cost of $85 million. During December 1996, the Sprint PCS
Partnerships initiated the commercial launch of PCS service in seven markets.
From inception through 1996, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company
contributed an aggregate of approximately $0.9 billion, including approximately
$0.2 billion during the year ended December 31, 1996.) The remaining capital
that the Sprint PCS Partnerships will require to fund the construction of the
PCS systems and the commitments made to APC and CoxCalifornia will be
substantial. The partners had agreed in forming the Sprint PCS Partnerships to
contribute up to an aggregate of approximately $4.2 billion of equity thereto,
from inception through fiscal 1999, subject to certain requirements. The Company
expects that the remaining approximately $1.2 billion of such amount (of which
the Company's share is approximately $0.4 billion) will be contributed by the
end of the second quarter of 1998 (although there can be no assurance that any
additional capital will be contributed). The Company expects that the Sprint PCS
Partnerships will require additional equity thereafter.
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of
Class A common stock at $16.00 per share to the public for aggregate net
proceeds of approximately $410,000,000. As a result of the TCG IPO, the
Company's ownership interest in TCG was reduced from approximately 35% to
approximately 31%. Accordingly, the Company recognized a gain amounting to $12
million (before deducting deferred income tax expense of approximately $5
million).
As of April 29, 1996, Liberty Media Group, The News Corporation Limited
("News Corp.") and TINTA formed two sports programming ventures. In the United
States, Liberty Media Group and News Corp. formed Liberty/Fox U.S. Sports LLC
("Fox Sports") into which Liberty Media Group contributed interests in its
national and regional sports networks and into which News Corp. contributed its
fx cable network and certain other assets. Liberty Media Group received a 50%
interest in Fox Sports and $350 million in cash.
Internationally, News Corp. and a limited liability company
("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of
Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to
operate previously existing sports services in Latin America and Australia and a
variety of new sports services throughout the world, except in Asia and in the
United Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with
News Corp. owning the other 50%. News Corp. contributed various international
sports rights and certain trademark rights. Liberty/TINTA contributed Prime
Deportiva, a Spanish language sports service distributed in Latin American and
in Hispanic markets in the United States; an interest in Torneos y Competencias
S.A., an Argentinean sports programming and production business; various
international sports and satellite transponder rights and cash. Liberty/TINTA
also contributed its 50% interest in Premier Sports and All-Star Sports. Both
are Australian 24-hour sports services available via multichannel, multipoint
distribution systems or cable television. Fox Sports International is accounted
for using the equity method.
As part of the formation of Fox Sports International, Liberty/TINTA is
entitled to receive from News Corp. 7.5% of the outstanding stock of Star
Television Limited. Upon delivery of such stock to Liberty/ TINTA, News Corp. is
entitled to receive from Liberty/TINTA $20 million and rights under various
Asian sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Pursuant to an agreement among Liberty Media Group, Barry Diller and
certain of their respective affiliates entered into in August 1995 and amended
in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV
INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million
shares of Class B common stock of Silver King Communications, Inc. ("Silver
King") (which shares represented voting control of Silver King at such time) and
$3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a
corporation formed by Liberty Media Group and Mr. Diller
V-72
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of
the equity and none of the voting power (except for protective rights with
respect to certain fundamental corporate actions) and Mr. Diller owns less than
1% of the equity and all of the voting power. BDTV-I exercised the option
shortly after its contribution, thereby becoming the controlling stockholder of
Silver King. Such change in control of Silver King had been approved by the FCC
in June 1996, subject, however, to the condition that the equity interest of
Liberty Media Group in Silver King not exceed 21.37% without the prior approval
of the FCC (the "FCC Order").
Pursuant to an Agreement and Plan of Exchange and Merger entered into in
August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger
of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger")
where HSN is the surviving corporation and a subsidiary of Silver King following
the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a
portion of its investment in HSN and accordingly, recorded a pre-tax gain of
approximately $47 million. In order to effect the HSN Merger in compliance with
the FCC Order, Liberty Media Group agreed to defer receiving certain shares of
Silver King that would otherwise have become issuable to it in the HSN Merger
until such time as it was permitted to own such shares. As a result, the HSN
Merger was structured so that Liberty Media Group received (i) 7,809,111 shares
of Class B common stock of Silver King, all of which shares Liberty Media Group
contributed to BDTV II INC. ("BDTVII"), (ii) the contractual right (the
"Contingent Right") to be issued up to an additional 2,591,752 shares of Class B
common stock of Silver King from time to time upon the occurrence of certain
events which would allow Liberty Media Group to own additional shares in
compliance with the FCC Order (including events resulting in the dilution of
Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of
Class B common stock and 17,566,702 shares of common stock of HSN (representing
approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by
Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which
the relative equity ownership and voting power of Liberty Media Group and Mr.
Diller are substantially the same as their respective equity ownership and
voting power in BDTV-I.
As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty
Media Group and therefore, the financial results of HSN will no longer be
consolidated with the financial results of Liberty Media Group. Although Liberty
Media Group no longer possesses voting control over HSN, it continues to have an
indirect equity interest in HSN through its ownership of the equity securities
of BDTV-I and BDTV-II as well as a direct interest in HSN which would be
exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II
are accounted for using the equity method.
Telewest is a company that is currently operating and constructing cable
television and telephone systems in the United Kingdom ("UK"). Telewest was
formed on October 3, 1995 upon the merger (the "TeleWest Merger") of TeleWest
Communications plc ("TeleWest Communications") with SBC (CableComms) (UK). Prior
to the TeleWest Merger, the Company had an effective ownership interest of
approximately 36% in TeleWest Communications. As a result of the TeleWest
Merger, the Company recognized a gain of approximately $165 million (before
deducting deferred income taxes of $58 million), which gain represents the
difference between the Company's recorded cost for TeleWest Communications and
the Company's 27% effective proportionate share of Telewest's net assets.
Telewest contributed $109 million, $70 million and $43 million of the
Company's share of its affiliates' losses during the years ended December 31,
1996, 1995 and 1994, respectively. In addition, the Company has other less
significant equity method investments in video distribution and programming
businesses located in the UK, other parts of Europe, Asia, Latin America and
certain other foreign countries. In the aggregate, such other equity method
investments accounted for $79 million, $62 million and $50 million of the
Company's share of its affiliates' losses in 1996, 1995 and 1994, respectively.
V-73
<PAGE> 312
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of TeleWest Communications' November 1994 initial public
offering and the associated dilution of the Company's ownership interest of
TeleWest Communications, the Company recognized a gain amounting to $161 million
(before deducting the related tax expense of $57 million).
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general partnership is,
as such, liable as a matter of partnership law for all debts (other than
non-recourse debts) of that partnership in the event liabilities of that
partnership were to exceed its assets.
(5) INVESTMENT IN TIME WARNER
At December 31, 1995, TCI owned shares of TBS common stock and shares of
TBS preferred stock that were convertible into TBS common stock. The Company's
total holdings represented an approximate 7.5% voting interest for those matters
which preferred and common voted as a single class. On October 10, 1996, Time
Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS Class A
and Class B common share held, and each holder of TBS Class C preferred stock
received 0.80 of a Time Warner common share for each of the 6 shares of TBS
Class B common stock into which each share of Class C preferred stock could have
been converted.
Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered
into an Agreement Containing Consent Order with the Federal Trade Commission
("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent
Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed
to exchange the shares of Time Warner common stock to be received in the
TBS/Time Warner Merger for shares of a separate series of Time Warner common
stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW
Exchange Stock are entitled to one one-hundredth ( 1/10th) of a vote for each
share with respect to the election of directors. Holders of the TW Exchange
Stock will not have any other voting rights, except as required by law or with
respect to limited matters, including amendments of the terms of the TW Exchange
Stock adverse to such holders. Subject to the federal communications laws, each
share of the TW Exchange Stock will be convertible at any time at the option of
the holder on a one-for-one basis for a share of Time Warner common stock.
Holders of TW Exchange Stock are entitled to receive dividends ratably with the
Time Warner common stock and to share ratably with the holders of Time Warner
common stock in assets remaining for common stockholders upon dissolution,
liquidation or winding up of Time Warner.
In connection with the TBS/Time Warner Merger, the Company received
approximately 50.6 million shares of the TW Exchange Stock in exchange for its
TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized
a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996.
At December 31, 1996, the Company's investment in Time Warner, carried at
cost, had an aggregate fair value of approximately $2 billion based upon the
market value of the marketable common stock into which it is convertible.
Subject to a number of conditions, including receipt of a ruling from the
Internal Revenue Service ("IRS") that such dividend would be tax free to the
Liberty Media Group stockholders, TCI agreed that it would distribute in the
form of a stock dividend (the "Spin-Off") to the Liberty Media Group
stockholders the stock of a new company ("Spinco") which would hold the TW
Exchange Stock and the business of Southern Satellite Systems, Inc.
("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes
the TBS SuperStation signal in the United States and Canada. The level of
Liberty Media Group's ownership interest in Time Warner will be restricted until
the Spin-Off occurs, at which time, such restriction would be eased for Spinco.
V-74
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Spin-Off occurs, certain control stockholders of TCI would exchange
the Spinco common stock they receive for a Spinco convertible preferred security
which would only be entitled to vote on major corporate transactions involving
Spinco.
In connection with the TBS/Time Warner Merger, Liberty and Time Warner
entered into, among other agreements, an agreement providing for the grant to
Time Warner of an option (the "Contract Option") to enter into a contract with
Southern (the "Distribution Contract") pursuant to which Southern would provide
Time Warner with certain uplinking and distribution services relating to WTBS
and would assist Time Warner in converting WTBS from a superstation into a
copyright paid cable programming service. The Contract Option will be granted no
later than the fifth business day following the earlier of May 31, 1997, the
receipt of a favorable IRS ruling and the determination that the IRS ruling will
not be obtained. On the date of grant, Time Warner will issue to Southern, in
consideration for the Contract Option and certain noncompetition covenants, an
aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to
Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the
Contract Option and enters into the Distribution Contract, Time Warner will be
obligated to make quarterly payments to Southern in an amount which, when added
to Southern's net cash flow, would aggregate approximately $213.3 million on a
present value basis discounted to the effective date of the Distribution
Contract.
(6) ACQUISITIONS
On July 31, 1996, pursuant to certain agreements entered into among TCIC, a
subsidiary of TCI, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"),
TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub")
which owned Viacom's cable systems and related assets (the "Viacom
Acquisition").
The transaction was structured as a tax-free reorganization in which Cable
Sub transferred all of its non-cable assets, as well as all of its liabilities
other than current liabilities, to a new subsidiary of Viacom ("New Viacom
Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan
Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any
obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock
(collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange
Offer") a portion of their shares of Viacom Common Stock for shares of Class A
Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). Immediately following the completion of the Exchange Offer, TCIC
acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's obligations
under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred
Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The Exchangeable Preferred Stock is
exchangeable, at the option of the holder commencing after the fifth anniversary
of the date of issuance, for shares of Series A TCI Group Stock at an exchange
rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable
Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to
redemption, at the option of Cable Sub, after the fifth anniversary of the date
of issuance, initially at a redemption price of $102.50 per share and thereafter
at prices declining ratably annually to $100 per share on and after the eighth
anniversary of the date of issuance, plus accrued and unpaid dividends to the
date of redemption. The Exchangeable Preferred Stock is also subject to
mandatory redemption on the tenth anniversary of the date of issuance at a price
equal to the Stated Value per share plus accrued and unpaid dividends. Amounts
payable by Cable Sub in satisfaction of its optional or mandatory redemption
obligations with respect to the
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exchangeable Preferred Stock may be made in cash or, at the election of Cable
Sub, in shares of Series A TCI Group Stock, or in any combination of the
foregoing.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of Cable Sub have been consolidated with
those of the Company since the date of acquisition, and the Company recorded
Cable Sub's assets and liabilities at fair value. On a pro forma basis, the
Company's revenue, net loss, and net loss per share of TCI Group Stock would
have been increased by $280 million, $55 million and $.08, respectively, for the
year ended December 31, 1996; and revenue, net loss, net loss per share of TCI
Group Stock and net loss per share of TCI Class A Common Stock would have been
increased by $446 million, $115 million, $.07 and $.10, respectively, for the
year ended December 31, 1995 had Cable Sub been consolidated with the Company on
January 1, 1995. The foregoing unaudited pro forma financial information is
based upon historical results of operations adjusted for acquisition costs and,
in the opinion of management, is not necessarily indicative of the results had
the Company operated Cable Sub since January 1, 1995.
As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable")
consummated a transaction, whereby TeleCable was merged into TCIC. The aggregate
$1.6 billion purchase price was satisfied by TCIC's assumption of approximately
$300 million of TeleCable's net liabilities and the issuance to TeleCable's
shareholders of approximately 42 million shares of TCI Class A common stock and
1 million shares of Series D Preferred Stock with an aggregate initial
liquidation value of $300 million (see note 9).
On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision
for a purchase price of $282 million, before liabilities assumed. The purchase
price was paid with cash consideration of $195 million and TINTA's issuance of
$87 million principal amount of secured negotiable promissory notes payable to
the selling shareholders. TINTA has an option during the two-year period ended
April 25, 1997 to increase its ownership interest in Cablevision up to 80% at a
cost per subscriber similar to the initial purchase price, adjusted however for
certain fluctuations in applicable foreign currency exchange rates.
(7) SPIN-OFF OF TCI SATELLITE ENTERTAINMENT, INC.
Through December 4, 1996, the Company had an investment in a direct
broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which
the Company accounted for under the equity method. Primestar provides
programming and marketing support to each of its cable partners who provide
satellite television service to their customers. On December 4, 1996, the
Company distributed (the "Satellite Spin-off") to the holders of shares of TCI
Group Stock all of the issued and outstanding common stock of TCI Satellite
Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off,
Satellite's assets and operations included the Company's interest in Primestar,
the Company's business of distributing Primestar programming and two
communications satellites. As a result of the Satellite Spin-off, Satellite's
operations are no longer consolidated with the Company's. In addition, the
Satellite Spin-off effected a change in the conversion rate for each of the
Company's equity and debt securities that are convertible into Series A TCI
Group Stock. See notes 8, 9 and 11.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of Satellite as of and through the date of
the Satellite Spin-off is as follows (amounts in millions):
<TABLE>
<CAPTION>
<S> <C>
Financial Position
Cash, receivables and other assets........................ $ 104
Investment in PRIMESTAR Partners L.P. .................... 32
Property and equipment, net............................... 1,111
------
$1,247
======
Accounts payable and accrued liabilities.................. $ 60
Due to PRIMESTAR Partners L.P............................. 458
Due to TCI................................................ 324
Equity.................................................... 405
------
$1,247
======
Operations
Revenue................................................... $ 377
Operating expenses........................................ (373)
Depreciation.............................................. (166)
------
Loss before income tax benefit......................... (162)
Income tax benefit........................................ 53
------
Net loss............................................... $ (109)
======
</TABLE>
(8) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT -------------------
DECEMBER 31, 1996 1996 1995
----------------- -------- -------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Debt of subsidiaries:
Notes payable.................................. 8.3% $ 9,308 7,713
Bank credit facilities......................... 6.6% 4,813 3,854
Commercial paper............................... 6.1% 638 1,469
Convertible notes(a)........................... 9.5% 43 45
Other debt..................................... 124 130
------- ------
$14,926 13,211
======= ======
</TABLE>
- ---------------
(a) These convertible notes, which are stated net of unamortized discount of
$178 million and $186 million at December 31, 1996 and 1995, respectively,
mature on December 18, 2021. The notes require (so long as conversion of the
notes has not occurred) an annual interest payment through 2003 equal to
1.85% of the face amount of the notes. During 1996, certain of these notes
were converted into 1,623,800 shares of Series A TCI Group Stock and 608,925
shares of Series A Liberty Group Stock. During 1995 and 1994, certain of
these notes were converted into 3,416 shares and 2,350,000 shares of TCI
Class A common stock, respectively. At December 31, 1996, the notes were
convertible, at the option of the holders, into an aggregate of 37,083,773
shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty
Group Stock (as adjusted to give effect to the Liberty Group Stock
Dividend).
During the year ended December 31, 1996, in order to reduce future interest
costs, the Company redeemed certain notes payable which had an aggregate
principle balance of $904 million and fixed interest rates ranging from 7.88% to
10.44% (the "Redemption"). In connection with the Redemption, the Company
recognized a loss on early extinguishment of debt of $62 million. Such loss
related to prepayment penalties amounting to $60 million and the retirement of
deferred loan costs.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also, during the year ended December 31, 1996, certain subsidiaries of the
Company terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately
$2 billion and refinanced certain other bank credit facilities. In connection
with such termination and refinancings, the Company recognized a loss on early
extinguishment of debt of $9 million related to the retirement of deferred loan
costs. At December 31, 1996, subsidiaries of the Company had approximately $1.8
billion in unused lines of credit, excluding amounts related to lines of credit
which provide availability to support commercial paper.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which require,
among other things, the maintenance of certain earnings, specified cash flow and
financial ratios (primarily the ratios of cash flow to total debt and cash flow
to debt service, as defined), and include certain limitations on indebtedness,
investments, guarantees, dispositions, stock repurchases and/or dividend
payments.
As security for borrowings under one of its bank credit facilities, the
Company has pledged 116,853,195 shares of Series A TCI Group Stock held by a
subsidiary of the Company. As security for borrowings under another of its
credit facilities, TCI has pledged a portion of its Time Warner common stock.
The fair value of the debt of the Company's subsidiaries is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of debt, which has a carrying value of $14,926 million, was $15,523
million at December 31, 1996.
In order to achieve the desired balance between variable and fixed rate
indebtedness, the Company has entered into various interest rate exchange
agreements pursuant to which it (i) pays fixed interest rates (the "Fixed Rate
Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on
notional amounts of $310 million at December 31, 1996 and (ii) pays variable
interest rates (the "Variable Rate Agreements") and receives fixed interest
rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at
December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, the
Company's net payments pursuant to the Fixed Rate Agreements were $14 million,
$13 million and $26 million, respectively; and the Company's net receipts
(payments) pursuant to the Variable Rate Agreements were $15 million, (less than
$1 million), and $36 million, respectively. During the year ended December 31,
1996, the Company terminated certain Variable Rate Agreements with an aggregate
notional amount of $700 million. The Company received $16 million upon such
terminations. After giving effect to the Company's interest rate exchange
agreements, approximately 49% of the Company's indebtedness bears interest at
fixed rates.
The Company's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
FIXED RATE AGREEMENTS VARIABLE RATE AGREEMENTS
- ----------------------------------------------- ------------------------------------------------
INTEREST RATE NOTIONAL INTEREST RATE NOTIONAL
EXPIRATION DATE TO BE PAID AMOUNT EXPIRATION DATE TO BE RECEIVED AMOUNT
--------------- ------------- -------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
October 1997......... 7.2%-9.3% $ 80 April 1997........... 7.0% $ 200
December 1997........ 8.7% 230 September 1998....... 4.8%-5.4% 450
----
April 1999........... 7.4% 50
$310
====
February 2000........ 5.8%-6.6% 300
March 2000........... 5.8%-6.0% 675
September 2000....... 5.1% 75
------
$1,750
======
</TABLE>
The Company is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However,
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that the Company would pay or receive to terminate the agreements at
December 31, 1996, taking into consideration current interest rates and assuming
the current creditworthiness of the counterparties. At December 31, 1996, the
Company would be required to pay an estimated $15 million to terminate the
Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate
Agreements.
Certain of TCI's subsidiaries are required to maintain unused availability
under bank credit facilities to the extent of outstanding commercial paper.
Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per
annum on the average unborrowed portion of the total amount available for
borrowings under bank credit facilities.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1997........................................................ $1,418*
1998........................................................ 490
1999........................................................ 721
2000........................................................ 766
2001........................................................ 1,079
</TABLE>
- ---------------
* Includes $638 million of commercial paper.
(9) REDEEMABLE PREFERRED STOCKS
The conversion rates identified below for the redeemable preferred stocks
that are convertible into Series A TCI Group Stock were adjusted, as applicable,
on December 4, 1996 as a result of the Satellite Spin-off. See note 7. The
conversion rates for the redeemable preferred stocks that are convertible into
Series A Liberty Group Stock have been adjusted to give effect to the Liberty
Group Stock Dividend. See note 1.
Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a series
of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series
C," par value $.01 per share, as partial consideration for an acquisition by
TCI. There were 80,000 shares of Series C Preferred Stock authorized and 70,575
shares outstanding at December 31, 1996.
Each share of Series C Preferred Stock is convertible, at the option of the
holders, into 116.24 shares of Series A TCI Group Stock and 37 shares of Series
A Liberty Group Stock, subject to anti-dilution adjustments. The dividend,
liquidation and redemption features of the Series C Preferred Stock will be
determined by reference to the liquidation value of the Series C Preferred
Stock, which as of any date of determination is equal, on a per share basis, to
the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the
dividend payment date on or immediately preceding such date of determination to
the extent not paid on or before such date, plus (iii), for purposes of
determining liquidation and redemption payments, all unpaid dividends accrued on
the sum of clauses (i) and (ii) above, to such date of determination.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock ranking pari passu with the Series C Preferred Stock, the
holders of Series C Preferred Stock are entitled to receive and, subject to any
prohibition or restriction contained in any instrument evidencing indebtedness
of TCI, TCI is obligated to pay preferential cumulative cash dividends out of
funds legally available therefor. Dividends accrue cumulatively at an annual
rate of 5 1/2% of the liquidation value per share, whether or not such dividends
are declared or funds are legally or contractually available for payment of
dividends, except that if TCI fails to redeem shares of Series C Preferred Stock
required to be redeemed on a redemption date, dividends will thereafter accrue
cumulatively at an annual rate of 15% of the liquidation value per share.
Accrued dividends
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are payable quarterly on January 1, April 1, July 1 and October 1 of each year,
commencing on the first dividend payment date after the issuance of the Series C
Preferred Stock. Dividends not paid on any dividend payment date will be added
to the liquidation value on such date and remain a part thereof until such
dividends and all dividends accrued thereon are paid in full. Dividends accrue
on unpaid dividends at the rate of 5 1/2% per annum, unless such dividends
remain unpaid for two consecutive quarters in which event such rate will
increase to 15% per annum. The Series C Preferred Stock ranks prior to the
Series A TCI Group Stock, Series A Liberty Group Stock and Class B Preferred
Stock and pari passu with the Series F Preferred Stock with respect to the
declaration and payment of dividends.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets of TCI
available for distribution to stockholders an amount in cash, per share, equal
to the liquidation value. The Series C Preferred Stock will rank prior to the
TCI common stock and Class B Preferred Stock and pari passu with the Series F
Preferred Stock as to any such distributions.
The Series C Preferred Stock is subject to optional redemption at any time
after the seventh anniversary of its issuance, in whole or in part, by TCI at a
redemption price, per share, equal to the then liquidation value of the Series C
Preferred Stock. Subject to the rights of any other class or series of the
Company's preferred stock ranking pari passu with the Series C Preferred Stock,
the Series C Preferred Stock is required to be redeemed by the Company at any
time after such seventh anniversary at the option of the holder, in whole or in
part (provided that the aggregate liquidation value of the shares to be redeemed
is in excess of $1 million), in each case at a redemption price, per share,
equal to the liquidation value.
For so long as any dividends are in arrears on the Series C Preferred Stock
or any class or series of TCI preferred stock ranking pari passu with the Series
C Preferred Stock and until all dividends accrued up to the immediately
preceding dividend payment date on the Series C Preferred Stock and such parity
stock shall have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, TCI may not redeem or
otherwise acquire any shares of Series C Preferred Stock, any such parity stock
or any class or series of its preferred stock ranking junior (including the TCI
common stock and the Series C Preferred Stock) unless all then outstanding
shares of Series C Preferred Stock and such parity stock are redeemed. If TCI
fails to redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, and until all such shares are redeemed in full, TCI may not
redeem any such parity stock or junior stock, or otherwise acquire any shares of
such stock or Series C Preferred Stock. Nothing contained in the two immediately
preceding sentences shall prevent TCI from acquiring (i) shares of Series C
Preferred Stock and any such parity stock pursuant to a purchase or exchange
offer made to holders of all outstanding shares of Series C Preferred Stock and
such parity stock, if (a) as to holders of all outstanding shares of Series C
Preferred Stock, the terms of the purchase or exchange offer for all such shares
are identical, (b) as to holders for all outstanding shares of a particular
series or class of parity stock, the terms of the purchase or exchange offer for
all such shares are identical and (c) as among holders of all outstanding shares
of Series C Preferred Stock and parity stock, the terms of each purchase or
exchange offer are substantially identical relative to the respective
liquidation prices of the shares of Series C Preferred Stock and each series or
class of such parity stock, or (ii) shares of Series C Preferred Stock, parity
stock or junior stock in exchange for, or through the application of the
proceeds of the sale of, shares of junior stock.
The Series C Preferred Stock is subject to restrictions on transfer
although it has certain customary registration rights with respect to the
underlying shares of TCI Group and Liberty Group Stock. The Series C Preferred
Stock may vote on all matters submitted to a vote of the holders of the TCI
common stock, has one vote for each share of TCI Group and Liberty Group Stock
into which the shares of Series C Preferred Stock are converted for such
purpose, and may vote as a single class with the TCI common stock. The Series C
Preferred Stock has no other voting rights except as required by the Delaware
General Corporation Law ("DGCL") and except that the consent of the holders of
record of shares representing at least two-thirds of the liquidation value of
the outstanding shares of the Series C Preferred Stock is necessary to (i) amend
the designation, rights, preferences and limitations of the Series C Preferred
Stock as set forth in the TCI Charter
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and (ii) to create or designate any class or series of TCI preferred stock that
would rank prior to the Series C Preferred Stock.
Convertible Preferred Stock, Series D. The Company issued 1,000,000 shares
of a series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series D," par value $.01 per share, as partial consideration for the
merger between TCIC and TeleCable (see note 6). At December 31, 1996, there were
997,222 shares of Series D Preferred Stock outstanding.
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board out of unrestricted funds legally available
therefor, cumulative dividends, in preference to dividends on any stock that
ranks junior to the Series D Preferred Stock (currently the TCI Group Stock, the
Liberty Group Stock and the Class B Preferred Stock), that shall accrue on each
share of Series D Preferred stock at the rate of 5 1/2% per annum of the
liquidation value ($300 per share). Dividends are cumulative, and in the event
that dividends are not paid in full on two consecutive dividend payment dates or
in the event that TCI fails to effect any required redemption of Series D
Preferred Stock, accrue at the rate of 10% per annum of the liquidation value.
The Series D Preferred Stock ranks on parity with the Series C Preferred Stock
and the Series F Preferred Stock.
Each share of Series D Preferred Stock is convertible into 10 shares of
Series A TCI Group Stock and 3.5 shares of Series A Liberty Group Stock, subject
to adjustment upon certain events specified in the certificate of designation
establishing Series D Preferred Stock. In addition to the aforementioned shares
of TCI common stock, holders of Series D Preferred Stock are entitled to one
share of Satellite common stock for each share of Series D Preferred Stock
converted. Such shares of Satellite common stock represent the number of shares
of Satellite common stock that they would have received had they converted their
Series D Preferred Stock into TCI Group Stock prior to the Satellite Spin-off.
To the extent any cash dividends are not paid on any dividend payment date, the
amount of such dividends will be deemed converted into shares of TCI common
stock at a conversion rate equal to 95% of the then current market price of
common stock, and upon issuance of common stock to holders of Series D Preferred
Stock in respect of such deemed conversion, such dividend will be deemed paid
for all purposes.
Shares of Series D Preferred Stock are redeemable for cash at the option of
the holder at any time after the tenth anniversary of the issue date at a price
equal to the liquidation value in effect as of the date of the redemption.
Shares of Series D Preferred Stock may also be redeemed for cash at the option
of TCI after the fifth anniversary of the issue date at such redemption price or
after the third anniversary of the issue date if the market value per share
exceeds certain defined levels for periods specified in the certificate of
designation.
If TCI fails to effect any required redemption of Series D Preferred Stock,
the holders thereof will have the option to convert their shares of Series D
Preferred Stock into common stock at a conversion rate of 95% of the then
current market value of common stock, provided that such option may not be
exercised unless the failure to redeem continues for more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the stockholders of TCI.
Convertible Redeemable Participating Preferred Stock, Series F. The Company
is authorized to issue 500,000 shares of Series F Preferred Stock, par value
$.01 per share. Subsidiaries of TCI hold all the issued and outstanding shares
(278,307 shares). Immediately prior to the record date for the Distribution, the
Company caused each of its subsidiaries holding Subsidiary Shares to exchange
such shares for shares of Series F Preferred Stock having an aggregate value of
not less than that of the Subsidiary Shares so exchanged. Subsidiaries of TCI
exchanged all of the Subsidiary Shares for 355,141 shares of Series F Preferred
Stock. Subsequent to such exchange, a holder of 78,077 shares of Series F
Preferred Stock converted its holdings into 100,524,364 shares of Series A TCI
Group Stock.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each holder of Series F Preferred Stock has the right to receive upon
conversion 1,496.65 shares of Series A TCI Group Stock. The anti-dilution
provisions of the Series F Preferred Stock provide that the conversion rate of
the Series F Preferred Stock will be adjusted by increasing the number of shares
of Series A TCI Group Stock issuable upon conversion in the event of any
non-cash dividend or distribution of the Series A TCI Group Stock to give effect
to the value of the securities, assets or other property so distributed;
however, no such adjustment shall entitle the holder to receive the actual
security, asset or other property so distributed upon the conversion of shares
of Series F Preferred Stock.
The holders of the Series F Preferred Stock are entitled to participate, on
an as-converted basis, with the holders of the Series A TCI Group Stock, with
respect to any cash dividends or distribution declared and paid on the Series A
TCI Group Stock. Dividends or distribution on the Series A TCI Group Stock which
are not paid in cash would result in the adjustment of the applicable conversion
rate as described above.
Upon the dissolution, liquidation or winding up of the Company, holders of
the Series F Preferred Stock will be entitled to receive from the assets of the
Company available for distribution to stockholders an amount, in cash or
property or a combination thereof, per share of Series F Preferred Stock, equal
to the sum of (x) $.01 and (y) the amount to be distributed per share of Series
A TCI Group Stock in such liquidation, dissolution or winding up multiplied by
the applicable conversion rate of a share of Series F Preferred Stock.
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in party, at a redemption
price, per share, equal to the issue price of a share of Series F Preferred
Stock (as adjusted in respect of stock splits, reverse splits and other events
affecting the shares of Series F Preferred Stock), plus any dividends which have
been declared but are unpaid as of the date fixed for such redemption. The
Company may elect to pay the redemption price (or designated portion thereof) of
the shares of Series F Preferred Stock called for redemption by issuing to the
holder thereof, in respect of its shares to be redeemed, a number of shares of
Series A TCI Group Stock equal to the aggregate redemption price (or designated
portion thereof) of such shares divided by the average of the last sales prices
of the Series A TCI Group Stock for a period specified, and subject to the
adjustments described, in the certificate of designation establishing the Series
F Preferred Stock.
Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred
Stock, Series H ("Series H Preferred Stock"). In January, 1996, TCI issued
7,259,380 shares of a series of TCI Series Preferred Stock designated
"Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380
shares of a series of TCI Series Preferred Stock designated "Redeemable
Convertible Liberty Media Group Preferred Stock, Series H" as consideration for
an acquisition. At December 31, 1996, there were 6,695,427 shares of each of
Series G Preferred Stock and Series H Preferred Stock outstanding.
The initial liquidation value for the Series G Preferred Stock and Series H
Preferred Stock is $21.60 per share and $5.40 per share, respectively, subject
in both cases, to increase in an amount equal to aggregate accrued but unpaid
dividends, if any. Dividends will begin to accrue on the Series G and Series H
Preferred Stock on the first anniversary of issuance of the Series G and Series
H Preferred Stock, and will thereafter be payable semi-annually commencing
August 1, 1997, at the rate of 4% per annum on the liquidation value. Any
dividends paid on the Series G and Series H Preferred Stock may be paid, at
TCI's election, in cash or shares of TCI Group Stock. Additional dividends will
accrue on unpaid dividends initially at a rate of 4% per annum. The dividend
rate on dividends that remain unpaid for six months will increase to 8.625% per
annum.
Each share of Series G Preferred Stock is convertible at the option of the
holder at any time prior to the close of business on the last business day prior
to redemption into 1.19 shares of Series A TCI Group Stock and each share of
Series H Preferred Stock is convertible at any time prior to the close of
business on the last business day prior to redemption into .2625 shares of
Series A Liberty Group Stock. However, the shares of Series A Liberty Group
Stock issuable upon conversion of the Series H Preferred Stock shall be adjusted
to
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provide for the Liberty Group Stock Dividend. The conversion rights of Series G
and Series H Preferred Stock are subject to adjustment in certain circumstances.
Among other such adjustments, if the Liberty Group Stock, or any other
redeemable capital stock of TCI into which either series of Preferred Stock may
be convertible ("Redeemable Capital Stock"), is redeemed in full by TCI (the
"Redemption Event"), then, except as otherwise described below, the shares of
such Series G and Series H Preferred Stock will thereafter be convertible into
the kind and amount of consideration that would have been received in such
Redemption Event by a holder of the number of shares of Redeemable Capital Stock
that would have been issuable upon conversion of such shares of Series G and
Series H Preferred Stock, if they had been converted in full immediately prior
to such Redemption Event.
However, if any series of Redeemable Capital Stock into which a series of
Series G or Series H Preferred Stock is then convertible is redeemed in full by
TCI in exchange for securities of another issuer ("Redemption Securities"), TCI
may elect to provide the holders of such Series G or Series H Preferred Stock
with the right to exchange such Series G or Series H Preferred Stock,
concurrently with the Redemption Event, for preferred stock of such other issuer
("Mirror Preferred Stock"). Such Mirror Preferred Stock shall be convertible
into Redemption Securities and shall otherwise have terms and conditions
comparable to the Series G or Series H Preferred Stock exchanged. If TCI
provides such an exchange right, any holder that does not then choose to
participate in such exchange will continue to hold such Series G or Series H
Preferred Stock but such holder will lose the conversion right with respect to
the Redeemable Capital Stock redeemed in the Redemption Event and will not have
any right to receive Redemption Securities in lieu thereof. A holder that
participates in such exchange will receive Mirror Preferred Stock convertible
into Redemption Securities, but will no longer hold the Series G or Series H
Preferred Stock so exchanged.
An alternative provision will apply if, at the time of exercise of any such
exchange right provided by TCI, the holder of the applicable series of Series G
or Series H Preferred Stock would be entitled to receive on conversion any
property in addition to the Redeemable Capital Stock being redeemed. In that
case, holders that choose to participate in the exchange will receive both
Mirror Preferred Stock issued by the issuer of the Redemption Securities of the
other issuer and a new preferred stock of TCI convertible into such additional
property. In such event, the Mirror Preferred Stock and such new TCI preferred
stock will have a combined liquidation value equal to the liquidation value of
the Series G or Series H Preferred Stock exchanged and will otherwise have terms
and conditions comparable to such Series G or Series H Preferred Stock.
The Series G and Series H Preferred Stock are redeemable at TCI's option,
in whole or in part, any time on or after February 1, 2001. The Series G and
Series H Preferred Stock will be redeemable in full on February 1, 2016, to the
extent then outstanding. In all cases, the redemption price per share will be
the liquidation value thereof, including the amount of any accrued but unpaid
dividends thereon, to and including the redemption date.
The Series G and Series H Preferred Stock will rank prior to TCI common
stock and the TCI Class B Preferred Stock and pari passu with all other
currently outstanding classes and series of TCI preferred stock with respect to
the declaration and payment of dividends and in liquidation.
The Series G and Series H Preferred Stock will vote in any general election
of directors of TCI and will have one vote per share for such purposes and will
vote as a single class with the TCI common stock, the TCI Class B Preferred
Stock and any other class or series of TCI Preferred Stock entitled to vote in
any general election of directors. The Series G and Series H Preferred Stock
will have no other voting rights except as required by the DGCL.
(10) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common securities
to TCIC, and issued $500 million of 8.72% Trust
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Originated Preferred Securities(SM) (the "Trust I Preferred Securities" and
together with the common securities, the "Trust I Securities") to the public.
Trust I exists for the exclusive purposes of issuing Trust I Securities and
investing the proceeds thereof into an aggregate principal amount of $516
million of 8.72% Subordinated Deferrable Interest Notes due January 31, 2045
(the "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated Debt
Securities are unsecured obligations of TCIC and are subordinate and junior in
right of payment to certain other indebtedness of the Company. Upon redemption
of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will
be mandatorily redeemable. TCIC effectively provides a full and unconditional
guarantee of Trust I's obligations under the Trust I Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common securities
to TCIC, and issued $500 million of 10% Trust Preferred Securities (the "Trust
II Preferred Securities" and together with the common securities, the "Trust II
Securities") to the public. Trust II exists for the exclusive purposes of
issuing Trust II Securities and investing the proceeds thereof into an aggregate
principal amount of $516 million of 10% Subordinated Deferrable Interest Notes
due May 31, 2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other indebtedness of the
Company. Upon redemption of the 10% Subordinated Debt Securities, the Trust II
Preferred Securities will be mandatorily redeemable. TCIC effectively provides a
full and unconditional guarantee of Trust II's obligations under the Trust II
Preferred Securities.
The Trust I and Trust II Preferred Securities are presented together in a
separate line item in the accompanying consolidated balance sheet captioned
"Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely subordinated debt securities of TCI Communications, Inc."
Dividends accrued on the Trust I and Trust II Preferred Securities are included
in minority interests in losses (earnings) of consolidated subsidiaries in the
accompanying consolidated statements of operations.
(11) STOCKHOLDERS' EQUITY
Common Stock
The Series A TCI Group Stock and Series A Liberty Group Stock each have one
vote per share, and the Series B TCI Group Stock and Series B Liberty Group
Stock each have ten votes per share. Each share of Series B TCI Group Stock is
convertible, at the option of the holder, into one share of Series A TCI Group
Stock, and each share of Series B Liberty Group Stock is convertible, at the
option of the holder, into one share of Series A Liberty Group Stock. See note
1.
The rights of holders of the TCI Group Stock upon liquidation of TCI are
based upon the ratio of the aggregate market capitalization, as defined, of the
TCI Group Stock to the aggregate market capitalization, as defined, of the TCI
Group Stock and the Liberty Group Stock.
Similarly, the rights of holders of the Liberty Group Stock upon
liquidation of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the Liberty Group Stock to the aggregate market
capitalization, as defined, of the Liberty Group Stock and the TCI Group Stock.
Employee Benefit Plans
The Company has several employee stock purchase plans (the "Plans") to
provide employees an opportunity for ownership in the Company and to create a
retirement fund. Terms of the Plans generally provide for employees to
contribute up to 10% of their compensation to a trust for investment in TCI
Group Stock and Liberty Media Group Stock. The Company, by annual resolution of
the Board, generally contributes up to 100% of the amount contributed by
employees. Certain of the Company's subsidiaries have their own employee benefit
plans. Contributions to all plans aggregated $35 million, $28 million and $21
million for 1996, 1995 and 1994, respectively.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
Class A Preferred Stock. The Company is authorized to issue 700,000 shares
of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI held
all of the issued and outstanding shares of such stock, amounting to 592,797
shares. The holders of the Class A Preferred Stock exchanged such Subsidiary
Shares for shares of Series F Preferred Stock immediately prior to the record
date of the Distribution. See note 1.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The
Company is authorized to issue 1,675,096 shares of Class B Preferred Stock and
1,620,026 of such shares are issued and outstanding.
Dividends accrue cumulatively (but without compounding) at an annual rate
of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation
Value"), whether or not such dividends are declared or funds are legally
available for payment of dividends. Accrued dividends will be payable annually
on March 1 of each year (or the next succeeding business day if March 1 does not
fall on a business day), and, in the sole discretion of the Board, may be
declared and paid in cash, in shares of Series A TCI Group Stock or in any
combination of the foregoing. Accrued dividends not paid as provided above on
any dividend payment date will accumulate and such accumulated unpaid dividends
may be declared and paid in cash, shares of Series A TCI Group Stock or any
combination thereof at any time (subject to the rights of any senior stock and,
if applicable, to the concurrent satisfaction of any dividend arrearages on any
class or series of TCI preferred stock ranking on a parity with the Class B
Preferred Stock with respect to dividend rights) with reference to any regular
dividend payment date, to holders of record of Class B Preferred Stock as of a
special record date fixed by the Board (which date may not be more than 45 days
nor less than 10 days prior to the date fixed for the payment of such
accumulated unpaid dividends). The Class B Preferred Stock ranks junior to the
Series F Preferred Stock with respect to the declaration and payment of
dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of Series A TCI Group Stock, the number of such
shares to be issued and delivered will be determined by dividing the amount of
the dividend to be paid in shares of Series A TCI Group Stock by the Average
Market Price of the Series A TCI Group Stock. For this purpose, "Average Market
Price" means the average of the daily last reported sale prices (or, if no sale
price is reported on any day, the average of the high and low bid prices on such
day) of a share of Series A TCI Group Stock for the period of 20 consecutive
trading days ending on the tenth trading day prior to the regular record date or
special record date, as the case may be, for the applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to the Class
B Preferred Stock with respect to liquidating distributions, to receive from the
assets of TCI available for distribution to stockholders an amount in cash or
property or a combination thereof, per share, equal to the Stated Liquidation
Value thereof, plus all accumulated and accrued but unpaid dividends thereon to
and including the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option of the
holders or otherwise.
Subject to the prior preferences and other rights of any class or series of
TCI preferred stock, the Class B Preferred Stock will be exchangeable at the
option of TCI in whole but not in part at any time for junior subordinated debt
securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be
issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a
qualified trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal amount of
which will be equal to the aggregate Stated Liquidation Value of the shares of
Class B Preferred Stock so exchanged by such holder, plus all accumulated and
accrued but unpaid dividends thereon to and including the exchange date. The
Junior Exchange Notes will be issuable only in principal amounts of $100 or any
integral multiple thereof and
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a cash adjustment will be paid to the holder for any excess principal that would
otherwise be issuable. The Junior Exchange Notes will mature on the fifteenth
anniversary of the date of issuance and will be subject to earlier redemption at
the option of TCI, in whole or in part, for a redemption price equal to the
principal amount thereof plus accrued but unpaid interest. Interest will accrue,
and be payable annually, on the principal amount of the Junior Exchange Notes at
a rate per annum to be determined prior to issuance by adding a spread of 215
basis points to the "Fifteen Year Treasury Rate" (as defined in the Indenture).
Interest will accrue on overdue principal at the same rate, but will not accrue
on overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of
TCI and will be subordinated in right of payment to all Senior Debt (as defined
in the Indenture). Accordingly, holders of Class B Preferred Stock who receive
Junior Exchange Notes in exchange therefor may have difficulty selling such
Notes.
For so long as any dividends are in arrears on the Class B Preferred Stock
or any class or series of TCI preferred stock ranking pari passu with the Class
B Preferred Stock which is entitled to payment of cumulative dividends prior to
the redemption, exchange, purchase or other acquisition of the Class B Preferred
Stock, and until all dividends accrued up to the immediately preceding dividend
payment date on the Class B Preferred Stock and such parity stock shall have
been paid or declared and set apart so as to be available for payment in full
thereof and for no other purpose, neither TCI nor any subsidiary thereof may
redeem, exchange, purchase or otherwise acquire any shares of Class B Preferred
Stock, any such parity stock or any class or series of its capital stock ranking
junior to the Class B Preferred Stock (including the TCI common stock), or set
aside any money or assets for such purpose, unless all of the outstanding shares
of Class B Preferred Stock and such parity stock are redeemed. If TCI fails to
redeem or exchange shares of Class B Preferred Stock on a date fixed for
redemption or exchange, and until such shares are redeemed or exchanged in full,
TCI may not redeem or exchange any parity stock or junior stock, declare or pay
any dividend on or make any distribution with respect to any junior stock or set
aside money or assets for such purpose and neither TCI nor any subsidiary
thereof may purchase or otherwise acquire any Class B Preferred Stock, parity
stock or junior stock or set aside money or assets for any such purpose. The
failure of TCI to pay any dividends on any class or series of parity stock or to
redeem or exchange on any date fixed for redemption or exchange any shares of
Class B Preferred Stock shall not prevent TCI from (i) paying any dividends on
junior stock solely in shares of junior stock or the redemption purchase or
other acquisition of junior stock solely in exchange for (together with cash
adjustment for fractional shares, if any) or (but only in the case of a failure
to pay dividends on any parity stock) through the application of the proceeds
from the sale of, shares of junior stock; or (ii) the payment of dividends on
any parity stock solely in shares of parity stock and/or junior stock or the
redemption, exchange, purchase or other acquisition of Class B Preferred Stock
or parity stock solely in exchange for (together with a cash adjustment for
fractional shares, if any), or (but only in the case of failure to pay dividends
on any parity stock) through the application of the proceeds from the sale of,
parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of directors,
will have one vote per share for such purpose and will vote as a single class
with the TCI common stock and any class or series of TCI preferred stock
entitled to vote in any general election of directors. The Class B Preferred
Stock will have no other voting rights except as required by the DGCL.
Series Preferred Stock. The TCI Series Preferred Stock is issuable, from
time to time, in one or more series, with such designations, preferences and
relative participating, option or other special rights, qualifications,
limitations or restrictions thereof, as shall be stated and expressed in a
resolution or resolutions providing for the issue of such series adopted by the
Board. The Company is authorized to issue 50,000,000 shares of Series Preferred
Stock.
All shares of any one series of the TCI Series Preferred Stock are required
to be alike for every particular and all shares are required to rank equally and
be identical in all respects, except insofar as they may vary with
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respect to matters which the Board is expressly authorized by the TCI Charter to
determine in the resolution or resolutions proving for the issue of any series
of the TCI Series Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. The Company is authorized
to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par
value $.01. Subsidiaries of TCI held all of the issued and outstanding shares of
such stock, amounting to 246,402 shares. The holders of the Series E Preferred
Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock
immediately prior to the record date of the Distribution.
Stock Options
In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock
Incentive Plan (the "1994 Plan"). The Plan provided for awards to be made in
respect of a maximum of 16 million shares of TCI Class A common stock. Awards
may be made as grants of stock options, stock appreciation rights, restricted
shares, stock units or any combination thereof.
The 1994 Plan was adjusted to provide that the number and type of shares
subject to future awards consists of a number of shares of Series A TCI Group
Stock equal to the number of shares of Class A common stock subject to future
awards immediately prior to the Distribution and a number of shares of Series A
Liberty Group Stock equal to one-fourth of the number of shares of Class A
common stock subject to future awards immediately prior to Distribution.
Following the Distribution, the Compensation Committee of TCI may in its
discretion grant awards, including awards of options on, or stock appreciation
rights respecting, shares of Series A TCI Group Stock, Series A Liberty Group
Stock, or combinations thereof, in such amounts and types as it determines in
accordance with the terms of the 1994 Plan, as adjusted.
In 1995, the Company adopted the Tele-Communications, Inc. 1995 Employee
Stock Incentive Plan (the "1995 Plan"). In addition, the Company has established
the Tele-Communications, Inc. 1996 Stock Incentive Plan (the "1996 Plan" and
together with the 1994 Plan and the 1995 Plan, the "Incentive Plans") which was
approved by stockholders at the TCI 1996 annual meeting. The 1996 Plan provides
(i) for stock-based awards to be made in respect of a maximum of 16 million
shares of Series A TCI Group Stock and a maximum of 6 million shares of Series A
Liberty Group Stock (subject to certain adjustments described below) and (ii)
for cash awards in amounts determined by the TCI compensation committee. Series
A TCI Group Stock and Series A Liberty Group Stock shall be hereinafter
collectively referred to as the "Common Stock".
Awards may be made as grants of stock options ("Options"), stock
appreciation rights ("SARs"), restricted shares ("Restricted Shares"), stock
units ("Stock Units"), performance awards ("Performance Awards"), or any
combination thereof (collectively, "Awards"). Shares in respect of which Awards
are made may be either authorized but unissued shares of Common Stock or issued
shares reacquired by the Company, including shares purchased in the open market.
Shares of Common Stock that are subject to Awards that expire, terminate or are
annulled for any reason without having been exercised (or, with respect to
Tandem SARs deemed exercised, by virtue of the exercise of a related Option), or
are Restricted Shares or Stock Units that are forfeited prior to becoming
vested, or are subject to Awards of SAR's that are exercised for cash, will
return to the pool of such shares available for grant under the 1996 Plan.
In connection with the Distribution, each holder of an outstanding option
or stock appreciation right received an additional option or stock appreciation
right, as applicable, covering a number of shares of Series A Liberty Group
Stock equal to one-fourth of the number of shares of Class A common stock
theretofore subject to the outstanding option or stock appreciation right, and
the outstanding option or stock appreciation right would continue in effect as
an option or stock appreciation right covering the same number of shares of
Series A TCI Group Stock (as redesignated) that were theretofore subject to the
option or stock appreciation right. The aggregate pre-adjustment strike price of
the outstanding options or stock appreciation rights was allocated between the
outstanding options or stock appreciation rights and the newly issued options
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or stock appreciation rights in a ratio determined by the Compensation
Committee. The following descriptions of stock options and/or stock appreciation
rights have been adjusted to reflect such change.
Awards of Series A TCI Group Stock made under the Incentive Plans were
adjusted in connection with the Satellite Spin-off such that immediately prior
to the Satellite Spin-off, each option was divided into two separately
exercisable options: (i) an option to purchase Satellite Series A common stock
(an "Add-on Satellite Option"), exercisable for the number of shares of
Satellite Series A common stock that would have been issued in the Satellite
Spin-off in respect of the shares of Series A TCI Group Stock subject to the
applicable TCI option, if such TCI option had been exercised in full immediately
prior to the record date of the Satellite Spin-off, and containing substantially
equivalent terms as the existing TCI option, and (ii) an option to purchase
Series A TCI Group Stock (an "Adjusted TCI Option"), exercisable for the same
number of shares of Series A TCI Group Stock as the corresponding TCI option had
been. The aggregate exercise price of each TCI option was allocated between the
Add-on Satellite Option and the Adjusted TCI Option into which it is divided,
and all other terms of the Add-on Satellite Option and Adjusted TCI Option will
in all material respects be the same as such TCI option. Similar adjustments
were made to the outstanding TCI SARs, resulting in the holders thereof holding
Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs, effective
immediately prior to the Satellite Spin-off.
As a result of the foregoing, certain persons who remain TCI employees or
non-employee directors after the Satellite Spin-off and certain persons who were
TCI employees prior to the Satellite Spin-off but became Satellite employees
after the Satellite Spin-off hold both Adjusted TCI Options and separate Add-on
Satellite Options and/or hold both Adjusted TCI SARs and separate Add-on
Satellite SARs. The obligations with respect to the Adjusted TCI Options, Add-on
Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI
employees and non-employee directors following the Satellite Spin-off are
obligations solely of TCI. The obligations with respect to the Adjusted TCI
Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs
held by persons who are Satellite employees at the time of the Satellite
Spin-off and following the Satellite Spin-off are no longer TCI employees are
obligations solely of Satellite. Prior to the Satellite Spin-off, TCI and
Satellite entered into an agreement to sell to each other from time to time at
the then current market price shares of Series A TCI Group Stock and Satellite
Series A common stock, respectively, as necessary to satisfy their respective
obligations under such securities.
As a result of the Liberty Stock Dividend, options to purchase shares of
Liberty Group Stock were increased by one option for each two options previously
granted, and the exercise price was also adjusted accordingly. The following
Liberty Group Stock option disclosures have been adjusted to reflect such
changes.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the number and weighted average exercise price
("WAEP") of certain options in tandem with SARs to purchase Class A common
stock, Series A TCI Group Stock and Series A Liberty Group Stock pursuant to the
Incentive Plans:
<TABLE>
<CAPTION>
SERIES A
CLASS A SERIES A LIBERTY
COMMON TCI GROUP GROUP
STOCK WAEP STOCK WAEP STOCK WAEP
----------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,
1994........................ 8,309,336 $16.61 -- --
Granted................... 3,220,000 22.00 -- --
Assumed................... 54,600 19.56 -- --
Exercised................. (217,483) 17.26 -- --
Canceled.................. (45,625) 20.13 -- --
----------- ---------- ----------
Outstanding at December 31,
1994........................ 11,320,828 18.13 -- --
Converted from Class A
options................. (11,218,866) 18.15 11,218,866 $13.58 --
Adjustment for
Distribution............ -- -- 4,207,056 $12.10
Granted................... -- 7,507,500 16.99 3,879,000 15.95
Exercised................. (91,962) 16.07 (933,516) 12.45 (340,504) 11.11
Canceled.................. (10,000) 17.25 (90,500) 13.07 (33,936) 11.66
----------- ---------- ----------
Outstanding at December 31,
1995........................ -- 17,702,350 15.08 7,711,616 14.08
Exercised................. -- (196,300) 12.70 (87,730) 11.89
Canceled.................. -- (132,200) 15.35 (27,900) 12.68
----------- ---------- ----------
Outstanding at December 31,
1996........................ -- 17,373,850 12.97 7,595,986 14.11
=========== ========== ==========
Exercisable at December 31,
1994........................ 3,053,348 16.35 -- --
=========== ========== ==========
Exercisable at December 31,
1995........................ -- 4,717,230 12.87 1,774,222 11.48
=========== ========== ==========
Exercisable at December 31,
1996........................ -- 8,189,828 11.89 3,290,718 12.71
=========== ========== ==========
Vesting Period....... 4-5 yrs 4-5 yrs
========== ==========
</TABLE>
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
330,000 restricted shares of Series A TCI Group common stock and 45,000
restricted shares of Series A Liberty Group Stock to certain officers and other
key employees of the Company. Such restricted shares vest as to 50% on December
13, 2000 and as to the remaining 50% on December 13, 2001.
SARs with respect to 1,357,875 shares of Series A TCI Group Stock and
533,811 shares of Series A Liberty Group Stock were outstanding at December 31,
1996. These rights have an adjusted strike price of $0.52 and $0.54 per share,
respectively, and become exercisable and vest evenly over seven years, beginning
March 28, 1991. The SARs expire on March 28, 2001. The Company has the option of
paying the holder in stock or cash. During the year ended December 31, 1996,
SARs with respect to 65,625 shares of Series A TCI Group Stock were exercised.
On August 3, 1995, stockholders of the Company approved the Director Stock
Option Plan (the "DSOP") including the grant, effective as of November 16, 1994,
to each person that as of that date was a member of the Board and was not an
employee of the Company or any of its subsidiaries, of options to
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase 50,000 shares of TCI Class A common stock. Pursuant to the DSOP,
options to purchase 300,000 shares of TCI Class A common stock were granted at
an exercise price of $22.00 per share. Such options had a weighted average fair
value of $16.49 on the date of grant. Options issued pursuant to the DSOP vest
and become exercisable over a five-year period from the date of grant and expire
10 years from the date of grant. During the year ended December 31, 1995,
options to purchase 50,000 shares of Series A TCI Group Stock and options to
purchase 18,750 shares of Series A Liberty Group Stock were canceled. During the
year ended December 31, 1996, options to purchase 150,000 shares of Series A TCI
Group Stock and options to purchase 56,250 shares of Series A Liberty Group
stock with a WAEP of $14.75 and $17.28, respectively, were issued pursuant to
the DSOP. Such options had a weighted average fair value of $9.83 and $11.51,
respectively, on the date of grant.
At December 31, 1996, 400,000 options with respect to TCI Group Stock
granted pursuant to the DSOP were outstanding, 100,000 of which were
exercisable. Such options had a range of exercise prices of $12.25 to $16.99,
with a WAEP of $14.06, and a weighted average remaining contractual life of 8.63
years.
At December 31, 1996, 150,000 options with respect to Liberty Group Stock
granted pursuant to the DSOP were outstanding, 37,500 of which were exercisable.
Such options had a range of exercise prices of $14.67 to $17.50, with a WAEP of
$15.65, and a weighted average remaining contractual life of 8.63 years.
The estimated fair values noted above are based on the Black-Scholes model
and are stated in current annualized dollars on a present value basis. The key
assumptions used in the model for purposes of these calculations include the
following: (a) a discount rate equal to the 10-year Treasury rate on the date of
grant; (b) a 35% volatility factor, (c) the 10-year option term; (d) the closing
price of the respective common stock on the date of grant; and (e) an expected
dividend rate of zero. The actual value that the subject directors may realize
will depend upon the extent to which the stock price exceeds the exercise price
on the date the options are exercised. Accordingly, the value realized by such
directors will not necessarily be the value determined by the model.
Estimated compensation relating to restricted stock awards, options with
tandem SARs and SARs has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate is subject to future adjustment based upon market
value, and ultimately, on the final determination of market value when the
rights are exercised or the restricted stock awards are vested. Had the Company
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of compensation would not
have been materially different from what has been reflected in the accompanying
consolidated financial statements.
Other
In connection with the exercise of a stock option by an officer/director of
Liberty, a note was given to Liberty as partial payment of the exercise price.
This note bore interest at 7.54% per annum. The Company recorded the net assumed
note receivable, amounting to $15 million, from such officer as a reduction of
stockholders' equity. On October 27, 1994, such officer tendered to the Company
634,917 shares of TCI Class B common stock in full payment of principal and
interest amounting to $15 million.
The excess of consideration received on debentures converted or options
exercised over the par value of the stock issued is credited to additional
paid-in capital.
At December 31, 1996, there were 127,607,438 shares of Series A TCI Group
Stock and 30,090,303 shares of Series A Liberty Group Stock (as adjusted to give
effect to the Liberty Group Stock Dividend) reserved for issuance under exercise
privileges related to options, convertible debt securities and convertible
preferred stock and upon vesting of the restricted stock awards described in
this note 11 and in notes 8 and 9. In addition, one share of Series A TCI Group
Stock is reserved for each outstanding share of Series B TCI Group Stock and one
share of Series A Liberty Group Stock is reserved for each outstanding
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share of Series B Liberty Group Stock. See note 1 for the effect of the
Distribution on the conversion rights of holders of convertible securities.
(12) TRANSACTIONS WITH OFFICERS AND DIRECTORS
Effective January 31, 1996, a director of the Company purchased one-third
of the Company's interest in two limited partnerships and obtained two ten-year
options to purchase the Company's remaining partnership interests. The purchase
price for the one-third partnership interests was 37.209 shares of WestMarc
Communications, Inc. ("WestMarc," a wholly-owned subsidiary of the Company)
Series C Cumulative Compounding Preferred Stock owned by such director, and the
purchase price for the ten-year options was $100 for each option. All options
are exercisable for cash in the aggregate amount of $3,000,000.
On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an
executive officer of TCI was transferred all of TCI's right title and interest
in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock
of WestMarc owned by TCI. Such preferred stock has a liquidation value of
$1,999,500 and is subject to forfeiture by such officer in the event of certain
circumstances from the date of grant through December 13, 2005.
Effective December 1, 1996, an executive officer of the Company and an
executive officer of TCIC were each granted options representing 1.0% of the
Company's common equity in TCI Telephony Services, Inc., a consolidated
subsidiary of the Company, ("Telephony Services"). The aggregate exercise price
for each such option is equal to 1.0% of (i) the Company's cumulative investment
in Telephony Services as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax
benefits generated by Telephony Services (up to $500 million) as and when used
by TCI. Each such executive officer was also granted a similar option
representing 1.0% of the Company's common equity in TCI Wireline, Inc., another
consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise
price for each such Wireline option is equal to 1.0% of the Company's cumulative
investment in Wireline as of December 1, 1996, adjusted for a 6% per annum
interest factor from the date each such investment was made to the date of such
exercise. Any exercise by one of such executive officers of all or part of one
of such options (as to either the Telephony Services option or the Wireline
option) would need to be accompanied by the exercise by such executive officer
of a pro rata portion of the other such option. All of such options vest 20% per
annum beginning February 1, 1997, and will expire on February 1, 2006.
Effective December 1, 1996, two executive officers of the Company and an
executive officer of TCIC were each granted options representing 1.0% of the
Company's common equity in TCI.NET, Inc., a consolidated subsidiary of the
Company. The aggregate exercise price for each such TCI.NET, Inc. option is
equal to 1.0% of the Company's cumulative investment in TCI.NET, Inc. as of
December 31, 1996, adjusted for a 6% per annum interest factor from the date
each such investment was made to the date of such exercise price. Such options
vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006.
On the date of the Satellite Spin-off, the Company granted options to two
of its executive officers to purchase 1.0% and an option to an employee of TCIC
to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise
price for each such option is equal to 1.0% or 0.5%, as applicable, of the
Company's net investment in Satellite on the date of the Satellite Spin-off.
Such options vest 20% per annum beginning February 1, 1997 and expire on
February 1, 2006.
Estimated compensation relating to the aforementioned restricted stock
award and options has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate is subject to future adjustment based upon market
value, and ultimately, on the final determination of market value when the
rights are exercised or the restricted stock awards are vested. Had the Company
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation would not have been materially different from what has been
reflected in the accompanying consolidated financial statements.
(13) SALE OF SUBSIDIARY STOCK
On July 18, 1995, TINTA completed an initial public offering (the "IPO") in
which it sold 20 million shares of TINTA Series A common stock to the public for
consideration of $16.00 per share aggregating $320 million, before deducting
related expenses (approximately $19 million). The shares sold to the public
represented 17% of TINTA's total issued and outstanding common stock. Also in
July 1995, TINTA issued 687,500 shares of TINTA Series A common stock as partial
consideration for a 35% ownership interest in Torneos Y Competencias S.A., an
Argentine sports programming company (the "TYC Acquisition"). As a result of the
IPO and the TYC Acquisition, the Company recognized a gain amounting to $123
million.
In June 1995, Flextech issued share capital for cash and preferred shares
of Thomson Directories Limited. In connection with such issuance, the Company
recorded a $51 million increase to stockholders' equity and a $93 million
increase to minority interests in equity of consolidated subsidiaries. No gain
was recognized in the Company's consolidated statement of operations due
primarily to the existence of the Company's contingent obligations to repurchase
certain of the Flextech share capital.
(14) INCOME TAXES
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which the Company owns
less than 80% each file a separate income tax return. TCI and such subsidiaries
calculate their respective tax liabilities on a separate return basis which are
combined in the accompanying consolidated financial statements.
Income tax benefit (expense) for the years ended December 31, 1996, 1995
and 1994 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Year ended December 31, 1996:
Federal................................................. $(25) (175) (200)
State and local......................................... (13) (49) (62)
---- ---- ----
$(38) (224) (262)
==== ==== ====
Year ended December 31, 1995:
Federal................................................. $(23) 130 107
State and local......................................... (10) 23 13
---- ---- ----
$(33) 153 120
==== ==== ====
Year ended December 31, 1994:
Federal................................................. $(69) (29) (98)
State and local......................................... (14) (8) (22)
---- ---- ----
$(83) (37) (120)
==== ==== ====
</TABLE>
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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,
------------------------
1996 1995 1994
------ ----- -----
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Computed "expected" tax benefit (expense)................... $(189) 102 (64)
Amortization not deductible for tax purposes................ (22) (25) (13)
Minority interest in losses (earnings) of consolidated
subsidiaries.............................................. (3) 9 (3)
Gain on sale of subsidiary stock............................ -- 43 --
Recognition of losses of consolidated partnership........... -- -- (10)
State and local income taxes, net of federal income tax
benefit................................................... (49) (4) (20)
Valuation allowance on foreign corporation.................. -- -- (10)
Other....................................................... 1 (5) --
----- --- ----
$(262) 120 (120)
===== === ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
AMOUNTS IN MILLIONS
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 679 583
Less -- valuation allowance............................ (121) (121)
Investment tax credit carryforwards....................... 118 118
Less -- valuation allowance............................ (41) (41)
Alternative minimum tax credit carryforwards.............. 95 95
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes
in excess of losses recognized for income tax
purposes............................................... 232 176
Future deductible amounts principally due to
non-deductible accruals................................ 79 90
Other..................................................... 11 10
------ -----
Net deferred tax assets................................ 1,052 910
------ -----
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... 1,193 1,111
Franchise costs, principally due to differences in
amortization........................................... 4,676 3,569
Investment in affiliates, due principally to undistributed
earnings of affiliates................................. 917 499
Intangible assets, principally due to differences in
amortization........................................... 36 42
Leases capitalized for tax purposes....................... 90 53
Other..................................................... 152 220
------ -----
Total gross deferred tax liabilities................... 7,064 5,494
------ -----
Net deferred tax liability............................. $6,012 4,584
====== =====
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 was
$162 million. Such balance did not change from December 31, 1995.
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes aggregating approximately $1,499 million of which, if not
utilized to reduce taxable income in future periods,
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$136 million expires in 2003, $117 million in 2004, $355 million in 2005, $288
million in 2006, $138 million in 2009, $167 million in 2010 and $298 million in
2011. Certain subsidiaries of the Company had additional net operating loss
carryforwards for income tax purposes aggregating approximately $236 million and
these net operating losses are subject to certain rules limiting their usage.
At December 31, 1996, the Company had remaining available investment tax
credits of approximately $63 million which, if not utilized to offset future
Federal income taxes payable, expire at various dates through 2005. Certain
subsidiaries of the Company had additional investment tax credit carryforwards
aggregating approximately $55 million and these investment tax credit
carryforwards are subject to certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries which
filed separate income tax returns are presently under examination by the IRS for
the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues
related to the years 1981-1991 have been resolved in the Company's favor. The
IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the
opinion of management, any additional tax liability, not previously provided
for, resulting from the IRS Examinations or the IRS Appeals, ultimately
determined to be payable, should not have a material adverse effect on the
consolidated financial position of the Company.
(15) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994,
the FCC adopted certain rate regulations required by the 1992 Cable Act and
imposed a moratorium on certain rate increases. As a result of such actions, the
Company's basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. Basic and tier service rates are evaluated
against competitive benchmark rates as published by the FCC, and equipment and
installation charges are based on actual costs. Any rates for Regulated Services
that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate
regulations. The rate regulations do not apply to the relatively few systems
which are subject to "effective competition" or to services offered on an
individual service basis, such as premium movie and pay-per-view services.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, the Company's rates for Regulated Services are subject to review by the
FCC, if a complaint has been filed, or the appropriate franchise authority, if
such authority has been certified. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Any refunds of the excess portion of all
other Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film Licensing
Obligations"). Based on customer levels at December 31, 1996, these agreements
require minimum payments aggregating approximately $571 million. The aggregate
amount of the Film Licensing Obligations under other license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as well
as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, the Company's aggregate payments under the Film
Licensing Obligations could prove to be significant.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At December 31, 1996, such
commitments aggregated $226 million.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $278
million at December 31, 1996. Although there can be no assurance, management of
the Company believes that it will not be required to meet its obligations under
such guarantees, or if it is required to fulfill any of such guarantees, that
they will not be material to the Company.
The Company leases business offices, has entered into converter lease
agreements, pole rental agreements and transponder lease agreements and uses
certain equipment under lease arrangements. Rental expense under such
arrangements amounted to $187 million, $142 million and $82 million in 1996,
1995 and 1994, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in millions):
<TABLE>
<CAPTION>
<S> <C>
1997........................................................ $173
1998........................................................ 163
1999........................................................ 149
2000........................................................ 126
2001........................................................ 116
Thereafter.................................................. 354
</TABLE>
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is anticipated
that future minimum lease commitments will not be less than the amount shown for
1997.
Certain key employees of the Company hold restricted stock awards, options
and options with tandem SARs to acquire shares of certain subsidiaries' common
stock. Estimates of the compensation related to the restricted stock awards and
options and/or SARs have been recorded in the accompanying consolidated
financial statements pursuant to APB Opinion No. 25. Such estimates are subject
to future adjustment based upon the market value of the respective common stock
and, ultimately, on the final market value when the rights are exercised or the
restricted stock awards are vested. Had the Company accounted for its stock
based compensation pursuant to the fair value based accounting method in
Statement No. 123, the amount of compensation would not have been materially
different from what has been reflected in the accompanying consolidated
financial statements.
Estimates of compensation relating to phantom stock appreciation rights
("PSARs") granted to employees of a subsidiary of TCI have been recorded in the
accompanying combined financial statements, but is subject to future adjustment
based upon a valuation model derived from such subsidiary's cash flow, working
capital and debt. Effective January 1, 1994, these employees have a put right
that requires such subsidiary to purchase their respective PSARs. The subsidiary
may call the PSARs on or after January 1, 1996.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the opinion
of management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) INFORMATION ABOUT THE COMPANY'S OPERATIONS
The following is selected information about the Company's operations for
the years ended December 31, 1996, 1995 and 1994. Separate amounts of the
Company's home shopping service have been provided to enhance the readers
understanding of the Company.
<TABLE>
<CAPTION>
PROGRAMMING
-------------------------
COMMUNI- ELECTRONIC OTHER INTERSEGMENT
CATIONS RETAILING PROGRAMMING ELIMINATIONS TOTAL
-------- ---------- ----------- ------------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C>
1996
Revenue................... $ 6,790 984 355 (107) 8,022
======= === ===== ==== ======
Operating income (loss)... $ 546 36 50 -- 632
======= === ===== ==== ======
Depreciation and
amortization........... $ 1,555 37 24 -- 1,616
======= === ===== ==== ======
Capital expenditures...... $ 2,043 5 7 -- 2,055
======= === ===== ==== ======
Identifiable assets....... $27,154 442 2,617 31 30,244
======= === ===== ==== ======
1995
Revenue................... $ 5,145 920 521 (80) 6,506
======= === ===== ==== ======
Operating income (loss)... $ 653 (85) (26) -- 542
======= === ===== ==== ======
Depreciation and
amortization........... $ 1,274 43 55 -- 1,372
======= === ===== ==== ======
Capital expenditures...... $ 1,733 13 36 -- 1,782
======= === ===== ==== ======
Identifiable assets....... $23,059 725 1,793 -- 25,577
======= === ===== ==== ======
1994
Revenue................... $ 4,043 432 240 (33) 4,682
======= === ===== ==== ======
Operating income (loss)... $ 781 9 (2) -- 788
======= === ===== ==== ======
Depreciation and
amortization........... $ 992 15 11 -- 1,018
======= === ===== ==== ======
Capital expenditures...... $ 1,239 19 6 -- 1,264
======= === ===== ==== ======
Identifiable assets....... $17,121 739 1,448 (32) 19,276
======= === ===== ==== ======
</TABLE>
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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>
1996:
Revenue:
As previously reported.................................. $1,959 2,022 2,135
Adjustment to reclassify franchise fee revenue.......... (67) (70) (74)
Adjustment to reclassify shipping and handling
revenue............................................... (27) -- --
Adjustment to reflect optical fiber leases as capital
leases................................................ (4) (4) (3)
------ ----- -----
As adjusted $1,861 1,948 2,058 2,155
====== ===== ===== =====
Operating income:
As previously reported.................................. $ 176 173 223
Adjustment to reflect optical fiber leases as capital
leases................................................ (4) (4) (3)
------ ----- -----
As adjusted............................................. $ 172 169 220 71
====== ===== ===== =====
Net earnings (loss):
As previously reported.................................. $ (118) (184) (136)
Adjustment to reflect optical fiber leases as capital
leases................................................ (3) (3) (2)
------ ----- -----
As adjusted............................................. $ (121) (187) (138) 724
====== ===== ===== =====
Primary earnings (loss) attributable to common
stockholders per common and common equivalent share:
Series A and Series B TCI Group Stock:
As previously reported............................. $ (.22) (.29) (.24)
Adjustment to reflect optical fiber leases as
capital leases................................... -- (.01) (.01)
------ ----- -----
As adjusted........................................ $ (.22) (.30) (.25) (.46)
====== ===== ===== =====
Series A and Series B Liberty Group Stock (a)......... $ .06 .02 .07 3.83
Fully diluted earnings (loss) attributable to common
stockholders per common and common equivalent share:
Series A and Series B TCI Group Stock:
As previously reported............................. $ (.22) (.29) (.24)
Adjustment to reflect optical fiber leases as
capital leases................................... -- (.01) (.01)
------ ----- -----
As adjusted........................................ $ (.22) (.30) (.25) (.46)
====== ===== ===== =====
Series A and Series B Liberty Group Stock (a)......... $ .06 .02 .07 3.74
1995:
Revenue:
As previously reported.................................. $1,524 1,674 1,761 1,892
Adjustment to reclassify franchise fee.................. (56) (62) (63) (65)
Adjustment to reclassify shipping and handling
revenue............................................... (22) (26) (23) (28)
------ ----- ----- -----
As adjusted............................................. $1,446 1,586 1,675 1,799
====== ===== ===== =====
Operating income.......................................... $ 180 135 176 51
Net earnings (loss)....................................... $ (44) (95) 32 (64)
Primary and fully diluted earnings (loss) attributable to
common
stockholders per common and common equivalent share:
TCI Class A and Class B common stock.................... $ (.08) (.16) .12 N/A
Series A and Series B TCI Group Stock................... N/A N/A $(.09) (.07)
Series A and Series B Liberty Group Stock (a)........... N/A N/A $(.02) (.09)
</TABLE>
- ---------------
(a) Adjusted to give effect to the Liberty Group Stock Dividend.
V-97
<PAGE> 336
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the TCI Ventures Group's combined financial statements for the three months
ended March 31, 1997 and for the year ended December 31, 1996 and the TCI
Ventures Group's Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1996 included elsewhere
herein.
On May 14, 1997, the Board of Directors of Tele-Communications, Inc. (the
"Board") authorized, subject to shareholder approval (the "TCI Ventures Group
Stock Proposal"), the issuance of two new series of stock ("TCI Ventures Group
Common Stock") which are intended to reflect the separate performance of the TCI
Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
V-98
<PAGE> 337
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets and liabilities so attributed to the TCI
Ventures Group in the future would not include assets and liabilities of the
Company's domestic programming businesses and investments or its domestic cable
operations (including its businesses which utilize its cable plant to distribute
telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock will not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Common Stock, respectively (representing approximately 30% of the shares of each
such series outstanding as of June 30, 1997, excluding shares held by majority
owned subsidiaries of the Company) in the ratio of one share of the applicable
series of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
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In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group Common Stock would be issued upon such exchange. Similarly, options to
purchase shares of Series A TCI Group Stock that are outstanding under the
Company's various stock incentive plans will be adjusted upon consummation of
the Exchange Offers by dividing such options into options to purchase shares of
Series A TCI Ventures Group Common Stock and options to purchase shares of
Series A TCI Group Stock, with 30% of the shares originally subject to the
options being allocated to the options to purchase TCI Ventures Group Common
Stock and 70% of such shares being allocated to the options to purchase shares
of TCI Group Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures Group
Stock Proposal will not affect legal title to such assets or responsibility for
such liabilities of the Company or any of its subsidiaries. Holders of TCI Group
Stock, Liberty Media Group Stock and TCI Ventures Group Stock will be common
stockholders of the Company and will be subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group Stock, and dividends on, or certain
repurchases of, preferred stock, will reduce funds of the Company legally
available for the payment of dividends on the TCI Group Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
On January 25, 1996, the stockholders of UVSG adopted an agreement and plan
of merger dated as of July 10, 1995, as amended, among UVSG, TCI and TCI Merger
Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub was merged into UVSG,
with UVSG as the surviving corporation (the "UVSG Merger"). TCI Ventures Group
acquired 12,373,294 shares of UVSG Class B common stock and 2,145,466 shares of
UVSG Class A common stock, together representing approximately 40% of the issued
and outstanding common stock of UVSG and approximately 86% of the total voting
power of UVSG common stock immediately after the UVSG Merger, resulting in UVSG
becoming a majority-controlled subsidiary of TCI Ventures Group.
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Group (the
"Satellite Joint Venture"). The operations of the Satellite Joint Venture have
been consolidated, effective April 1, 1996, with the operating results of the
TCI Ventures Group.
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A., a cable
television operation in the west of the greater Buenos Aires metropolitan area,
for a purchase price of $112.2 million (the "OCC Acquisition"). Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt of approximately $45 million in order to fund such cash
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payments. The remaining purchase price was satisfied by Cablevision's issuance
of $46.4 million principal amount of secured negotiable promissory notes.
In January 1997, TCI Ventures Group reduced its voting interest in Flextech
p.1.c. ("Flextech") to 50% by issuing to a nominee an irrevocable proxy (the
"Proxy") to vote 960,850 Flextech ordinary shares ("Flextech Ordinary Shares")
at any shareholder meeting to be held through December 31, 1997. In April 1997,
Flextech and BBC Worldwide Limited formed two separate joint ventures (the "BBC
Joint Ventures") and entered into certain related transactions. The consummation
of the BBC Joint Ventures and related transactions resulted in, among other
things, a reduction of TCI Ventures Group's ownership interest in Flextech to
35.9% and the issuance to TCI Ventures Group by Flextech of a special voting
share (the "Special Voting Share"). The Special Voting Share when combined with
TCI Ventures Group's other share capital in Flextech, allows TCI Ventures Group
to cast 50% of the votes on most matters brought to the shareholders of Flextech
for vote. So long as the Proxy remains outstanding, TCI Ventures Group's 50%
voting interest will be reduced by the 960,850 votes represented by the Proxy.
The Special Voting Share will terminate upon the occurrence of the earlier of
(i) the third anniversary of issuance or (ii) any transfer of Flextech shares by
TCI Ventures Group outside a specified affiliated group. In light of TCI
Ventures Group's decreased voting interest in Flextech, TCI Ventures Group,
effective January 1, 1997, ceased to combine Flextech and began to account for
Flextech using the equity method of accounting.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The following table sets forth certain financial information for the TCI
Ventures Group and each of the combined businesses attributed to it:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
--------------- ---------------
AMOUNT % AMOUNT %
-------- --- -------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
Revenue:
UVSG........................................... $122,876 50% 50,163 31%
International.................................. 65,611 27 62,624 39
ETC w/tci...................................... 23,560 9 21,705 14
NDTC........................................... 24,013 10 16,703 10
WTCI........................................... 9,095 4 8,730 6
@Home.......................................... 809 -- -- --
Summitrak...................................... -- -- -- --
Other.......................................... 1,056 -- 337 --
-------- --- -------- ---
$247,020 100% 160,262 100%
======== === ======== ===
Operating, selling, general, administrative and
stock compensation:
UVSG........................................... $100,902 49% 39,664 30%
International.................................. 40,479 20 45,801 35
ETC w/tci...................................... 25,917 13 23,018 18
NDTC........................................... 12,396 6 10,168 8
WTCI........................................... 5,681 3 5,389 4
@Home.......................................... 8,326 4 3,122 2
Summitrak...................................... 898 -- 993 1
Other.......................................... 11,392 5 2,268 2
-------- --- -------- ---
$205,991 100% 130,423 100%
======== === ======== ===
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1997 1996
--------------- ---------------
AMOUNT % AMOUNT %
-------- --- -------- ---
<S> <C> <C> <C> <C>
Depreciation and amortization:
UVSG........................................... $ 8,736 21% 3,966 13%
International.................................. 15,713 38 12,126 41
ETC w/tci...................................... 1,838 5 743 3
NDTC........................................... 7,103 17 7,443 25
WTCI........................................... 2,124 5 2,965 10
@Home.......................................... 1,574 4 27 --
Summitrak...................................... 3,983 10 2,035 7
Other.......................................... 73 -- 225 1
-------- --- -------- ---
$ 41,144 100% 29,530 100%
======== === ======== ===
Operating income (loss):
UVSG........................................... $ 13,238 n/a 6,533 n/a
International.................................. 9,419 4,697
ETC w/tci...................................... (4,195) (2,056)
NDTC........................................... 4,514 (908)
WTCI........................................... 1,290 376
@Home.......................................... (9,091) (3,149)
Summitrak...................................... (4,881) (3,028)
Other.......................................... (10,409) (2,156)
-------- --------
$ (115) 309
======== ========
</TABLE>
Revenue
Revenue increased by $87 million or 54% during the three months ended March
31, 1997 as compared to the same period in 1996. Such increase principally
results from growth from acquisitions consummated subsequent to January 1, 1996
net of the impact of the deconsolidation of Flextech in January of 1997.
Revenue from UVSG increased by $73 million or 145% during the three months
ended March 31, 1997 compared to revenue of $50 million for the three months
ended March 31, 1996. The increased revenue for the quarter was primarily due to
the inclusion of UVSG for two months in 1996 versus three months in 1997 as well
as $40 million of additional revenue attributable the Satellite Joint Venture.
International revenue increased $3 million or 5% during the three months
ended March 31, 1997 as compared to the corresponding prior year period. Such
amount was comprised of an increase in cable revenue of $16 million or 32%, net
of programming revenue from Flextech amounting to $13 million for the three
months ended March 31, 1996. The cable revenue increase is primarily
attributable to revenue amounting to $8 million associated with the OCC
Acquisition and a 10% increase in Cablevision's average number of basic
subscribers.
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation and amortization,
increased $76 million or 58% during the three months ended March 31, 1997 as
compared to the same period of 1996. Such increases were similarly the result of
acquisitions net of the impact of the deconsolidation of Flextech.
Operating costs and expenses, excluding depreciation and amortization, from
UVSG increased by $61 million or 154% during the three months ended March 31,
1997 compared to operating costs and expenses of $40 million for the three
months ended March 31, 1996. Such increased costs for the quarter were primarily
due to the inclusion of UVSG for two months in 1996 versus three months in 1997
as well as $36 million of additional costs attributable to the inclusion of the
Satellite Joint Venture only during 1997.
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International costs and expenses, excluding depreciation and amortization,
decreased $5.3 million or 12% during the three months ended March 31, 1997
compared to the corresponding prior period, including $15 million of costs and
expenses from Flextech for the three months ended March 31, 1996. International
cable expenses increased $9 million during the three months ended March 31,
1997.
Certain TCI corporate general and administrative costs are charged to TCI
Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs TCI Ventures
Group would incur for comparable services on a stand alone basis. During each of
the three months ended March 31, 1997 and 1996, TCI Ventures Group was allocated
$2 million in corporate general and administrative costs by TCI Group.
The $12 million or 39% increase in depreciation and amortization expense
during the three months ended March 31, 1997, as compared to the corresponding
prior year period, is the result of a net increase in the TCI Ventures Group's
assets that are subject to depreciation and amortization. The increases in such
assets that are attributable to acquisitions and capital expenditures more than
offset the decrease of $1 million that is attributable to the deconsolidation of
Flextech.
Other Income and Expense
Telewest Communications plc ("Telewest"), which is currently constructing
broadband cable television and telephony networks in the United Kingdom ("UK"),
has incurred losses since its inception. It is expected that the current
construction requirements of Telewest will be substantially complete by the end
of the year 2000. The TCI Ventures Group's share of Telewest's net losses
increased $11.1 million or 36% during the three months ended March 31, 1997, as
compared to the corresponding prior year period. Such increase is primarily
attributable to increases in depreciation and amortization, interest expense and
foreign currency transaction losses. In connection with a previous merger
transaction, Telewest issued United States (sometimes referred to herein as the
"U.S.") dollar denominated senior debentures ("Telewest Debentures"). Changes in
the exchange rate used to translate the Telewest Debentures into UK pounds
sterling and the adjustment of a foreign currency option contract to market
value caused Telewest to experience unrealized foreign currency transaction
losses of L24.1 million ($40.5 million using the applicable exchange rate) and
L16.7 million ($25.6 million using the applicable exchange rate) during the
three months ended March 31, 1997 and 1996, respectively. It is anticipated that
Telewest will continue to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest Debentures,
which mature in 2006 and 2007, if not redeemed earlier.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (collectively, "Sprint PCS" or the "Sprint PCS Partnership", and PhillieCo,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are
subsidiaries of Sprint, Cox and the Company. The Company, through TCI Telephony,
has a 30% interest as a partner in each of the Sprint PCS Partnerships and a
35.3% interest as a partner in PhillieCo. The share of losses from the TCI
Ventures Group's investment in the PCS Ventures was $64 million for the three
months ended March 31, 1997 which represents an increase of $44 million as
compared to 1996. The increase in the share of losses is attributed primarily to
general and administrative costs associated with the start-up of operations and
Sprint Spectrum's share of losses in American PCS L.P. The PCS Ventures are in
the development stage of operations. It is expected that Sprint PCS will
continue to incur significant operating losses and significant negative cash
flow from operating activities during the next several years while it develops
and constructs its PCS network and builds its customer base. If and when Sprint
PCS has successfully completed its network buildout, Sprint PCS's operating
profitability will depend upon many factors, including, among others, its
ability to market its products and services successfully, achieve its projected
market penetration, manage customer turnover rates effectively and price its
products and services competitively. There can be no assurance that Sprint PCS
will achieve or sustain operating profitability or positive cash flow from
operating activities in the future. If Sprint PCS does not achieve and maintain
operating profitability and positive cash flow from operating activities on a
timely basis, it may not be able to meet its debt service requirements.
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The share of losses from the TCI Ventures Group's investment in Teleport
was $14 million for the three months ended March 31, 1997 which represents a $6
million increase as compared to 1996. The increase in the share of losses is
largely attributed to costs incurred by Teleport in the expansion of their local
telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets.
Teleport has incurred net losses since its inception due to capital expenditures
associated with the acquisition, installation, development and expansion of its
existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. TCI
expects that Teleport will continue to incur net losses for the foreseeable
future as it acquires, installs, develops and expands its existing and new
telecommunications networks. There can be no assurance that Teleport will
achieve or sustain profitability or generate sufficient positive cash flow to
service its debt.
The TCI Ventures Group's share of the losses of the affiliates other than
Telewest, PCS Ventures and Teleport increased $1 million or 2% during the three
months ended March 31, 1997, as compared to the corresponding prior year period.
Such increase is primarily attributable to increased losses of Liberty/TINTA
LLC, Jupiter Telecommunications Co., Ltd. and MultiThematiques S.A.
("MultiThe-matiques"). As previously described, the TCI Ventures Group,
effective January 1, 1997, ceased to combine Flextech and began to account for
Flextech using the equity method of accounting.
In February 1997, TSX Corporation ("TSX"), an equity affiliate of the TCI
Venture Group, and Antec Corporation ("Antec") entered into a business
combination with Antec being the surviving entity. In connection with this
transaction, the TCI Ventures Group recognized a $28.9 million gain representing
the difference between the fair value of the Antec shares received and the
carrying value of its investment in TSX at the date of the transaction. Upon
completion of this transaction, the TCI Ventures Group holds an approximate 16%
ownership interest in Antec.
International sustained a net loss of $33 million for the three months
ended March 31, 1997, which includes International and its consolidated
subsidiaries' share of the losses of its affiliates of $64 million, for the
three months ended March 31, 1997. Most of International's affiliates have
incurred net losses since their respective inception dates and are expected to
continue to incur net losses for the foreseeable future. International expects
to continue to incur net losses for the foreseeable future due, in part, to the
relatively high level of depreciation and amortization that is common to growth
oriented companies operating within the capital intensive cable industry. Any
improvements in the results of operations of International are largely dependent
upon the ability of International's operating subsidiaries and affiliates to
increase their respective subscriber bases. No assurance can be given that any
such subscriber base increases will occur.
@Home has incurred net losses since its inception. Management of @Home
expects to incur significant additional losses as @Home continues to devote
capital to the building of its national network operations and services. To
achieve profitability, @Home must develop and market products and services which
are accepted on a broad commercial basis. @Home's products have not yet
demonstrated that they will achieve broad commercial acceptance. There can be no
assurance that @Home will ever achieve profitability.
The TCI Ventures Group's net loss of $77.3 million for the three months
ended March 31, 1997 represents an increase of $22.7 million, as compared to the
TCI Ventures Group's net loss of $54.6 million for the three months ended March
31, 1996. Such change is primarily the net result of increases in share of
losses of affiliates offset by the gain recognized in the TSX and Antec merger.
MATERIAL CHANGES IN FINANCIAL CONDITION
Substantially all of the entities the ownership of which, or the investment
in which, has been attributed to the TCI Ventures Group will require significant
additional capital in order to develop their respective businesses and assets,
to fund future operating losses and to fund future growth. In certain cases,
principally with respect to the Sprint PCS Partnerships, the TCI Ventures Group
has contractual commitments pursuant to which (subject to certain conditions) it
may be required to make significant additional capital contributions to the
entities in which it has investments.
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The Sprint PCS Partners, including TCI Telephony, have agreed to contribute
up to an aggregate of approximately $4.2 billion of equity to Sprint PCS from
inception through fiscal 1999 (of which TCI Telephony's share is approximately
$1.3 billion) if and to the extent required by annual budgets of Sprint PCS for
fiscal years in such period approved by the Sprint PCS Partners or requested
during such period by the affirmative vote of Sprint PCS Partners with
percentage interests in Sprint PCS of 75% or more in the aggregate. As of March
31, 1997 approximately $3.0 billion of such $4.2 billion had been contributed to
Sprint PCS, of which amount TCI Telephony had contributed approximately $900
million. TCI Telephony currently expects that the remaining approximately $1.2
billion of such amount (of which TCI Telephony's share would be approximately
$360 million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed by any or all of the Sprint PCS Partners). In
addition, in connection with certain debt financings by Sprint Spectrum, L.P., a
subsidiary of the Sprint PCS Partnerships ("Sprint Spectrum"), the corporate
parents of the Sprint PCS Partners (TCI, Cox, Comcast and Sprint, collectively,
the "Sprint PCS Parents") entered into a capital contribution agreement with
Sprint Spectrum (the "Capital Contribution Agreement"), of which the secured
creditors in such debt financings are beneficiaries, pursuant to which each
Sprint PCS Parent agreed to make certain contributions, or cause contributions
to be made, to Sprint Spectrum from time to time upon the occurrence of certain
events (including a payment default under or acceleration of Sprint Spectrum's
obligation pursuant to the debt financings agreements) up to a maximum aggregate
amount determined in accordance with a formula. The obligations of TCI under the
Capital Contribution Agreement have been attributed to the TCI Ventures Group.
As of March 31, 1997, approximately $500 million in cash of such agreed
contributions under the Capital Contribution Agreement had been contributed
directly or indirectly to Sprint Spectrum (of which TCI contributed
approximately $150 million), thereby reducing the Sprint PCS Parents' respective
obligations under the Capital Contribution Agreement by such amount and reducing
TCI's obligation to approximately $150 million as of December 31, 1996. Based on
the currently expected timing of additional contributions to Sprint PCS
(including the currently expected timing of Sprint PCS's expected capital
contributions to its affiliates and to its subsidiaries other than Sprint
Spectrum and its subsidiaries), TCI does not expect that its obligations under
the Capital Contribution Agreement will result in the obligation to make any
incremental capital contributions to Sprint PCS in addition to TCI Telephony's
pro rata portion of the balance of the $4.2 billion that the Sprint PCS Partners
have agreed to contribute.
The TCI Ventures Group's ability to obtain sufficient capital resources to
make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. WTCI
and NDTC are the only wholly owned subsidiaries attributed to the TCI Ventures
Group that are operating companies and such entities are currently the TCI
Ventures Group's only source of cash provided by operating activities. As a
result, the TCI Ventures Group has limited ability to generate funds internally
to fund capital requirements and limited cash flow from operating activities to
support external financings. The other operating companies attributed to the TCI
Ventures Group have other investors, public or private, and the payment of
dividends, or the making of loans or advances by any one of such TCI Ventures
Group entities to any other of such TCI Ventures Group entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. Initially, therefore, the TCI
Ventures Group will rely on borrowings under a revolving loan facility (the
"Credit Facility") to TCI Ventures Group for a five-year period commencing on
the closing of the Exchange Offers. Such facility would permit aggregate
borrowings at any one time outstanding of up to $500 million (subject to
reduction as provided below), which borrowings would bear interest at a rate per
annum equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to 3/8% per
annum of the average unborrowed availability under the Revolving Credit Facility
would be payable by the TCI Ventures Group to the TCI Group on a quarterly
basis. The maximum amount of borrowings permitted under the Credit Facility will
be reduced on a dollar-for-dollar basis by up to $300 million if and to the
extent that the aggregate amount of any additional capital that TCI Ventures
Group is required to contribute to Sprint PCS Partnerships subsequent to the
closing of the Exchange Offers is less than $300 million. If the available
borrowings under the Credit Facility are not sufficient to fund the TCI Ventures
Group's capital requirements, no assurance can be given that the TCI Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for the
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TCI Ventures Group by, among other things, engaging in public offerings or
private placements of TCI Ventures Group common stock or through issuance of
debt securities or preferred equity securities attributed to the TCI Ventures
Group. The Company anticipates, however that for the foreseeable future the TCI
Ventures Group will continue to be dependent upon funding from the TCI Group.
The TCI Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to the TCI Ventures
Group.
The majority of the TCI Ventures Group entities currently have significant
capital requirements and TCI expects such entities will continue to have
significant capital requirements for the foreseeable future. TCI Ventures
Group's businesses and investments consist of entities which require the
acquisition, ownership, development and operation of broadband cable television
and telephony distribution networks and new programming services, all of which
require substantial capital investment. The buildout of Sprint PCS's network and
the development of @Home's network infrastructure and the development, marketing
and distribution of their respective products and services will require
substantial capital. Although Teleport has been operating its networks for over
ten years, its continuous acquisition, development and expansion of its existing
and new networks and services also require significant capital expenditures.
International expects to have substantial capital requirements for the
foreseeable future because its businesses and investments consist of entities
which require the acquisition, ownership, development and operation of broadband
cable television and telephony distribution networks and new programming
services. Many of International's subsidiaries and affiliates are incurring
substantial costs as they build or rebuild their cable networks or develop and
acquire programming. Until such companies begin generating profits and positive
cash flow from operating activities, they will need additional capital to fund
capital expenditures and working capital requirements. International has
commitments under various partnership and other funding agreements to contribute
capital or loan money to fund capital expenditures and other capital
requirements of certain affiliates. International believes that its actual
future cash requirements in order to fund the capital expenditures and working
capital requirements of its subsidiaries and affiliates will exceed the sum of
the amounts that International and its consolidated subsidiaries are currently
contractually obligated to fund and such additional funding commitments that
International and its consolidated subsidiaries are currently negotiating.
Further, International's business strategy requires that it have the ability to
access or raise sufficient funds to allow it to take advantage of new
acquisition and joint venture opportunities as they arise, which management of
International believes will require the availability of substantial additional
funds. Although International has $134 million proceeds remaining from the sale
of its 4 1/2% Convertible Subordinated Debentures due 2006 which were issued in
February 1996 (the "International Debentures") (which remaining proceeds have
been loaned to TCI pursuant to an unsecured promissory note pending its use by
International) and has a $200 million credit facility ("International Credit
Facility") with the TCI Ventures Group, International's ability to otherwise
obtain debt financing from unaffiliated entities to assist its operating
companies and to meet its capital obligations at other than the subsidiary level
will be limited because International does not conduct any operations directly.
No assurance can be given that International will be able to meet its
commitments to its subsidiaries and affiliates or to fund its operations or
liquidity requirements through the receipt of cash distributions or other
advances from its subsidiaries or affiliates. The only subsidiary of
International from which it presently is able to obtain funds is the subsidiary
which owns International's interest in the Puerto Rico cable systems (the
"Puerto Rico Subsidiary"). International believes that the remaining
consolidated operating activities of International will produce net cash flow
deficits for the foreseeable future. Accordingly, International anticipates that
it will be dependent upon its current levels of cash and cash equivalents
(exclusive of amounts held by its subsidiaries), the remaining proceeds from the
sale of the International Debentures and borrowings under the International
Credit Facility to meet its liquidity requirements, including its commitments to
its subsidiaries and its affiliates, for the foreseeable future. To the extent
that International seeks to make significant additional acquisitions or
significant new investments or is required to meet significant future liquidity
requirements, it will need to obtain additional financing.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
March 31, 1997 there were minimal subscribers to its @Home services. @Home
believes
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that the net proceeds of $88 million from its initial public offering on July
11, 1997, together with existing cash, cash equivalents and capital lease
financing, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 18 months. @Home may, however,
require additional funds if its estimates of working capital and/or capital
expenditure and/or lease financing requirements change or prove inaccurate or in
order for @Home to respond to unforeseen technological or marketing hurdles or
to take advantage of unanticipated opportunities. Over the longer term, it is
likely that @Home will require substantial additional funds to continue to fund
its infrastructure investment, product development, marketing, sales and
customer support needs. There can be no assurance that any such funds will be
available at the time or times needed, or available on terms acceptable to
@Home. If adequate funds are not available, or are not available on acceptable
terms, @Home may not be able to continue its network implementation, to develop
new products and services or otherwise to respond to competitive pressures. Such
inability could have a material adverse effect on @Home's business, operating
results and financial condition.
Because TCI's investment in @Home is attributed to the TCI Ventures Group
while the entity which will distribute the @Home service to subscribers of TCI's
cable systems is attributed to the TCI Group, certain conflicts of interest
between the TCI Group and the TCI Ventures Group may result in that actions
taken by the TCI Group, such as the speed at which TCI's cable television
systems are upgraded to the level necessary to support distribution of the @Home
service, will have a direct impact upon the value of the TCI Ventures Group's
interest in @Home. Similarly, the extent to which TCI elects to use @Home as the
provider of certain services which are not covered by TCI's exclusivity
obligations to @Home, rather than another third party, may have an effect upon
the business of @Home and therefore upon the value of the TCI Ventures Group.
For example, TCI's exclusivity obligations do not extend to work-related
services. TCI.NET, the entity in the TCI Group that has responsibility for the
provision of Internet services, may elect to use @Home as the provider of such
work-related services or a third party. To the extent the TCI Group utilizes
@Home to provide such services, the revenue derived therefrom by @Home would
presumably affect its valuation and therefore the overall value of the TCI
Ventures Group. TCI is under no obligation to use @Home as the provider of such
services. To the extent TCI does determine to use @Home as such provider, the
terms upon which @Home would provide such services will be subject to
negotiation, without regard for the terms upon which @Home provides high-speed
residential Internet services.
During the period in which each of TCI, Cox and Comcast have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
(approximately 23 million), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems which have in the aggregate approximately 2.5
million homes passed. In addition, TCI has announced that it is considering
various plans and proposals that may result in the disposition of other of its
cable systems. In the event that such cable systems continue to be exclusive to
@Home, such cable systems and their homes passed would continue to be included
in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to the other @Home
Cable Stockholders, even through such cable systems are no longer owned or
controlled by TCI. If TCI does not require that such cable systems remain
exclusive to @Home, the TCI Ventures Group could be required to sell shares to
Cox, Comcast and KPCB. There can be no assurance that, if the TCI Ventures Group
is required to sell shares of @Home, the price paid to the TCI Ventures Group
would represent adequate consideration to the TCI Ventures Group because such
fair market value may not adequately reflect the TCI Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox and
Comcast in the event TCI does not attain certain subscriber penetration levels
for the @Home service relative to the subscriber penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of the
TCI Ventures Group's interest in @Home.
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In addition, although TCI, Cox and Comcast are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are subject to a number
of exceptions which allow them to compete with @Home in certain circumstances.
Further, TCI, Cox and Comcast compete to some extent with @Home for advertising
and certain other revenues because @Home retains 100% of all national
advertising revenue delivered on the @Home service, while the local cable
operations of TCI, Cox and Comcast retain 100% of revenue generated from local
service offerings that do not require access to an Internet backbone or that
relate to programming within the local areas of the browser for the @Home
service, such as revenue from local advertising.
The TCI Group has agreements with UVSG for the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems attributed
to the TCI Group and for UVSG's subscriber management services, and UVSG
purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment is attributed to the TCI Ventures Group, situations may
arise where the entity attributed to one Group may make a decision which
adversely affects one of the other Groups. For example, UVTV markets and
distributes superstation WGN (Chicago) to several of the Company's cable systems
attributed to the TCI Group. TCI recently canceled WGN in certain of its wholly
owned systems which systems serve approximately 4.5 million subscribers. Such
cancellation was the primary cause for the number of WGN subscribers decreasing
by 3.5 million or 9% from March 1996 to March 1'997 (which decrease was
partially offset by new system launches and existing system subscriber growth
aggregating approximately 1.1 million subscribers).
There can be no assurance that any of the foregoing entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
it to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements described above will not
significantly increase due to changing circumstances, such as unanticipated
opportunities, technological or marketing hurdles, unanticipated expenses, and
the like. The failure to generate sufficient cash flow from operating activities
or to raise sufficient funds may require such entity to delay or abandon some or
all of its development and expansion plans or in certain instances, could result
in the failure to meet certain regulatory requirements, any and all of which
could have a material adverse effect on such entity's growth, its ability to
compete in its industry and its ability to service its debt.
Many of International's interests in its subsidiaries and affiliates are
governed by partnership and other agreements that require it to contribute
capital or make loans to such subsidiaries or affiliates. The failure of
International to meet its capital commitments to a particular operating company
may have adverse consequences to it and therefore to the TCI Ventures Group.
Such consequences may include, among others, (i) a breach of contract action for
damages against International, (ii) the dilution of International's interest in
such operating Company, (iii) the loss of any management rights in such entity
(such as a right to elect one or more directors), (iv) the right of the other
investors in such operating company to force International to sell its interest
at less than fair value or (v) the forced dissolution of such operating Company.
Similarly, with respect to Sprint PCS, if TCI Ventures Group fails to make
any portion of its required additional capital contributions to Sprint PCS
(other than an additional capital contribution that TCI Ventures Group is
entitled to decline to make), and does not cure such failure within the time
periods specified in the Amended and Restated Agreement of Limited Partnership
of Sprint Spectrum Holding Company, L.P., dated as of January 31, 1996 (the
"Sprint PCS Partnership Agreement"), such failure would constitute an Adverse
Act and TCI Telephony would become an Adverse Partner (each such term, as
defined in the Sprint PCS Partnership Agreement). If TCI Ventures Group were to
become an Adverse Partner, it would lose its right to appoint a representative
to the governing body of Sprint PCS (the "Sprint PCS Partnership Board"), and
the Sprint PCS Partnership Board, by action of the representatives of the other
Sprint PCS Partners that are not Adverse Partners, would be entitled to elect
(i) to commence procedures to allow such other Sprint PCS Partners to purchase
TCI Ventures Group's interest in Sprint PCS at a discount (which purchase price
in the case of a failure to make a required capital contribution would be the
lower of 90% of the net equity of TCI Ventures Group's interest in Sprint PCS
and 80% of TCI Ventures Group's prior capital contributions (less any
distributions paid to TCI Ventures Group)) and/or (ii) to cause Sprint PCS to
seek to obtain specific performance of TCI Ventures Group's obligations or to
sue for money damages. TCI
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Ventures Group could also become an Adverse Partner through, among other things,
the disposition of its interest in Sprint PCS other than in accordance with the
Sprint PCS Partnership Agreement or a material breach of a material covenant in
the Sprint PCS Partnership Agreement.
The failure by TCI Ventures Group to make its pro rata portion of any
additional capital contributions validly requested to be made to Sprint PCS
(whether or not required under the applicable provisions of the Sprint PCS
Partnership Agreement) would result in a decrease in TCI Ventures Group's
current 30% percentage interest in Sprint PCS. Such dilution would be calculated
on the basis of the relative amount of capital contributions made by the Sprint
PCS Partners until an aggregate of $5.0 billion had been contributed;
thereafter, the dilution formula would take into account the fair market value
of each Sprint PCS Partner's interest in Sprint PCS, subject to certain
exceptions. In the event TCI Ventures Group's percentage interest were to
decrease below the 8% minimum ownership requirement set forth in the Sprint PCS
Partnership Agreement, TCI Ventures Group's interest in Sprint PCS would convert
into that of an "Exclusive Limited Partner" and TCI Ventures Group would lose
the right to designate a representative to the Sprint PCS Partnership Board.
Neither PCS systems nor the delivery of Internet services over the cable
infrastructure have any significant commercial operating history in the United
States, and there can be no assurance that operation of either of these
businesses will become profitable. Neither Sprint PCS nor @Home can estimate
with any degree of certainty the potential demand for their services. The
inability of either Sprint PCS or @Home to obtain the necessary equipment for
its systems could have a material adverse effect on its financial condition and
results of operations. Both Sprint PCS and @Home are relying on new products and
technologies to operate their services which have not yet been widely tested on
a commercial basis. Failure of such products and technologies to operate in the
manner expected by such entity, or any delay or inability to obtain a sufficient
quantity of such products at acceptable price and performance levels could delay
or impair the expansion of such entity's business.
NDTC operates a development stage business in an emerging industry and
accordingly faces challenges similar to those described above. NDTC began
offering its "Headend in the Sky" or "HITS" services directly to cable systems
commercially during the fourth quarter of 1996. The HITS services consist of the
transport of compressed and encrypted digital television programming signals to
addressable set-top boxes and the authorization of such boxes. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC (which is presently utilizing HITS in a few of TCIC's major markets), but
there can be no assurance that such contracts will be finalized or will be
finalized on terms which will enable NDTC to be profitable. Cable systems are in
an early stage of rolling out digital services to their customers, and customer
acceptance of such services and accordingly, the demand for NDTC's HITS
services, is uncertain. In addition, the HITS service utilizes statistical
multiplexing of digitally compressed video signals, a new technology which has
not been tested or distributed on a large scale and accordingly, the
effectiveness of such technology is uncertain.
Both the wireless telecommunications industry and the Internet services
industry are experiencing significant technological change, evolving industry
standards, ongoing improvements in the capacity and quality of such services,
frequent new product and service introductions and enhancements and changes in
end-user requirements and preferences. Accordingly, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. With respect to PCS, there is uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly access rates
may continue to decline. With respect to Internet services, critical issues
concerning the commercial use of the Internet remain unresolved and may impact
the growth of Internet use, especially in the business market targeted by @Home.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed options, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, and inadequate protection of the confidentiality of stored data
and information moving across the Internet. There can be no assurance that
@Home's service will be able to meet any or all of these concerns. Market
acceptance of @Home's services is substantially dependent upon the adoption of
the Internet for commerce and communications. If either of
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@Home's or Sprint PCS's market fails to develop, develops more slowly than
expected, or becomes highly competitive, such entity's business, operating
results and financial condition may be materially adversely affected. For the
foregoing reasons, the future prospects of the PCS and Internet services
industries and of Sprint PCS and @Home remain uncertain.
For the year ended December 31, 1996, WTCI's six largest customers
accounted in the aggregate for approximately 70% of WTCI's consolidated gross
revenue. WTCI provides such services pursuant to master service contracts which
provide for transmission services pursuant to individual service orders. The
master service contracts expire when the last service order in effect thereunder
has terminated. WTCI's six largest customers' master service contracts all
contain many service orders (in some cases, in excess of 100 service orders)
with remaining terms varying from 1 month to approximately 15 months. A
significant reduction in the level of services WTCI provides for any of these
customers could have material adverse effect on WTCI's results of operations or
financial condition, unless WTCI located replacement customers willing to lease
the vacated channels on similar terms. In particular, WTCI's largest carrier
customer has the right to terminate its contract for use of the entire capacity
of a core backbone of WTCI's network between the Seattle and Denver areas in
October 1997, subject to certain conditions. Although this areas has been
overbuilt with fiber, management of WTCI does not believe such termination would
have a material adverse effect on WTCI because it believes that it is likely
that it would be able to re-lease all of such capacity based on current demand
in the area for its long distance transport services.
A significant number of NDTC's major customers are affiliates of TCI, such
as Encore Media Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
Communications, Inc., each of which is owned in part by Liberty Media
Corporation, a wholly owned subsidiary of the Company, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the year
ended December 31, 1996, revenue from services provided to TCI and its
consolidated subsidiaries accounted for 34% of NDTC's total revenue for 1996.
Although NDTC has been seeking, and intends to continue to seek, to expand its
customer base to increase the number of unaffiliated customers over time, there
can be no assurance that it will be successful.
Many of the assets attributed to the TCI Ventures Group consist of
noncontrolling interests in other entities, such as the investments in Sprint
PCS and Teleport. In addition, International has invested in most of its
subsidiaries and affiliates with strategic and local partners, and financial and
operational considerations, as well as laws that limit foreign equity positions,
will likely require International to continue to invest with partners. Many
foreign countries limit foreign investment to a minority equity position or
require the board of directors to be largely independent, which, as discussed
below, can result in International having diminished ability to implement
strategies that International may favor, or cause dividends or distributions to
be paid. For the most part, the Company has attempted to structure its
investments in a manner that allows it to participate in management decisions
(including through representation on the board of directors or other governing
body and veto rights (alone or with one or more of the other investors) over
significant business decisions); however, as is the case with the Company's
interests in Sprint PCS, Teleport and many of the operating companies in which
International has interests, TCI will often be unable to direct the operations,
strategies, and financial decisions of the companies in which it has acquired,
or will acquire, an interest without the concurrence of one or more of its
partners or other co-investors. Moreover, the ability of the Company (directly
or indirectly) to pledge, sell or otherwise dispose of its interest in many of
the operating companies in which it has investments is subject to shareholder or
similar agreements that severely limit the ability of the parties to transfer
their equity interests. Accordingly, the Company may not be able to cause its
subsidiaries or affiliates that are attributed to the TCI Ventures Group to make
distributions when the TCI Ventures Group may have a need for such distributions
and may not be able to timely dispose of its investment in many of such
companies if required for financial or other reasons.
In addition, in the case of Sprint PCS, the structure of the governance of
such TCI Ventures Group Entity allows for situations in which the failure of the
Sprint PCS Partners to agree on certain issues may give rise to a "deadlock
event," which, if unresolved after a certain period of time, may require the
dissolution or liquidation of Sprint PCS. Specifically, the Sprint PCS
Partnership Agreement provides that Sprint PCS will be dissolved upon the
failure of the Sprint PCS Partners to resolve a "Deadlock Event" which is deemed
to
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occur (i) if the Sprint PCS Partnership Board fails to approve a proposed annual
budget or business plan for two consecutive fiscal years or (ii) if the position
of chief executive officer remains vacant for 60 days after a candidate has been
proposed by at least two Sprint PCS Partners having an aggregate of at least 33%
of the voting percentage interests. Upon the occurrence of a Deadlock Event, the
Sprint PCS Partners that are general partners first are required for a period of
20 days to use their good faith efforts to try to resolve the Deadlock Event. If
the general partners are unable to resolve the matter, such matter will be
referred to the chief executive officers of the Sprint PCS Parents. In the event
the chief executive officers fail to reach a resolution, the matter will be
referred to a mediation service. If the mediator and the Sprint PCS Partners
fail to resolve the Deadlock Event, Sprint PCS will be liquidated unless the
Sprint PCS Partnership Board, by a majority vote of 75% determines not to
dissolve or the buy-sell arrangements contained in the Sprint PCS Partnership
Agreement are employed.
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group Entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group Entities. In addition, International and
certain of the other TCI Ventures Group Entities, such as Teleport and Sprint
PCS, are holding companies, the assets of which consist solely or primarily of
investments in their subsidiaries and affiliates. As such, the ability of such
holding companies to meet their respective financial obligations and their
funding and other commitments to their respective subsidiaries and affiliates,
is dependent upon the earnings of such subsidiaries and affiliates and the
distribution or other payment of such earnings to such holding companies in the
form of dividends, loans or other advances, payment or reimbursement for
management fees and expenses from their respective subsidiaries and affiliates,
or repayment of loans and advances from such holding companies. Accordingly,
such holding companies' ability to meet their respective liquidity requirements,
including debt service, is severely limited as a result of their dependence upon
the distribution of earnings and advances of funds by their respective
subsidiaries and affiliates. The payment of dividends or the making of loans or
advances to such holding companies by their respective subsidiaries and
affiliates may be subject to statutory, regulatory or contractual restrictions,
are contingent upon the earnings of those subsidiaries and affiliates, and are
subject to various business considerations. In the case of International,
distributions or other payments from foreign subsidiaries and affiliates may
also be subject to restrictions on expatriation of funds or adverse currency
exchange rates and, in the case of subsidiaries or affiliates that are located
in countries where the United States does not have a tax treaty, to increased
withholding taxes. Moreover, International does not have voting control over
many of the entities in which it has ownership interests and such entities will
have no obligation, contingent or otherwise, to make any funds available to
International, whether by dividends, advances, loans or other payments. Certain
of the subsidiaries or affiliates of such holding companies are, or may in the
future be, subject to loan agreements that prohibit or limit the transfer of
funds to such holding companies in the form of dividends, loans, or advances
and/or require that any indebtedness of such subsidiaries or affiliates to such
holding companies be subordinate to the indebtedness under such loan agreements.
Further, any right of any of such holding companies as an equity holder to
participate in the distribution of the assets of any of its subsidiaries upon
liquidation or reorganization will be subject to the prior claims of the
creditors (including trade creditors) or such subsidiary. To date,
International, for example, has not received any significant distributions or
advances from any of its subsidiaries or affiliates. Accordingly, it has had to
rely, and expects to rely for the foreseeable future, on outside sources for
financing.
Many of the TCI Ventures Group entities operate in industries, primarily
the telecommunications industry, which have experienced and are expected to
continue to experience rapid and significant changes in technology. The degree
to which these changes will affect such entities and the ability of such
entities to compete in their respective businesses cannot be predicted. Also,
alternative technologies may develop for the provision of services similar to
those provided by such entities. Such entities may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time such entity is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
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Currently International is the only TCI Ventures Group Entity that has
significant businesses outside the United States. International's subsidiaries
and affiliates operate solely outside the United States (with the exception of
Puerto Rico). @Home currently has distribution agreements with two of Canada's
leading cable operators, although such operators have not yet begun commercial
distribution of @Home's services. @Home's business strategy includes expansion
into Canada and other international markets; however, there can be no assurance
that @Home will be successful in expanding its product and service offerings
into foreign markets because of its extremely limited experience in developing
localized versions of its products and services and in developing relationships
with international cable system operators. If @Home does commence significant
international operations, or in the event any of the other TCI Ventures Group
Entities determined to expand into international markets, such entities (along
with International) will be subject to the risks inherent in doing business on
an international level, such as regulatory requirements and loss of revenue,
property and equipment from expropriation, nationalization and confiscatory
taxation. International is and such other TCI Ventures Group Entities would also
be exposed to the risk of changes to laws and policies that govern foreign
investment in countries where they have operations as well as, to a lesser
extent, changes in United States laws and regulations relating to investing in
or trading with countries in which International and such other TCI Ventures
Group Entities may have investment.
Certain of the countries in which International has operating companies or
in which International. @Home or another TCI Ventures Group Entity may operate
in the future, may be subject to a substantially greater degree of social,
political and economic instability than is the case in other countries. Such
instability may result from, among other things, (i) authoritarian governments
or military involvement in political and economic decision making, and changes
in government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of any
subsidiary or affiliate of International or any other TCI Ventures Group Entity
located within such country or that has significant operations there (and
thereby have a potentially material adverse effect on the results of operations
or financial condition of International or such Entity) and could result in the
loss of International's or such other TCI Ventures Group Entity's investment in
such subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
The TCI Ventures Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar (the functional currency of TCI Ventures Group)
against the UK pound sterling, the Japanese yen ("Y"), the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of the TCI Ventures Group's operating subsidiaries and affiliates. Since the
enactment of a convertibility plan in April 1991, the Argentine government has
maintained an exchange rate of one Argentine peso to one U.S. dollar. No
assurance can be given that such an exchange rate will be maintained in future
periods.
Because the TCI Ventures Group's functional currency is the U.S. dollar,
any increase or decrease in the value of the U.S. dollar against any foreign
currency in which the TCI Ventures Group has funding commitments effectively
reduces or increases the U.S. dollar equivalent of such funding commitments. At
the same time, any increase or decrease in the value of the U.S. dollar against
any foreign currency that is the functional currency of an operating subsidiary
or affiliate of TCI Ventures Group will cause the TCI Ventures Group to
experience unrealized foreign currency translation losses or gains with respect
to amounts already invested in such foreign currencies.
The TCI Ventures Group and certain of its operating subsidiaries and
affiliates are also exposed to foreign currency risk to the extent that they
enter into transactions denominated in currencies other than their respective
functional currencies. In this regard, the TCI Ventures Group has experienced
realized and unrealized currency gains and losses with respect to (i) the UK
pound sterling denominated loans made by an indirect subsidiary of TCI Ventures
Group to Flextech and (ii) the TCI Ventures Group's French franc denominated
obligation (the "MultiThematiques Obligation") to make capital contributions to
MultiThematiques. In addition, Telewest has experienced realized and unrealized
foreign currency transaction gains and losses with respect to the Telewest
Debentures.
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Because TCI Ventures Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, the TCI Ventures Group
generally does not attempt to hedge existing investments in its foreign
affiliates and subsidiaries. With respect to funding commitments that are
denominated in currencies other than the U.S. dollar, the TCI Ventures Group
historically has sought to reduce its exposure to short-term (generally no more
than 90 days) movements in the applicable exchange rates once the timing and
amount of such funding commitments become fixed. Although the TCI Ventures Group
monitors foreign currency exchange rates with the objective of mitigating its
exposure to unfavorable fluctuations in such rates, the TCI Ventures Group
believes that, given the nature of its business, it is not possible or practical
to eliminate the TCI Ventures Group's exposure to unfavorable fluctuations in
foreign currency exchange rates.
On November 20, 1995, TCI Ventures Group announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that TCI Ventures Group
could be required to make cash contributions totaling $46 million over the next
three years in connection with the DTH Ventures.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of a joint
venture ("Sports Venture") formed among TCI Ventures Group, Liberty Media Group
and News Corporation Limited ("News Corp.") (the "Sports Venture Rights") to the
Sports Venture, TCI Ventures Group, News Corp. and Liberty Media Group have paid
their respective portion of any payments made with respect to the Sports Venture
Rights. Through March 31, 1997, payments made under the International/Torneos
Sports Agreement totaled $20.1 million.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the TCI Ventures Group's
affiliates. At March 31, 1997, the U.S. dollar equivalent of the amounts
borrowed pursuant to the Guaranteed Obligations was $16.6 million. The TCI
Ventures Group also has guaranteed the obligation of an affiliate ("The Premium
Movie Partnership") to pay fees for the license to exhibit certain films through
the year 2000. If the TCI Ventures Group were to fail to fulfill its obligations
under the guarantees, the beneficiaries have the right to demand an aggregate
payment of approximately $55 million. Although the TCI Ventures Group has not
had to perform under such guarantee to date, the TCI Ventures Group cannot be
certain that it will not be required to perform under such guarantee in the
future.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group (ii) the Hallmark Cards Incorporated ("Hallmark")
and U S WEST, Inc. ("U S WEST") subsidiaries' interests in Flextech acquired in
June of 1995 (the "Hallmark Subscription" and the "U S WEST Subscription"),
respectively, and (iii) Flextech securities acquired by International Family
Entertainment, Inc. ("IFE") pursuant to certain acquisitions in 1996 (the "IFE
Acquisitions") exceeds 75% of Flextech's issued and outstanding share capital,
or (y) subject to certain exceptions, the Flextech Ordinary Shares cease to be
admitted to trading on the Official List of the London Stock Exchange as a
result of the exercise by the TCI Ventures Group of any of its rights as a
Flextech shareholder, the TCI Ventures Group shall be obligated to offer to
purchase from the Hallmark and U S WEST subsidiaries, and from IFE any Flextech
Ordinary Shares held by them and which were originally acquired pursuant to the
Hallmark Subscription, the U S WEST Subscription, or the IFE Acquisitions, as
applicable. Under such circumstances, the offer price for such shares shall be
the higher of (i) the then current market price for the Flextech Ordinary Shares
and (ii) the highest price paid to any third party by the TCI Ventures Group for
any Flextech Ordinary Shares during the preceding 12 month period. In the event
the TCI Ventures Group is required to purchase any Flextech Ordinary Shares, as
described above, it may elect, subject to certain limited exceptions, to pay the
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purchase price thereof in cash or in shares of International Series A common
stock, or in certain securities of TCI.
On December 13, 1995, TCI Ventures Group invested in MultiThematiques with
two French media companies, CANAL+ S.A. ("Canal+") and Generale d'Images S.A.
("GDI"). Canal+ and GDI have contributed to MultiThematiques their combined
equity interests in four French thematic channels and Canal+ has also
contributed its equity interest in a Spanish classic movie channel. The TCI
Ventures Group contributed 123.1 million French Francs ("FF") ($24.7 million at
the applicable exchange rate), FF105.0 million ($20.4 million at the applicable
exchange rate) and FF100.00 million ($19.5 million at the applicable exchange
rate) to MultiThematiques in December 1995, December 1996 and February 1997,
respectively. The TCI Ventures Group is obligated to contribute an additional
FF164.0 million ($29.1 million) no later than December 13, 1997. In order to
manage the TCI Ventures Group's foreign exchange currency risk with respect to
its December 13, 1997 contribution obligation, the TCI Ventures Group entered
into a foreign currency option contract that allows the TCI Ventures Group to
purchase FF164.0 million at a price of FF5.5367 per U.S. dollar through December
13, 1997. Each of TCI Ventures Group, Canal+ and GDI own a one-third interest in
MultiThematiques.
On January 27, 1997, International announced that it was instituting a
stock repurchase program. Under the stock repurchase program, International may
repurchase from time to time up to 5% (approximately 5.3 million shares) of its
outstanding International Series A Common Stock. Through March 31, 1997,
International had repurchased 492,000 shares under such program for an aggregate
purchase price of $6.8 million. Subsequent to March 31, 1997, International
repurchased an additional 2.9 million shares of International Series A common
stock for an aggregate purchase price of $35.2 million under such program.
The board of directors of UVSG has authorized UVSG to repurchase from time
to time up to an aggregate of 1,000,000 shares of UVSG's Class A common stock
using existing cash resources. Through March 31, 1997, UVSG had repurchased
124,000 shares of stock for a total of $2.1 million.
The TCI Ventures Group has significant contingent obligations with respect
to Flextech's funding obligations to one of the BBC Joint Ventures (the
"Principal Joint Venture") provided by the TCI Ventures Group to the Principal
Joint Venture in April 1997. For additional information concerning the effects
of the formation of the BBC Joint Ventures and related transactions on the
liquidity and capital resources of the TCI Ventures Group and Flextech, see note
3 to the accompanying combined financial statements.
On May 1, 1997, the Puerto Rico Subsidiary paid cash consideration of
approximately $12.2 million, and assumed aggregate indebtedness of $32 million,
to acquire the 50% ownership interest in Caguas/Humacao Cable Systems which the
TCI Ventures Group did not already own (the "Caguas Acquisition"). In connection
with the Caguas Acquisition, the Puerto Rico Subsidiary entered into a credit
facility and used borrowings of approximately $45 million thereunder to fund the
cash portion of the purchase price and to repay the assumed indebtedness.
Cablevision's debt includes $100.5 million of bank borrowings due on or
before December 31, 1997. Although no assurance can be given, it is anticipated
that Cablevision will extend the maturity dates of, or otherwise refinance, such
bank borrowings.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in the combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity incurring
the debt or issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt incurred
or preferred stock issued by entities included in a Group should be specifically
attributed to and reflected in the combined financial statements of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted
V-114
<PAGE> 353
to the TCI Group and certain cash disbursements of the other Groups will be
funded by the TCI Group on a daily basis. Such transfers of funds between the
Groups will be reflected as borrowings or, if determined by the Board, in the
case of a transfer from the TCI Group to either the Liberty Media Group or the
TCI Ventures Group, reflected as the creation of an, or an increase in any then
existing Inter-Group Interest of the TCI Group in such Group or, in the case of
a transfer from either the Liberty Media Group or the TCI Ventures Group to the
TCI Group, reflected as a reduction in any then existing Inter-Group Interest of
the TCI Group in such Group. There are no specific criteria for determining when
a transfer will be reflected as a borrowing or as an increase or reduction in an
Inter-Group Interest. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the financing needs and objectives
of the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
Except as described with respect to the Credit Facility, loans from one
Group to another Group would bear interest at such rates and have such repayment
schedules and other terms as are established from time to time by, or pursuant
to procedures established by, the Board. The Board expects to make such
determinations, either in specific instances or by setting generally applicable
polices from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the use of
proceeds by and creditworthiness of the recipient Group, the capital expenditure
plans and investment opportunities available to each Group and the availability,
cost and time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
Stock as of the date of such transfer, such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures Group being charged (in addition
to the charge for the dividend or other distribution paid), with an amount equal
to the product of the aggregate amount of such dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is
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<PAGE> 354
charged to the TCI Group will be to such extend reflected in the combined
financial statements of the TCI Group and will result in an increase in the TCI
Group's Inter-Group Interest in the TCI Ventures Group.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or operational
strategies through one Group or one or more of the other Groups, after
consideration of such factors as it deems relevant. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
V-116
<PAGE> 355
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Cash and cash equivalents................................... $ 51,091 105,527
Trade and other receivables, net............................ 93,988 115,491
Film inventory and other prepaid expenses................... 26,185 85,998
Investment in Telewest Communications plc ("Telewest"),
accounted for under the equity method (note 6)............ 426,810 488,495
Investments in Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (and their respective predecessor) and
PhillieCo (collectively, the "PCS Ventures"), accounted
for under the equity method (note 7)...................... 728,246 829,651
Investment in Teleport Communications Group, Inc.
("Teleport"), accounted for under the equity method, and
related receivables (note 8).............................. 262,850 276,112
Investment in other affiliates, accounted for under the
equity method, and related receivables (note 9)........... 403,220 474,599
Property and equipment, at cost:
Land...................................................... 7,847 7,837
Distribution systems...................................... 796,013 761,191
Support equipment and buildings........................... 200,011 208,294
---------- ---------
1,003,871 977,322
Less accumulated depreciation............................. 258,478 240,322
---------- ---------
745,393 737,000
---------- ---------
Franchise costs and other intangible assets................. 960,902 1,029,842
Less accumulated amortization............................. 108,816 103,631
---------- ---------
852,086 926,211
---------- ---------
Other assets, net of amortization........................... 273,693 220,619
---------- ---------
$3,863,562 4,259,703
========== =========
LIABILITIES AND COMBINED EQUITY
Accounts payable............................................ $ 35,437 71,776
Accrued liabilities......................................... 129,388 148,962
Customer prepayments........................................ 115,590 100,670
MultiThematiques Obligation (note 9)........................ 27,044 47,902
Capital lease obligations................................... 193,832 199,961
Debt (note 10).............................................. 512,757 526,254
Deferred income taxes....................................... 189,107 220,306
Other liabilities........................................... 8,263 21,477
---------- ---------
Total liabilities................................. 1,211,418 1,337,308
---------- ---------
Minority interests in equity of subsidiaries................ 218,147 370,879
Combined equity:
Combined equity........................................... 2,556,643 2,686,794
Cumulative foreign currency translation adjustments....... 4,817 26,146
Unrealized holding gains for available-for-sale
securities............................................. 7,028 15,077
---------- ---------
2,568,488 2,728,017
Due from Tele-Communications, Inc. ("TCI" or the
"Company") ("TCI Note Receivable") (note 11)........... (134,491) (176,501)
---------- ---------
Total combined equity............................. 2,433,997 2,551,516
---------- ---------
Commitments and contingencies (notes 3, 5, 7, 9 and 12)
$3,863,562 4,259,703
========== =========
</TABLE>
See accompanying notes to combined financial statements.
V-117
<PAGE> 356
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
----------- ---------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C>
Revenue (note 11)........................................... $ 247,020 160,262
Operating costs and expenses:
Operating (note 11)....................................... 133,084 80,464
General and administrative (note 11)...................... 64,645 51,316
Stock compensation (note 12).............................. 8,262 (1,357)
Depreciation.............................................. 26,354 19,166
Amortization.............................................. 14,790 10,364
--------- -------
247,135 159,953
--------- -------
Operating income (loss)................................ (115) 309
Other income (expense):
Share of losses of Telewest (note 6)...................... (41,708) (30,597)
Share of losses of PCS Ventures (note 7).................. (63,536) (19,208)
Share of losses of Teleport (note 8)...................... (13,768) (7,962)
Share of losses of other affiliates (note 9).............. (23,108) (22,580)
Interest expense.......................................... (14,196) (12,354)
Interest income (note 11)................................. 3,034 6,387
Minority interests' share of losses....................... 616 3,601
Foreign currency transaction gains........................ 1,477 1,284
Gain on dispositions...................................... 28,893 414
Other, net................................................ 789 4,363
--------- -------
(121,507) (76,652)
--------- -------
Loss before income taxes............................... (121,622) (76,343)
Income tax benefit.......................................... 44,370 21,771
--------- -------
Net loss............................................... $ (77,252) (54,572)
========= =======
Pro forma net loss per common share (note 1)................ $ (.38)
=========
</TABLE>
See accompanying notes to combined financial statements.
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<PAGE> 357
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
STATEMENT OF COMBINED EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE HOLDINGS
FOREIGN GAINS FOR
CURRENCY AVAILABLE-
TRANSLATION FOR-SALE TCI TOTAL
COMBINED ADJUSTMENT, SECURITIES, NOTE COMBINED
EQUITY NET OF TAXES NET OF TAXES RECEIVABLE EQUITY
---------- ------------ ------------ ---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997....... $2,686,794 26,146 15,077 (176,501) 2,551,516
Net loss....................... (77,252) -- -- -- (77,252)
Repurchases of International
common stock................ (6,798) -- -- -- (6,798)
Foreign currency translation
adjustment.................. -- (21,329) -- -- (21,329)
Unrealized holding gains for
available-for-sale
securities.................. -- -- (8,049) -- (8,049)
Repayment on TCI Note
Receivable.................. -- -- -- 42,010 42,010
Interest income on TCI Note
Receivable.................. (2,400) -- -- -- (2,400)
Stock compensation............. 8,262 -- -- -- 8,262
Revenue from TCI Group and
Liberty Media Group......... (13,541) -- -- -- (13,541)
Operating costs to TCI Group... 13,150 -- -- -- 13,150
Corporate general and
administrative cost
allocations................. 2,212 -- -- -- 2,212
Intergroup tax allocation...... (46,074) -- -- -- (46,074)
Other intercompany transfers... (7,710) -- -- -- (7,710)
---------- ------- ------ -------- ---------
Balance at March 31, 1997........ $2,556,643 4,817 7,028 (134,491) 2,433,997
========== ======= ====== ======== =========
</TABLE>
See accompanying notes to combined financial statements.
V-119
<PAGE> 358
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(77,252) (54,572)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 41,144 29,530
Stock compensation...................................... 8,262 (1,357)
Payments of stock compensation.......................... (57) --
Share of losses of PCS Ventures......................... 63,536 19,208
Share of losses of Teleport............................. 13,768 7,962
Share of losses of Telewest............................. 41,708 30,597
Share of losses of other affiliates..................... 23,108 22,580
Minority interests' share of losses..................... (616) (3,601)
Gain on dispositions.................................... (28,893) (414)
Foreign currency transaction gains...................... (2,653) (1,304)
Accretion of discount on MultiThematiques Obligation.... 966 1,595
Other noncash charges................................... 768 320
Deferred income tax expense (benefit)................... 1,417 (5,809)
Intergroup tax allocation............................... (46,074) (16,329)
Changes in operating assets and liabilities, net of the
effect of the deconsolidation of Flextech p.1.c.:
Change in receivables................................. (6,260) 4,666
Change in film inventory and other prepaid expenses... (2,328) (6,839)
Change in payables, accruals and other liabilities.... (3,542) (12,763)
-------- --------
Net cash provided by operating activities.......... 27,002 13,470
-------- --------
Cash flows from investing activities:
Effect of the deconsolidation of Flextech p.l.c. cash and
cash equivalents........................................ (38,142) --
Cash received in acquisitions............................. -- 10,073
Investments in and loans to affiliates and others......... (44,359) (72,614)
Capital expended for property and equipment............... (42,249) (29,920)
Repayments received on loans to affiliates................ 63,495 --
Cash paid to purchase minority interests.................. -- (4,296)
Other, net................................................ 13,162 10,815
-------- --------
Net cash used in investing activities.............. (48,093) (85,942)
-------- --------
Cash flows from financing activities:
Borrowings of debt........................................ 36,857 17,395
Repayments of debt........................................ (72,243) (38,218)
Repayments of capital lease obligations................... (2,956) (3,359)
Repurchases of International common stock................. (6,798) --
Issuance of debentures.................................... -- 345,000
Payment of deferred financing costs....................... -- (9,495)
Contributions from minority interest owners............... -- 2,235
Distribution to minority interest owners.................. (7,000) --
Repayment on TCI Note Receivable.......................... 42,010 --
Change in cash transfers to other Groups.................. (23,215) (268,098)
-------- --------
Net cash provided (used) by financing activities... (33,345) 45,460
-------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... -- (1,329)
-------- --------
Net decrease in cash and cash equivalents.......... (54,436) (28,341)
Cash and cash equivalents:
Beginning of period.............................. 105,527 141,754
-------- --------
End of period.................................... $ 51,091 113,413
======== ========
</TABLE>
See accompanying notes to combined financial statements.
V-120
<PAGE> 359
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
On May 14, 1997, the Board of Directors of TCI (the "Board") authorized,
subject to shareholder approval (the "TCI Ventures Group Stock Proposal"), the
issuance of two new series of stock ("TCI Ventures Group Common Stock") which
are intended to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
V-121
<PAGE> 360
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets and liabilities so attributed to the TCI
Ventures Group in the future would not include assets and liabilities of the
company's domestic programming businesses and investments or its domestic cable
operations (including its businesses which utilize its cable plant to distribute
telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock will not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing
V-122
<PAGE> 361
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of the Exchange Offers. Accrued dividends on the preferred equity interest would
accumulate and compound annually (but not be payable currently) until the fifth
anniversary of the closing the Exchange Offers.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group Common Stock would be issued upon such exchange. Similarly, options to
purchase shares of Series A TCI Group Stock that are outstanding under the
Company's various stock incentive plans will be adjusted upon consummation of
the Exchange Offers by dividing such options into options to purchase shares of
Series A TCI Ventures Group Common Stock and options to purchase shares of
Series A TCI Group Stock, with 30% of the shares originally subject to the
options being allocated to the options to purchase TCI Ventures Group Common
Stock and 70% of such shares being allocated to the options to purchase shares
of TCI Group Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of TCI contemplated by the TCI Ventures Group Stock
Proposal will not affect legal title to such assets or responsibility for such
liabilities of the Company or any of its subsidiaries. Holders of TCI Group
Stock, Liberty Media Group Stock and TCI Ventures Group Stock will be common
stockholders of the Company and will be subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group Stock, and dividends on, or certain
repurchases of, preferred stock, will reduce funds of the Company legally
available for the payment of dividends on the TCI Group Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
are based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of such
periods. The results of operations for any interim period are not necessarily
indicative of results for the full year. These unaudited interim consolidated
financial statements should be read in conjunction with the TCI Ventures Group's
December 31, 1996 audited financial statements and notes thereto.
V-123
<PAGE> 362
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement No.
128"). Statement No. 128 requires the presentation of basic earnings per share
("EPS") and, for companies with potentially dilutive securities, such as
convertible debt, options and warrants, diluted EPS. Statement No. 128 is
effective for annual and interim periods ending after December 31, 1997. TCI
Ventures Group does not expect that Statement No. 128 will have a material
impact on the calculation of the TCI Ventures Group's loss per share.
Pro forma loss attributable to common shareholders for the three months
ended March 31, 1997 assumes, solely for the purpose of this calculation, that
the Exchange Offers were consummated prior to January 1, 1997 and that, the
Exchange Offer was fully subscribed.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(2) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $15.4 million and $9.0 million during the three
months ended March 31, 1997 and 1996, respectively. Cash paid for income taxes
was $1.7 million during the three months ended March 31, 1997. Cash paid for
income taxes was not material during the three months ended March 31, 1996.
The net cash received by the TCI Ventures Group in acquisitions is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Fair value of assets acquired............................... $ -- 309,179
Liabilities assumed, net of current assets.................. -- (77,605)
Minority interest in equity of acquired entity.............. -- (45,643)
Increase in combined equity resulting from preferred stock
issued in acquisition..................................... -- (196,004)
-------- --------
Cash received in acquisitions............................. $ -- (10,073)
======== ========
Property and equipment purchased under capital leases....... $ -- 63,656
======== ========
</TABLE>
The non-cash effects of changing the method of accounting for the TCI
Venture Group's ownership interest in Flextech p.l.c. ("Flextech") (see note 3)
from the consolidation method to the equity method are summarized below (amounts
in thousands):
<TABLE>
<S> <C>
Assets reclassified to equity investments................... $ 177,003
Liabilities reclassified to equity investments.............. (72,512)
Minority interests in equity of subsidiaries reclassified to
equity investments........................................ (142,633)
---------
Decrease in cash and cash equivalents....................... $ (38,142)
=========
</TABLE>
(3) FLEXTECH TRANSACTIONS
TCI Ventures Group's ownership interest in the issued and outstanding share
capital of Flextech was 48.8% during the three months ended March 31, 1996,
46.2% from April 1996 through April 1997, and 35.9% from April 1997 to the
present. TCI Ventures Group's voting interest in Flextech was 50.6% during 1996
and approximately 50% from January 1997 to the present.
In January 1997, TCI Ventures Group reduced its voting interest in Flextech
to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to vote
960,850 Flextech ordinary shares ("Flextech Ordinary
V-124
<PAGE> 363
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Shares") at any shareholder meeting to be held through December 31, 1997. In
April 1997, Flextech and BBC Worldwide Limited ("BBC Worldwide") formed two
separate joint ventures (the "BBC Joint Ventures") and entered into certain
related transactions. The consummation of the BBC Joint Ventures and related
transactions resulted in, among other things, a reduction of TCI Ventures
Group's ownership interest in Flextech to 35.9% and the issuance to TCI Ventures
Group by Flextech of a special voting share (the "Special Voting Share"). The
Special Voting Share when combined with TCI Ventures Group's other share capital
in Flextech, allows TCI Ventures Group to cast 50% of the votes on most matters
brought to the shareholders of Flextech for vote. So long as the Proxy remains
outstanding, TCI Ventures Group's 50% voting interest will be reduced by the
960,850 votes represented by the Proxy. The Special Voting Share will terminate
upon the occurrence of the earlier of (i) the third anniversary of issuance or
(ii) any transfer of Flextech shares by TCI Ventures Group outside a specified
affiliated group. In light of TCI Ventures Group's decreased voting interest in
Flextech, TCI Ventures Group, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UK Living
Limited ("UKLL") and UK Gold Television Limited ("UKGL") all of the share
capital in those two companies not already owned by Flextech and the TCI
Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding convertible non-preference shares ("Flextech
Non-Preference Shares") had been issued in connection with previous acquisition
transactions by Flextech due to the TCI Ventures Group's requirement that it
maintain specified voting interests in Flextech. With the issuance of the
Special Voting Share, the purpose for the Flextech Non-Preference Shares was
eliminated. Accordingly, and in order to simplify the capital structure of
Flextech, upon the issuance of the Special Voting Share, the Flextech Non-
Preference Shares were converted into Flextech Ordinary Shares. Immediately
following such conversion, and the issuance of additional Flextech Ordinary
Shares in connection with the UKGL and UKLL transactions described above, (i)
the TCI Ventures Group's interest in the equity share capital of Flextech was
35.9% and (ii) the TCI Ventures Group's voting interest was 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). If Flextech
defaults in its funding obligation to the Principal Joint Venture and fails to
cure within 42 days after receipt of notice from BBC Worldwide, BBC Worldwide is
entitled, within the following 90 days, to require that the TCI Ventures Group
assume all of Flextech's funding obligations to the Principal Joint Venture (the
"Standby Commitment"). In addition to Flextech's April 1997 purchase of L22
million ($36 million) of ordinary shares in the Principal Joint Venture,
Flextech is obligated to provide the Principal Joint Venture with a primary
credit facility of L88 million ($144 million) and, subject to certain
restrictions, a standby credit facility of L30 million ($49 million).
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit
V-125
<PAGE> 364
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
facilities, or (ii) the date on which Flextech delivers a bank guarantee of all
of its funding obligations to the Principal Joint Venture.
So long as the TCI Ventures Group is contingently obligated under the
Standby Commitment, it has been agreed that (i) Flextech will not sell any of
its direct or indirect interests in the Principal Joint Venture, (ii) Flextech
will not conduct its business in such a way as is likely to cause it to be in
material breach of any material contracts or to have insufficient working
capital to meet its funding obligation to the Principal Joint Venture, and (iii)
Flextech will use its available resources to subscribe for any outstanding loan
stock of the Principal Joint Venture, if and to the extent required by the TCI
Ventures Group at any time after December 31, 2011.
(4) ACQUISITIONS
(a) OCC Acquisition
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation in the west of the greater Buenos Aires metropolitan area,
for a purchase price of $112.2 million (the "OCC Acquisition"). Cash
consideration of $43.7 million was paid at closing and an additional cash
payment of $22.1 million was paid on December 1, 1996. Cablevision incurred
additional bank debt of approximately $45 million in order to fund such cash
payments. The remaining purchase price was satisfied by Cablevision's issuance
of $46.4 million principal amount of secured negotiable promissory notes (the
"OCC Notes"). The OCC Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of OCC have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded OCC's assets and liabilities at fair value.
(b) UVSG Merger
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended, among UVSG, TCI and TCI
Merger Sub, Inc. ("Merger Sub"), pursuant to which Merger Sub was merged into
UVSG, with UVSG as the surviving corporation (the "UVSG Merger"). TCI Ventures
Group acquired 12,373,294 shares of UVSG Class B common stock and 2,145,466
shares of UVSG Class A common stock, together representing approximately 40% of
the issued and outstanding common stock of UVSG and approximately 86% of the
total voting power of UVSG common stock immediately after the UVSG Merger,
resulting in UVSG becoming a majority-controlled subsidiary of TCI Ventures
Group. The UVSG Merger has been accounted for by the purchase method.
Accordingly, the results of operations of UVSG have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded UVSG's assets and liabilities at fair value.
(c) Satellite Joint Venture
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Media Group
(the "Satellite Joint Venture"). The combination was accounted for as a merger
of businesses under common control, whereby the assets and obligations of both
UVSG and Liberty Media Group which were contributed to the venture were
reflected at their historical cost. The operations of the Satellite Joint
Venture have been consolidated, effective April 1, 1996, with the operating
results of the TCI Ventures Group.
(5) CABLEVISION
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision. None of Cablevision's post-acquisition operating results have
been allocated to Cablevision's 49% minority interest
V-126
<PAGE> 365
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
because (i) the minority interest has no obligation to provide any funding to
Cablevision and (ii) Cablevision's liabilities exceeded the minority interest's
historical cost basis in Cablevision's assets at March 31, 1997. To the extent
that Cablevision's post-acquisition net earnings (exclusive of the effects of
purchase accounting) cause the minority interest's historical cost basis in
Cablevision's net assets to become positive, the TCI Ventures Group would begin
to allocate 49% of such net earnings to the minority interest. If the minority
interest's historical cost basis had been positive during the three months ended
March 31, 1997 and 1996, the TCI Ventures Group would have allocated $3.5
million and $5.3 million, respectively, of Cablevision's net earnings (exclusive
of the effect of purchase accounting) to the minority interest.
(6) INVESTMENT IN TELEWEST
At March 31, 1997, the TCI Ventures Group indirectly owned, through its 50%
ownership interest in TW Holdings, Inc., 132,638,250 or 26.7% of the issued and
outstanding non-voting Telewest convertible preference shares and 246,111,750 or
26.5% (assuming no conversion of the Telewest convertible preference shares) of
the issued and outstanding Telewest ordinary shares. On March 31, 1997, the
reported closing price on the London Stock Exchange of Telewest's ordinary
shares was L1.09 ($1.79).183
As a result of Telewest's 1995 issuance of U.S. dollar denominated
debentures (the "Telewest Debentures"), changes in the exchange rate used to
convert the U.S. dollar into the United Kingdom ("UK") pound sterling will cause
Telewest to experience realized and unrealized foreign currency transaction
gains and losses throughout the term of the Telewest Debentures, which mature in
2006 and 2007, if not redeemed earlier. During the three months ended March 31,
1997 and 1996, Telewest experienced foreign currency transaction losses of L24.1
million ($40.5 million using the applicable exchange rate) and L16.7 million
($25.6 million using the applicable exchange rate), respectively, resulting from
the conversion of the Telewest Debentures into UK pounds sterling and the
adjustment of a foreign currency option contract to market value.
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the TCI Ventures Group's share of Telewest's
operating results from UK pounds to U.S. dollars was 1.6459 to 1 and 1.5362 to 1
during the three months ended March 31, 1997 and 1996, respectively. The spot
rate used to translate the TCI Ventures Group's share of Telewest's net assets
from UK pounds to U.S. dollars was 1.6395 to 1 and 1.7125 to 1 at March 31, 1997
and December 31, 1996, respectively.
Summarized unaudited results of operations of Telewest are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
--------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Revenue.................................................... $ 147,876 100,099
Operating, selling, general and administrative expenses.... (135,983) (105,856)
Depreciation and amortization.............................. (72,014) (49,940)
--------- ---------
Operating loss........................................... (60,121) (55,697)
Share of losses of affiliates.............................. (8,144) (5,464)
Interest expense, net...................................... (45,656) (26,376)
Foreign currency transaction loss.......................... (40,525) (25,602)
Other, net................................................. (126) 2
--------- ---------
Net loss................................................. $(154,572) (113,137)
========= =========
</TABLE>
V-127
<PAGE> 366
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) INVESTMENTS IN PCS VENTURES
Summarized unaudited results of operations for the PCS Ventures, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
--------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 9,487 --
Operating expenses........................................ (167,582) (30,775)
Depreciation and amortization............................. (34,429) (254)
--------- -------
Operating loss......................................... (192,524) (31,029)
Interest expense.......................................... (1,590) (290)
Other, net................................................ (22,955) (36,186)
--------- -------
Net loss............................................... $(217,069) (67,505)
========= =======
</TABLE>
TCI Ventures Group is a partner in a series of partnerships formed to
engage in the business of providing wireless communications services, using the
radio spectrum for broadband personal communications services ("PCS"), to
residential and business customers nationwide, using the "Sprint" brand. The PCS
Ventures include Sprint Spectrum Holding Company, L. P. ("Sprint Spectrum") and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation, Comcast Corporation, Cox Communications,
Inc. and the TCI Ventures Group. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the TCI Ventures Group.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the TCI
Ventures Group contributed an aggregate of approximately $0.9 billion). The
remaining capital that the Sprint PCS Partnerships will require to fund the
construction of the PCS systems and the commitments made to APC and
Cox-California will be substantial. The partners had agreed in forming the
Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2
billion of equity thereto, from inception through fiscal 1999, subject to
certain requirements. The TCI Ventures Group expects that the remaining
approximately $1.2 billion of such amount (of which the TCI Ventures Group's
share is approximately $0.4 billion) will be contributed by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed). The TCI Ventures Group expects that the Sprint PCS
Partnerships will require additional equity thereafter.
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
TCI Ventures Group currently believes that such agreement will not result in the
TCI Ventures Group's being required to make any incremental capital
contributions in addition to its pro rata portion of the aforementioned $4.2
billion amount.
(8) INVESTMENT IN TELEPORT
Teleport is a competitive local exchange carrier which provides integrated
local telecommunications services in major metropolitan markets nationwide.
Teleport's customers are principally telecommunications intensive businesses,
long distance carriers and resellers of wireless communications companies.
V-128
<PAGE> 367
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The TCI Ventures Group's investment in Teleport is accounted for under the
equity method of accounting.
Summarized unaudited combined results of operations for Teleport, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
--------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Operations
Revenue................................................... $ 96,844 50,435
Operating expenses........................................ (90,708) (42,718)
Depreciation and amortization............................. (29,756) (12,849)
-------- -------
Operating loss......................................... (23,620) (5,132)
Interest expense.......................................... (29,508) (8,148)
Other, net................................................ 8,100 (5,413)
-------- -------
Net loss............................................... $(45,028) (18,693)
======== =======
</TABLE>
(9) INVESTMENTS IN OTHER AFFILIATES
The TCI Ventures Group's affiliates other than Telewest PCS Ventures and
Teleport that are accounted for using the equity method (the "Other Affiliates")
generally are engaged in the cable and/or programming businesses in various
foreign countries.
Certain of the Other Affiliates are general partnerships and any subsidiary
of the TCI Ventures Group that is a general partner in a general partnership
could be liable, depending upon the applicable partnership law, for all debts of
that partnership to the extent liabilities of that partnership were to exceed
its assets.
Agreements governing the TCI Ventures Group's investment in certain of the
Other Affiliates contain (i) buy-sell and other exit arrangements whereby the
TCI Ventures Group could be required to purchase another investor's ownership
interest and (ii) performance guarantees whereby the TCI Ventures Group and/or
other subsidiaries of TCI have guaranteed the performance of the TCI Ventures
Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying amount
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
CARRYING VALUE
-------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Flextech (note 3)........................................... $114,544 --
Flextech Affiliates(a)...................................... -- 129,563
MultiThematiques S.A. ("MultiThematiques").................. 79,289 84,007
Liberty/TINTA LLC(b)........................................ 60,009 63,227
Jupiter Telecommunications Co., Ltd. ("Jupiter")............ 39,200 47,251
Bresnan International Partners (Poland), L.P. .............. 27,848 27,951
Bresnan International Partners (Chile), L.P. ............... 20,993 34,408
Other....................................................... 61,337 88,192
-------- -------
$403,220 474,599
======== =======
</TABLE>
V-129
<PAGE> 368
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(a) Flextech Affiliates
Due to the January 1, 1997 deconsolidation of Flextech described in note 3,
Flextech's equity method affiliates (the "Flextech Affiliates") are no longer
included with the Other Affiliates; the Flextech Affiliates are included with
Flextech.
At December 31, 1996, the Flextech Affiliates were comprised of European
Business News Partners (30%-owned by Flextech), HIT Entertainment PLC (23%-owned
by Flextech), Preview Investments B.V. (33%-owned by Flextech), Scottish
Television plc (20%-owned by Flextech), UKGL (25%-owned by Flextech) and UKLL
(31%-owned by Flextech). In connection with the April 1997 formation of the BBC
Joint Ventures, Flextech acquired all of the equity share capital of UKGL and
UKLL (75% and 68.75%, respectively) that Flextech did not already own.
(b) Liberty/TINTA LLC
TCI Ventures Group may make additional cash contributions totaling $29.0
million to the limited liability company owned in equal parts by subsidiaries of
TCI Ventures Group and Liberty Media Group (the "LLC") to fund the operations of
the joint venture between TCI Ventures Group, News Corporation Limited ("News
Corp.") and Liberty Media Group (the "Sports Venture"). As part of the formation
of the Sports Venture, the LLC is entitled to receive from News Corp. 7.5% of
the outstanding stock of STAR Television Limited. Upon the delivery of such
stock to the LLC, News Corp. is entitled to receive from the LLC up to $20.0
million and rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of the Sports
Venture (the "Sports Venture Rights") to the Sports Venture, TCI Ventures Group,
News Corp. and Liberty Media Group have paid their respective portion of any
payments made with respect to the Sports Venture Rights. Through March 31, 1997,
payments made under the International/Torneos Sports Agreement totaled $20.1
million.
The $33 million excess of TCI Ventures Group's aggregate historical cost
basis in the LLC over TCI Ventures Group's 50% proportionate share of the LLC's
net assets is being amortized over an estimated useful life of 20 years.
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized unaudited results of operations of the Other Affiliates by
geographic region for the periods in which they were owned by the TCI Ventures
Group are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------
LATIN
AMERICA AND
ASIA AND THE UNITED
EUROPE(A) AUSTRALIA CARIBBEAN(B) STATES TOTAL
--------- --------- ------------ ------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
COMBINED OPERATIONS
Revenue...................................... $ 60,499 50,837 3,484 2,345 117,165
Operating, selling, general and
administrative expenses.................... (77,551) (56,652) (2,086) (2,035) (138,324)
Depreciation and amortization................ (6,457) (10,186) (856) (1,285) (18,784)
-------- ------- ------ ------- --------
Operating income (loss).................... (23,509) (16,001) 542 (975) (39,943)
Interest expense, net........................ (558) (2,883) (1,918) (497) (5,856)
Other, net................................... 276 (966) (6,797) (44) (7,531)
-------- ------- ------ ------- --------
Net loss................................... $(23,791) (19,850) (8,173) (1,516) (53,330)
======== ======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------------------------------
LATIN
AMERICA AND
ASIA AND THE UNITED
EUROPE(A) AUSTRALIA CARIBBEAN(B) STATES TOTAL
--------- --------- ------------ ------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
COMBINED OPERATIONS
Revenue...................................... $ 87,167 37,316 10,819 24,449 159,751
Operating, selling, general and
administrative expenses.................... (94,962) (42,361) (9,229) (20,354) (166,906)
Depreciation and amortization................ (2,146) (7,712) (972) (146) (10,976)
-------- ------- ------ ------- --------
Operating income (loss).................... (9,941) (12,757) 618 3,949 (18,131)
Interest expense, net........................ (1,809) (2,254) (3,387) (357) (7,807)
Other, net................................... (925) 277 (263) (104) (1,015)
-------- ------- ------ ------- --------
Net earnings (loss)........................ $(12,675) (14,734) (3,032) 3,488 (26,953)
======== ======= ====== ======= ========
</TABLE>
- ---------------
(a) The summarized combined operations for the three months ended March 31, 1997
include the results of operations of Flextech but exclude the results of
operations of the Flextech Affiliates. The summarized combined operations
for the three months ended March 31, 1996 include only the operations of the
Flextech Affiliates.
(b) The summarized operating results of Torneos are included in the combined
operations for the three months ended March 31, 1996 but are excluded from
the combined operations for the three months ended March 31, 1997 due to TCI
Ventures Group's contribution of its 35% ownership interest in Torneos to
the Sports Venture.
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(10) DEBT
The components of debt are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Convertible Subordinated Debentures ("Debentures").......... $345,000 345,000
Cablevision notes........................................... -- 13,013
Cablevision bank loans...................................... 100,835 104,556
OCC Notes................................................... 43,691 46,418
Other....................................................... 23,231 17,267
-------- -------
$512,757 526,254
======== =======
</TABLE>
With the exception of the Debentures, which had a fair value of $259
million at March 31, 1997, the TCI Ventures Group believes that the fair value
and the carrying value of the TCI Ventures Group's debt were approximately equal
at March 31, 1997.
Subsequent to March 31, 1997, the subsidiary which conducts operations in
Puerto Rico (the "Puerto Rico Subsidiary") entered into a new reducing revolving
bank credit facility (the "Puerto Rico Bank Facility"). The Puerto Rico Bank
Facility is unsecured and provides for maximum borrowing commitments of $100
million. The availability of such commitments for borrowing is subject to the
Puerto Rico Subsidiary's compliance with applicable financial covenants and
other customary conditions. Commencing March 31, 2000, the maximum commitments
will be reduced quarterly in accordance with a schedule, until final maturity at
March 31, 2006. Borrowings under the Puerto Rico Bank Facility bear interest at
variable rates. In addition, the Puerto Rico Subsidiary is required to pay a
commitment fee equal to 0.375% on the average daily unused portion of the
maximum borrowing commitments, payable quarterly in arrears and at maturity. The
Puerto Rico Bank Facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios (primarily the ratios
of cash flow to total debt and cash flow to debt service, as defined), and
includes certain limitations on indebtedness, investments, guarantees,
acquisitions, dispositions, dividends, liens and encumbrances, and transactions
with affiliates. If TCI's ownership interest in International were to fall below
50.1%, borrowings under the Puerto Rico Bank Facility would be secured by the
assets of the Puerto Rico Subsidiary and the variable interest rates on such
borrowings would be increased.
(11) COMBINED EQUITY
General
If the TCI Ventures Group Stock Proposal is approved by stockholders, the
Series A TCI Ventures Group Stock will have one vote per share and the Series B
TCI Ventures Group Stock will have ten votes per share.
Shares of Series B TCI Ventures Group Stock will be convertible at any time
at the option of the holder only into the same number of shares of Series A TCI
Ventures Group Stock.
The rights of holders of the TCI Ventures Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Ventures Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock, the TCI Ventures Group Stock and the Liberty
Media Group Stock.
Transactions with TCI Group, Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to TCI
Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
levels that management believes to be reasonable and that approximate the costs
TCI Ventures Group would incur for comparable services on a stand alone basis.
During the three months ended March 31, 1997 and 1996, TCI Ventures Group was
allocated $2,212,000 and $2,234,000, respectively, in corporate general and
administrative costs by TCI Group.
Certain of the companies with domestic operations that are attributed to
the TCI Ventures Group provide services to companies attributed to one or more
of the other Groups, and certain of the companies attributed to the other Groups
provide services and the use of facilities to companies attributed to the TCI
Ventures Group. Generally, services and rights to use facilities provided
pursuant to contractual arrangements to which a member of the TCI Ventures Group
that is not a wholly owned subsidiary of the Company is a party will continue to
be provided in accordance with the terms of such arrangements following the
consummation of the Exchange Offers. For example, Teleport has the indefeasible
right to use certain fiber optic and cable transmission facilities of the
Company for compensation based on the cost of construction of such facilities.
In general, such arrangements were entered into with Teleport by the Company and
other multiple cable system operators ("MSOs") that are stockholders of Teleport
several years ago when Teleport was a privately owned company. Similarly, @Home
has entered into arrangements for the distribution of its @Home service with its
stockholders that are MSO's. The TCI Group has agreements with UVSG for, among
other things, the carriage of UVSG's Prevue Networks and superstation
programming on certain of the cable systems attributed to the TCI Group, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Many of these contracts were entered into prior to the UVSG Merger. Because of
the presence in each of TCG, @Home and UVSG of other stockholders not affiliated
with the Company and the independent management teams at each of these
companies, the Company anticipates that future contractual arrangements between
these companies and entities attributed to the other Groups will be negotiated
on an arm's-length basis.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each of
which is a wholly owned subsidiary of the Company, provide or may provide
services to the other Groups. WTCI provides video transport services to the TCI
Group (in addition to services provided to third parties) based on published
tariffed rates. NDTC provides digital television services, including digital
compression of programming, satellite uplinking, and transponder management,
primarily to programming suppliers, many of which are affiliated with the
Liberty Media Group, and satellite distributors. Such services provided to
affiliated companies are governed by agreements which have been negotiated on a
basis which approximates arm's-length terms and the material terms of which are
substantially the same as those governing relationships with third parties,
except as appropriate to take into account volume differences. NDTC has also
recently begun offering on a commercial basis its newly developed service of
authorization of addressable set-top boxes and transmission of compressed and
encrypted digital programming signals directly to cable operators, and is
currently negotiating a long term contract with the TCI Group, for such
services. Such negotiations are being carried out on a basis which approximates
arm's-length terms and it is expected that the material terms made available to
the TCI Group will be substantially the same as those provided to unaffiliated
third parties, but will include pricing on a most favored nations basis due to
the importance to NDTC of the TCI Group's large customer base. SUMMITrak has
been funded by the TCI Group during its development and test phases, which are
substantially complete. Currently, the TCI Group is only utilizing SUMMITrak's
services on a test basis and has no agreement with SUMMITrak for commercial
deployment. If SUMMITrak's services are used by the TCI Group on a commercial
basis, such use will be at commercial rates and on a basis which approximates
arm's-length terms.
Amounts included in revenue for services provided to the other Groups by
WTCI and NDTC are $11,492,000 and $5,055,000 for the three months ended March
31, 1997 and 1996, respectively.
V-133
<PAGE> 372
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During the three months ended March 31, 1997 and 1996, revenue earned by
UVSG from TCI Group was $2,049,000 and $2,464,000, respectively. UVSG purchased
programming from Liberty Media Group and certain affiliates during 1997 and 1996
amounting to $11,850,000 and $2,802,000, respectively.
Amounts outstanding under the TCI Note Receivable bear interest at variable
rates based on TCI's weighted average cost of bank borrowings of similar
maturities (6.2% at March 31, 1997). Principal and interest is due and payable
as mutually agreed from time to time by TCI and International. During the three
months ended March 31, 1997 and 1996, interest income related to the TCI Note
Receivable aggregated $2.4 million and $2.2 million, respectively.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in the combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity incurring
the debt or issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt incurred
or preferred stock issued by entities included in a Group should be specifically
attributed to and reflected in the combined financial statements of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in any then existing, Inter-Group Interest of the TCI Group in such Group or, in
the case of a transfer from either the Liberty Media Group or the TCI Ventures
Group to the TCI Group, reflected as a reduction in any then existing
Inter-Group Interest of the TCI Group in such Group. There are no specific
criteria for determining when a transfer will be reflected as a borrowing or as
an increase or reduction in an Inter-Group Interest. The Board expects to make
such determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
The TCI Ventures Group is expected to require additional advances from the
TCI Group for some period of time. To satisfy this need, the Company has agreed
to provide a revolving loan facility (the "Credit Facility") to TCI Ventures
Group for a five-year period commencing on the closing of the Exchange Offers.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction or increase as provided below), which
borrowings would bear interest at a rate per annum equal to The Bank of New
York's prime rate (as in effect from time to time) plus 1% per annum, payable
quarterly. A commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Revolving Credit Facility would be payable by the TCI
Ventures Group to the TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Ventures Group is required
to contribute to Sprint PCS Partnerships subsequent to the closing of the
Exchange Offers is less than $300 million.
Except as described above with respect to the Credit Facility, loans from
one Group to another Group would bear interest at such rates and have such
repayment schedules and other terms as are established from
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<PAGE> 373
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
time to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable polices from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans of and investment opportunities available to each
Group and the availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
Stock as of the date of such transfer, such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures Group being charged (in addition
to the charge for the dividend or other distribution paid), with an amount equal
to the product of the aggregate amount of such dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Group will be to such extend reflected in the combined financial
statements of the TCI Group and will result in an increase in the TCI Group's
Inter-Group Interest in the TCI Ventures Group.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or operational
strategies through one Group or one or more of the other Groups, after
consideration of such factors as it deems relevant. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
V-135
<PAGE> 374
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
The Puerto Rico Subsidiary purchases programming services from the TCI
Group. The charges, which approximate the TCI Group's cost and are based on the
aggregate number of subscribers served by the Puerto Rico Subsidiary, aggregated
$1.3 million and $1.1 million during the three months ended March 31, 1997 and
1996, respectively. Such programming charges are included in operating costs and
expenses in the accompanying combined statements of operations.
(12) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the TCI Ventures
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of Sprint Spectrum. As previously
described, the Partners are obligated to make cash capital contributions to
Sprint Spectrum in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996. Pursuant to an agreement entered
into in connection with certain financings by Sprint Spectrum, under certain
circumstances the Partners may be required to make additional contributions to
Sprint Spectrum to fund projected cash shortfalls to the extent that the amount
of the Partners' aggregate contributions to Sprint Spectrum (exclusive of
certain amounts, including amounts invested in certain affiliates of Sprint
Spectrum), following December 31, 1995 are less than $1.0 billion; however,
based on the currently expected timing and use of the Partners' contributions to
Sprint Spectrum, the TCI Ventures Group currently believes that such agreement
will not result in the TCI Ventures Group's being required to make any
incremental capital contributions in addition to its pro rata portion of such
$1.9 billion amount.
The TCI Ventures Group has guaranteed the obligation of an affiliate ("The
Premium Movie Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount
V-136
<PAGE> 375
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of The Premium Movie Partnership's license fee obligations is not currently
estimable, the TCI Ventures Group believes that the aggregate payments pursuant
to such obligations could be significant. If the TCI Ventures Group were to fail
to fulfill its obligations under the guarantee, the beneficiaries have the right
to demand an aggregate payment from the TCI Ventures Group of approximately $55
million. Although the TCI Ventures Group has not had to perform under such
guarantee to date, the TCI Ventures Group cannot be certain that it will not be
required to perform under such guarantee in the future.
In 1995, Flextech issued newly issued Flextech Ordinary Shares and Flextech
Non-Preference Shares to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and U S WEST, Inc. ("U S WEST") (the
"U S WEST Subscription").
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group, (ii) the Hallmark and U S WEST subsidiaries'
interests in Flextech acquired under the Hallmark Subscription and the U S WEST
Subscription, respectively, and (iii) Flextech securities acquired by
International Family Entertainment, Inc. ("IFE") pursuant to certain
acquisitions (the "IFE Acquisitions") exceeds 75% of Flextech's issued and
outstanding share capital, or (y) subject to certain exceptions, the Flextech
Ordinary Shares cease to be admitted to trading on the Official List of the
London Stock Exchange as a result of the exercise by the TCI Ventures Group of
any of its rights as a Flextech shareholder, the TCI Ventures Group shall be
obligated to offer to purchase from the Hallmark and U S WEST subsidiaries, and
from IFE any Flextech Ordinary Shares held by them and which were originally
acquired pursuant to the Hallmark Subscription, the U S WEST Subscription, or
the IFE Acquisitions, as applicable. Under such circumstances, the offer price
for such shares shall be the higher of (i) the then current market price for the
Flextech Ordinary Shares and (ii) the highest price paid to any third party by
the TCI Ventures Group for any Flextech Ordinary Shares during the preceding 12
month period. In the event the TCI Ventures Group is required to purchase any
Flextech Ordinary Shares, it may elect, subject to certain limited exceptions,
to pay the purchase price thereof in cash or in shares of International Series A
common stock, or in certain securities of TCI.
In light of certain change of control provisions contained in the articles
of association of UKGL and UKLL, TCI has agreed to maintain an indirect voting
interest of at least 50.01% in a wholly-owned subsidiary of Flextech so long as
Flextech continues to hold its ownership interests in UKGL and UKLL. Under
Flextech's Articles of Association, if the TCI Ventures Group becomes obligated
to purchase any of the Flextech Non-Preference Shares (as described above) and
fails to complete such purchase within 12 months from the date such purchase is
required to be completed, such Flextech Non-Preference Shares shall become
convertible into Flextech Ordinary Shares whether or not the TCI Ventures Group
ceases to own at least 50.01% of the voting interest attributable to Flextech's
then outstanding ordinary share capital.
On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that International could
be required to make cash contributions totaling $46 million over the next three
years in connection with the DTH Ventures.
Certain key employees of TCI involved with TCI Ventures Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock, Series A Liberty Media Group Stock and International Series A common
stock as well as restricted stock awards of Series A TCI Group Stock and
International Series A common stock. Additionally, in December of 1996, certain
employees of TCI involved with TCI Ventures Group were each granted options
representing 1.0% of the common equity of TCI Telephony Services, Inc., TCI
Wireline, Inc., and TCI.NET, Inc. The exercise price of each such option will be
adjusted for a 6% per annum interest factor to the date of exercise.
Additionally, in December of 1996, an
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<PAGE> 376
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
employee involved with TCI Ventures Group was granted options representing 1.0%
of TCI Satellite Entertainment, Inc.
Estimates of the compensation relating to the options and/or stock
appreciation rights as well as restricted stock awards granted to employees
involved with TCI Ventures Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
value of the underlying equity and, ultimately, on the final determination of
market value when the options or rights are exercised or the restricted shares
are vested.
V-138
<PAGE> 377
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
GENERAL
On May 14, 1997, the Board of Directors of Tele-Communications, Inc. (the
"Board") authorized, subject to shareholder approval (the "TCI Ventures Group
Stock Proposal"), the issuance of two new series of stock ("TCI Ventures Group
Common Stock") which are intended to reflect the separate performance of the TCI
Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses, assets and liabilities as
the Company or any of its subsidiaries may in the future acquire for the TCI
Ventures Group, as determined by the Board. It is currently the intention of the
Company that any businesses, assets
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and liabilities so attributed to the TCI Ventures Group in the future would not
include assets and liabilities of the company's domestic programming businesses
and investments or its domestic cable operations (including its businesses which
utilize its cable plant to distribute telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock will not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group
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Stock currently issuable upon exchange of such convertible notes, an equal
number of shares of TCI Ventures Group Common Stock would be issued upon such
exchange. Similarly, options to purchase shares of Series A TCI Group Stock that
are outstanding under the Company's various stock incentive plans will be
adjusted upon consummation of the Exchange Offers by dividing such options into
options to purchase shares of Series A TCI Ventures Group Common Stock and
options to purchase shares of Series A TCI Group Stock, with 30% of the shares
originally subject to the options being allocated to the options to purchase TCI
Ventures Group Common Stock and 70% of such shares being allocated to the
options to purchase shares of TCI Group Stock. The terms of each of such options
at the time of issuance will be the same as the terms of the option that they
replace, including as to the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures Group
Stock Proposal will not affect legal title to such assets or responsibility for
such liabilities of the Company or any of its subsidiaries. Holders of TCI Group
Stock, Liberty Media Group Stock and TCI Ventures Group Stock will be common
stockholders of the Company and will be subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group Stock, and dividends on, or certain
repurchases of, preferred stock, will reduce funds of the Company legally
available for the payment of dividends on the TCI Group Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision S.A. and certain affiliated companies ("Cablevision") for an
adjusted purchase price of $282.0 million, before liabilities assumed (the
"Cablevision Acquisition"). The purchase price was paid with cash consideration
of $195.2 million (including a previously paid $20 million deposit) and the TCI
Ventures Group's issuance of $86.8 million principal amount of secured
negotiable promissory notes payable to the selling shareholders.
In June 1995, the TCI Ventures Group acquired certain assets of
CareerTrack, Inc. ("CareerTrack") and DDP Realty Company and all of the
outstanding common stock of CareerTrack (collectively, the "CareerTrack
Acquisition") in exchange for cash in the amount of $17,998,000, non-interest
bearing promissory notes with a recorded amount of $12,790,000 (net of discount
of $2,612,000), and assumed debt of $6,922,000.
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended (the "UVSG Merger
Agreement"), among UVSG, TCI and TCI Merger Sub, Inc. ("Merger Sub"), pursuant
to which Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). TCI Ventures Group acquired 12,373,294 shares of UVSG Class
B common stock and 2,145,466 shares of UVSG Class A common stock, together
representing approximately 40% of the issued and outstanding common stock of
UVSG and approximately 86% of the total voting power of UVSG common stock
immediately after the UVSG Merger, resulting in UVSG becoming a majority-
controlled subsidiary of TCI Ventures Group.
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by UVSG and Liberty Media Group (the "Satellite
Joint Venture"). The operations of the Satellite Joint Venture have been
consolidated, effective April 1, 1996, with the operating results of the TCI
Ventures Group.
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On October 1, 1996, Cablevision acquired 99.99% of the issued and
outstanding capital stock of Oeste Cable Color S.A., a cable television
operation in the west of the greater Buenos Aires metropolitan area, for a
purchase price of $112.2 million (the "OCC Acquisition"). Cash consideration of
$43.7 million was paid at closing and an additional cash payment of $22.1
million was paid on December 1, 1996. The remaining purchase price was satisfied
by Cablevision's issuance of $46.4 million principal amount of secured
negotiable promissory notes.
On February 2, 1994, the TCI Ventures Group contributed its 100% ownership
interests in Flextech Television Limited ("FTV") and Bravo Classic Movies
Limited ("Bravo Ltd."), together with its equity method investments in UK Gold
Television Limited ("UKGL"), UK Living Limited ("UKLL") and Starstream Limited
("Starstream") (collectively, the "International UK Programming Assets") to
Flextech p.l.c. ("Flextech") in exchange for 60.4% of Flextech's issued and
outstanding ordinary shares (the "Flextech Combination").
On June 5, 1995, Flextech completed the sale of newly issued Flextech
ordinary shares ("Flextech Ordinary Shares") and newly issued convertible
non-preference shares ("Flextech Non-Preference Shares") to subsidiaries of
Hallmark Cards Incorporated ("Hallmark") (the "Hallmark Subscription") and U S
WEST, Inc. ("U S WEST") (the "U S WEST Subscription") in exchange for L48.4
million ($77.2 million using the applicable exchange rate) in cash and
convertible redeemable preferred shares of Thomson Directories Limited,
respectively. The Hallmark Subscription and the U S WEST Subscription are
collectively referred to herein as the "Flextech Transactions."
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in Maidstone
Broadcasting ("Maidstone"), which Flextech did not already own and (ii) a 100%
ownership interest in TVS Television Limited ("TVS"). Excluding liabilities
assumed, the total consideration paid by Flextech to acquire such ownership
interests was L31.4 million ($47.8 million using the applicable exchange rate),
of which L3.0 million ($4.5 million using the applicable exchange rate) was paid
in cash and the remaining balance was satisfied by Flextech's issuance of
convertible non-preference shares (the "IFE Consideration Shares").
The TCI Ventures Group owned, at December 31, 1996, 46.5% of the issued and
outstanding Flextech share capital and 50.9% of the aggregate voting interests
attributable to such Flextech share capital.
In January 1997, the TCI Ventures Group reduced its voting interest in
Flextech to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to
vote 960,850 Flextech Ordinary Shares at any shareholder meeting to be held
through December 31, 1997. In April 1997, Flextech and BBC Worldwide Limited
("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions. The consummation of the BBC Joint
Ventures and related transactions resulted in, among other things, a reduction
of TCI Ventures Group's ownership interest in Flextech to 35.9% and the issuance
to the TCI Ventures Group by Flextech of a special voting share (the "Special
Voting Share"). The Special Voting Share when combined with International's
other share capital in Flextech, allows TCI Ventures Group to cast 50% of the
votes on most matters brought to the shareholders of Flextech for vote. So long
as the Proxy remains outstanding, TCI Ventures Group's 50% voting interest will
be reduced by the 960,850 votes represented by the Proxy. The Special Voting
Share will terminate upon the occurrence of the earlier of (i) the third
anniversary of issuance or (ii) any transfer of Flextech shares by the TCI
Ventures Group outside a specified affiliated group. In light of the TCI
Ventures Group's decreased voting interest in Flextech, as described above, the
TCI Ventures Group, effective January 1, 1997, ceased to consolidate Flextech
and began to account for Flextech using the equity method of accounting.
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SUMMARY OF OPERATIONS
Combined Operations
The following table sets forth certain financial information for the TCI
Ventures Group and each of the combined businesses attributed to it during the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- ------- --- ------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Revenue:
UVSG.......................... $409,616 44% -- --% -- --%
International................. 314,560 34 190,533 59 43,982 42
ETC w/tci..................... 90,598 10 49,994 15 -- --
NDTC.......................... 74,881 8 53,393 16 26,051 25
WTCI.......................... 31,857 4 31,877 10 33,811 33
Summitrak..................... -- -- -- -- -- --
@Home......................... 673 -- -- -- -- --
Other......................... 3,491 -- 194 -- -- --
-------- --- ------- --- ------- ---
$925,676 100% 325,991 100% 103,844 100%
======== === ======= === ======= ===
Operating, selling, general,
administrative and stock
compensation:
UVSG.......................... $342,544 42% -- --% -- --%
International................. 279,170 34 165,389 58 62,196 61
ETC w/tci..................... 107,785 13 51,360 18 -- --
NDTC.......................... 44,171 5 30,867 11 20,390 20
WTCI.......................... 19,530 2 19,399 7 17,798 18
Summitrak..................... 1,649 -- 1,657 1 644 1
@Home......................... 23,950 3 2,845 1 -- --
Other......................... 8,145 1 12,318 4 (311) --
-------- --- ------- --- ------- ---
$826,944 100% 283,835 100% 100,717 100%
======== === ======= === ======= ===
Depreciation and amortization:
UVSG.......................... $ 29,775 20% -- --% -- --%
International................. 58,747 40 36,360 48 8,590 30
ETC w/tci..................... 4,953 3 3,900 5 -- --
NDTC.......................... 28,776 19 18,737 25 6,918 24
WTCI.......................... 10,595 7 10,164 14 11,478 40
Summitrak..................... 11,680 8 5,582 7 1,684 6
@Home......................... 1,774 1 21 -- -- --
Other......................... 2,989 2 333 1 -- --
-------- --- ------- --- ------- ---
$149,289 100% 75,097 100% 28,670 100%
======== === ======= === ======= ===
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- ------- --- ------- ---
DOLLAR AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss):
UVSG.......................... $ 37,297 n/a -- n/a -- n/a
International................. (23,357) (11,216) (26,804)
ETC w/tci..................... (22,140) (5,266) --
NDTC.......................... 1,934 3,789 (1,257)
WTCI.......................... 1,732 2,314 4,535
Summitrak..................... (13,329) (7,239) (2,328)
@Home......................... (25,051) (2,866) --
Other......................... (7,643) (12,457) 311
-------- ------- -------
$(50,557) (32,941) (25,543)
======== ======= =======
</TABLE>
Revenue
Revenue increased by $600 million or 184% during the year ended December
31, 1996 as compared to 1995. Revenue increased by $222 million or 214% during
the year ended December 31, 1995 as compared to 1994. Such increases are
principally the result of revenue from acquired companies.
Revenue from UVSG, amounting to $410 million, represents in excess of
two-thirds of the combined increase in revenue for 1996. Such increase is
principally the result of the acquisition in January of 1996 of UVSG by the TCI
Ventures Group. Additionally, such increase reflects $121 million additional
revenue resulting from the Satellite Joint Venture.
International revenue increased $124 million or 65% during the year ended
December 31, 1996 as compared to the corresponding prior year period. Such
increase was comprised of an increase in cable revenue of $78 million or 55% and
an increase in programming revenue from Flextech of $46 million or 97% during
the year ended December 31, 1996. The increase in cable revenue is primarily
attributable to the effect of the Cablevision Acquisition and the OCC
Acquisition. A significant component of the increase in programming revenue is
attributable to the inclusion of Maidstone and TVS in the TCI Ventures Group's
results of operations in 1996.
International revenue increased $147 million during the year ended December
31, 1995 as compared to the corresponding prior period, representing a 333%
increase. Of such amount, international cable revenue increased $124 million
(649%) primarily as the result of the Cablevision Acquisition and the OCC
Acquisition. International programming revenue increased $23 million or 93%
during the year ended December 31, 1995. The majority of such increase is
attributable to 92% and 64% increases in revenue from Bravo, Ltd. and
Starstream, respectively.
Revenue from ETC w/tci increased $41 million or 81% during the year ended
December 31, 1996 as compared to 1995. Revenue from ETC w/tci increased $50
million from 1994 to 1995. Such increases are attributable to the CareerTrack
Acquisition consummated in June of 1995.
The TCI Ventures Group, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. During the years ended December 31, 1996, 1995 and 1994, revenue
attributable to Flextech of $94 million, $48 million and $25 million,
respectively, was included in the TCI Ventures Group's statements of operations.
Operating Costs and Expenses
Operating costs and expenses, excluding depreciation and amortization,
increased by $543 million or 191% during the year ended December 31, 1996 as
compared to 1995. Operating costs and expenses, excluding depreciation and
amortization, increased by $183 million or 182% during the year ended December
31, 1995 as compared to 1994. Such increases are principally the result of
operating costs and expenses from acquired companies.
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Operating costs and expenses, excluding depreciation and amortization, from
UVSG represents 63% of the combined increase in operating costs and expenses for
1996. Such increase is principally the result of the acquisition in January of
1996 of UVSG by the TCI Ventures Group. Additionally, such increase reflects
$110 million additional expense resulting from the Satellite Joint Venture.
International operating costs and expenses, excluding depreciation and
amortization, increased $114 million or 69% for the year ended December 31,
1996, as compared to the corresponding prior year period. International
programming costs and expenses increased $64 million during 1996, a 103%
increase. Such increase is attributable to the inclusion of Maidstone and TVS in
the TCI Ventures Group's results of operations in 1996 and higher programming
and stock compensation costs during 1996. International cable costs and expenses
increased $44 million (48%) during the year ended December 31, 1996, primarily
as a result of the Cablevision Acquisition, the OCC Acquisition, and increased
programming costs.
International operating costs and expenses, excluding depreciation and
amortization, increased $103 million during the year ended December 31, 1995 as
compared to the corresponding prior year period, representing a 166% increase.
Of such amount, cable operating costs and expenses increased $76 million or 512%
during 1995, of which $69 million was attributable to the Cablevision
Acquisition. International programming costs and expenses increased $23 million
or 58% during 1995 as compared to the 1994 period. The majority of such increase
is attributable to higher transponder, marketing and programming costs of Bravo,
Ltd. and Starstream.
During 1996, the TCI Ventures Group revised its estimate of future revenue
to be earned from certain programming rights. As a result of such revisions, the
TCI Ventures Group has recorded an adjustment of $9 million to reduce the
carrying value of the affected programming rights.
The TCI Ventures Group, effective January 1, 1997, ceased to consolidate
Flextech and began to account for Flextech using the equity method of
accounting. During the years ended December 31, 1996, 1995 and 1994, programming
operating costs and expenses (including any programming rights provisions)
attributable to Flextech of $131 million, $62 million and $39 million,
respectively, were included in the TCI Ventures Group's statements of
operations.
Operating costs and expenses from ETC w/tci, excluding depreciation and
amortization, increased $56 million or 110% during the year ended December 31,
1996 as compared to 1995. Operating costs and expenses from ETC w/tci, excluding
depreciation and amortization, increased $51 million from 1994 to 1995. Such
increases are attributable to the CareerTrack Acquisition consummated in
mid-1995.
Certain TCI corporate general and administrative costs are charged to TCI
Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs TCI Ventures
Group would incur for comparable services on a stand alone basis. During the
years ended December 31, 1996, 1995 and 1994, TCI Ventures Group was allocated
$8 million, $4 million and less than $1 million, respectively, in corporate
general and administrative costs by TCI Group.
The $74 million or 99% and $46 million or 162% increases in depreciation
and amortization expense during the years ended December 31, 1996 and 1995,
respectively, are the result of increases in the TCI Ventures Group's assets
that are subject to depreciation and amortization. The increases in such assets
were primarily attributable to acquisitions, as described above, and capital
expenditures.
Other Income and Expense
Telewest Communications plc ("Telewest"), which is currently constructing
broadband cable television and telephony networks in the United Kingdom ("UK"),
has incurred losses since its inception. It is expected that the current
construction requirements of Telewest will be substantially complete by the end
of the year 2000. The TCI Ventures Group's indirect ownership interest in
Telewest decreased from 50% to 37.8% in November 1994, from 37.8% to 26.8% in
October 1995 and from 26.8% to 26.6% during 1996. Despite such decreased
ownership interests, the TCI Ventures Group's share of Telewest's net losses
increased $39.1 million or 56% and $27.8 million or 65% during 1996 and 1995,
respectively. In general, such increases are attributable to Telewest incurring
higher amounts of interest expense, depreciation and amortization. Such
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higher amounts include certain effects of a previous merger transaction (the
"SBCC Transaction"). In connection with the SBCC Transaction, Telewest issued
United States (sometimes referred to herein as the "U.S.") dollar denominated
senior debentures (the "Telewest Debentures"). In light of the issuance of the
Telewest Debentures and Telewest's use of purchase accounting to account for the
SBCC Transaction, Telewest's interest expense, depreciation and amortization
were significantly higher during the fourth quarter of 1995 and the year ended
December 31, 1996 (and will be significantly higher in future periods) as
compared to the amounts incurred by Old Telewest prior to the consummation of
the SBCC Transaction. In addition, changes in the exchange rate used to
translate the Telewest Debentures into UK pounds sterling and the adjustment of
a foreign currency option contract to market value caused Telewest to experience
unrealized foreign currency transaction gains (losses) of $1.7 million and
$(23.0 million) during 1996 and 1995, respectively. It is anticipated that
Telewest will continue to experience realized and unrealized foreign currency
transaction gains and losses throughout the term of the Telewest Debentures,
which mature in 2006 and 2007, if not redeemed earlier.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (collectively, "Sprint PCS" or the "Sprint PCS Partnership"), and
PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS
Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the Company. The
partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The
Company, through TCI Telephony, has a 30% interest as a partner in each of the
Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. The
share of losses from the TCI Ventures Group's investment in the PCS Ventures was
$133 million for the year ended December 31, 1996 which represents an increase
of $99 million as compared to 1995. The share of losses from the PCS Ventures
was $34 million for the year ended December 31, 1995 which represents an
increase of $33 million, as compared to the share of losses of $1 million for
the year ended December 31, 1994. The increase in the share of losses is
attributed primarily to general and administrative costs associated with the
start-up of operations and Sprint Spectrum's share of losses in American PCS
L.P. The PCS Ventures are in the development stage of operations. It is expected
that Sprint PCS will continue to incur significant operating losses and
significant negative cash flow from operating activities during the next several
years while it develops and constructs its PCS network and builds its customer
base. If and when Sprint PCS has successfully completed its network buildout,
Sprint PCS's operating profitability will depend upon many factors, including,
among others, its ability to market its products and services successfully,
achieve its projected market penetration, manage customer turnover rates
effectively and price its products and services competitively. There can be no
assurance that Sprint PCS will achieve or sustain operating profitability or
positive cash flow from operating activities in the future. If Sprint PCS does
not achieve and maintain operating profitability and positive cash flow from
operating activities on a timely basis, it may not be able to meet its debt
service requirements.
The share of losses from the TCI Ventures Group's investment in Teleport
was $51 million for the year ended December 31, 1996 which represents a $21
million increase as compared to 1995. The share of losses from Teleport was $30
million for the year ended December 31, 1995 which represents an increase of $11
million, as compared to the share of losses of $19 million for the year ended
December 31, 1994. The increase in the share of losses is largely attributed to
costs incurred by Teleport in the expansion of their local telecommunications
networks, increased depreciation expense and increased interest expense
partially offset by an increase in telecommunications services revenue
attributed to increased sales of services in existing and new markets. Teleport
has incurred net losses since its inception due to capital expenditures
associated with the acquisition, installation, development and expansion of its
existing and new telecommunications networks and the associated initial
operating expenses of such networks. These networks generally incur negative
cash flow from operating activities and operating losses until an adequate
customer base and revenue stream for such networks have been established. TCI
expects that Teleport will continue to incur net losses for the foreseeable
future as it acquires, installs, develops and expands its existing and new
telecommunications networks. There can be no assurance that Teleport will
achieve or sustain profitability or generate sufficient positive cash flow to
service its debt.
The TCI Ventures Group's share of the losses of affiliates other than
Telewest, PCS Ventures and Teleport (the "Other Affiliates") increased $14
million or 23% and $25 million or 70% during the years ended
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December 31, 1996 and 1995, as compared to the corresponding prior year periods.
The majority of the 1996 increase is attributable to (i) increased losses of
certain of its affiliates in 1996 and (ii) the TCI Ventures Group's share of
losses of affiliates that were acquired in 1996 and late 1995. The majority of
the 1995 increase is attributable to the TCI Ventures Group's share of losses of
affiliates that were acquired in 1995 or late 1994.
Interest income increased $15 million or 97% and $12 million or 364% during
the years ended December 31, 1996 and 1995, respectively. The 1996 increase is
primarily attributable to interest income earned on amounts loaned to TCI. Such
loans were funded with the net proceeds received upon the February 9, 1996
issuance of International's 4 1/2% Convertible Subordinated Debentures (the
"Debentures"). The 1995 increase is attributable to the increase in cash and
cash equivalents that resulted from the International initial public offering
("International IPO").
Interest expense increased $9 million or 23% and $29 million or 222% during
the years ended December 31, 1996 and 1995, respectively, as a result of an
increase in the outstanding debt balance. The 1996 increase is primarily
attributable to the issuance of the Debentures. The 1995 increase is primarily
attributable to debt incurred in connection with the Cablevision Acquisition and
borrowings incurred by Flextech in 1995.
In connection with the dilution of the TCI Ventures Group's ownership
interest in Telewest that occurred in connection with the October 1995 SBCC
Transaction and the November 1994 initial public offering of Telewest's
predecessor, the TCI Ventures Group recognized non-cash gains of $165 million
and $161 million (before deducting the related tax expense of $58 million and
$57 million, respectively) during the years ended December 31, 1995 and 1994,
respectively. During 1996, the TCI Ventures Group also recognized a non-cash
gain of $258,000 in connection with the issuance of stock by Telewest. Such
gains represent the differences, at the respective transaction dates, between
the TCI Ventures Group's recorded cost for its ownership interest in Telewest
and the TCI Ventures Group proportionate share of Telewest's net assets. No
assurance can be given that any such gains will be recognized in the future.
Teleport conducted an initial public offering (the "Teleport IPO") on July
2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per
share to the public for aggregate net proceeds of approximately $410,000,000. As
a result of the Teleport IPO, the TCI Ventures Group's ownership interest in
Teleport was reduced from approximately 35% to approximately 31%. Accordingly,
the TCI Ventures Group recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
The TCI Ventures Group recognized net gains upon the disposition of assets
of $12 million and $49 million during 1996 and 1995, respectively. The 1996 gain
is primarily attributable to the dissolution of the TeleWest Europe Group, an
entity in which International held a 50% ownership interest. The 1995 gain is
attributable to the sale of the cable television subsidiaries of IVS Cable
Holdings Limited, a subsidiary of Flextech.
On July 18, 1995, International completed the International IPO in which
20,000,000 shares of International's Series A common stock were sold to the
public for net proceeds of approximately $301 million. In connection with such
sale, the TCI Ventures Group recognized a non-recurring gain of $123 million.
The minority interests' share of net losses (earnings) was $28 million,
$(15 million) and $10 million during the years ended December 31, 1996, 1995,
and 1994, respectively. Such minority interests are attributable to Flextech
since none of Cablevision's $65 million of net liabilities at the April 25, 1995
acquisition date and none of Cablevision's post-acquisition operating results
have been allocated to Cablevision's 49% minority interest because (i) the
Cablevision minority interest has no obligation to provide any funding to
Cablevision and (ii) the minority interest continued to have a negative
historical cost basis in Cablevision's net assets at December 31, 1996. To the
extent that Cablevision's post-acquisition net earnings (exclusive of the
effects of purchase accounting) cause the minority interest's historical cost
basis in Cablevision's net assets to become positive, the TCI Ventures Group
would begin to allocate 49% of such net earnings to the minority interest. If
the minority interest's historical cost basis had been positive during the
periods ended December 31, 1996 and 1995, the TCI Ventures Group would have
allocated $16 million and $12 million, respectively, of Cablevision's net
earnings (exclusive of the effects of purchase accounting) to the minority
interest.
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The TCI Ventures Group recognized realized and unrealized foreign currency
transaction gains (losses) of $7 million, $(3) million and $1 million during the
years ended December 31, 1996, 1995, and 1994, respectively. The 1996 amount
includes (i) a $3.6 million unrealized gain with respect to the remeasurement
into the U.S. dollar of the French franc denominated obligation (the
"MultiThematiques Obligation") to make capital contributions to MultiThematiques
S.A. ("MultiThematiques") and (ii) a $3.6 million unrealized gain with respect
to the remeasurement into the U.S. dollar of the UK pound denominated
intercompany debt owed by Flextech to an indirect subsidiary of International.
During 1996, holding losses on certain available-for-sale securities were
determined to be other than temporary. Accordingly, the TCI Ventures Group
recognized a $59 million loss during 1996 in connection with the write-off of
such securities.
Income Taxes
The TCI Ventures Group's income tax benefit (expense) was $110 million, $2
million and $(21 million) during the years ended December 31, 1996, 1995 and
1994, respectively. A tax sharing agreement (the "Tax Sharing Agreement") among
TCI Ventures Group, TCI and certain other subsidiaries of TCI was implemented
effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of
a pre-existing tax sharing arrangement and contains additional provisions
regarding the allocations of certain consolidated income tax attributes and the
settlement procedures with respect to the intercompany allocation of current tax
attributes.
Net Earnings (Losses)
The TCI Ventures Group reported net earnings (losses) of $(258 million),
$60 million and $13 million during the years ended December 31, 1996, 1995 and
1994, respectively. Included in such amounts was the recognition of certain
nonoperating gains aggregating $33 million, $336 million and $155 million during
1996, 1995 and 1994, respectively. TCI Ventures Group would have reported net
loss in all periods presented excluding the impact of such gains. The losses are
principally due to operating losses and share of losses of affiliates.
International sustained operating losses of $23 million for the year ended
December 31, 1996. International's net earnings (loss) was $130 million for the
year ended December 31, 1996, which includes International and its consolidated
subsidiaries' share of the losses of its affiliates of $179 million, for the
year ended December 31, 1996. Most of International's affiliates have incurred
net losses since their respective inception dates and are expected to continue
to incur net losses for the foreseeable future. International expects to
continue to incur net losses for the foreseeable future due, in part, to the
relatively high level of depreciation and amortization that is common to growth
oriented companies operating within the capital intensive cable industry. Any
improvements in the results of operations of International are largely dependent
upon the ability of International's operating subsidiaries and affiliates to
increase their respective subscriber bases. No assurance can be given that any
such subscriber base increases will occur.
@Home has incurred net losses since its inception. Management of @Home
expects to incur significant additional losses as @Home continues to devote
capital to the building of its national network operations and services. To
achieve profitability, @Home must develop and market products and services which
are accepted on a broad commercial basis. @Home's products have not yet
demonstrated that they will achieve broad commercial acceptance. There can be no
assurance that @Home will ever achieve profitability.
Liquidity and Capital Resources
Substantially all of the entities the ownership of which, or the investment
in which, has been attributed to the TCI Ventures Group will require significant
additional capital in order to develop their respective businesses and assets,
to fund future operating losses and to fund future growth. In certain cases,
principally with respect to the Sprint PCS Partnerships, the TCI Ventures Group
has contractual commitments pursuant to which (subject to certain conditions) it
may be required to make significant additional capital contributions to the
entities in which it has investments.
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The Sprint PCS Partners, including TCI Telephony, have agreed to contribute
up to an aggregate of approximately $4.2 billion of equity to Sprint PCS from
inception through fiscal 1999 (of which TCI Telephony's share is approximately
$1.3 billion) if and to the extent required by annual budgets of Sprint PCS for
fiscal years in such period approved by the Sprint PCS Partners or requested
during such period by the affirmative vote of Sprint PCS Partners with
percentage interests in Sprint PCS of 75% or more in the aggregate. As of March
31, 1997 approximately $3.0 billion of such $4.2 billion had been contributed to
Sprint PCS, of which amount TCI Telephony had contributed approximately $900
million. TCI Telephony currently expects that the remaining approximately $1.2
billion of such amount (of which TCI Telephony's share would be approximately
$360 million) will be contributed by the Sprint PCS Partners by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed by any or all of the Sprint PCS Partners). In
addition, in connection with certain debt financings by Sprint Spectrum, L.P., a
subsidiary of the Sprint PCS Partnerships ("Sprint Spectrum"), the corporate
parents of the Sprint PCS Partners (TCI, Cox, Comcast and Sprint, collectively,
the "Sprint PCS Parents") entered into a capital contribution agreement with
Sprint Spectrum (the "Capital Contribution Agreement"), of which the secured
creditors in such debt financings are beneficiaries, pursuant to which each
Sprint PCS Parent agreed to make certain contributions, or cause contributions
to be made, to Sprint Spectrum from time to time upon the occurrence of certain
events (including a payment default under or acceleration of Sprint Spectrum's
obligation pursuant to the debt financings agreements) up to a maximum aggregate
amount determined in accordance with a formula. The obligations of TCI under the
Capital Contribution Agreement have been attributed to the TCI Ventures Group.
As of March 31, 1997, approximately $500 million in cash of such agreed
contributions under the Capital Contribution Agreement had been contributed
directly or indirectly to Sprint Spectrum (of which TCI contributed
approximately $150 million), thereby reducing the Sprint PCS Parents' respective
obligations under the Capital Contribution Agreement by such amount and reducing
TCI's obligation to approximately $150 million as of December 31, 1996. Based on
the currently expected timing of additional contributions to Sprint PCS
(including the currently expected timing of Sprint PCS's expected capital
contributions to its affiliates and to its subsidiaries other than Sprint
Spectrum and its subsidiaries), TCI does not expect that its obligations under
the Capital Contribution Agreement will result in the obligation to make any
incremental capital contributions to Sprint PCS in addition to TCI Telephony's
pro rata portion of the balance of the $4.2 billion that the Sprint PCS Partners
have agreed to contribute.
The TCI Ventures Group's ability to obtain sufficient capital resources to
make its expected additional capital contributions to the Sprint PCS
Partnerships and other entities in which it has investments are limited. WTCI
and NDTC are the only wholly owned subsidiaries attributed to the TCI Ventures
Group that are operating companies and such entities are currently the TCI
Ventures Group's only source of cash provided by operating activities. As a
result, the TCI Ventures Group has limited ability to generate funds internally
to fund capital requirements and limited cash flow from operating activities to
support external financings. The other operating companies attributed to the TCI
Ventures Group have other investors, public or private, and the payment of
dividends, or the making of loans or advances by any one of such TCI Ventures
Group entities to any other of such TCI Ventures Group entities would be subject
to various business considerations, as well as any legal restrictions, including
pursuant to agreements among the investors. Initially, therefore, the TCI
Ventures Group will rely on borrowings under a revolving loan facility (the
"Credit Facility") to TCI Ventures Group for a five-year period commencing on
the closing of the Exchange Offers. Such facility would permit aggregate
borrowings at any one time outstanding of up to $500 million (subject to
reduction as provided below), which borrowings would bear interest at a rate per
annum equal to The Bank of New York's prime rate (as in effect from time to
time) plus 1% per annum, payable quarterly. A commitment fee equal to 3/8% per
annum of the average unborrowed availability under the Revolving Credit Facility
would be payable by the TCI Ventures Group to the TCI Group on a quarterly
basis. The maximum amount of borrowings permitted under the Credit Facility will
be reduced on a dollar-for-dollar basis by up to $300 million if and to the
extent that the aggregate amount of any additional capital that TCI Ventures
Group is required to contribute to Sprint PCS Partnerships subsequent to the
closing of the Exchange Offers is less than $300 million. If the available
borrowings under the Credit Facility are not sufficient to fund the TCI Ventures
Group's capital requirements, no assurance can be given that the TCI Ventures
Group will be able to obtain any required additional financing on terms
acceptable to it, or at all. TCI could raise additional capital for the
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TCI Ventures Group by, among other things, engaging in public offerings or
private placements of TCI Ventures Group common stock or through issuance of
debt securities or preferred equity securities attributed to the TCI Ventures
Group. The Company anticipates, however that for the foreseeable future the TCI
Ventures Group will continue to be dependent upon funding from the TCI Group.
The TCI Ventures Group's failure to meet its contractual and other capital
requirements could have significant adverse consequences to the TCI Ventures
Group.
The majority of the TCI Ventures Group entities currently have significant
capital requirements and TCI expects such entities will continue to have
significant capital requirements for the foreseeable future. TCI Ventures
Group's businesses and investments consist of entities which require the
acquisition, ownership, development and operation of broadband cable television
and telephony distribution networks and new programming services, all of which
require substantial capital investment. The buildout of Sprint PCS's network and
the development of @Home's network infrastructure and the development, marketing
and distribution of their respective products and services will require
substantial capital. Although Teleport has been operating its networks for over
ten years, its continuous acquisition, development and expansion of its existing
and new networks and services also require significant capital expenditures.
International expects to have substantial capital requirements for the
foreseeable future because its businesses and investments consist of entities
which require the acquisition, ownership, development and operation of broadband
cable television and telephony distribution networks and new programming
services. Many of International's subsidiaries and affiliates are incurring
substantial costs as they build or rebuild their cable networks or develop and
acquire programming. Until such companies begin generating profits and positive
cash flow from operating activities, they will need additional capital to fund
capital expenditures and working capital requirements. International has
commitments under various partnership and other funding agreements to contribute
capital or loan money to fund capital expenditures and other capital
requirements of certain affiliates. International believes that its actual
future cash requirements in order to fund the capital expenditures and working
capital requirements of its subsidiaries and affiliates will exceed the sum of
the amounts that International and its consolidated subsidiaries are currently
contractually obligated to fund and such additional funding commitments that
International and its consolidated subsidiaries are currently negotiating.
Further, International's business strategy requires that it have the ability to
access or raise sufficient funds to allow it to take advantage of new
acquisition and joint venture opportunities as they arise, which management of
International believes will require the availability of substantial additional
funds. Although, as of March 31, 1997, International has $134 million proceeds
remaining from the sale of its 4 1/2% Convertible Subordinated Debentures due
2006 which were issued in February 1996 (the "International Debentures") (which
remaining proceeds have been loaned to TCI pursuant to an unsecured promissory
note pending its use by International) and has a $200 million credit facility
("International Credit Facility") with the TCI Ventures Group, International's
ability to otherwise obtain debt financing from unaffiliated entities to assist
its operating companies and to meet its capital obligations at other than the
subsidiary level will be limited because International does not conduct any
operations directly. No assurance can be given that International will be able
to meet its commitments to its subsidiaries and affiliates or to fund its
operations or liquidity requirements through the receipt of cash distributions
or other advances from its subsidiaries or affiliates. The only subsidiary of
International from which it presently is able to obtain funds is the subsidiary
which owns International's interest in the Puerto Rico cable systems.
International believes that the remaining consolidated operating activities of
International will produce net cash flow deficits for the foreseeable future.
Accordingly, International anticipates that it will be dependent upon its
current levels of cash and cash equivalents (exclusive of amounts held by its
subsidiaries), the remaining proceeds from the sale of the International
Debentures and borrowings under the International Credit Facility to meet its
liquidity requirements, including its commitments to its subsidiaries and its
affiliates, for the foreseeable future. To the extent that International seeks
to make significant additional acquisitions or significant new investments or is
required to meet significant future liquidity requirements, it will need to
obtain additional financing.
@Home is investing significantly in the development of its network
infrastructure and hiring new personnel rapidly in anticipation of potential
growth in its business, which is in a very early state of development. As of
March 31, 1997 there were minimal subscribers to its @Home services. @Home
believes that the net proceeds of $88 million from its initial public offering
on July 11, 1997, together with existing
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cash, cash equivalents and capital lease financing, will be sufficient to meet
its working capital and capital expenditure requirements for at least the next
18 months. @Home may, however, require additional funds if its estimates of
working capital and/or capital expenditure and/or lease financing requirements
change or prove inaccurate or in order for @Home to respond to unforeseen
technological or marketing hurdles or to take advantage of unanticipated
opportunities. Over the longer term, it is likely that @Home will require
substantial additional funds to continue to fund its infrastructure investment,
product development, marketing, sales and customer support needs. There can be
no assurance that any such funds will be available at the time or times needed,
or available on terms acceptable to @Home. If adequate funds are not available,
or are not available on acceptable terms, @Home may not be able to continue its
network implementation, to develop new products and services or otherwise to
respond to competitive pressures. Such inability could have a material adverse
effect on @Home's business, operating results and financial condition.
Because TCI's investment in @Home is attributed to the TCI Ventures Group
while the entity which will distribute the @Home service to subscribers of TCI's
cable systems is attributed to the TCI Group, certain conflicts of interest
between the TCI Group and the TCI Ventures Group may result in that actions
taken by the TCI Group, such as the speed at which TCI's cable television
systems are upgraded to the level necessary to support distribution of the @Home
service, will have a direct impact upon the value of the TCI Ventures Group's
interest in @Home. Similarly, the extent to which TCI elects to use @Home as the
provider of certain services which are not covered by TCI's exclusivity
obligations to @Home, rather than another third party, may have an effect upon
the business of @Home and therefore upon the value of the TCI Ventures Group.
For example, TCI's exclusivity obligations do not extend to work-related
services. TCI.NET, the entity in the TCI Group that has responsibility for the
provision of Internet services, may elect to use @Home as the provider of such
work-related services or a third party. To the extent the TCI Group utilizes
@Home to provide such services, the revenue derived therefrom by @Home would
presumably affect its valuation and therefore the overall value of the TCI
Ventures Group. TCI is under no obligation to use @Home as the provider of such
services. To the extent TCI does determine to use @Home as such provider, the
terms upon which @Home would provide such services will be subject to
negotiation, without regard for the terms upon which @Home provides high-speed
residential Internet services.
During the period in which each of TCI, Cox and Comcast have agreed
(subject to certain exceptions and limitations) to use @Home as its exclusive
provider of high speed residential consumer Internet access services, a
stockholders agreement among such parties and @Home provides that in the event
the number of exclusive homes passed attributable to TCI decreases below 80% of
the number of homes passed of TCI and its controlled affiliates as of June 1996
(approximately 23 million), then TCI will be required to offer to sell a
proportionate amount of its equity in @Home to certain other stockholders of
@Home at fair market value. TCI has recently announced the proposed sale or
transfer of certain cable systems which have in the aggregate approximately 2.5
million homes passed. In addition, TCI has announced that it is considering
various plans and proposals that may result in the disposition of other of its
cable systems. In the event that such cable systems continue to be exclusive to
@Home, such cable systems and their homes passed would continue to be included
in TCI's homes passed for purposes of determining whether or not TCI is
obligated to offer a portion of its equity interest in @Home to the other @Home
Cable Stockholders, even through such cable systems are no longer owned or
controlled by TCI. If TCI does not require that such cable systems remain
exclusive to @Home, the TCI Ventures Group could be required to sell shares to
Cox, Comcast and KPCB. There can be no assurance that, if the TCI Ventures Group
is required to sell shares of @Home, the price paid to the TCI Ventures Group
would represent adequate consideration to the TCI Ventures Group because such
fair market value may not adequately reflect the TCI Ventures Group's
expectation of the long term value of such investments in @Home. In addition to
the exceptions to the general exclusivity obligations, Cox and Comcast have the
right to terminate the exclusivity provisions with respect to TCI, Cox and
Comcast in the event TCI does not attain certain subscriber penetration levels
for the @Home service relative to the subscriber penetration levels of Cox and
Comcast, as of June 4, 1999, and each anniversary thereafter until 2002. Such
termination could have a material adverse effect on @Home and the value of the
TCI Ventures Group's interest in @Home.
In addition, although TCI, Cox and Comcast are subject to certain
exclusivity obligations to carry @Home's residential consumer Internet service
over their cable systems, such exclusivity obligations are
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subject to a number of exceptions which allow them to compete with @Home in
certain circumstances. Further, TCI, Cox and Comcast compete to some extent with
@Home for advertising and certain other revenues because @Home retains 100% of
all national advertising revenue delivered on the @Home service, while the local
cable operations of TCI, Cox and Comcast retain 100% of revenue generated from
local service offerings that do not require access to an Internet backbone or
that relate to programming within the local areas of the browser for the @Home
service, such as revenues from local advertising.
The TCI Group has agreements with UVSG for the carriage of UVSG's Prevue
Networks and superstation programming on certain of the cable systems attributed
to the TCI Group and for UVSG's subscriber management services, and UVSG
purchases programming from companies attributed to the Liberty Media Group.
Because TCI's investment is attributed to the TCI Ventures Group, situations may
arise where the entity attributed to one Group may make a decision which
adversely affects one of the other Groups. For example, UVTV markets and
distributes superstation WGN (Chicago) to several of the Company's cable systems
attributed to the TCI Group. TCI recently canceled WGN in certain of its wholly
owned systems which systems serve approximately 4.5 million subscribers. Such
cancellation was the primary cause for the number of WGN subscribers decreasing
by 3.5 million or 9% from March 1996 to March 1'997 (which decrease was
partially offset by new system launches and existing system subscriber growth
aggregating approximately 1.1 million subscribers).
There can be no assurance that any of the foregoing entities will be
successful in generating sufficient cash flow from operating activities or
raising debt or equity capital in sufficient amounts or on terms acceptable to
it to be able to meet their respective capital requirements. There is also no
assurance that the anticipated capital requirements described above will not
significantly increase due to changing circumstances, such as unanticipated
opportunities, technological or marketing hurdles, unanticipated expenses, and
the like. The failure to generate sufficient cash flow from operating activities
or to raise sufficient funds may require such entity to delay or abandon some or
all of its development and expansion plans or in certain instances, could result
in the failure to meet certain regulatory requirements, any and all of which
could have a material adverse effect on such entity's growth, its ability to
compete in its industry and its ability to service its debt.
Many of International's interests in its subsidiaries and affiliates are
governed by partnership and other agreements that require it to contribute
capital or make loans to such subsidiaries or affiliates. The failure of
International to meet its capital commitments to a particular operating company
may have adverse consequences to it and therefore to the TCI Ventures Group.
Such consequences may include, among others, (i) a breach of contract action for
damages against International, (ii) the dilution of International's interest in
such operating Company, (iii) the loss of any management rights in such entity
(such as a right to elect one or more directors), (iv) the right of the other
investors in such operating company to force International to sell its interest
at less than fair value or (v) the forced dissolution of such operating Company.
Similarly, with respect to Sprint PCS, if TCI Ventures Group fails to make
any portion of its required additional capital contributions to Sprint PCS
(other than an additional capital contribution that TCI Ventures Group is
entitled to decline to make), and does not cure such failure within the time
periods specified in the Amended and Restated Agreement of Limited Partnership
of Sprint Spectrum Holding Company, L.P., dated as of January 31, 1996 (the
"Sprint PCS Partnership Agreement"), such failure would constitute an Adverse
Act and TCI Telephony would become an Adverse Partner (each such term, as
defined in the Sprint PCS Partnership Agreement). If TCI Ventures Group were to
become an Adverse Partner, it would lose its right to appoint a representative
to the governing body of Sprint PCS (the "Sprint PCS Partnership Board"), and
the Sprint PCS Partnership Board, by action of the representatives of the other
Sprint PCS Partners that are not Adverse Partners, would be entitled to elect
(i) to commence procedures to allow such other Sprint PCS Partners to purchase
TCI Ventures Group's interest in Sprint PCS at a discount (which purchase price
in the case of a failure to make a required capital contribution would be the
lower of 90% of the net equity of TCI Ventures Group's interest in Sprint PCS
and 80% of TCI Ventures Group's prior capital contributions (less any
distributions paid to TCI Ventures Group)) and/or (ii) to cause Sprint PCS to
seek to obtain specific performance of TCI Ventures Group's obligations or to
sue for money damages. TCI Ventures Group could also become an Adverse Partner
through, among other things, the disposition of its
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interest in Sprint PCS other than in accordance with the Sprint PCS Partnership
Agreement or a material breach of a material covenant in the Sprint PCS
Partnership Agreement.
The failure by TCI Ventures Group to make its pro rata portion of any
additional capital contributions validly requested to be made to Sprint PCS
(whether or not required under the applicable provisions of the Sprint PCS
Partnership Agreement) would result in a decrease in TCI Ventures Group's
current 30% percentage interest in Sprint PCS. Such dilution would be calculated
on the basis of the relative amount of capital contributions made by the Sprint
PCS Partners until an aggregate of $5.0 billion had been contributed;
thereafter, the dilution formula would take into account the fair market value
of each Sprint PCS Partner's interest in Sprint PCS, subject to certain
exceptions. In the event TCI Ventures Group's percentage interest were to
decrease below the 8% minimum ownership requirement set forth in the Sprint PCS
Partnership Agreement, TCI Ventures Group's interest in Sprint PCS would convert
into that of an "Exclusive Limited Partner" and TCI Ventures Group would lose
the right to designate a representative to the Sprint PCS Partnership Board.
Neither PCS systems nor the delivery of Internet services over the cable
infrastructure have any significant commercial operating history in the United
States, and there can be no assurance that operation of either of these
businesses will become profitable. Neither Sprint PCS nor @Home can estimate
with any degree of certainty the potential demand for their services. The
inability of either Sprint PCS or @Home to obtain the necessary equipment for
its systems could have a material adverse effect on its financial condition and
results of operations. Both Sprint PCS and @Home are relying on new products and
technologies to operate their services which have not yet been widely tested on
a commercial basis. Failure of such products and technologies to operate in the
manner expected by such entity, or any delay or inability to obtain a sufficient
quantity of such products at acceptable price and performance levels could delay
or impair the expansion of such entity's business.
NDTC operates a development stage business in an emerging industry and
accordingly faces challenges similar to those described above. NDTC began
offering its "Headend in the Sky" or "HITS" services directly to cable systems
commercially during the fourth quarter of 1996. The HITS services consist of the
transport of compressed and encrypted digital television programming signals to
addressable set-top boxes and the authorization of such boxes. Contracts related
to HITS for authorization and transmission services are currently under
negotiation with a number of affiliated and unaffiliated customers, including
TCIC (which is presently utilizing HITS in a few of TCIC's major markets), but
there can be no assurance that such contracts will be finalized or will be
finalized on terms which will enable NDTC to be profitable. Cable systems are in
an early stage of rolling out digital services to their customers, and customer
acceptance of such services and accordingly, the demand for NDTC's HITS
services, is uncertain. In addition, the HITS service utilizes statistical
multiplexing of digitally compressed video signals, a new technology which has
not been tested or distributed on a large scale and accordingly, the
effectiveness of such technology is uncertain.
Both the wireless telecommunications industry and the Internet services
industry are experiencing significant technological change, evolving industry
standards, ongoing improvements in the capacity and quality of such services,
frequent new product and service introductions and enhancements and changes in
end-user requirements and preferences. Accordingly, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. With respect to PCS, there is uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly access rates
may continue to decline. With respect to Internet services, critical issues
concerning the commercial use of the Internet remain unresolved and may impact
the growth of Internet use, especially in the business market targeted by @Home.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, lack of
availability of cost-effective, high-speed options, a limited number of local
access points for corporate users, inability to integrate business applications
on the Internet, and inadequate protection of the confidentiality of stored data
and information moving across the Internet. There can be no assurance that
@Home's service will be able to meet any or all of these concerns. Market
acceptance of @Home's services is substantially dependent upon the adoption of
the Internet for commerce and communications. If either of @Home's or Sprint
PCS's market fails to develop, develops more slowly than expected, or becomes
highly
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competitive, such entity's business, operating results and financial condition
may be materially adversely affected. For the foregoing reasons, the future
prospects of the PCS and Internet services industries and of Sprint PCS and
@Home remain uncertain.
For the year ended December 31, 1996, WTCI's six largest customers
accounted in the aggregate for approximately 70% of WTCI's consolidated gross
revenue. WTCI provides such services pursuant to master service contracts which
provide for transmission services pursuant to individual service orders. The
master service contracts expire when the last service order in effect thereunder
has terminated. WTCI's six largest customers' master service contracts all
contain many service orders (in some cases, in excess of 100 service orders)
with remaining terms varying from 1 month to approximately 15 months. A
significant reduction in the level of services WTCI provides for any of these
customers could have material adverse effect on WTCI's results of operations or
financial condition, unless WTCI located replacement customers willing to lease
the vacated channels on similar terms. In particular, WTCI's largest carrier
customer has the right to terminate its contract for use of the entire capacity
of a core backbone of WTCI's network between the Seattle and Denver areas in
October 1997, subject to certain conditions. Although this areas has been
overbuilt with fiber, management of WTCI does not believe such termination would
have a material adverse effect on WTCI because it believes that it is likely
that it would be able to re-lease all of such capacity based on current demand
in the area for its long distance transport services.
A significant number of NDTC's major customers are affiliates of TCI, such
as Encore Media Corporation, Liberty/Fox Regional Sports, L.L.C. and Discovery
Communications, Inc., each of which is owned in part by Liberty Media
Corporation, a wholly owned subsidiary of the Company, and NDTC derives a
substantial portion of its revenue from such affiliated companies. For the year
ended December 31, 1996, revenue from services provided to TCI and its
consolidated subsidiaries accounted for 34% of NDTC's total revenue for 1996.
Although NDTC has been seeking, and intends to continue to seek, to expand its
customer base to increase the number of unaffiliated customers over time, there
can be no assurance that it will be successful.
Many of the assets attributed to the TCI Ventures Group consist of
noncontrolling interests in other entities, such as the investments in Sprint
PCS and Teleport. In addition, International has invested in most of its
subsidiaries and affiliates with strategic and local partners, and financial and
operational considerations, as well as laws that limit foreign equity positions,
will likely require International to continue to invest with partners. Many
foreign countries limit foreign investment to a minority equity position or
require the board of directors to be largely independent, which, as discussed
below, can result in International having diminished ability to implement
strategies that International may favor, or cause dividends or distributions to
be paid. For the most part, the Company has attempted to structure its
investments in a manner that allows it to participate in management decisions
(including through representation on the board of directors or other governing
body and veto rights (alone or with one or more of the other investors) over
significant business decisions); however, as is the case with the Company's
interests in Sprint PCS, Teleport and many of the operating companies in which
International has interests, TCI will often be unable to direct the operations,
strategies, and financial decisions of the companies in which it has acquired,
or will acquire, an interest without the concurrence of one or more of its
partners or other co-investors. Moreover, the ability of the Company (directly
or indirectly) to pledge, sell or otherwise dispose of its interest in many of
the operating companies in which it has investments is subject to shareholder or
similar agreements that severely limit the ability of the parties to transfer
their equity interests. Accordingly, the Company may not be able to cause its
subsidiaries or affiliates that are attributed to the TCI Ventures Group to make
distributions when the TCI Ventures Group may have a need for such distributions
and may not be able to timely dispose of its investment in many of such
companies if required for financial or other reasons.
In addition, in the case of Sprint PCS, the structure of the governance of
such TCI Ventures Group Entity allows for situations in which the failure of the
Sprint PCS Partners to agree on certain issues may give rise to a "deadlock
event," which, if unresolved after a certain period of time, may require the
dissolution or liquidation of Sprint PCS. Specifically, the Sprint PCS
Partnership Agreement provides that Sprint PCS will be dissolved upon the
failure of the Sprint PCS Partners to resolve a "Deadlock Event" which is deemed
to occur (i) if the Sprint PCS Partnership Board fails to approve a proposed
annual budget or business plan for
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two consecutive fiscal years or (ii) if the position of chief executive officer
remains vacant for 60 days after a candidate has been proposed by at least two
Sprint PCS Partners having an aggregate of at least 33% of the voting percentage
interests. Upon the occurrence of a Deadlock Event, the Sprint PCS Partners that
are general partners first are required for a period of 20 days to use their
good faith efforts to try to resolve the Deadlock Event. If the general partners
are unable to resolve the matter, such matter will be referred to the chief
executive officers of the Sprint PCS Parents. In the event the chief executive
officers fail to reach a resolution, the matter will be referred to a mediation
service. If the mediator and the Sprint PCS Partners fail to resolve the
Deadlock Event, Sprint PCS will be liquidated unless the Sprint PCS Partnership
Board, by a majority vote of 75% determines not to dissolve or the buy-sell
arrangements contained in the Sprint PCS Partnership Agreement are employed.
The ability of a cash flow generating business, if any, of one of the TCI
Ventures Group Entities to fund the cash flow deficits of the businesses of one
or more of the other TCI Ventures Group Entities is limited not only by the
structural separation of such businesses in separate corporations and
partnerships, but also by the presence of other investors, both debt and equity,
in many of the TCI Ventures Group Entities. In addition, International and
certain of the other TCI Ventures Group Entities, such as Teleport and Sprint
PCS, are holding companies, the assets of which consist solely or primarily of
investments in their subsidiaries and affiliates. As such, the ability of such
holding companies to meet their respective financial obligations and their
funding and other commitments to their respective subsidiaries and affiliates,
is dependent upon the earnings of such subsidiaries and affiliates and the
distribution or other payment of such earnings to such holding companies in the
form of dividends, loans or other advances, payment or reimbursement for
management fees and expenses from their respective subsidiaries and affiliates,
or repayment of loans and advances from such holding companies. Accordingly,
such holding companies' ability to meet their respective liquidity requirements,
including debt service, is severely limited as a result of their dependence upon
the distribution of earnings and advances of funds by their respective
subsidiaries and affiliates. The payment of dividends or the making of loans or
advances to such holding companies by their respective subsidiaries and
affiliates may be subject to statutory, regulatory or contractual restrictions,
are contingent upon the earnings of those subsidiaries and affiliates, and are
subject to various business considerations. In the case of International,
distributions or other payments from foreign subsidiaries and affiliates may
also be subject to restrictions on expatriation of funds or adverse currency
exchange rates and, in the case of subsidiaries or affiliates that are located
in countries where the United States does not have a tax treaty, to increased
withholding taxes. Moreover, International does not have voting control over
many of the entities in which it has ownership interests and such entities will
have no obligation, contingent or otherwise, to make any funds available to
International, whether by dividends, advances, loans or other payments. Certain
of the subsidiaries or affiliates of such holding companies are, or may in the
future be, subject to loan agreements that prohibit or limit the transfer of
funds to such holding companies in the form of dividends, loans, or advances
and/or require that any indebtedness of such subsidiaries or affiliates to such
holding companies be subordinate to the indebtedness under such loan agreements.
Further, any right of any of such holding companies as an equity holder to
participate in the distribution of the assets of any of its subsidiaries upon
liquidation or reorganization will be subject to the prior claims of the
creditors (including trade creditors) or such subsidiary. To date,
International, for example, has not received any significant distributions or
advances from any of its subsidiaries or affiliates. Accordingly, it has had to
rely, and expects to rely for the foreseeable future, on outside sources for
financing.
Many of the TCI Ventures Group entities operate in industries, primarily
the telecommunications industry, which have experienced and are expected to
continue to experience rapid and significant changes in technology. The degree
to which these changes will affect such entities and the ability of such
entities to compete in their respective businesses cannot be predicted. Also,
alternative technologies may develop for the provision of services similar to
those provided by such entities. Such entities may be required to select in
advance one technology over another, but it will be impossible to predict with
any certainty, at the time such entity is required to make its investment, which
technology will prove to be the most economic, efficient or capable of
attracting customer usage.
Currently International is the only TCI Ventures Group Entity that has
significant businesses outside the United States. International's subsidiaries
and affiliates operate solely outside the United States (with the
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exception of Puerto Rico). @Home currently has distribution agreements with two
of Canada's leading cable operators, although such operators have not yet begun
commercial distribution of @Home's services. @Home's business strategy includes
expansion into Canada and other international markets; however, there can be no
assurance that @Home will be successful in expanding its product and service
offerings into foreign markets because of its extremely limited experience in
developing localized versions of its products and services and in developing
relationships with international cable system operators. If @Home does commence
significant international operations, or in the event any of the other TCI
Ventures Group Entities determined to expand into international markets, such
entities (along with International) will be subject to the risks inherent in
doing business on an international level, such as regulatory requirements and
loss of revenue, property and equipment from expropriation, nationalization and
confiscatory taxation. International is and such other TCI Ventures Group
Entities would also be exposed to the risk of changes to laws and policies that
govern foreign investment in countries where they have operations as well as, to
a lesser extent, changes in United States laws and regulations relating to
investing in or trading with countries in which International and such other TCI
Ventures Group Entities may have investment.
Certain of the countries in which International has operating companies or
in which International. @Home or another TCI Ventures Group Entity may operate
in the future, may be subject to a substantially greater degree of social,
political and economic instability than is the case in other countries. Such
instability may result from, among other things, (i) authoritarian governments
or military involvement in political and economic decision making, and changes
in government through coups or other extra-constitutional means; (ii) social
unrest associated with demands for improved economic, social and political
conditions; (iii) internal insurgencies and terrorist activities; and (iv)
hostile relations with neighboring countries. Risks associated with social,
political and economic instability in a particular country could materially
adversely affect the results of operations and financial condition of any
subsidiary or affiliate of International or any other TCI Ventures Group Entity
located within such country or that has significant operations there (and
thereby have a potentially material adverse effect on the results of operations
or financial condition of International or such Entity) and could result in the
loss of International's or such other TCI Ventures Group Entity's investment in
such subsidiary or affiliate or the loss by such subsidiary or affiliate of its
assets in such country.
The TCI Ventures Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar (the functional currency of TCI Ventures Group)
against the UK pound sterling, the Japanese yen ("Y"), the Argentine peso and
various other foreign currencies that are the functional currencies of certain
of the TCI Ventures Group's operating subsidiaries and affiliates. Since the
enactment of a convertibility plan in April 1991, the Argentine government has
maintained an exchange rate of one Argentine peso to one U.S. dollar. No
assurance can be given that such an exchange rate will be maintained in future
periods.
Because the TCI Ventures Group's functional currency is the U.S. dollar,
any increase or decrease in the value of the U.S. dollar against any foreign
currency in which the TCI Ventures Group has funding commitments effectively
reduces or increases the U.S. dollar equivalent of such funding commitments. At
the same time, any increase or decrease in the value of the U.S. dollar against
any foreign currency that is the functional currency of an operating subsidiary
or affiliate of TCI Ventures Group will cause the TCI Ventures Group to
experience unrealized foreign currency translation losses or gains with respect
to amounts already invested in such foreign currencies.
The TCI Ventures Group and certain of its operating subsidiaries and
affiliates are also exposed to foreign currency risk to the extent that they
enter into transactions denominated in currencies other than their respective
functional currencies. In this regard, the TCI Ventures Group has experienced
realized and unrealized currency gains and losses with respect to (i) the UK
pound sterling denominated loans made by an indirect subsidiary of TCI Ventures
Group to Flextech and (ii) the MultiThematiques Obligation. In addition,
Telewest has experienced realized and unrealized foreign currency transaction
gains and losses with respect to the Telewest Debentures.
Because TCI Ventures Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, the TCI Ventures Group
generally does not attempt to hedge existing investments in its foreign
affiliates and subsidiaries. With respect to funding commitments that are
denominated in currencies other than the U.S. dollar, the TCI Ventures Group
historically has sought to reduce its exposure to short-term
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(generally no more than 90 days) movements in the applicable exchange rates once
the timing and amount of such funding commitments become fixed. Although the TCI
Ventures Group monitors foreign currency exchange rates with the objective of
mitigating its exposure to unfavorable fluctuations in such rates, the TCI
Ventures Group believes that, given the nature of its business, it is not
possible or practical to eliminate the TCI Ventures Group's exposure to
unfavorable fluctuations in foreign currency exchange rates.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UKLL and UKGL
all of the share capital in those two companies not already owned by Flextech
and the TCI Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding Flextech Non-Preference Shares had been issued in
connection with previous acquisition transactions by Flextech due to the TCI
Ventures Group's requirement that it maintain specified voting interests in
Flextech. With the issuance of the Special Voting Share, the purpose for the
Flextech Non-Preference Shares was eliminated. Accordingly, and in order to
simplify the capital structure of Flextech, upon the issuance of the Special
Voting Share, the Flextech Non-Preference Shares were converted into Flextech
Ordinary Shares. Immediately following such conversion, and the issuance of
additional Flextech Ordinary Shares in connection with the UKGL and UKLL
transactions described above, (i) the TCI Ventures Group's interest in the
equity share capital of Flextech was 35.9% and (ii) the TCI Ventures Group's
voting interest was approximately 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). To support
its funding obligations, Flextech has obtained a revolving credit facility with
current borrowing availability of up to L85 million ($139 million), and with a
term of up to 5 years, from a syndicate of banks (the "Flextech Revolving Credit
Facility"). If Flextech defaults in its funding obligation to the Principal
Joint Venture and fails to cure within 42 days after receipt of notice from BBC
Worldwide, BBC Worldwide is entitled, within the following 90 days, to require
that the TCI Ventures Group assume all of Flextech's funding obligations to the
Principal Joint Venture (the "Standby Commitment"). In addition to Flextech's
April 1997 purchase of L22 million ($36 million) of ordinary shares in the
Principal Joint Venture, Flextech is obligated to provide the Principal Joint
Venture with a primary credit facility of L88 million ($144 million) and,
subject to certain restrictions, a standby credit facility of L30 million ($49
million). Borrowings under the primary and standby credit facility would be
represented by shares of loan stock of the Principal Joint Venture, bearing
interest at 2% above LIBOR, which interest would be capitalized quarterly.
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit facilities, or (ii) the date on which Flextech delivers a
bank guarantee of all of its funding obligations to the Principal Joint Venture.
The TCI Ventures Group has significant contingent obligations with respect
to Flextech's funding obligations to one of the BBC Joint Ventures (the
"Principal Joint Venture") provided by the TCI Ventures Group to the Principal
Joint Venture in April 1997. For additional information concerning the effects
of the formation of the BBC Joint Ventures and related transactions on the
liquidity and capital resources of the TCI Ventures Group and Flextech, see note
4 to the accompanying combined financial statements.
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On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). Through December 31, 1996, TCI Ventures
Group had contributed $17.9 million to the DTH Ventures. It is anticipated that
TCI Ventures Group could be required to make cash contributions totaling $46
million over the next three years in connection with the DTH Ventures.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of a joint
venture ("Sports Venture") formed among TCI Ventures Group, Liberty Media Group
and News Corporation Limited ("News Corp.") (the "Sports Venture Rights") to the
Sports Venture, TCI Ventures Group, News Corp. and Liberty Media Group have paid
their respective portion of any payments made with respect to the Sports Venture
Rights. Through March 31, 1997, payments made under the International/Torneos
Sports Agreement totaled $20.1 million.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the TCI Ventures Group's
affiliates (the "Guaranteed Obligations"). At December 31, 1996, the U.S. dollar
equivalent of the amounts borrowed pursuant to the Guaranteed Obligations was
$39.3 million. Certain of the Guaranteed Obligations allow for additional
borrowings in future periods. The TCI Ventures Group also has guaranteed the
obligation of an affiliate ("The Premium Movie Partnership") to pay fees for the
license to exhibit certain films through the year 2000. If the TCI Ventures
Group were to fail to fulfill its obligations under the guarantees, the
beneficiaries have the right to demand an aggregate payment of approximately $58
million at December 31, 1996. Although the TCI Ventures Group has not had to
perform under such guarantee to date, the TCI Ventures Group cannot be certain
that it will not be required to perform under such guarantee in the future.
On January 10, 1997, the TCI Ventures Group signed an agreement to pay cash
consideration of approximately $12.7 million, and to assume certain
indebtedness, to acquire the 50% ownership interest in Caguas/Humacao Cable
Systems which the TCI Ventures Group did not already own (the "Caguas
Acquisition"). At December 31, 1996, the indebtedness to be assumed had a
principal balance of $32 million.
Certain of the agreements underlying the Flextech Transactions and the IFE
Acquisitions required the TCI Ventures Group to repurchase an aggregate of
10,467,090 Flextech Non-Preference Shares at fair value (or in the case of the
IFE Consideration Shares, at the greater of fair value or L3.64 ($6.23 per
share) if such shares have not become convertible into Flextech Ordinary Shares
by June 1, 1997. In connection with the closing of the BBC Joint Venture and the
issuance to the TCI Ventures Group of the Special Voting Share, all of the
Flextech Non-Preference Shares are to be converted into Flextech Ordinary
Shares, thereby eliminating TCI Ventures Group's put obligations with respect to
such shares, insofar as such obligations are based on the convertibility of such
shares.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group (ii) the Hallmark and U S WEST subsidiaries'
interests in Flextech acquired under the Hallmark Subscription and the U S WEST
Subscription, respectively, and (iii) Flextech securities acquired by IFE
pursuant to the IFE Acquisitions exceeds 75% of Flextech's issued and
outstanding share capital, or (y) subject to certain exceptions, the Flextech
Ordinary Shares cease to be admitted to trading on the Official List of the
London Stock Exchange as a result of the exercise by the TCI Ventures Group of
any of its rights as a Flextech shareholder, the TCI Ventures Group shall be
obligated to offer to purchase from the Hallmark and U S WEST subsidiaries, and
IFE any Flextech Ordinary Shares or Flextech Non-Preference Shares held by them
and which were originally acquired pursuant to the Hallmark Subscription, the U
S WEST Subscription, or the IFE Acquisitions, as applicable. Under such
circumstances, the offer price for such shares shall be the higher of (i) the
then current market price for the Flextech Ordinary Shares and (ii) the highest
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price paid to any third party by the TCI Ventures Group for any Flextech
Ordinary Shares or Flextech Non-Preference Shares during the preceding 12 month
period. In the event the TCI Ventures Group is required to purchase any Flextech
Non-Preference Shares or Flextech Ordinary Shares, as described above, it may
elect, subject to certain limited exceptions, to pay the purchase price thereof
in cash or in shares of International Series A common stock, or in certain
securities of TCI.
On December 13, 1995, International invested in MultiThematiques with two
French media companies, CANAL + S.A. ("Canal +") and General d'Images S.A.
("GDI"). Canal + and GDI have contributed to MultiThematiques their combined
equity interests in four French thematic channels and Canal + has also
contributed its equity interest in a Spanish classic movie channel. The TCI
Ventures Group contributed 123.1 million French Francs ("FF") ($24.7 million at
the applicable exchange rate), FF105.0 million ($20.2 million) and FF100.00
million ($19.3 million) to MultiThematiques in December 1995, December 1996 and
February 1997, respectively. The TCI Ventures Group is obligated to contribute
an additional FF164.0 million ($31.6 million) no later than December 13, 1997.
In order to manage the TCI Ventures Group's foreign exchange currency risk with
respect to its December 13, 1997 contribution obligation, the TCI Ventures Group
entered into a foreign currency option contract that allows the TCI Ventures
Group to purchase FF 164.0 million at a price of FF 5.5367 per U.S. dollar
through December 13, 1997. Each of International, Canal + and GDI own a
one-third interest in MultiThematiques.
On January 27, 1997, International announced that it was instituting a
stock repurchase program. Under the stock repurchase program, International may
repurchase from time to time up to 5% (approximately 5.3 million shares) of its
outstanding Series A common stock. As of March 31, 1997, International had
repurchased 492,000 shares under such program for an aggregate purchase price of
$6.8 million.
The board of directors of UVSG has authorized it to repurchase from time to
time up to an aggregate of 1,000,000 shares of its Class A common stock using
existing cash resources. No shares of stock were repurchased during 1996;
however, through March 20, 1997, UVSG had repurchased 124,000 shares of stock.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
in the combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity incurring
the debt or issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt incurred
or preferred stock issued by entities included in a Group should be specifically
attributed to and reflected in the combined financial statements of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in, Inter-Group Interest of the TCI Group in such Group or, in the case of a
transfer from either the Liberty Media Group or the TCI Ventures Group to the
TCI Group, reflected as a reduction in any then existing Inter-Group Interest of
the TCI Group in such Group. There are no specific criteria for determining when
a transfer will be reflected as a borrowing or as an increase or reduction in an
Inter-Group Interest. The Board expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the financing needs and objectives
of the Groups, the investment objectives of the Groups, the availability, cost
and time associated with alternative financing sources, prevailing interest
rates and general economic conditions.
Except as described with respect to the Credit Facility, loans from one
Group to another Group would bear interest at such rates and have such repayment
schedules and other terms as are established from time to time by, or pursuant
to procedures established by, the Board. The Board expects to make such
determinations,
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either in specific instances or by setting generally applicable polices from
time to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the use of proceeds by
and creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
Stock as of the date of such transfer, such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures Group being charged (in addition
to the charge for the dividend or other distribution paid), with an amount equal
to the product of the aggregate amount of such dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Group will be to such extent reflected in the combined financial
statements of the TCI Group and will result in an increase in the TCI Group's
Inter-Group Interest in the TCI Ventures Group.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
will be based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or operational
strategies through one Group or one or more of the other Groups, after
consideration of such factors as it deems relevant. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manage and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is
V-160
<PAGE> 399
presented to TCI or any of its controlled affiliates, including those that are a
part of the Liberty Media Group. The foregoing does not apply to (1)
international programming services owned or managed, directly or indirectly (in
whole or in part), by TCI or any of its controlled affiliates other than
International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
V-161
<PAGE> 400
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated
financial statements of Tele-Communications, Inc. and subsidiaries as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996.
We have also audited the accompanying combined balance sheets of TCI
Ventures Group (a combination of certain assets of Tele-Communications, Inc., as
defined in note 1) as of December 31, 1996 and 1995, and the related combined
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined financial statements of TCI Ventures Group are presented for
purposes of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of TCI Ventures Group are intended to reflect
the performance of the businesses of Tele-Communications, Inc. consisting of
Tele-Communications, Inc.'s principal international assets and substantially all
of Tele-Communications, Inc.'s domestic non-cable and non-programming assets.
The combined financial statements of TCI Ventures Group should be read in
conjunction with the consolidated financial statements of Tele-Communications,
Inc. and subsidiaries.
In our opinion, the financial statements referred to in the second
paragraph above present fairly, in all material respects, the combined financial
position of TCI Ventures Group as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
May 30, 1997, except for the
second paragraph in
note 1 and the second,
third and fourth
paragraphs of note 14,
which are as of
July 11, 1997.
V-162
<PAGE> 401
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Cash and cash equivalents................................... $ 105,527 141,754
Trade and other receivables, net............................ 115,491 32,600
Film inventory and other prepaid expenses................... 85,998 45,451
Investment in Telewest Communications plc ("Telewest"),
accounted for under the equity method (note 8)............ 488,495 550,216
Investments in Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (and their respective predecessor) and
PhillieCo (collectively, the "PCS Ventures"), accounted
for under the equity method (note 9)...................... 829,651 689,062
Investments in Teleport Communications Group, Inc., TCG
Partners and certain local market partnerships
("Teleport"), accounted for under the equity method, and
related receivables (note 10)............................. 276,112 244,012
Investments in other affiliates, accounted for under the
equity method, and related receivables (note 11).......... 474,599 391,649
Property and equipment, at cost:
Land...................................................... 7,837 3,950
Distribution systems...................................... 761,191 470,449
Support equipment and buildings........................... 208,294 120,455
---------- ----------
977,322 594,854
Less accumulated depreciation............................. 240,322 146,312
---------- ----------
737,000 448,542
---------- ----------
Franchise costs and other intangible assets................. 1,029,842 620,914
Less accumulated amortization............................. 103,631 47,585
---------- ----------
926,211 573,329
---------- ----------
Other assets, net of amortization........................... 220,619 330,554
---------- ----------
$4,259,703 3,447,169
========== ==========
LIABILITIES AND COMBINED EQUITY
Accounts payable............................................ $ 71,776 28,766
Accrued liabilities......................................... 148,962 60,927
Customer prepayments........................................ 100,670 2,407
MultiThematiques Obligation (note 11)....................... 47,902 65,876
Capital lease obligations (note 15)......................... 199,961 116,872
Debt (note 12).............................................. 526,254 204,189
Deferred income taxes (note 14)............................. 220,306 254,816
Other liabilities........................................... 21,477 8,434
---------- ----------
Total liabilities.................................. 1,337,308 742,287
---------- ----------
Minority interests in equity of subsidiaries (notes 4 and
5)........................................................ 370,879 326,160
Combined equity (notes 4, 5 and 13):
Combined equity........................................... 2,686,794 2,326,106
Cumulative foreign currency translation adjustment, net of
taxes................................................... 26,146 (8,555)
Unrealized holding gains for available-for-sale
securities, net of taxes................................ 15,077 61,171
---------- ----------
2,728,017 2,378,722
Due from Tele-Communications, Inc. ("TCI" or the
"Company")("TCI Note Receivable")(note 13).............. (176,501) --
---------- ----------
Total combined equity.............................. 2,551,516 2,378,722
---------- ----------
Commitments and contingencies (notes 4, 5, 9, 11 and 15).... $4,259,703 3,447,169
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
V-163
<PAGE> 402
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue (note 13)........................................... $ 925,676 325,991 103,844
Operating costs and expenses:
Operating (note 13)....................................... 536,457 137,038 75,045
Programming rights provision.............................. 8,706 -- --
General and administrative (note 13)...................... 288,735 142,183 26,428
Stock compensation (note 15).............................. (6,954) 4,614 (756)
Depreciation.............................................. 90,411 49,125 22,674
Amortization.............................................. 58,878 25,972 5,996
--------- ------- -------
976,233 358,932 129,387
--------- ------- -------
Operating loss......................................... (50,557) (32,941) (25,543)
Other income (expense):
Share of losses of Telewest (note 8)...................... (109,357) (70,274) (42,520)
Share of losses of the PCS Ventures (note 9).............. (133,497) (33,890) (992)
Share of losses of Teleport (note 10)..................... (50,543) (29,975) (19,366)
Share of losses of other affiliates (note 11)............. (74,941) (60,951) (35,791)
Interest income (note 13)................................. 30,040 15,267 3,290
Interest expense.......................................... (51,128) (41,730) (12,979)
Gain on sale of subsidiary stock (note 7)................. -- 122,660 --
Gain on issuance of stock by equity investees (notes 8 and
10).................................................... 12,668 164,900 161,481
Gain (loss) on disposition of assets, net................. 12,225 48,710 (6,133)
Recognized holding gain for available-for-sale securities,
net.................................................... 8,048 -- --
Minority interests' share of losses (earnings)............ 28,177 (14,924) 10,279
Foreign currency transaction gains (losses)............... 6,994 (2,649) 1,389
Other, net................................................ 3,104 (5,960) 500
--------- ------- -------
(318,210) 91,184 59,158
--------- ------- -------
Earnings (loss) before income taxes.................... (368,767) 58,243 33,615
Income tax benefit (expense) (note 14)...................... 110,345 1,797 (20,965)
--------- ------- -------
Net earnings (loss).................................... $(258,422) 60,040 12,650
========= ======= =======
Pro forma net loss per common share (note 2)................ $ (1.26)
=========
</TABLE>
See accompanying notes to combined financial statements.
V-164
<PAGE> 403
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
STATEMENTS OF COMBINED EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE HOLDING
FOREIGN GAINS FOR
CURRENCY AVAILABLE-
TRANSLATION FOR-SALE
ADJUSTMENT, SECURITIES, TOTAL
COMBINED NET OF NET OF TCI NOTE COMBINED
EQUITY TAXES TAXES RECEIVABLE EQUITY
---------- ----------- ------------ ---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993....................... $ 634,009 (13,504) -- -- 620,505
Net earnings..................................... 12,650 -- -- -- 12,650
Foreign currency translation adjustment.......... -- 9,851 -- -- 9,851
Change in unrealized holding gains for
available-for-sale securities.................. -- -- 575 -- 575
Stock compensation............................... (756) -- -- -- (756)
Revenue from TCI Group and Liberty Media Group... (7,274) -- -- -- (7,274)
Operating costs to TCI Group..................... 2,600 -- -- -- 2,600
Corporate general and administrative cost
allocations.................................... 445 -- -- -- 445
Intergroup tax allocation........................ 31,909 -- -- -- 31,909
Other intercompany transfers..................... 498,277 -- -- -- 498,277
---------- ------- ------- -------- ---------
Balance at December 31, 1994....................... 1,171,860 (3,653) 575 -- 1,168,782
Net earnings..................................... 60,040 -- -- -- 60,040
Foreign currency translation adjustment.......... -- (4,902) -- -- (4,902)
Change in unrealized holding gains for
available-for-sale securities.................. -- -- 60,596 -- 60,596
Adjustment in connection with the issuance of
ordinary shares by Flextech p.l.c. (note 4).... 50,900 -- -- -- 50,900
Issuance of International common stock in 1995
initial public offering........................ 301,343 -- -- -- 301,343
Issuance of International common stock as partial
consideration for investment................... 11,000 -- -- -- 11,000
Stock compensation............................... 4,614 -- -- -- 4,614
Revenue from TCI Group and Liberty Media Group... (20,881) -- -- -- (20,881)
Operating costs to TCI Group..................... 3,400 -- -- -- 3,400
Corporate general and administrative cost
allocations.................................... 4,120 -- -- -- 4,120
Intergroup tax allocation........................ (55,941) -- -- -- (55,941)
Other intercompany transfers..................... 795,651 -- -- -- 795,651
---------- ------- ------- -------- ---------
Balance at December 31, 1995....................... 2,326,106 (8,555) 61,171 -- 2,378,722
Net loss......................................... (258,422) -- -- -- (258,422)
Issuance of International common stock........... 9,990 -- -- -- 9,990
Minority interest deficit in Satellite Joint
Venture at formation........................... (49,169) -- -- -- (49,169)
Excess of earnings over distributions to minority
interest in Satellite Joint Venture............ 8,454 -- -- -- 8,454
Foreign currency translation adjustment.......... -- 34,701 -- -- 34,701
Recognition of unrealized gain for
available-for-sale securities, net............. -- -- (8,048) -- (8,048)
Change in unrealized holding gain for
available-for-sale securities.................. -- -- (38,046) -- (38,046)
TCI Note Receivable.............................. -- -- -- (336,375) (336,375)
Repayment on TCI Note Receivable................. -- -- -- 159,874 159,874
Stock compensation............................... (6,954) -- -- -- (6,954)
Revenue from TCI Group and Liberty Media Group... (38,292) -- -- -- (38,292)
Operating costs to TCI Group..................... 38,400 -- -- -- 38,400
Corporate general and administrative cost
allocations.................................... 7,918 -- -- -- 7,918
Interest income on TCI Note Receivable........... (14,000) -- -- -- (14,000)
Intergroup tax allocation........................ (52,660) -- -- -- (52,660)
Other intercompany transfers..................... 715,423 -- -- -- 715,423
---------- ------- ------- -------- ---------
Balance at December 31, 1996....................... $2,686,794 26,146 15,077 (176,501) 2,551,516
========== ======= ======= ======== =========
</TABLE>
See accompanying notes to combined financial statements.
V-165
<PAGE> 404
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(258,422) 60,040 12,650
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................... 149,289 75,097 28,670
Programming rights provision............................ 8,706 -- --
Stock compensation...................................... (6,954) 4,614 (756)
Payment of stock compensation........................... -- (3,270) --
Share of losses of Telewest............................. 109,357 70,274 42,520
Share of losses of PCS Ventures......................... 133,497 33,890 992
Share of losses of Teleport............................. 50,543 29,975 19,366
Share of losses of other affiliates..................... 74,941 60,951 35,791
Gain on sale of subsidiary stock........................ -- (122,660) --
Gain on issuance of stock by equity investees........... (12,668) (164,900) (161,481)
Loss (gain) on disposition of assets.................... (12,225) (48,710) 6,133
Recognized holding gain for available-for-sale
securities............................................. (8,048) -- --
Minority interests' share of earnings (losses).......... (28,177) 14,924 (10,279)
Foreign currency transaction losses (gains)............. (6,287) 1,761 (1,389)
Accretion of discount on MultiThematiques Obligation.... 5,751 271 --
Other noncash charges (credits)......................... 6,445 (1,259) 8
Deferred income tax expense (benefit)................... (71,643) 45,063 (10,949)
Intergroup tax allocation............................... (52,660) (55,941) 31,909
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Change in receivables................................. (13,394) (4,147) (9,810)
Change in film inventory and other prepaid expenses... (16,667) (31,199) (2,272)
Change in payables and accruals....................... 34,471 42,124 (6,602)
--------- ---------- --------
Net cash provided (used) by operating activities.... 85,855 6,898 (25,499)
--------- ---------- --------
Cash flows from investing activities:
Investments in and loans to affiliates and others......... (499,685) (1,040,896) (393,137)
Cash paid for acquisitions, net........................... (108,790) (189,752) --
Payment of deposit on pending acquisition................. -- -- (20,000)
Capital expended for property and equipment............... (209,378) (141,569) (76,050)
Cash paid to purchase minority interests.................. (4,636) (24,735) --
Proceeds from repayment of loans by affiliates and
others.................................................. 21,628 12,062 1,640
Proceeds from dispositions of assets...................... 142,854 99,335 63
Other, net................................................ 3,304 (47,931) (56)
--------- ---------- --------
Net cash used in investing activities............... (654,703) (1,333,486) (487,540)
--------- ---------- --------
Cash flows from financing activities:
Issuance of debentures.................................... 345,000 -- --
TCI Note Receivable....................................... (336,375) -- --
Repayments on TCI Note Receivable......................... 159,874 -- --
Net proceeds from initial public offering................. -- 301,343 --
Borrowings of debt........................................ 191,219 314,815 12,772
Repayments of debt........................................ (282,541) (310,216) (9,282)
Repayments of capital lease obligations................... (11,724) (5,742) (1,394)
Net proceeds from issuance of common stock................ 9,990 -- --
Cash proceeds from issuance of shares by Flextech plc..... -- 74,779 --
Payment of deferred financing costs....................... (9,524) (2,105) --
Change in cash transfers from other Groups................ 457,954 1,081,757 497,285
Contributions from minority interest owners............... 4,822 -- 16,162
Other, net................................................ -- 8,707 --
--------- ---------- --------
Net cash provided by financing activities........... 528,695 1,463,338 515,543
--------- ---------- --------
Effect of exchange rate changes on cash..................... 3,926 (3,142) 224
--------- ---------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (36,227) 133,608 2,728
Cash and cash equivalents:
Beginning of year....................................... 141,754 8,146 5,418
--------- ---------- --------
End of year............................................. $ 105,527 141,754 8,146
========= ========== ========
</TABLE>
See accompanying notes to combined financial statements.
V-166
<PAGE> 405
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) BASIS OF PRESENTATION
On May 14, 1997, the Board of Directors of TCI (the "Board") authorized,
subject to shareholder approval (the "TCI Ventures Group Stock Proposal"), the
issuance of two new series of stock ("TCI Ventures Group Common Stock") which
are intended to reflect the separate performance of the TCI Ventures Group.
The TCI Ventures Group Common Stock, if issued, will be intended to reflect
the separate performance of the TCI Ventures Group. The TCI Ventures Group would
initially consist principally of the following assets and their related
liabilities: (i) TCI's 85% equity interest (representing a 92% voting interest)
in International, which is the Company's primary vehicle for the conduct of its
international cable, telephony and programming businesses (other than those
international programming businesses attributed to the Liberty Media Group),
(ii) TCI's principal interests in the Telephony Business, owned through its
indirect wholly owned subsidiary TTS-Delaware (together with its consolidated
subsidiaries, "TCI Telephony") consisting primarily of the Company's investment
in a series of partnerships formed to engage in the business of providing
wireless communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residential and business customers
nationwide under the Sprint(R) brand (a registered trademark of Sprint
Communications Company, L.P.) (the "PCS Ventures"), the Company's 30% equity
interest (representing a 37% voting interest) in Teleport Communications Group
Inc. ("Teleport" or "TCG"), a competitive local exchange carrier, and Western
Tele-Communications, Inc. (together with its consolidated subsidiaries, "WTCI"),
a wholly owned subsidiary of the Company that provides long distance transport
of video, voice and data traffic and other telecommunications services to
telecommunications carriers on a wholesale basis using primarily a digital
broadband microwave network located throughout a 12 state region, (iii) TCI's
40% equity interest (representing an 85% voting interest) in UVSG, which
provides satellite-delivered video, audio, data and program promotion services
to cable television systems, satellite dish owners, radio stations and private
network users, primarily throughout North America, (iv) TCI's 39% equity
interest (representing a 72% voting interest) in At Home Corporation ("@Home"),
a provider of high speed multimedia Internet services, and (v) other assets,
including National Digital Television Center, Inc. ("NDTC"), a wholly owned
subsidiary of the Company that provides digital compression and authorization
services to programming suppliers and to video distribution outlets, ETC, an 80%
owned subsidiary of the Company that develops and distributes for-profit
education, training and communication services and products, and TCI SUMMITrak
of Texas, Inc. and TCI SUMMITrak L.L.C. (collectively, "SUMMITrak"), wholly
owned subsidiaries of the Company that provide an integrated network-based
information management system currently to certain of TCI's cable systems with
plans to expand its service to include third parties. The stocks of
International, TCG, UVSG and @Home are traded on the National Market tier of The
Nasdaq Stock Market. The PCS Ventures include Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS
Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the
Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the
Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the
Company. The Company, through TCI Telephony, has a 30% interest as a partner in
each of the Sprint PCS Partnerships and a 35% interest as a partner in
PhillieCo. (Percentage equity and voting interests provided above have been
rounded to the nearest whole number and calculated as of June 30, 1997, except
for percentage interests in entities that are not consolidated subsidiaries
which have been calculated as of March 31, 1997 and except that the percentage
equity and voting interests in @Home have been adjusted to reflect the closing
of its initial public offering on July 11, 1997.)
The TCI Ventures Group would also include such other assets and liabilities
of the TCI Group as the Board may in the future determine to attribute or sell
to the TCI Ventures Group and such other businesses,
V-167
<PAGE> 406
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities as the Company or any of its subsidiaries may in the
future acquire for the TCI Ventures Group, as determined by the Board. It is
currently the intention of the Company that any businesses, assets and
liabilities so attributed to the TCI Ventures Group in the future would not
include assets and liabilities of the Company's domestic programming businesses
and investments or its domestic cable operations (including its businesses which
utilize its cable plant to distribute telephony and Internet services).
The TCI Group is intended to reflect the performance of those businesses of
TCI not attributed to the Liberty Media Group (which is intended to reflect the
performance of TCI's business which produces and distributes programming
services) and the TCI Ventures Group. Collectively, the TCI Group, the Liberty
Media Group and the TCI Ventures Group are referred to as the "Groups" and
individually may be referred to herein as a "Group".
The common stockholders' equity value of TCI attributable to the TCI
Ventures Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding TCI Ventures Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of TCI
Ventures Group Stock, the Inter-Group Interest of the TCI Group in the TCI
Ventures Group is 100%. As any shares of TCI Ventures Group Stock are issued and
distributed or sold, the TCI Group's Inter-Group Interest in the TCI Ventures
Group will be reduced accordingly.
While the TCI Ventures Group Stock constitutes common stock of TCI,
issuance of the TCI Ventures Group Stock will not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock"), Series A Liberty Media Group and Series B Liberty Media Group
common stock ("Liberty Media Group Stock") and TCI Ventures Group Stock (when
issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Prior to August 28, 1997, the Company will commence offers (the "Exchange
Offers") to exchange shares of Series A TCI Ventures Group Common Stock and
Series B TCI Ventures Group Common Stock for up to an aggregate of 188,661,300
shares of Series A TCI Group Stock and 16,266,400 shares of Series B TCI Group
Stock, respectively (representing approximately 30% of the shares of each such
series outstanding as of June 30, 1997, excluding shares held by majority owned
subsidiaries of the Company) in the ratio of one share of the applicable series
of TCI Ventures Group Common Stock in exchange for each share of the
corresponding series of TCI Group Stock properly tendered. The Exchange Offers
will be subject, among other conditions, to the approval by stockholders of the
TCI Ventures Group Stock Proposal. If such approval is obtained and other
conditions are satisfied, the Company would consummate the Exchange Offers on or
about September 10, 1997.
The aggregate number of shares of TCI Ventures Group Common Stock being
offered in the Exchange Offers is intended initially to represent 100% of the
common stockholders' equity value of the Company attributable to the TCI
Ventures Group. Accordingly, if all of such shares were issued in the Exchange
Offers, the Inter-Group Interest of the TCI Group in the TCI Ventures Group
would be reduced to zero. If immediately following the consummation of the
Exchange Offers the TCI Group has any remaining Inter-Group Interest in the TCI
Ventures Group, the Company will extinguish such Inter-Group Interest in
consideration of the attribution to the TCI Group of a preferred equity interest
in the TCI Ventures Group with a face amount equal to the market value of the
shares of TCI Ventures Group Common Stock not issued in the Exchange Offers
(which shall be deemed to be the same, on a per share basis, as the market value
of the Series A TCI Group Stock on the last trading day preceding the closing of
the Exchange Offers), a dividend rate of 5% per annum and a mandatory redemption
obligation on the 15th anniversary of the closing of the Exchange Offers.
Accrued dividends on the preferred equity interest would accumulate and compound
annually (but not be payable currently) until the fifth anniversary of the
closing of the Exchange Offers.
V-168
<PAGE> 407
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the shares of TCI Ventures Group Common Stock to be issued
in the Exchange Offers, shares of Series A TCI Ventures Group Common Stock are
being reserved for issuance upon conversion, exercise or exchange subsequent to
the closing of the Exchange Offers of certain outstanding convertible notes
issued by a subsidiary of the Company and upon exercise of certain outstanding
options. In lieu of a number of shares of Series A TCI Group Stock equal to 30%
of the number of shares of Series A TCI Group Stock currently issuable upon
exchange of such convertible notes, an equal number of shares of TCI Ventures
Group Common Stock would be issued upon such exchange. Similarly, options to
purchase shares of Series A TCI Group Stock that are outstanding under the
Company's various stock incentive plans will be adjusted upon consummation of
the Exchange Offers by dividing such options into options to purchase shares of
Series A TCI Ventures Group Common Stock and options to purchase shares of
Series A TCI Group Stock, with 30% of the shares originally subject to the
options being allocated to the options to purchase TCI Ventures Group Common
Stock and 70% of such shares being allocated to the options to purchase shares
of TCI Group Stock. The terms of each of such options at the time of issuance
will be the same as the terms of the option that they replace, including as to
the exercise price per share and vesting schedule.
Notwithstanding the attribution of assets and liabilities, equity and items
of income and expense among the TCI Group, the Liberty Media Group and the TCI
Ventures Group for the purpose of preparing the combined financial statements of
the TCI Group, the Liberty Media Group and the TCI Ventures Group, the change in
the capital structure of the Company contemplated by the TCI Ventures Group
Stock Proposal will not affect legal title to such assets or responsibility for
such liabilities of the Company or any of its subsidiaries. Holders of TCI Group
Stock, Liberty Media Group Stock and TCI Ventures Group Stock will be common
stockholders of the Company and will be subject to risks associated with an
investment in the Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Stock, the Liberty Media Group Stock and the
TCI Ventures Group Stock. In addition, any net losses of any Group, dividends or
distributions on, or repurchases of, the TCI Group Stock, the Liberty Media
Group Stock or the TCI Ventures Group Stock, and dividends on, or certain
repurchases of, preferred stock, will reduce funds of the Company legally
available for the payment of dividends on the TCI Group Stock, the Liberty Media
Group Stock and the TCI Ventures Group Stock. The combined financial statements
of the TCI Group, the Liberty Media Group and the TCI Ventures Group should be
read in conjunction with the consolidated financial statements of the Company.
Dividends on the TCI Ventures Group Stock will be payable at the sole
discretion of the Board out of the lesser of the assets of TCI legally available
for dividends or the available dividend amount with respect to TCI Ventures
Group, as defined. Determinations to pay dividends on TCI Ventures Group Stock
are based primarily upon the financial condition, results of operations and
business requirements of TCI Ventures Group and TCI as a whole.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
TCI Ventures Group considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1995 was not material.
V-169
<PAGE> 408
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Investments
For those investments in affiliates in which the TCI Ventures Group's
voting interest is 20% to 50%, the equity method of accounting is generally
used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the TCI Ventures Group's share of the net earnings or
losses of affiliates as they occur rather than as dividends or other
distributions are received. The TCI Ventures Group's share of net earnings or
losses of affiliates includes the amortization of purchase adjustments.
Investments in debt securities and marketable equity securities in which
the TCI Ventures Group's voting interest is less than 20% are classified as
available-for-sale and are carried at fair value. Any unrealized holding gains
and losses (net of the related deferred income tax effect) are carried as a
separate component of combined equity. Any unrealized holding losses which are
deemed to be other than temporary are charged to operations. Other investments
in which the TCI Ventures Group's ownership interest is less than 20% are
generally carried at cost.
Changes in the TCI Ventures Group's proportionate share of the underlying
equity of a subsidiary or equity method investee, which result from the issuance
of additional equity by such subsidiary or equity method investee, are generally
recognized as gains or losses in the TCI Ventures Group's statements of
operations.
Film Inventory
Film inventory includes exhibition and other exploitation rights acquired
under license agreements or through production and output agreements. Such
rights, along with the related obligation, are recorded at the face amount of
the contract at the time the programming becomes available.
Film inventory is carried at the lower of unamortized cost or net
realizable value. Exhibition rights are amortized on a straight-line basis over
the available runs in the contract period. Other exploitation rights are
amortized based on the percentage that current year revenues bear to estimated
future revenues on a program-by-program basis. Estimates of future revenues are
periodically reviewed by management and revised when warranted by changing
conditions, such as changes in the distribution marketplace or changes in the
expected usage of a program.
Long-Lived Assets
(a) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Equipment acquired under capital leases
are stated at the present value of minimum lease payments, not to exceed the
fair value of the leased asset. Construction and initial subscriber installation
costs, including interest during construction, material, labor and applicable
overhead, are capitalized. Interest capitalized during 1996, 1995 and 1994 was
not material.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 20 years for distribution systems (3 to 5 years for converters and
in-home wiring and 10 to 20 years for the remaining components of the
distribution system) and 3 to 40 years for support equipment and buildings (3 to
5 years for support equipment and 10 to 40 years for buildings and
improvements). Equipment held under capital leases are depreciated on a
straightline basis over the shorter of the lease term or estimated useful life
of the asset.
Repairs and maintenance are charged to operations, and additions are
capitalized. At the time of ordinary retirements, sales or other dispositions of
cable property, the original cost and cost of removal of such property are
charged to accumulated depreciation, and salvage, if any, is credited thereto.
Gains and losses relating to cable are only recognized in connection with sales
of properties in their entirety. Gains and losses relating to all other assets
are recognized at the time of disposal.
V-170
<PAGE> 409
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
Franchise costs and other intangible assets generally include the
difference between the cost of acquiring cable, telephony and programming
companies and amounts allocated to their tangible assets. Such amounts are
amortized on a straight-line basis over their useful lives (10 to 40 years).
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The TCI Ventures Group
adopted Statement No. 121 effective January 1, 1996. Such adoption did not have
a significant effect on the financial position or results of operations of the
TCI Ventures Group. In accordance with Statement No. 121, the TCI Ventures Group
periodically reviews the carrying amount of its long-lived assets, franchise
costs and certain other assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. The TCI Ventures
Group considers historical and expected future net operating losses to be its
primary indicators of potential impairment. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets ("Assets").
The TCI Ventures Group deems Assets to be impaired if the TCI Ventures Group is
unable to recover the carrying value of its Assets over their expected remaining
useful life through a forecast of undiscounted future operating cash flows
directly related to the Assets. If Assets are deemed to be impaired, the loss is
measured as the amount by which the carrying amount of the Assets exceeds their
fair values. The TCI Ventures Group generally measures fair value by considering
sales prices for similar assets or by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash
flows. Accordingly, actual results could vary significantly from such estimates.
Foreign Currency Translation
The functional currency of TCI Ventures Group is the United States ("U.S.")
dollar. The functional currency of the TCI Ventures Group's foreign operations
generally is the applicable local currency for each foreign subsidiary and
foreign equity method investee. In this regard, the functional currency of
Cablevision S.A. and certain affiliated companies ("Cablevision"), Flextech
p.1.c. ("Flextech") and the multi-channel video and telecommunications
distribution business in Puerto Rico (the "Consolidated Puerto Rico Entities")
is the Argentine peso, the United Kingdom ("UK") pound sterling ("L" or
"pounds") and the U.S. dollar, respectively. All amounts presented herein with
respect to Cablevision are stated in U.S. dollars because the Argentine
government has maintained an exchange rate of one U.S. dollar to one Argentine
peso since April of 1991. However, no assurance can be given that the Argentine
government will maintain such an exchange rate in future periods. Assets and
liabilities of foreign subsidiaries and foreign equity investees are translated
at the spot rate in effect at the applicable reporting date, and the combined
statements of operations and the TCI Ventures Group's share of the results of
operations of its foreign equity affiliates are translated at the average
exchange rates in effect during the applicable period. The resulting unrealized
cumulative translation adjustment, net of applicable income taxes, is recorded
as a separate component of combined equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in the combined statements of operations as unrealized
(based on the applicable period end translation) or realized upon settlement of
the transactions.
V-171
<PAGE> 410
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash flows from the TCI Ventures Group's consolidated foreign subsidiaries
are calculated in their functional currencies. The effect of exchange rate
changes on cash balances held in foreign currencies is reported as a separate
line item in the accompanying statements of cash flows.
Foreign Currency Derivatives
From time to time, the TCI Ventures Group uses certain derivative financial
instruments to manage its foreign currency risks. Amounts receivable or payable
pursuant to derivative financial instruments that qualify as hedges of existing
assets, liabilities and firm commitments are deferred and reflected as an
adjustment of the carrying amount of the hedged item. Market value changes in
all other derivative financial instruments are recognized currently in the
combined statements of operations. At December 31, 1996 and 1995, the TCI
Ventures Group had no material deferred hedging gains or losses.
Proforma Loss Per Common Share
Pro forma loss attributable to common shareholders for the year ended
December 31, 1996 assumes, solely for the purpose of this calculation, that the
Exchange Offers were consummated prior to January 1, 1996 and that, the Exchange
Offers were fully subscribed.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. As allowed by Statement No. 123, the TCI Ventures Group continues
to account for stock-based employee compensation pursuant to Accounting
Principles Board Opinion No. 25 ("APB Opinion No. 25"). For the year ending
December 31, 1996, the TCI Ventures Group estimates that compensation expense
would not be materially different under Statement No. 123.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid for interest was $36.3 million, $38.0 million and $12.7 million
for years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for
income taxes was $12.5 million during the year ended December 31, 1996 and was
not material during the years ended December 31, 1995 and 1994.
V-172
<PAGE> 411
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net cash paid by the TCI Ventures Group for acquisitions is as follows
(amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Fair value of assets acquired...................... $ 632,768 589,193 92,536
Issuance of notes payable.......................... (51,727) (86,755) --
Liabilities assumed (including deferred income tax
liabilities of $36.6 million and $177.7 million
in 1996 and 1995, respectively), net of current
assets........................................... (151,273) (310,022) (33,857)
Historical cost of contributed net assets.......... -- -- (40,017)
Increase in minority interests in equity of
subsidiaries due to issuance of shares by
Flextech......................................... (43,223) -- --
Minority interest in equity of acquired entity..... (81,751) (2,664) (18,662)
Increase in combined equity resulting from
preferred stock issued in acquisition............ (196,004) -- --
--------- -------- -------
Cash paid for acquisitions....................... $ 108,790 189,752 --
========= ======== =======
Property and equipment purchased under capital
leases........................................... $ 63,656 77,076 34,058
========= ======== =======
</TABLE>
(4) FLEXTECH TRANSACTIONS
On February 2, 1994, the TCI Ventures Group contributed its 100% ownership
interests in Flextech Television Limited ("FTV") and Bravo Classic Movies
Limited ("Bravo Ltd."), together with its equity method investments in UK Gold
Television Limited ("UKGL"), UK Living Limited ("UKLL") and Starstream Limited
("Starstream") (collectively, the "International UK Programming Assets") to
Flextech in exchange for 60.4% of Flextech's issued and outstanding ordinary
shares.
The TCI Ventures Group owned, at December 31, 1996, 56,340,598 Flextech
Ordinary Shares representing 46.5% of the issued and outstanding Flextech share
capital and 50.9% of the aggregate voting interests attributable to such
Flextech share capital.
On June 5, 1995, Flextech completed the sale of newly issued Flextech
Ordinary Shares and newly issued convertible non-preference shares ("Flextech
Non-Preference Shares") to subsidiaries of Hallmark Cards Incorporated
("Hallmark") (the "Hallmark Subscription") and U S WEST, Inc. ("U S WEST") (the
"U S WEST Subscription") in exchange for L48.4 million ($77.2 million using the
applicable exchange rate) in cash and convertible redeemable preferred shares of
Thomson Directories Limited, respectively. The Hallmark Subscription and the U S
WEST Subscription are collectively referred to herein as the "Flextech
Transactions."
In connection with the Flextech Transactions, the TCI Ventures Group
recorded a $50.9 million increase to combined equity and a $93.2 million
increase to minority interests in equity of subsidiaries. No gain was recognized
due primarily to the existence of the TCI Ventures Group's contingent
obligations to purchase Flextech Non-Preference Shares and/or Flextech Ordinary
Shares from U S WEST (UK) and Hallmark.
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in Maidstone
Broadcasting ("Maidstone"), which Flextech did not already own and (ii) a 100%
ownership interest in TVS Television Limited. Excluding liabilities assumed, the
total consideration paid by Flextech to acquire such ownership interests was
L31.4 million ($47.8 million using the applicable exchange rate), of which L3.0
million ($4.5 million using the applicable exchange rate) was paid in cash and
the remaining balance was satisfied by Flextech's issuance of convertible
non-preference shares (the "IFE Consideration Shares"). In connection with the
above-described transactions (collectively, the "IFE Acquisitions"), the TCI
Ventures Group granted to IFE the right to put the IFE Consideration Shares to
the TCI
V-173
<PAGE> 412
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ventures Group under certain circumstances. Due primarily to the TCI Ventures
Group's contingent purchase obligations under the above-described put option,
the TCI Ventures Group recognized no gain in connection with the dilution of the
TCI Ventures Group's ownership interest in Flextech that resulted from the
issuance of the IFE Consideration Shares. Accordingly, the full value ascribed
to the IFE Consideration Shares has been reflected as an increase to minority
interests in equity of subsidiaries as set forth in the accompanying December
31, 1996 combined balance sheet. In connection with the BBC Joint Ventures, as
defined below, and certain related transactions, all of the IFE Consideration
Shares were converted into Flextech Ordinary Shares thereby eliminating the TCI
Ventures Group's put obligation with respect to such shares.
In January 1997, the TCI Ventures Group reduced its voting interest in
Flextech to 50% by issuing to a nominee an irrevocable proxy (the "Proxy") to
vote 960,850 Flextech Ordinary Shares at any shareholder meeting to be held
through December 31, 1997. In April 1997, Flextech and BBC Worldwide Limited
("BBC Worldwide") formed two separate joint ventures (the "BBC Joint Ventures")
and entered into certain related transactions. The consummation of the BBC Joint
Ventures and related transactions resulted in, among other things, a reduction
of TCI Ventures Group's ownership interest in Flextech to 35.9% and the issuance
to the TCI Ventures Group by Flextech of a special voting share (the "Special
Voting Share"). The Special Voting Share when combined with TCI Ventures Group's
other share capital in Flextech, allows TCI Ventures Group to cast 50% of the
votes on most matters brought to the shareholders of Flextech for vote. So long
as the Proxy remains outstanding, TCI Ventures Group's 50% voting interest will
be reduced by the 960,850 votes represented by the Proxy. The Special Voting
Share will terminate upon the occurrence of the earlier of (i) the third
anniversary of issuance or (ii) any transfer of Flextech shares by the TCI
Ventures Group outside a specified affiliated group. In light of the TCI
Ventures Group's decreased voting interest in Flextech, the TCI Ventures Group,
effective January 1, 1997, ceased to consolidate Flextech and began to account
for Flextech using the equity method of accounting.
In connection with the Flextech Combination, the TCI Ventures Group
purchased L9.4 million ($14.2 million using the applicable exchange rate) of
certain unsecured convertible debt of Flextech (the "Flextech Convertible
Debt"). The Flextech Convertible Debt may be converted into Flextech ordinary
shares ("Flextech Ordinary Shares") at the rate of L3.00 ($5.14) per Flextech
Ordinary Share for a period of 180 days commencing in September 1997. The
conversion of such debt, however, would not increase the TCI Ventures Group's
voting interest attributable to Flextech share capital so long as the Proxy
remains outstanding.
In April 1997, (i) Flextech and BBC Worldwide formed the two BBC Joint
Ventures and (ii) Flextech acquired from the other shareholders of UKLL and UKGL
all of the share capital in those two companies not already owned by Flextech
and the TCI Ventures Group through the issuance of new Flextech Ordinary Shares.
Flextech's outstanding Flextech Non-Preference Shares had been issued in
connection with previous acquisition transactions by Flextech due to the TCI
Ventures Group's requirement that it maintain specified voting interests in
Flextech. With the issuance of the Special Voting Share, the purpose for the
Flextech Non-Preference Shares was eliminated. Accordingly, and in order to
simplify the capital structure of Flextech, upon the issuance of the Special
Voting Share, the Flextech Non-Preference Shares were converted into Flextech
Ordinary Shares. Immediately following such conversion, and the issuance of
additional Flextech Ordinary Shares in connection with the UKGL and UKLL
transactions described above, (i) the TCI Ventures Group's interest in the
equity share capital of Flextech was 35.9% and (ii) the TCI Ventures Group's
voting interest was 50%.
Flextech has undertaken to finance the working capital requirements of one
of the BBC Joint Ventures (the "Principal Joint Venture"). Flextech has also
agreed to make available to the other BBC Joint Venture (the "Second Joint
Venture"), if required, funding of up to L10 million ($16 million). If Flextech
defaults in
V-174
<PAGE> 413
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
its funding obligation to the Principal Joint Venture and fails to cure within
42 days after receipt of notice from BBC Worldwide, BBC Worldwide is entitled,
within the following 90 days, to require that the TCI Ventures Group assume all
of Flextech's funding obligations to the Principal Joint Venture (the "Standby
Commitment"). In addition to Flextech's April 1997 purchase of L22 million ($36
million) of ordinary shares in the Principal Joint Venture, Flextech is
obligated to provide the Principal Joint Venture with a primary credit facility
of L88 million ($144 million) and, subject to certain restrictions, a standby
credit facility of L30 million ($49 million).
If BBC Worldwide requires the TCI Ventures Group to perform Flextech's
funding obligations pursuant to the Standby Commitment, then the TCI Ventures
Group will acquire Flextech's entire equity interest in the Principal Joint
Venture for L1.00, and will replace Flextech's directors on the board of the
Principal Joint Venture with representatives of the TCI Ventures Group. Flextech
will pay commitment and standby fees to the TCI Ventures Group for its
undertaking under the Standby Commitment. If Flextech repays to the TCI Ventures
Group all loans it makes to the Principal Joint Venture (plus interest at
International's marginal cost of funds plus 2% per annum) within 180 days after
the TCI Ventures Group first becomes obligated to perform Flextech's financial
obligations, it may reacquire its interest in the Principal Joint Venture for
L1.00. The TCI Ventures Group may also, within the same period, require Flextech
to reacquire its interest on the same terms. The Standby Commitment will
terminate on the earliest of (i) the date on which Flextech has met all of its
required financial obligations to the Principal Joint Venture under the primary
and standby credit facilities, or (ii) the date on which Flextech delivers a
bank guarantee of all of its funding obligations to the Principal Joint Venture.
So long as the TCI Ventures Group is contingently obligated under the
Standby Commitment, it has been agreed that (i) Flextech will not sell any of
its direct or indirect interests in the Principal Joint Venture, (ii) Flextech
will not conduct its business in such a way as is likely to cause it to be in
material breach of any material contracts or to have insufficient working
capital to meet its funding obligation to the Principal Joint Venture, and (iii)
Flextech will use its available resources to subscribe for any outstanding loan
stock of the Principal Joint Venture, if and to the extent required by TCI
Ventures Group at any time after December 31, 2011.
(5) ACQUISITIONS
(a) OCC Acquisition
On October 1, 1996, Cablevision S.A. ("Cablevision") acquired 99.99% of the
issued and outstanding capital stock of Oeste Cable Color S.A. ("OCC"), a cable
television operation, for a purchase price of $112.2 million (the "OCC
Acquisition"). Cash consideration of $43.7 million was paid at closing and an
additional cash payment of $22.1 million was paid on December 1, 1996. The
remaining purchase price was satisfied by Cablevision's issuance of $46.4
million principal amount of secured negotiable promissory notes (the "OCC
Notes"). The OCC Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of OCC have been consolidated with those
of the TCI Ventures Group since the date of acquisition and the TCI Ventures
Group recorded OCC's assets and liabilities at fair value.
(b) UVSG Merger
On January 25, 1996, the stockholders of UVSG adopted the Agreement and
Plan of Merger dated as of July 10, 1995, as amended (the "UVSG Merger
Agreement"), among UVSG, TCI and TCI Merger Sub, Inc. ("Merger Sub"), pursuant
to which Merger Sub was merged into UVSG, with UVSG as the surviving corporation
(the "UVSG Merger"). TCI Ventures Group acquired 12,373,294 shares of UVSG Class
B common stock and 2,145,466 shares of UVSG Class A common stock, together
representing approximately 40% of the issued and outstanding common stock of
UVSG and approximately 86% of the total voting power of UVSG common stock
immediately after the UVSG Merger, resulting in UVSG becoming a majority-
V-175
<PAGE> 414
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
controlled subsidiary of TCI Ventures Group. The UVSG Merger has been accounted
for by the purchase method. Accordingly, the results of operations of UVSG have
been consolidated with those of the TCI Ventures Group since the date of
acquisition and the TCI Ventures Group recorded UVSG's assets and liabilities at
fair value.
(c) Satellite Joint Venture
On August 9, 1996, the TCI Ventures Group and Liberty Media Group executed
an amended and restated agreement under which UVSG and Liberty Media Group
contributed their retail C-band home satellite dish business' assets,
obligations and operations, effective April 1, 1996, to Superstar/Netlink Group
LLC, a new entity owned 50% each by TCI Ventures Group and Liberty Media Group
(the "Satellite Joint Venture"). The combination was accounted for as a merger
of businesses under common control, whereby the assets and obligations of both
UVSG and Liberty Media Group which were contributed to the venture were
reflected at their historical cost. The operations of the Satellite Joint
Venture have been consolidated, effective April 1, 1996, with the operating
results of the TCI Ventures Group.
Assets contributed by Liberty Media Group to the Satellite Joint Venture
totaled $14.7 million and consisted primarily of $14.3 million of accounts
receivable. These assets were subject to liabilities of $64.0 million,
consisting of $50.9 million of customer prepayments and $13.1 million of
accounts payable and accrued liabilities and resulted in Liberty Media Group
contributing net liabilities to the venture. UVSG contributed net liabilities in
the same amount to the venture. UVSG has classified the capital deficit of
Liberty Media Group in the venture as a reduction to combined equity.
Unaudited pro forma summarized operating results of the TCI Ventures Group
assuming the OCC Acquisition, IFE Acquisitions, the UVSG Merger and the
Satellite Joint Venture had been, in each case, consummated on January 1, 1995,
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995
------------ ---------
<S> <C> <C>
Revenue..................................................... $1,017,447 763,001
========== =======
Net earnings (loss)......................................... $ (259,359) 66,679
========== =======
</TABLE>
The foregoing unaudited pro forma information is based upon historical
results of operations and is not necessarily indicative of the results that
would have been obtained had the OCC Acquisition, IFE Acquisitions, the UVSG
Merger and the Satellite Joint Venture actually occurred on January 1, 1995.
On April 25, 1995, the TCI Ventures Group acquired a 51% ownership interest
in Cablevision for an adjusted purchase price of $282.0 million, before
liabilities assumed (the "Cablevision Acquisition"). The purchase price was paid
with cash consideration of $195.2 million (including a previously paid $20
million deposit) and the TCI Ventures Group's issuance of $86.8 million
principal amount of secured negotiable promissory notes payable (the
"Cablevision Notes") to the selling shareholders. The Cablevision Acquisition
has been accounted for by the purchase method. Accordingly, the results of
operations of Cablevision have been consolidated with those of the TCI Ventures
Group since the date of acquisition and the TCI Ventures Group recorded
Cablevision's assets and liabilities at fair value.
None of Cablevision's $65.0 million of net liabilities at the April 25,
1995 acquisition date, and none of Cablevision's post-acquisition operating
results have been allocated to Cablevision's 49% minority interest because (i)
the minority interest has no obligation to provide any funding to Cablevision
and (ii) the minority interest continued to have a negative historical cost
basis in Cablevision's net assets at December 31, 1996. To the extent that
Cablevision's post-acquisition net earnings (exclusive of the effects of
purchase accounting) cause the minority interest's historical cost basis in
Cablevision's net assets to become positive, the TCI Ventures Group would begin
to allocate 49% of such net earnings to the minority interest. If the minority
V-176
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interest's historical cost basis had been positive for the periods ended
December 31, 1996 and 1995, the TCI Ventures Group would have allocated $15.9
million and $11.7 million, respectively, of Cablevision's net earnings
(exclusive of the effects of purchase accounting) to the minority interest.
(6) DISPOSITION
On October 17, 1995, IVS Cable Holdings Limited ("IVS"), a consolidated
subsidiary of Flextech, completed the sale of a group of cable television
subsidiaries to an unaffiliated third party for aggregate cash proceeds of L62.6
million ($98.9 million using the applicable exchange rate) (the "IVS Subsidiary
Sale"). Flextech, which, at the time, indirectly owned 91.7% of IVS, received
L59.3 million ($93.7 million using the applicable exchange rate) of the cash
proceeds from the IVS Subsidiary Sale.
(7) SALE OF SUBSIDIARY STOCK
On July 18, 1995, International completed an initial public offering (the
"IPO") in which it sold 20 million shares of International Series A common stock
to the public for consideration of $16.00 per share aggregating $320 million,
before deducting related expenses (approximately $19 million). The shares sold
to the public represented 17% of International's total issued and outstanding
common stock. As a result of the IPO, the TCI Ventures Group recognized a gain
amounting to $123 million.
(8) INVESTMENT IN TELEWEST
From December 18, 1991 through November 22, 1994, the TCI Ventures Group
and certain affiliates of U S WEST, Inc. (the "U S WEST Affiliates") each held a
50% ownership interest in the TCI/U S WEST Cable Communications Group (the
"Telewest UK Joint Venture").
On November 22, 1994, the TCI Ventures Group and the U S WEST UK Affiliates
each entered into a series of transactions that resulted in the conversion of
their respective 50% ownership interests in the Telewest UK Joint Venture into
302,250,000 ordinary shares and 76,500,000 convertible preference shares of
Telewest's predecessor ("Old Telewest") (the "Old Telewest Exchange"). In
connection with the Old Telewest Exchange, the TCI Ventures Group and the U S
WEST Affiliates entered into an agreement to vote their shares together in such
a manner as may be mutually agreed, or in the absence of such agreement, to vote
their shares together in such a manner that would be most likely to continue the
status quo, without materially increasing Old Telewest's financial obligations,
or materially deviating from its approved business plan.
Following the completion of the Old Telewest Exchange, Old Telewest
conducted an initial public offering on November 30, 1994 in which it sold
243,740,000 ordinary shares for aggregate net proceeds of approximately L401.3
million ($627.8 million using the applicable exchange rate) (the "Old Telewest
IPO"). Upon completion of the Old Telewest Exchange and the Old Telewest IPO,
TCI and the U S WEST Affiliates each indirectly held approximately 36% of the
ordinary shares (assuming no conversion of the convertible preference shares)
and approximately 38% of the total outstanding ordinary and convertible
preference shares of Old Telewest. As a result of the Old Telewest IPO, and the
associated dilution of the TCI Ventures Group's ownership interest in Old
Telewest, the TCI Ventures Group recognized a $161.5 million non-cash gain
(before deducting the related tax expense of $56.5 million) during 1994.
During the second quarter of 1995, the Old Telewest shares owned by the TCI
Ventures Group and the U S WEST Affiliates were contributed to TW Holdings,
L.L.C. ("TW Holdings"), an entity in which the TCI Ventures Group and the U S
WEST Affiliates each hold an indirect 50% ownership interest.
On October 3, 1995, the merger of Old Telewest and SBC CableComms (UK)
("SBCC") was consummated whereby a new entity, Telewest (formerly Telewest plc),
acquired all of the outstanding share capital of Old Telewest and SBCC (the
"SBCC Transaction"). The SBCC Transaction effectively resulted in the conversion
of the TCI Ventures Group's 37.8% indirect ownership interest in Old Telewest
into a 26.8% indirect ownership interest in Telewest. As a result of the SBCC
Transaction, and the associated dilution of
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the TCI Ventures Group's ownership interest in Telewest, the TCI Ventures Group
recognized a non-cash gain of $164.9 million (before deducting estimated
deferred income taxes of $57.7 million) during the fourth quarter of 1995. In
connection with the SBCC Transaction, Telewest received $1.2 billion of net cash
proceeds from the issuance of U.S. dollar denominated senior debentures having
an aggregate principal amount of $1.8 billion at maturity (the "Telewest
Debentures"). As a result of Telewest's issuance of the Telewest Debentures,
changes in the exchange rate used to translate the U.S. dollar into the UK pound
sterling will cause Telewest to experience realized and unrealized foreign
currency transaction gains and losses throughout the term of the Telewest
Debentures, which mature in 2006 and 2007, if not redeemed earlier. During the
year ended December 31, 1996 and the period in 1995 following the issuance of
the Telewest Debentures, Telewest experienced unrealized foreign currency
transaction gains (losses) of $1.7 million and $(23.0 million) respectively,
with respect to the Telewest Debentures.
At December 31, 1996, the TCI Ventures Group indirectly owned through TW
Holdings, 132,638,250 or 26.7% of Telewest's convertible preference shares,
246,111,750 or 26.5% (assuming no conversion of the Telewest convertible
preference shares) of Telewest's ordinary shares, and 26.6% of Telewest's
aggregate convertible preference and ordinary share capital. The rights and
privileges of Telewest's convertible preference shares are similar to those of
the Telewest ordinary shares except that the Telewest convertible preference
shares may only be voted upon resolutions involving the winding up of Telewest
or resolutions involving any modification of the rights or privileges of the
Telewest convertible preference shares. In accordance with the requirements of
the London Stock Exchange, the Telewest convertible preference shares are
convertible into Telewest ordinary shares on a one-for-one basis only to the
extent that, following conversion, at least 25% of the Telewest ordinary shares
remain publicly held. In connection with the formation of TW Holdings, the TCI
Ventures Group and the U S WEST Affiliates entered into certain agreements which
contain provisions regarding, among other matters, the voting and disposition of
the Telewest ordinary and convertible preference shares, which shares represent
the only assets of TW Holdings.
On December 31, 1996, the reported closing price on the London Stock
Exchange of the Telewest ordinary shares was L1.24 per share ($2.12 per share).
Unless the context indicates otherwise, references herein to "Telewest"
include Telewest and its predecessor entities (Old Telewest and the Telewest UK
Joint Venture).
The functional currency of Telewest is the UK pound sterling. The average
exchange rate used to translate the TCI Ventures Group's share of Telewest's
operating results from UK pounds to U.S. dollars was 1.5718 to 1, 1.5799 to 1
and 1.5393 to 1 during the years ended December 31, 1996, 1995 and 1994,
respectively. The spot rate used to translate the TCI Ventures Group's share of
Telewest's net assets from UK pounds to U.S. dollars was 1.7125 to 1 and 1.5530
to 1 at December 31, 1996 and 1995, respectively.
V-178
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for Telewest is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Consolidated Financial Position
Cash and receivables, net................................. $ 241,117 797,618
Investments............................................... 162,816 157,426
Property and equipment, net............................... 2,478,030 1,652,094
Franchise costs and other assets, net..................... 956,910 948,797
---------- ---------
Total assets........................................... $3,838,873 3,555,935
========== =========
Debt...................................................... $1,505,713 1,277,465
Other liabilities......................................... 499,635 224,242
Shareholders' equity...................................... 1,833,525 2,054,228
---------- ---------
Total liabilities and equity........................... $3,838,873 3,555,935
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Consolidated Operations
Revenue......................................... $ 455,923 228,744 110,871
Operating, selling, general and administrative
expenses..................................... (454,458) (264,014) (139,504)
Depreciation and amortization................... (245,566) (107,233) (49,484)
--------- -------- --------
Operating loss.......................... (244,101) (142,503) (78,117)
Interest expense................................ (164,757) (42,101) (15,499)
Interest income................................. 26,163 24,718 3,527
Share of losses of affiliates................... (25,076) (20,186) (13,032)
Foreign exchange gain (loss).................... 1,670 (23,029) (32)
Other, net (including realized loss on interest
rate swap of $13,601,000 in 1995 and
extraordinary gain of $11,217,000 in 1994)... 242 (14,184) 13,797
--------- -------- --------
Net loss................................ $(405,859) (217,285) (89,356)
========= ======== ========
</TABLE>
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INVESTMENTS IN THE PCS VENTURES
Summarized financial information for the PCS Ventures, accounted for under
the equity method, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Financial Position
Cash...................................................... $ 14,427 1,149
Investments and related receivables....................... 2,611,088 2,296,130
Other assets, net......................................... 2,028,530 31,972
---------- ---------
Total assets...................................... $4,654,045 2,329,251
========== =========
Debt...................................................... $ 686,192 --
Other liabilities......................................... 1,407,929 53,436
Owners' equity............................................ 2,559,924 2,275,815
---------- ---------
Total liabilities and equity...................... $4,654,045 2,329,251
========== =========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Combined Operations
Revenue........................................... $ 12,647 -- --
Operating expenses................................ (354,593) (66,720) (3,295)
Depreciation and amortization..................... (11,297) (211) (38)
--------- -------- ------
Operating loss............................ (353,243) (66,931) (3,333)
Other, net........................................ (91,327) (45,749) 24
--------- -------- ------
Net loss.................................. $(444,570) (112,680) (3,309)
========= ======== ======
</TABLE>
TCI Ventures Group is a partner in a series of partnerships formed to
engage in the business of providing wireless communications services, using the
radio spectrum for broadband personal communications services ("PCS"), to
residential and business customers nationwide, using the "Sprint" brand. The PCS
Ventures include Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum") and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P.
("PhillieCo"). The partners of each of the Sprint PCS Partnerships are
subsidiaries of Sprint Corporation, Comcast Corporation, Cox Communications,
Inc. and the TCI Ventures Group. The partners of PhillieCo are subsidiaries of
Sprint, Cox and the TCI Ventures Group.
From inception through March 1997, the four partners have contributed
approximately $3.0 billion to the Sprint PCS Partnerships (of which the TCI
Ventures Group contributed an aggregate of approximately $0.9 billion). The
remaining capital that the Sprint PCS Partnerships will require to fund the
construction of the PCS systems and the commitments made to APC and
Cox-California will be substantial. The partners had agreed in forming the
Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2
billion of equity thereto, from inception through fiscal 1999, subject to
certain requirements. The TCI Ventures Group expects that the remaining
approximately $1.2 billion of such amount (of which the TCI Ventures Group's
share is approximately $0.4 billion) will be contributed by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be contributed). The TCI Ventures Group expects that the Sprint PCS
Partnerships will require additional equity thereafter.
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<PAGE> 419
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to an agreement entered into in connection with certain financings
by Sprint Spectrum, under certain circumstances the partners in Sprint Spectrum
may be required to make additional contributions to Sprint Spectrum to fund
projected cash shortfalls to the extent that the amount of the partners'
aggregate contributions to Sprint Spectrum (exclusive of certain amounts,
including amounts invested in certain affiliates of Sprint Spectrum), following
December 31, 1995 are less than $1.0 billion; however, based on the currently
expected timing and use of the partners' contributions to Sprint Spectrum, the
TCI Ventures Group currently believes that such agreement will not result in the
TCI Ventures Group's being required to make any incremental capital
contributions in addition to its pro rata portion of the aforementioned $4.2
billion amount.
(10) INVESTMENT IN TELEPORT
Teleport is a competitive local exchange carrier which provides integrated
local telecommunications services in major metropolitan markets nationwide.
TCG's customers are principally telecommunications intensive businesses, long
distance carriers and resellers of wireless communications companies.
During 1992, the TCI Ventures Group acquired a 30% ownership interest in
Teleport. Subsequent to the acquisition, the TCI Ventures Group advanced funds
to Teleport in the form of notes receivable. Such notes receivable bore interest
at a variable rate and amounted to (including accrued interest) $87,511,000 and
$61,372,000 at December 31, 1995 and 1994, respectively. In conjunction with the
Reorganization (as defined below), $57.8 million of such receivables were
converted to equity of Teleport. The remaining note receivable of $26 million
was exchanged for a new note which bears interest at 7.5% and is due in 2001.
Also during 1992, Teleport, with Cox, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG Partners to
invest, with Teleport, the Cable Stockholders and other cable operators, in 14
partnerships (the "Local Market Partnership") to develop and operate local
telecommunications networks.
The TCI Ventures Group's investment in Teleport is accounted for under the
equity method of accounting.
Summarized financial information for Teleport, accounted for under the
equity method, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Combined Financial Position
Cash...................................................... $ 277,540 32,835
Investments and related receivables....................... 124,891 99,299
Other assets, net......................................... 1,655,054 931,297
---------- ---------
Total assets...................................... $2,057,485 1,063,431
========== =========
Debt...................................................... $ 985,567 356,500
Other liabilities......................................... 275,048 236,421
Minority interest......................................... -- 4,409
Owners' equity............................................ 796,870 466,101
---------- ---------
Total liabilities and equity...................... $2,057,485 1,063,431
========== =========
</TABLE>
V-181
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Combined Operations
Revenue......................................... $ 267,669 216,445 144,426
Operating expenses.............................. (242,615) (215,861) (160,233)
Depreciation and amortization................... (78,416) (61,482) (30,149)
--------- -------- --------
Operating loss.......................... (53,362) (60,898) (45,956)
Interest expense................................ (73,633) (28,953) (9,862)
Other, net...................................... 12,146 (12,819) (7,182)
--------- -------- --------
Net loss................................ $(114,849) (102,670) (63,000)
========= ======== ========
</TABLE>
In June 1996, Teleport and the Cable Stockholders agreed to simplify the
Teleport capital structure by consolidating the ownership of TCG Partners and
the Local Market Partnerships as wholly owned subsidiaries of Teleport. As part
of this process, certain of the other cable operators agreed to exchange their
interests in the Local Market Partnerships with Teleport directly or through a
Cable Stockholder for Teleport common stock.
Teleport and the Cable Stockholders entered into a reorganization agreement
pursuant to which Teleport, TCG Partners and the Local Market Partnerships were
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization include:
The acquisition by Teleport of TCG Partners in exchange for Teleport
Class B common stock issued to the Cable Stockholders.
The acquisition by Teleport of all interests in 12 of the 14 Local
Market Partnerships in exchange for Teleport Class B common stock issued to
the Cable Stockholders and Teleport Class A common stock issued to other
cable operators.
The contribution to Teleport of $269 million in aggregate principal
amount of indebtedness, plus accrued interest from May 1995, owed by
Teleport to the Cable Stockholders (except that the TCI Ventures Group
retained a $26 million subordinated note due from Teleport) in exchange for
Teleport Class B common stock issued to the Cable Stockholders.
Teleport conducted an initial public offering (the "Teleport IPO") on July
2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per
share to the public for aggregate net proceeds of approximately $410,000,000. As
a result of the Teleport IPO, the TCI Ventures Group's ownership interest in
Teleport was reduced from approximately 35% to approximately 31%. Accordingly,
the TCI Venture Group recognized a gain amounting to $12 million (before
deducting deferred income tax expense of approximately $5 million).
In consideration of the transfer by each of the Cable Stockholders of its
respective interests in TCG Partners and the Local Market Partnerships and the
contribution to Teleport of the indebtedness described above, Teleport issued
immediately prior to the Teleport IPO approximately 69 million additional shares
of Class B common stock to the Cable Stockholders.
The issuance of shares received by the TCI Ventures Group in the
Reorganization assumed that subsequent to the Teleport IPO, the TCI Ventures
Group would contribute its partnership interests in TCG San Francisco and TCG
Seattle to Teleport. The transfer of such interests occurred in the fourth
quarter of 1996.
Additionally as part of the Reorganization, the TCI Ventures Group was
issued 638,862 shares of Teleport Class A common stock in consideration for the
transfer to Teleport of the partnership interest which
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the TCI Ventures Group acquired from MicroNet, Inc. in TCG San Francisco. The
TCI Ventures Group also has acquired a 4.2% interest in TCG San Francisco from
InterMedia Partners. The TCI Ventures Group was issued 372,666 shares of
Teleport Class A common stock for the transfer to Teleport of such acquired
partnership interest. These transfers also occurred in the fourth quarter of
1996.
On December 31, 1996, the reported closing price on the Nasdaq financial
market for Teleport's Class A common stock was $30.50 per share.
(11) INVESTMENTS IN OTHER AFFILIATES
The TCI Ventures Group's affiliates other than Telewest, PCS Ventures and
Teleport (the "Other Affiliates") generally are engaged in the cable and/or
programming businesses in the U.S. and in various foreign countries.
The TCI Ventures Group and/or other subsidiaries of TCI have guaranteed
notes payable and other obligations of certain of the Other Affiliates (the
"Guaranteed Obligations"). At December 31, 1996, the U.S. dollar equivalent of
the amounts borrowed pursuant to the Guaranteed Obligations aggregated $39.3
million. Certain of the Guaranteed Obligations allow for additional borrowings
in future periods.
Certain of the Other Affiliates are general partnerships and any subsidiary
of the TCI Ventures Group that is a general partner in a general partnership
could be liable, depending upon the applicable partnership law, for all debts of
that partnership to the extent liabilities of that partnership were to exceed
its assets.
Agreements governing the TCI Ventures Group's investment in certain of the
Other Affiliates contain (i) buy-sell and other exit arrangements whereby the
TCI Ventures Group could be required to purchase another investor's ownership
interest and (ii) performance guarantees whereby the TCI Ventures Group and/or
other subsidiaries of TCI have guaranteed the performance of the TCI Ventures
Group's subsidiary that directly holds the related investment.
The following table reflects the TCI Ventures Group's carrying value
(including receivables) of the Other Affiliates:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Flextech Affiliates(a)...................................... $129,563 123,156
MultiThematiques S.A. ("MultiThematiques")(b)............... 84,007 89,705
Liberty/TINTA LLC(c)........................................ 63,227 29,118
Jupiter Telecommunications Co., Ltd. ("Jupiter")(d)......... 47,251 16,268
Bresnan International Partners (Chile), L.P................. 34,408 59,286
Bresnan International Partners (Poland), L.P................ 27,951 16,739
DMX, Inc.................................................... -- 6,981
Telewest Europe Group ("Telewest Europe")(e)................ -- (16,800)
Other....................................................... 88,192 67,196
-------- -------
$474,599 391,649
======== =======
</TABLE>
(a) Flextech Affiliates
At December 31, 1996, the "Flextech Affiliates" were comprised of European
Business News Partners (30%-owned by Flextech), HIT Entertainment plc (23%-owned
by Flextech), Preview Investments B.V. ("Preview") (33%-owned by Flextech),
Scottish Television plc ("STV") (20%-owned by Flextech), UKGL (25%-owned by
Flextech) and UKLL (31%-owned by Flextech). Prior to the Maidstone acquisition
described in note 4, the "Flextech Affiliates" also included Flextech's 39%
interest in Maidstone. The functional currency of Preview is the Netherlands
guilder. The functional currency of all other Flextech
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Affiliates is the UK pound sterling. In connection with the April 1997 formation
of the BBC Joint Ventures, Flextech acquired all of the equity share capital of
UKGL and UKLL (75% and 68.75%, respectively) that Flextech did not already own.
The aggregate excess cost over Flextech's proportionate share of the net
assets of the Flextech Affiliates is being amortized over estimated useful lives
ranging from 10 to 20 years. At December 31, 1996, such aggregate excess cost
was approximately $61 million.
(b) MultiThematiques
On December 13, 1995, International invested in MultiThematiques, a newly
formed European programming company that is one-third-owned by each of the TCI
Ventures Group and two French media companies, CANAL + S.A. ("Canal +") and
Generale d'Images S.A. ("GDI"). On December 13, 1995, (i) International
contributed to MultiThematiques 123.1 million French francs ("FF") ($24.7
million at the applicable exchange rate), (ii) Canal + and GDI contributed to
MultiThematiques a combined 70% interest in Planete (a French documentary
channel), a combined 85% interest in Canal Jimmy (a lifestyle and entertainment
channel) and a combined 60% interest in each of two movie services, Cine Cinema
and Cine Cinefil, and (iii) Canal + contributed to MultiThematiques a 50%
ownership interest in Cine Classics, a start-up classic movie service. In
addition, International contributed FF105.0 million ($20.2 million) and FF100.0
million ($19.3 million) on December 13, 1996 and February 13, 1997,
respectively, to MultiThematiques. International also has agreed to contribute
FF164.0 million ($31.6 million) no later than December 13, 1997. In order to
manage the TCI Ventures Group's foreign currency exchange risk with respect to
its December 13, 1997 contribution obligation, the TCI Ventures Group entered
into a forward currency option contract that allows the TCI Ventures Group to
purchase FF164.0 million at a price of FF5.5367 per U.S. dollar through December
31, 1997.
Whereas Canal + and GDI were not required to make additional contributions
on a pro rata basis, International's obligation to make the above-described
additional FF369.1 million ($71.1 million) payment was viewed as additional
consideration to be paid by International to acquire its one-third interest in
MultiThematiques. Accordingly, the U.S. dollar equivalent of the estimated net
present value (using a discount rate of 10%) of the remaining future
contributions at December 31, 1996 and 1995 has been reflected as a liability
(the "MultiThematiques Obligation") in the accompanying combined balance sheets.
The $58.6 million excess of the TCI Ventures Group's investment in
MultiThematiques over the TCI Ventures Group's proportionate share of
MultiThematiques' net assets is being amortized over an estimated useful life of
twenty years. The majority of such excess was created in connection with the
recognition of the MultiThematiques Obligation.
TCI Ventures Group, Canal + and GDI have each agreed not to dispose of any
shares in MultiThematiques prior to November 21, 1999. Thereafter, each
shareholder may sell all (but not less than all) of its shares to a third party
subject to a pro rata right of first refusal by the non-selling shareholders. In
the event that any two shareholders propose to sell their shares of
MultiThematiques or jointly receive an offer to purchase such shares, the other
shareholder has the right to participate in such sale by selling its shares to
the prospective buyer on the same terms.
(c) Liberty/TINTA LLC
Effective April 29, 1996, TCI Ventures Group, Liberty Media Group and News
Corporation Limited ("News Corp.") formed a joint venture including a number of
partnerships or other entities under common ownership, (the "Sports Venture"),
to operate currently existing sports services in Latin America and Australia and
a variety of new sports services throughout the world, excluding the United
States, Canada and certain other defined geographic areas. News Corp. owns a 50%
interest in the Sports Venture with the remaining 50% owned by Liberty/TINTA
LLC, a limited liability company owned in equal parts by
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"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries of TCI Ventures Group and Liberty Media Group (the "LLC"). As of
December 31, 1996, TCI Ventures Group had contributed to the LLC $49.0 million
in cash and its 35% equity interest in Torneos y Competencias S.A. ("Torneos"),
an Argentinean sports programming production company, and Liberty Media Group
had contributed to the LLC its interests in Latin American and Australian Sports
programming services and its rights under various television sports programming
agreements. The LLC contributed the non-cash assets contributed to it by TCI
Ventures Group and Liberty Media Group to the Sports Venture. News Corp.
contributed various international sports rights and certain trademark rights in
exchange for its 50% interest in the Sports Venture. The carrying value and the
TCI Ventures Group's share of earnings (losses) of Torneos prior to its
contribution to the LLC have been included with the LLC in the above table.
TCI Ventures Group may make additional cash contributions totaling $29.0
million to the LLC to fund the operations of the Sports Venture. As part of the
formation of the Sports Venture, the LLC is entitled to receive from News Corp.
7.5% of the outstanding stock of STAR Television Limited. Upon the delivery of
such stock to the LLC, News Corp. is entitled to receive from the LLC up to
$20.0 million and rights under various Asian sports programming agreements. STAR
Television Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, International, Torneos y Competencias S.A. ("Torneos")
and the Torneos stockholders from whom International previously acquired its 35%
interest entered into an agreement (the "International/Torneos Sports
Agreement") whereby International agreed to make minimum periodic payments from
1996 through 2004 aggregating $235.2 million to acquire certain rights and
considerations, including the exploitation rights to all sports rights owned by
Torneos with the exception of any rights which at that time had been
contractually committed to any third party.
Pending the assignment of the rights under the International/Torneos Sports
Agreement which fit within the geographic area and business plan of the Sports
Venture (the "Sports Venture Rights") to the Sports Venture, TCI Ventures Group,
News Corp. and Liberty Group have paid their respective portion of any payments
made with respect to the Sports Venture Rights. Through December 31, 1996,
payments made under the International/Torneos Sports Agreement totaled $9.4
million.
The $33.0 million excess of the TCI Ventures Group's aggregate historical
cost basis in the LLC over the TCI Ventures Group's 50% proportionate share of
the LLC's net assets is being amortized over an estimated useful life of 20
years.
(d) Jupiter
On January 18, 1995, the TCI Ventures Group and Sumitomo Corporation
("Sumitomo"), a company incorporated in Japan, formed Jupiter for the purpose of
owning and operating cable television and telephony businesses in Japan and
other parts of Asia. The TCI Ventures Group and Sumitomo own 40% and 60%,
respectively of Jupiter. The functional currency of Jupiter is the Japanese yen
("Y").
The TCI Ventures Group has entered into an option agreement whereby the TCI
Ventures Group is entitled to sell Y1.6 billion in exchange for $17.5 million
through April 4, 2002. The option is treated as a hedge of the TCI Ventures
Group's foreign currency risk with respect to its existing investment in
Jupiter.
(e) TeleWest Europe
U S WEST Cable Europe, Inc. ("U S WEST Europe"), an indirect wholly-owned
subsidiary of U S WEST, and the TCI Ventures Group each owned 50% of TeleWest
Europe. TeleWest Europe owned a 91.7% paid-in interest in United Communications
International ("UCI"). UCI is a general partnership between TeleWest Europe and
UPC.
During the first quarter of 1996, the TCI Ventures Group and U S WEST
Europe agreed to initiate a course of action designed to result in the
liquidation and dissolution of TeleWest Europe. During the fourth quarter of
1996, the TCI Ventures Group received a cash distribution of $2.6 million and
recognized a gain of $13.0 million in connection with the dissolution of
TeleWest Europe.
V-185
<PAGE> 424
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of the Other Affiliates by geographic
region for the periods in which they were owned by the TCI Ventures Group are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Financial Position
Property and equipment, net...... $101,612 158,924 13,019 23,317 296,872
Intangible assets, net........... 293,061 118,083 6,413 -- 417,557
Other assets....................... 336,102 132,997 103,498 96,338 668,935
-------- ------- ------- ------- ---------
Total assets............. $730,775 410,004 122,930 119,655 1,383,364
======== ======= ======= ======= =========
Debt............................. $162,814 171,248 99,496 35,858 469,416
Other liabilities................ 200,069 107,653 7,807 43,435 358,964
Owners' equity................... 367,892 131,103 15,627 40,362 554,984
-------- ------- ------- ------- ---------
Total liabilities and
equity................. $730,775 410,004 122,930 119,655 1,383,364
======== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Financial Position
Property and equipment, net...... $200,132 126,109 14,672 14,027 354,940
Intangible assets, net........... 134,624 30,365 34,735 -- 199,724
Other assets..................... 260,535 60,090 80,956 70,910 472,491
-------- ------- ------- ------- ---------
Total assets............. $595,291 216,564 130,363 84,937 1,027,155
======== ======= ======= ======= =========
Debt............................. $176,188 87,828 140,778 21,078 425,872
Other liabilities.................. 146,482 78,643 17,297 30,282 272,704
Owners' equity (deficit)........... 272,621 50,093 (27,712) 33,577 328,579
-------- ------- ------- ------- ---------
Total liabilities and
equity................. $595,291 216,564 130,363 84,937 1,027,155
======== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
--------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue........................ $ 418,874 165,925 24,262 88,362 697,423
Operating expenses............. (437,048) (190,836) (16,882) (86,933) (731,699)
Depreciation and
amortization................ (18,330) (32,365) (3,411) (6,168) (60,274)
--------- -------- ------- ------- ---------
Operating income
(loss)............... (36,504) (57,276) 3,969 (4,739) (94,550)
Interest expense, net.......... (7,623) (11,885) (11,199) (2,328) (33,035)
Other, net..................... 25,706 (86) (31,866) (504) (6,750)
--------- -------- ------- ------- ---------
Net loss............... $ (18,421) (69,247) (39,096) (7,571) (134,335)
========= ======== ======= ======= =========
</TABLE>
V-186
<PAGE> 425
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
--------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue......................... $ 333,487 84,445 28,911 90,117 536,960
Operating expenses.............. (347,204) (90,817) (22,369) (88,927) (549,317)
Depreciation and amortization... (19,851) (26,861) (3,617) (2,172) (52,501)
--------- ------- ------- ------- ---------
Operating income
(loss)................ (33,568) (33,233) 2,925 (982) (64,858)
Interest expense, net........... (20,966) (9,065) (11,148) (342) (41,521)
Other, net...................... 995 (1,672) (4,426) (6,813) (11,916)
--------- ------- ------- ------- ---------
Net loss................ $ (53,539) (43,970) (12,649) (8,137) (118,295)
========= ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
LATIN
AMERICA
ASIA AND AND THE UNITED
EUROPE AUSTRALIA CARIBBEAN STATES TOTAL
-------- --------- --------- ------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Combined Operations
Revenue.......................... $233,723 46,475 21,612 57,381 359,191
Operating expenses............... (233,443) (70,622) (15,226) (57,296) (376,587)
Depreciation and amortization.... (35,269) (3,521) (6,759) (2,056) (47,605)
-------- ------- ------- ------- ---------
Operating loss........... (34,989) (27,668) (373) (1,971) (65,001)
Interest expense, net............ (15,971) (4,909) (3,939) (823) (25,642)
Other, net....................... (3,122) (19) 5,874 (2,595) 138
-------- ------- ------- ------- ---------
Net income (loss)........ $(54,082) (32,596) 1,562 (5,389) (90,505)
======== ======= ======= ======= =========
</TABLE>
(12) DEBT
The components of debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Debentures(a)............................................... $345,000 --
Cablevision Notes(b)........................................ 13,013 65,066
Cablevision bank loans(c)................................... 104,556 58,166
OCC Notes(d)................................................ 46,418 --
Flextech Bank Facility...................................... -- 67,794
Other....................................................... 17,267 13,163
-------- -------
$526,254 204,189
======== =======
</TABLE>
- ---------------
(a) On February 8, 1996, International received net cash proceeds of
approximately $336 million from the issuance of 4-1/2% Convertible
Subordinated Debentures (the "Debentures") due 2006 having an aggregate
principal amount of $345 million. The Debentures are convertible into shares
of International Series A common stock at a price of $27.30 per share of
International Series A common stock, subject to anti-dilution adjustments.
Interest on the Debentures is payable on February 15 and August 15 of each
V-187
<PAGE> 426
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year, commencing August 15, 1996. The Debentures may be redeemed by
International in whole or in part, at any time on or after February 15,
1999.Pending its use by International, the net proceeds from the sale of the
Debentures were loaned to TCI pursuant to an unsecured promissory note. See
note 13.
(b) The Cablevision Notes are secured by the TCI Ventures Group's pledge of the
stock representing its 51% interest in Cablevision. The Cablevision Notes
bore interest at 10% until May 1, 1996, when interest began to accrue at a
bank's prime rate plus 1% (9.25% at December 31, 1996). The Cablevision
Notes were paid during the three months ended March 31, 1997.
(c) Cablevision's bank debt, which is denominated in U.S. dollars, bears
interest at fixed rates. Including value added tax, the weighted average
interest rate of Cablevision's bank debt at December 31, 1996 was 7.81%.
(d) In connection with the OCC Acquisition, Cablevision issued $46.4 million
principal amount of secured negotiable promissory notes. The OCC Notes will
be repaid in 21 consecutive equal monthly installments commencing on January
10, 1997 and will accrue interest at 9.25%. The OCC Notes are secured by the
pledge of 51% of the stock of OCC.
The U.S. dollar equivalent of the annual maturities of the TCI Ventures
Group's debt for each of the next five years are as follows (amounts in
thousands):
<TABLE>
<S> <C>
1997........................................................ $199,692
1998........................................................ 24,798
1999........................................................ 2,786
2000........................................................ 940
2001........................................................ 940
</TABLE>
With the exception of the Debentures, which had a fair value of $259.6
million at December 31, 1996, the TCI Ventures Group believes that the fair
value and the carrying value of the TCI Ventures Group's debt were approximately
equal at December 31, 1996.
(13) COMBINED EQUITY
General
If the TCI Ventures Group Stock Proposal is approved by stockholders, the
Series A TCI Ventures Group Stock will have one vote per share and the Series B
TCI Ventures Group Stock will have ten votes per share.
Shares of Series B TCI Ventures Group Stock will be convertible at any time
at the option of the holder only into the same number of shares of Series A TCI
Ventures Group Stock.
The rights of holders of the TCI Ventures Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Ventures Group Stock to the aggregate market capitalization,
as defined, of the TCI Group Stock, the TCI Ventures Group Stock and the Liberty
Media Group Stock.
Transactions with TCI Group, Liberty Media Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to TCI
Ventures Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that approximate the costs TCI Ventures
Group would incur for comparable services on a stand alone basis. During the
years ended December 31, 1996, 1995 and 1994, TCI Ventures Group was allocated
$7,918,000, $4,120,000 and $445,000, respectively, in corporate general and
administrative costs by TCI Group.
V-188
<PAGE> 427
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Certain of the companies with domestic operations that are attributed to
the TCI Ventures Group provide services to companies attributed to one or more
of the other Groups, and certain of the companies attributed to the other Groups
provide services and the use of facilities to companies attributed to the TCI
Ventures Group. Generally, services and rights to use facilities provided
pursuant to contractual arrangements to which a member of the TCI Ventures Group
that is not a wholly owned subsidiary of the Company is a party will continue to
be provided in accordance with the terms of such arrangements following the
consummation of the Exchange Offers. For example, Teleport has the indefeasible
right to use certain fiber optic and cable transmission facilities of the
Company for compensation based on the cost of construction of such facilities.
In general, such arrangements were entered into with Teleport by the Company and
other multiple cable system operators ("MSOs") that are stockholders of Teleport
several years ago when Teleport was a privately owned company. Similarly, @Home
has entered into arrangements for the distribution of its @Home service with its
stockholders that are MSO's. The TCI Group has agreements with UVSG for, among
other things, the carriage of UVSG's Prevue Networks and superstation
programming on certain of the cable systems attributed to the TCI Group, and
UVSG purchases programming from companies attributed to the Liberty Media Group.
Many of these contracts were entered into prior to the UVSG Merger. Because of
the presence in each of TCG, @Home and UVSG of other stockholders not affiliated
with the Company and the independent management teams at each of these
companies, the Company anticipates that future contractual arrangements between
these companies and entities attributed to the other Groups will be negotiated
on an arm's-length basis.
In addition to the foregoing entities, WTCI, NDTC, and SUMMITrak, each of
which is a wholly owned subsidiary of the Company, provide or may provide
services to the other Groups. WTCI provides video transport services to the TCI
Group (in addition to services provided to third parties) based on published
tariffed rates. NDTC provides digital television services, including digital
compression of programming, satellite uplinking, and transponder management,
primarily to programming suppliers, many of which are affiliated with the
Liberty Media Group, and satellite distributors. Such services provided to
affiliated companies are governed by agreements which have been negotiated on a
basis which approximates arm's-length terms and the material terms of which are
substantially the same as those governing relationships with third parties,
except as appropriate to take into account volume differences. NDTC has also
recently begun offering on a commercial basis its newly developed service of
authorization of addressable set-top boxes and transmission of compressed and
encrypted digital programming signals directly to cable operators, and is
currently negotiating a long term contract with the TCI Group, for such
services. Such negotiations are being carried out on a basis which approximates
arm's-length terms and it is expected that the material terms made available to
the TCI Group will be substantially the same as those provided to unaffiliated
third parties, but will include pricing on a most favored nations basis due to
the importance to NDTC of the TCI Group's large customer base. SUMMITrak has
been funded by the TCI Group during its development and test phases, which are
substantially complete. Currently, the TCI Group is only utilizing SUMMITrak's
services on a test basis and has no agreement with SUMMITrak for commercial
deployment. If SUMMITrak's services are used by the TCI Group on a commercial
basis, such use will be at commercial rates and on a basis which approximates
arm's-length terms.
During the year ended December 31, 1996, revenue earned by UVSG from TCI
Group was $8.1 million. Additionally, TCI Group purchased system integration
services from UVSG totaling $3.1 million during 1996. UVSG purchases programming
from Liberty Media Group and certain affiliates. These purchases totaled $34.1
million for the year ended December 31, 1996.
Amounts included in revenue for services provided to the other Groups by
WTCI and NDTC are $27,092,000, $20,881,000 and $7,274,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Consolidated Puerto Rico Entities purchase programming services from
the TCI Group. The charges, which approximate the TCI Group's cost and are based
on the aggregate number of subscribers
V-189
<PAGE> 428
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
served by the Consolidated Puerto Rico Entities, aggregated $4.3 million, $3.4
million and $2.6 million during the years ended December 31, 1996, 1995 and
1994, respectively. Through December 31, 1995, the Consolidated Puerto Rico
Entities also had management arrangements with certain subsidiaries of the TCI
Group whereby such subsidiaries' management provided administrative services. As
compensation for these services, the Consolidated Puerto Rico Entities paid a
monthly fee calculated on a per-subscriber basis. Charges for such services were
$680,000 and $676,000 during the years ended December 31, 1995 and 1994,
respectively. The above-described programming and management fee charges are
included in operating costs in the accompanying combined statements of
operations.
Amounts outstanding under the TCI Note Receivable bear interest at variable
rates based on TCI's weighted average cost of bank borrowings of similar
maturities (6.25% at December 31, 1996). Principal and interest is due and
payable as mutually agreed from time to time by TCI and TINTA. During the year
ended December 31, 1996, interest income related to the TCI Note Receivable
aggregated $14.0 million.
If the TCI Ventures Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance by the Company of TCI Ventures Group Stock would be
(unless the Board otherwise provides) specifically attributed to and reflected
on the combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity incurring
the debt or issuing the preferred stock is Tele-Communications, Inc., the TCI
Group. The Board could, however, determine from time to time that debt incurred
or preferred stock issued by entities included in a Group should be specifically
attributed to and reflected on the combined financial statements of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the TCI Ventures Group, reflected as the creation of an, or an increase
in any then existing, Inter-Group Interest of the Company in such Group or, in
the case of a transfer from either the Liberty Media Group or the TCI Ventures
Group to the TCI Group, reflected as a reduction in any then existing
Inter-Group Interest of the TCI Group in such Group. There are no specific
criteria for determining when a transfer will be reflected as a borrowing or as
an increase or reduction in an Inter-Group Interest. The Board expects to make
such determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such factors as it
deems relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
The TCI Ventures Group is expected to require additional advances from the
TCI Group for some period of time. To satisfy this need, the Company has agreed
to provide a revolving loan facility (the "Credit Facility") to TCI Ventures
Group for a five-year period commencing on the closing of the Exchange Offers.
Such facility would permit aggregate borrowings at any one time outstanding of
up to $500 million (subject to reduction or increase as provided below), which
borrowings would bear interest at a rate per annum equal to The Bank of New
York's prime rate (as in effect from time to time) plus 1% per annum, payable
quarterly. A commitment fee equal to 3/8% per annum of the average unborrowed
availability under the Revolving Credit Facility would be payable by the TCI
Ventures Group to the TCI Group on a quarterly basis. The maximum amount of
borrowings permitted under the Credit Facility will be reduced on a
dollar-for-dollar basis by up to $300 million if and to the extent that the
aggregate amount of any additional capital that TCI Ventures Group
V-190
<PAGE> 429
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
is required to contribute to Sprint PCS Partnerships subsequent to the closing
of the Exchange Offers is less than $300 million.
Except as described above with respect to the Credit Facility, loans from
one Group to another Group would bear interest at such rates and have such
repayment schedules and other terms as are established from time to time by, or
pursuant to procedures established by, the Board. The Board expects to make such
determinations, either in specific instances or by setting generally applicable
polices from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the use of
proceeds by and creditworthiness of the recipient Group, the capital expenditure
plans and investment opportunities available to each Group and the availability,
cost and time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined statements
of operations of the Groups would reflect interest income or expense, as the
case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the TCI Ventures Group have been included as a
component of the TCI Ventures Group's combined equity. Such net borrowings
incurred prior to the consummation of the Exchange Offers will continue to be
reflected as a component of the TCI Ventures Group's combined equity. Amounts
borrowed by the TCI Ventures Group from another Group on and subsequent to the
consummation of the Exchange Offers (including pursuant to the Credit Facility),
will be reflected on the TCI Ventures Group's financial statements as
indebtedness to the applicable lender.
Although any increase in the TCI Group's Inter-Group Interest in the TCI
Ventures Group resulting from an equity contribution by the TCI Group to the TCI
Ventures Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the TCI Ventures Group to the TCI Group would be
determined by reference to the market value of the Series A TCI Ventures Group
Stock as of the date of such transfer, such an increase could occur at a time
when such shares could be considered undervalued and such a decrease could occur
at a time when such shares could be considered overvalued.
All financial impacts of issuances of shares of TCI Ventures Group Stock
the proceeds of which are attributed to the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Ventures Group,
and all financial impacts of issuances of shares of TCI Ventures Group Stock the
proceeds of which are attributed to the TCI Group in respect of a reduction in
the TCI Group's Inter-Group Interest in the TCI Ventures Group will be to such
extent reflected in the combined financial statements of the TCI Group.
Financial impacts of dividends or other distributions on TCI Ventures Group
Stock will be attributed entirely to the TCI Ventures Group, except that
dividends or other distributions on the TCI Ventures Group Stock will (if at the
time there is an Inter-Group Interest in the TCI Ventures Group) result in the
TCI Group being credited, and the TCI Ventures Group being charged (in addition
to the charge for the dividend or other distribution paid), with an amount equal
to the product of the aggregate amount of such dividend or other distribution
paid or distributed in respect of outstanding shares of TCI Ventures Group Stock
and a fraction the numerator of which is the TCI Ventures Group Inter-Group
Interest Fraction and the denominator of which is the TCI Ventures Group
Outstanding Interest Fraction (both as defined). Financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Ventures Group will be to such extent reflected in the combined
financial statements of the TCI Ventures Group, and financial impacts of
repurchases of TCI Ventures Group Stock the consideration for which is charged
to the TCI Group will be to such extent reflected in the combined financial
statements of the TCI Group and will result in an increase in the TCI Group's
Inter-Group Interest in the TCI Ventures Group.
The Board expects to determine, either in specific instances or by setting
generally applicable policies from time to time, whether to allocate resources
and financial support to or pursue business opportunities or
V-191
<PAGE> 430
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operational strategies through one Group or one or more of the other Groups,
after consideration of such factors as it deems relevant. TCI had advised
International that TCI intends (a) to make available to International any
opportunity to acquire, develop, own and/or manage cable and/or telephony
operations outside the United States that is presented to TCI or any of its
controlled affiliates and (b) except as provided below, to make available to
International any opportunity to acquire, develop, manager and/or operate
programming services outside of the United States (an "International Programming
Opportunity") that is presented to TCI or any of its controlled affiliates,
including those that are a part of the Liberty Media Group. The foregoing does
not apply to (1) international programming services owned or managed, directly
or indirectly (in whole or in part), by TCI or any of its controlled affiliates
other than International as of July 12, 1995 (the date of the prospectus for
International's initial public offering), (2) International Programming
Opportunities under development by TCI or any of its controlled affiliates other
than International that were the subject of a signed letter of intent or other
agreement in principle as of July 12, 1995, (3) an International Programming
Opportunity in respect of foreign sports programming, which may be pursued
either through International or Liberty Media Group, (4) an International
Programming Opportunity presented to a public company that is a controlled
affiliate of either TCI or any of TCI's controlled affiliates (other than
International), (5) an International Programming Opportunity presented to, or
cable television or cable telephony services provided by, any company or other
entity in which TCI or any of its controlled affiliates has an interest but
which is not itself a controlled affiliate of either TCI or any of TCI's
controlled affiliates and (6) the distribution outside the United States of a
programming service initially distributed within the United States and owned
and/or managed by TCI or any of its controlled affiliates (other than
International). If International determines not to pursue an International
Programming Opportunity, subsidiaries or controlled affiliates of TCI other than
International may pursue such International Programming Opportunity or
International and another subsidiary of TCI (or any of its other controlled
affiliates) may pursue such opportunity jointly. To the extent that TCI or any
of its controlled affiliates (other than International) owns rights to worldwide
or regional sporting events, TCI or such affiliates may also utilize those
rights worldwide, including to provide "backdrop" services. Neither TCI nor any
of its controlled affiliates will be obligated to make available to
International any International Programming Opportunity to the extent TCI or
such controlled affiliate is legally (for example, by a fiduciary duty owned to
others) or contractually prohibited from doing so. The foregoing arrangement
concerning International Programming Opportunities will, in any event, be
terminable at such time as TCI ceases to beneficially own at least a majority in
voting power of the outstanding shares of common stock of International.
Certain subsidiaries of TCI Group have provided guarantees and other credit
enhancements on the TCI Ventures Group's behalf. In this respect, the TCI
Ventures Group has entered into an indemnification agreement with TCI Group
whereby the TCI Ventures Group will indemnify TCI Group for any loss, claim or
liability that TCI Group may incur by reason of certain guarantees and credit
enhancements made by TCI Group on the TCI Ventures Group's behalf.
(14) INCOME TAXES
The TCI Ventures Group and its 80%-or-more-owned domestic subsidiaries are
included in the consolidated federal and state income tax returns of TCI. The
TCI Ventures Group's income taxes include those items in the consolidated
calculation applicable to the TCI Ventures Group ("intercompany tax allocation")
and any income taxes of TCI Ventures Group's consolidated foreign or domestic
subsidiaries that are excluded from the consolidated federal and state income
tax returns of TCI. Intercompany tax allocation represents an apportionment of
tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in
relation to their respective amounts of taxable earnings or losses. The payable
arising from the intercompany tax allocation was recorded as an increase in
equity through March 31, 1997.
V-192
<PAGE> 431
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A tax sharing agreement (the "Old Tax Sharing Agreement") among entities
attributed to the TCI Ventures Group, Liberty Media Group, the TCI Group and
certain subsidiaries of TCI was implemented effective July 1, 1995 for all
periods after such effective date and prior to October 1, 1997. The Old Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. Under the Old
Tax Sharing Agreement, tax liabilities and benefits of the entities attributed
to the TCI Ventures Group, Liberty Media Group, and TCI Group are charged or
credited to intercompany accounts between TCI and each of its first tier
subsidiaries. The Old Tax Sharing Agreement encompasses U.S. federal, state,
local and foreign tax consequences and relies upon the Code, and any applicable
state, local and foreign tax law and related regulations. In Connection with the
formation of the TCI Ventures Group, the net amount of the balance of each
intercompany account under the Old Tax Sharing Agreement that is attributable to
entities included in the TCI Ventures Group for the period beginning July 1,
1995 and ending prior to the consummation of the Exchange Offers will be
reflected as a component of the TCI Ventures Group's combined equity. The
intercompany account existing between TCI and International for the period
beginning July 1, 1995 and ending prior to the consummation of the Exchange
Offers will be required to be settled by the TCI Ventures Group and
International when International ceases to be a member of the TCI consolidated
group for federal income tax purposes. Tax liabilities and benefits, as
determined under the Old Tax Sharing Agreement, that are generated by the
entities comprising the TCI Ventures Group for the period beginning on the
consummation of the Exchange Offers and ending prior to October 1, 1997 will be
credited or debited to an intercompany account between TCI and the TCI Ventures
Group as described below. For the period beginning on the consummation of the
Exchange Offers and ending prior to October 1, 1997, the TCI Ventures Group will
be responsible to TCI for its share of consolidated income tax liabilities
(computed as if the Company was not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement. TCI will be
responsible to the TCI Venture Group to the extent that the TCI Ventures Group's
income tax attributes generated during the period beginning on the consummation
of the Exchange Offers and ending prior to October 1, 1997 are utilized by TCI
to reduce its consolidated income tax liabilities (computed as if the Company
was not liable for the alternative minimum tax). Accordingly, all tax attributes
generated by the TCI Ventures Group's operations for the period beginning on the
consummation of the Exchange Offers and ending prior to October 1, 1997
(including, but not limited to, net operating losses, tax credits, deferred
intercompany gains, and the tax basis of assets) will be inventoried and tracked
for the entities comprising the TCI Ventures Group. All intercompany accounts
existing under the Old Tax Sharing Agreement with respect to entities attributed
to the TCI Group, entities attributed to the Liberty Media Group and, for the
period beginning on the consummation of the Exchange Offers, entities attributed
to the TCI Ventures Group, will be required to be settled only upon the date
that an entity ceases to be a member of the TCI consolidated group for federal
income tax purposes. Under the Old Tax Sharing Agreement, TCI retains the burden
of any alternative minimum tax and has the right to receive the tax benefits
from any alternative minimum tax credit attributable to any tax period beginning
on or after July 1, 1995 and ending on or before October 1, 1997.
For periods from and after October 1, 1997, federal income taxes will be
computed pursuant to a new tax sharing agreement (the "New Tax Sharing
Agreement") based upon the type of tax paid by the Company (on a regular tax or
alternative minimum tax basis) on a separate basis for each Group (applying
provisions of the Code, and related regulations as if such Group filed a
separate consolidated return for federal income tax purposes, with certain
adjustments, but was subject to the same type of tax as the Company). Based upon
these separate calculations, an allocation of tax liabilities and benefits will
be made such that each Group will be required to make cash payments to the
Company based on its allocable share of the Company's consolidated federal
income tax liabilities (on a regular tax or alternative minimum tax basis, as
applicable). The Company may be required at the times and under the
circumstances described below to make cash
V-193
<PAGE> 432
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
payments to each Group for tax benefits (on a regular tax or alternative minimum
tax basis, as applicable) attributable to such Group and actually used by the
Company in reducing its consolidated federal income tax liability. Tax
attributes, including but not limited to net operating losses, foreign tax
credits, investment tax credits, alternative minimum tax net operating losses,
deferred intercompany gains, and tax basis in assets would be inventoried and
tracked for ultimate credit to or charge against each Group. Similarly, in each
taxable period that the Company pays alternative minimum tax, the federal income
tax liabilities and federal income tax benefits of each Group, computed as if
such Group were subject to regular tax, would be inventoried and tracked for
payment to or payment by each Group (at the difference between the amount such
Group would have paid or received under the New Tax Sharing Agreement if the
Company had paid regular tax during such taxable period and the amount such
Group paid or received under the New Tax Sharing Agreement on an alternative
minimum tax basis for such taxable period) in years that the Company utilizes
the alternative minimum tax credit associated with such taxable period. Even
though the tax benefits of a Group are utilized by the Company in reducing its
consolidated federal income tax liability, such Group may not receive current
cash payments for such benefit (or the difference between such Group's benefits
computed under the New Tax Sharing Agreement on a regular tax basis and on an
alternative minimum tax basis) if the Group against the income of which the tax
benefits are applied had other separate taxable losses (not currently utilized
by the Company) which would offset income attributable to such Group. The Group
generating the utilized tax benefits would receive a cash payment only if, and
when, the utilized taxable losses of the other Group are actually utilized. If
the utilized taxable losses expire without ever being utilized, the Group
generating the utilized tax benefits will never receive payment for such
benefits. In addition, if the utilized taxable losses are connected with a Group
or part of a Group which ceases to be part of the TCI consolidated group for
federal income tax purposes, there can be no assurance that the transferee will
agree to pay for the eventual use of the utilized taxable losses. In addition,
pursuant to the New Tax Sharing Agreement, state and local income taxes are
calculated on a separate return basis for each Group (applying provisions of
state and local tax law and related regulations as if the Group were a separate
unitary or combined group for tax purposes), and the Company's combined or
unitary tax liability is allocated among the Groups based upon such separate
calculation. The Company has retained the right to file all returns, make all
elections and control all audits and contests.
As detailed elsewhere, unutilized taxable losses of the TCI Ventures Group
may be used to offset the obligation of the TCI Ventures Group to pay dividends
on the TCI Ventures Group Preferred Interest. Any such taxable losses which are
so used will be considered taxable losses of the TCI Group for all calculations
under the New Tax Sharing Agreement relating to federal income taxes. Such
taxable losses will continue to be treated as taxable losses of the TCI Ventures
Group for all calculations relating to state and local income taxes. In
addition, any amount owed by the TCI Group with respect to utilized taxable
losses of the TCI Ventures Group may be canceled as an offset to the obligation
of the TCI Ventures Group to pay dividends on the TCI Ventures Group Preferred
Interest.
V-194
<PAGE> 433
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit (expense) attributable to the TCI Ventures Group's
pre-tax earnings (loss) for the years ended December 31, 1996, 1995 and 1994
consists of (amounts in thousands):
<TABLE>
<CAPTION>
DEFERRED CURRENT TOTAL
-------- -------- -------
<S> <C> <C> <C>
December 31, 1996:
Intercompany tax allocation........................ $ 52,660 -- 52,660
Federal............................................ -- 76,120 76,120
State and local.................................... (1,721) 3,464 1,743
Foreign............................................ (12,237) (7,941) (20,178)
-------- ------- -------
$ 38,702 71,643 110,345
======== ======= =======
December 31, 1995:
Intercompany tax allocation........................ $ 55,941 -- 55,941
Federal............................................ -- (27,689) (27,689)
State and local.................................... -- (2,715) (2,715)
Foreign............................................ (9,080) (14,659) (23,739)
-------- ------- -------
$ 46,861 (45,063) 1,798
======== ======= =======
December 31, 1994:
Intercompany tax allocation........................ $(31,909) -- (31,909)
Federal............................................ -- 10,018 10,018
State and local.................................... (5) 931 926
Foreign............................................ -- -- --
-------- ------- -------
$(31,914) 10,949 (20,965)
======== ======= =======
</TABLE>
Income tax benefit (expense) attributable to the TCI Ventures Group's
pre-tax earnings (loss) differs from the amounts computed by applying the U.S.
federal income tax rate of 35%, as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit (expense)............ $129,069 (20,385) (11,766)
Effect of foreign tax rate differential on earnings
of foreign subsidiary.............................. 1,051 4,516 --
Minority interest in earnings of consolidated
subsidiaries....................................... 4,657 (8,130) --
Increase in valuation allowance for deferred tax
assets resulting from certain unused tax loss
carryforwards...................................... (23,552) (7,935) (5,197)
Adjustment to deferred tax assets and liabilities for
enacted change in foreign income tax rate.......... (952) -- --
Amortization not deductible for tax purposes......... (6,232) (5,150) (217)
Gain of sale of subsidiary stock..................... -- 42,931 --
State taxes, net of federal tax effect............... 1,116 (1,743) 4
Other, net........................................... 5,188 (2,306) (3,789)
-------- ------- -------
$110,345 1,798 (20,965)
======== ======= =======
</TABLE>
V-195
<PAGE> 434
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 98,633 57,204
Less-valuation allowance.................................. (62,288) (42,154)
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes
in excess of losses recognized for tax purposes........ 35,556 --
Foreign currency translation adjustments included in
equity but not recognized for income tax purposes...... -- 2,637
Future deductible amounts, principally due to accruals not
currently deductible................................... 15,732 7,066
Other..................................................... -- 812
--------- --------
Net deferred tax assets........................... 87,633 25,565
--------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... (91,626) (61,506)
Franchise costs, not deductible for income tax purposes... (188,635) (162,732)
Foreign currency translation adjustments included in
equity but not recognized for income tax purposes...... (13,328) --
Unrecognized gain on sale of assets....................... (14,128) (12,812)
Investments in affiliates, due principally to losses of
affiliates recognized for tax in excess of losses
recognized for financial statement purposes............ -- (43,330)
Other..................................................... (222) --
--------- --------
Total gross deferred tax liabilities.............. (307,939) (280,380)
--------- --------
Net deferred tax liability........................ $(220,306) (254,815)
========= ========
</TABLE>
At December 31, 1996, the TCI Ventures Group had federal net operating loss
carryforwards for income tax purposes aggregating approximately $100 million
which, if not utilized to reduce taxable income in future periods, will begin to
expire at various dates beginning in the year 2004.
The TCI Ventures Group has net operating loss carryforwards of
approximately $130.1 million available in certain foreign tax jurisdictions.
These foreign net operating loss carryforwards may be utilized to reduce taxable
income in the applicable foreign tax jurisdictions indefinitely.
In addition, the TCI Ventures Group has net operating loss carryforwards of
approximately $14.4 million available in the Puerto Rico tax jurisdiction. If
unused, these net operating loss carryforwards expire at various dates over the
next 7 years.
(15) COMMITMENTS AND CONTINGENCIES
As a partner in certain partnerships, from time to time, the TCI Ventures
Group is obligated to make cash payments, either in the form of equity or loans,
the most significant of which is the funding of Sprint Spectrum. As previously
described, the Partners are obligated to make cash capital contributions to
Sprint Spectrum in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996. Pursuant to an agreement entered
into in connection with certain financings by Sprint
V-196
<PAGE> 435
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Spectrum, under certain circumstances the Partners may be required to make
additional contributions to Sprint Spectrum to fund projected cash shortfalls to
the extent that the amount of the Partners' aggregate contributions to Sprint
Spectrum (exclusive of certain amounts, including amounts invested in certain
affiliates of Sprint Spectrum), following December 31, 1995 are less than $1.0
billion; however, based on the currently expected timing and use of the
Partners' contributions to Sprint Spectrum, the TCI Ventures Group currently
believes that such agreement will not result in the TCI Ventures Group's being
required to make any incremental capital contributions in addition to its pro
rata portion of such $1.9 billion amount.
The TCI Ventures Group has guaranteed the obligation of an affiliate ("The
Premium Movie Partnership") to pay fees for the license to exhibit certain films
through 2000. Although the aggregate amount of The Premium Movie Partnership's
license fee obligations is not currently estimable, the TCI Ventures Group
believes that the aggregate payments pursuant to such obligations could be
significant. If the TCI Ventures Group were to fail to fulfill its obligations
under the guarantee, the beneficiaries have the right to demand an aggregate
payment from the TCI Ventures Group of approximately $58 million. Although the
TCI Ventures Group has not had to perform under such guarantee to date, the TCI
Ventures Group cannot be certain that it will not be required to perform under
such guarantee in the future.
If at any time (x) the aggregate of the amount of (i) Flextech securities
held by the TCI Ventures Group, (ii) Hallmark's and U S WEST's interest in
Flextech acquired under the Hallmark Subscription and the U S WEST Subscription,
respectively, and (iii) Flextech securities acquired by IFE pursuant to the IFE
Acquisitions exceeds 75% of Flextech's issued and outstanding share capital, or
(y) subject to certain exceptions, the Flextech Ordinary Shares cease to be
admitted to trading on the Official List of the London Stock Exchange as a
result of the exercise by the TCI Ventures Group of any of its rights as a
Flextech shareholder, the TCI Ventures Group shall be obligated to offer to
purchase from Hallmark, U S WEST and IFE any Flextech Ordinary Shares or
Flextech Non-Preference Shares held by them and which were originally acquired
pursuant to the Hallmark Subscription, the U S WEST Subscription, or the IFE
Acquisitions, as applicable. Under such circumstances, the offer price for such
shares shall be the higher of (i) the then current market price for the Flextech
Ordinary Shares and (ii) the highest price paid to any third party by the TCI
Ventures Group for any Flextech Ordinary Shares or Flextech Non-Preference
Shares during the preceding 12 month period. In the event the TCI Ventures Group
is required to purchase any Flextech Non-Preference Shares or Flextech Ordinary
Shares, it may elect, subject to certain limited exceptions, to pay the purchase
price thereof in cash or in shares of International Series A common stock, or in
certain securities of TCI.
In light of certain change of control provisions contained in the articles
of association of UKGL and UKLL, TCI has agreed to maintain an indirect voting
interest of at least 50.01% in a wholly-owned subsidiary of Flextech so long as
Flextech continues to hold its ownership interests in UKGL and UKLL. Under
Flextech's Articles of Association, if the TCI Ventures Group becomes obligated
to purchase any of the Flextech Non-Preference Shares (as described above) and
fails to complete such purchase within 12 months from the date such purchase is
required to be completed, such Flextech Non-Preference Shares shall become
convertible into Flextech Ordinary Shares whether or not the TCI Ventures Group
ceases to own at least 50.01% of the voting interest attributable to Flextech's
then outstanding ordinary share capital.
On November 20, 1995, International announced its intention to form
strategic partnerships with News Corp., Organizacoes Globo and Grupo Televisa
S.A. for the development and operation of a direct-to-home satellite service for
Latin America, Mexico, and various Central and South American countries
(collectively, the "DTH Ventures"). It is anticipated that International could
be required to make cash contributions totaling $46 million over the next three
years in connection with the DTH Ventures.
The TCI Ventures Group leases business offices, has entered into pole
rental and transponder lease agreements, and uses certain equipment under lease
arrangements. Rental costs under such arrangements
V-197
<PAGE> 436
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounted to $62 million, $41 million and $27 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
A summary of future minimum lease payments under noncancellable operating
and capital leases as of December 31, 1996 follows (amounts in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- --------
<S> <C> <C>
Years ending December 31:
1997................................................... $ 64,979 31,354
1998................................................... 57,679 31,376
1999................................................... 51,641 31,487
2000................................................... 32,416 31,716
2001................................................... 25,464 30,164
Thereafter............................................. 105,427 128,169
--------- --------
$ 337,606 284,266
=========
Less amounts representing interest.......................... 84,305
--------
Capital lease obligations................................... 199,961
========
</TABLE>
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1996.
Flextech has commitments to acquire distribution and exhibition rights for
a variety of programming under license agreements with Hallmark Entertainment
Inc. ("Hallmark Entertainment"). The rights are limited to the United Kingdom
and certain other European markets and have a term for a period of ten years
once the license period commences. Through December 31, 1996, programming with
an aggregate contractual value of L19.8 million ($33.9 million) had been
delivered to Flextech under such agreements. It is estimated that Flextech's
remaining commitments to acquire programming will be L10.5 million ($18.0
million). Hallmark Entertainment has provided Flextech a guarantee that it will
recover at least L14.6 million ($25.0 million) from the exploitation of such
rights. Flextech also agreed to purchase certain programming from STV during the
next two years. Flextech's aggregate remaining obligations at December 31, 1996
under such STV programming agreements were expected to range from L1.4 million
($2.4 million) to L6.5 million ($11.1 million).
Flextech's programming commitments will not be included in TCI Ventures
Group's disclosure of its consolidated commitments and contingencies upon the
January 1, 1997 deconsolidation of Flextech.
Certain key employees of TCI involved with TCI Ventures Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI Group
Stock, Series A Liberty Media Group Stock and International Series A common
stock as well as restricted stock awards of Series A TCI Group Stock and
International Series A common stock. Additionally, in December of 1996, certain
employees of TCI involved with TCI Ventures Group were each granted options
representing 1.0% of the common equity of TCI Telephony Services, Inc., TCI
Wireline, Inc., and TCI.NET, Inc. The exercise price of each such option will be
adjusted for a 6% per annum interest factor to the date of exercise.
Additionally, in December of 1996, an employee involved with TCI Ventures Group
was granted options representing 1.0% of TCI Satellite Entertainment, Inc.
Estimates of the compensation relating to the options and/or stock
appreciation rights as well as restricted stock awards granted to employees
involved with TCI Ventures Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the market
V-198
<PAGE> 437
"TCI VENTURES GROUP"
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
value of the underlying equity and, ultimately, on the final determination of
market value when the options or rights are exercised or the restricted shares
are vested.
Estimated compensation relating to the aforementioned restricted stock
award and options has been recorded through December 31, 1996 pursuant to APB
Opinion No. 25. Such estimate is subject to future adjustment based upon market
value, and ultimately, on the final determination of market value when the
rights are exercised or the restricted stock awards are vested. Had TCI Group
accounted for its stock based compensation pursuant to the fair value based
accounting method in Statement No. 123, the amount of compensation would not
have been materially different from what has been reflected in the accompanying
combined financial statements.
V-199
<PAGE> 438
[FORM OF PROXIES]
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 Stephen M. Brett 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 the shares of Tele-Communications,
Inc. Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock,
Redeemable Convertible TCI Group Preferred Stock, Series G, and/or Redeemable
Convertible Liberty Media Group Preferred Stock, Series H held of record by the
undersigned on July 25, 1997, at the Annual Meeting of Stockholders to be held
on August 28, 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 ALL NOMINEES FOR
DIRECTORS.
(Continued, and to be signed and dated on reverse side.)
TELE-COMMUNICATIONS, INC.
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030
<PAGE> 439
1. ELECTION OF THREE FOR all nominees
DIRECTORS listed below. [ ]
WITHHOLD AUTHORITY to vote * EXCEPTIONS [ ]
for all nominees listed below. [ ]
Nominees: Donne F. Fisher, Kim Magness and J.C. Sparkman
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
* Exceptions
--------------------------------------------------------------------
2. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the Annual Meeting.
CHANGE OF ADDRESS OF
COMMENTS MARK HERE [ ]
Please sign exactly as the 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
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 440
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 Stephen M. Brett 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 the shares of Tele-Communications,
Inc. Series A TCI Group Common Stock, par value $1.00 per share, held of
record by the undersigned on July 25, 1997, at the Annual Meeting of
Stockholders to be held on August 28, 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 ALL NOMINEES FOR
DIRECTORS AND FOR THE TWO PROPOSALS TO AMEND THE RESTATED CERTIFICATE OF
INCORPORATION OF TELE-COMMUNICATIONS, INC. (PROPOSALS NO. 2 AND NO. 3) AND
AGAINST THE PROPOSAL OF TWO STOCKHOLDERS (IF SUCH PROPOSAL IS PRESENTED AT THE
ANNUAL MEETING) (PROPOSAL NO. 4), EACH OF WHICH PROPOSALS IS DESCRIBED ON THE
REVERSE SIDE.
(Continued, and to be signed and dated on reverse side.)
TELE-COMMUNICATIONS, INC.
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030
<PAGE> 441
Proposals of the Board of Directors - The directors recommend a vote "FOR"
proposals 1, 2, and 3
1. ELECTION OF THREE DIRECTORS FOR all nominees listed below. [ ]
WITHHOLD AUTHORITY to vote * EXCEPTIONS
for all nominees listed below. [ ] [ ]
Nominees: Donne F. Fisher, Kim Magness and J.C. Sparkman
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
* Exceptions
--------------------------------------------------------------------
2. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
among other things, (a) redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock and the Tele-Communications, Inc.
Series B Telephony Group Common Stock as Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, respectively, (b) change the
name of the Telephony Group to the TCI Ventures Group and redefine the
assets and liabilities attributed to such Group, (c) make corresponding
changes to the terms of the other existing series of
Tele-Communications, Inc. Common Stock, to reflect the redesignation of
the Telephony Group Common Stock as TCI Ventures Group Common Stock,
and (d) provide for the reservation of shares of Series A TCI Ventures
Group Common Stock for issuance upon conversion, exercise or exchange
of certain options and convertible notes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
permit Tele-Communications, Inc. to redeem the Liberty Media Group
Common Stock for stock of a less than wholly owned subsidiary of
Tele-Communications, Inc. that holds, directly or indirectly, all the
assets and liabilities of the Liberty Media Group if
Tele-Communications, Inc.'s ownership of and voting interest in such
subsidiary is sufficient to satisfy the requirements of the Internal
Revenue Service for a distribution of Tele-Communications, Inc.'s
interest in such subsidiary to the holders of Liberty Media Group
Common Stock to be tax free to such holders.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
================================================================================
Proposal of certain stockholders- The directors recommend a vote "AGAINST" the
following proposal.
4. PROPOSAL TO ACT UPON, if presented by two stockholders of
Tele-Communications, Inc. at the Annual Meeting, a proposal of such
stockholders with respect to the elimination of election of directors
by classes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the Annual Meeting.
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
---------------------
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 442
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 Stephen M. Brett 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 the shares of Tele-Communications,
Inc. Series A Liberty Media Group Common Stock, par value $1.00 per share, held
of record by the undersigned on July 25, 1997, at the Annual Meeting of
Stockholders to be held on August 28, 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 ALL NOMINEES FOR
DIRECTORS AND FOR THE TWO PROPOSALS TO AMEND THE RESTATED CERTIFICATE OF
INCORPORATION OF TELE-COMMUNICATIONS, INC. (PROPOSALS NO. 2 AND NO. 3) AND
AGAINST THE PROPOSAL OF TWO STOCKHOLDERS (IF SUCH PROPOSAL IS PRESENTED AT THE
ANNUAL MEETING) (PROPOSAL NO. 4), EACH OF WHICH PROPOSALS IS DESCRIBED ON THE
REVERSE SIDE.
(Continued, and to be signed and dated on reverse side.)
TELE-COMMUNICATIONS, INC.
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030
<PAGE> 443
Proposals of the Board of Directors - The directors recommend a vote "FOR"
proposals 1, 2, and 3
1. ELECTION OF THREE DIRECTORS FOR all nominees listed below. [ ]
WITHHOLD AUTHORITY to vote * EXCEPTIONS
for all nominees listed below. [ ] [ ]
Nominees: Donne F. Fisher, Kim Magness and J.C. Sparkman
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
* Exceptions
--------------------------------------------------------------------
2. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
among other things, (a) redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock and the Tele-Communications, Inc.
Series B Telephony Group Common Stock as Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, respectively, (b) change the
name of the Telephony Group to the TCI Ventures Group and redefine the
assets and liabilities attributed to such Group, (c) make corresponding
changes to the terms of the other existing series of
Tele-Communications, Inc. Common Stock, to reflect the redesignation of
the Telephony Group Common Stock as TCI Ventures Group Common Stock,
and (d) provide for the reservation of shares of Series A TCI Ventures
Group Common Stock for issuance upon conversion, exercise or exchange
of certain options and convertible notes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
permit Tele-Communications, Inc. to redeem the Liberty Media Group
Common Stock for stock of a less than wholly owned subsidiary of
Tele-Communications, Inc. that holds, directly or indirectly, all the
assets and liabilities of the Liberty Media Group if
Tele-Communications, Inc.'s ownership of and voting interest in such
subsidiary is sufficient to satisfy the requirements of the Internal
Revenue Service for a distribution of Tele-Communications, Inc.'s
interest in such subsidiary to the holders of Liberty Media Group
Common Stock to be tax free to such holders.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
================================================================================
Proposal of certain stockholders- The directors recommend a vote "AGAINST" the
following proposal.
4. PROPOSAL TO ACT UPON, if presented by two stockholders of
Tele-Communications, Inc. at the Annual Meeting, a proposal of such
stockholders with respect to the elimination of election of directors
by classes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the Annual Meeting.
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
---------------------
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 444
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 Stephen M. Brett 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 the shares of Tele-Communications,
Inc. Series B TCI Group Common Stock, par value $1.00 per share, held of record
by the undersigned on July 25, 1997, at the Annual Meeting of Stockholders to be
held on August 28, 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 ALL NOMINEES FOR
DIRECTORS AND FOR THE TWO PROPOSALS TO AMEND THE RESTATED CERTIFICATE OF
INCORPORATION OF TELE-COMMUNICATIONS, INC. (PROPOSALS NO. 2 AND NO. 3) AND
AGAINST THE PROPOSAL OF TWO STOCKHOLDERS (IF SUCH PROPOSAL IS PRESENTED AT THE
ANNUAL MEETING) (PROPOSAL NO. 4), EACH OF WHICH PROPOSALS IS DESCRIBED ON THE
REVERSE SIDE.
(Continued, and to be signed and dated on reverse side.)
TELE-COMMUNICATIONS, INC.
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030
<PAGE> 445
Proposals of the Board of Directors - The directors recommend a vote "FOR"
proposals 1, 2, and 3
1. ELECTION OF THREE DIRECTORS FOR all nominees listed below. [ ]
WITHHOLD AUTHORITY to vote * EXCEPTIONS
for all nominees listed below. [ ] [ ]
Nominees: Donne F. Fisher, Kim Magness and J.C. Sparkman
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
* Exceptions
--------------------------------------------------------------------
2. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
among other things, (a) redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock and the Tele-Communications, Inc.
Series B Telephony Group Common Stock as Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, respectively, (b) change the
name of the Telephony Group to the TCI Ventures Group and redefine the
assets and liabilities attributed to such Group, (c) make corresponding
changes to the terms of the other existing series of
Tele-Communications, Inc. Common Stock, to reflect the redesignation of
the Telephony Group Common Stock as TCI Ventures Group Common Stock,
and (d) provide for the reservation of shares of Series A TCI Ventures
Group Common Stock for issuance upon conversion, exercise or exchange
of certain options and convertible notes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
permit Tele-Communications, Inc. to redeem the Liberty Media Group
Common Stock for stock of a less than wholly owned subsidiary of
Tele-Communications, Inc. that holds, directly or indirectly, all the
assets and liabilities of the Liberty Media Group if
Tele-Communications, Inc.'s ownership of and voting interest in such
subsidiary is sufficient to satisfy the requirements of the Internal
Revenue Service for a distribution of Tele-Communications, Inc.'s
interest in such subsidiary to the holders of Liberty Media Group
Common Stock to be tax free to such holders.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
================================================================================
Proposal of certain stockholders- The directors recommend a vote "AGAINST" the
following proposal.
4. PROPOSAL TO ACT UPON, if presented by two stockholders of
Tele-Communications, Inc. at the Annual Meeting, a proposal of such
stockholders with respect to the elimination of election of directors
by classes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the Annual Meeting.
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
---------------------
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 446
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 Stephen M. Brett 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 the shares of Tele-Communications,
Inc. Series B Liberty Media Group Common Stock, par value $1.00 per share,
held of record by the undersigned on July 25, 1997, at the Annual Meeting of
Stockholders to be held on August 28, 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 ALL NOMINEES FOR
DIRECTORS AND FOR THE TWO PROPOSALS TO AMEND THE RESTATED CERTIFICATE OF
INCORPORATION OF TELE-COMMUNICATIONS, INC. (PROPOSALS NO. 2 AND NO. 3) AND
AGAINST THE PROPOSAL OF TWO STOCKHOLDERS (IF SUCH PROPOSAL IS PRESENTED AT THE
ANNUAL MEETING) (PROPOSAL NO. 4), EACH OF WHICH PROPOSALS IS DESCRIBED ON THE
REVERSE SIDE.
(Continued, and to be signed and dated on reverse side.)
TELE-COMMUNICATIONS, INC.
P.O. BOX 11030
NEW YORK, N.Y. 10203-0030
<PAGE> 447
Proposals of the Board of Directors - The directors recommend a vote "FOR"
proposals 1, 2, and 3
1. ELECTION OF THREE DIRECTORS FOR all nominees listed below. [ ]
WITHHOLD AUTHORITY to vote * EXCEPTIONS
for all nominees listed below. [ ] [ ]
Nominees: Donne F. Fisher, Kim Magness and J.C. Sparkman
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.)
* Exceptions
--------------------------------------------------------------------
2. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
among other things, (a) redesignate the Tele-Communications, Inc.
Series A Telephony Group Common Stock and the Tele-Communications, Inc.
Series B Telephony Group Common Stock as Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock and Tele-Communications, Inc.
Series B TCI Ventures Group Common Stock, respectively, (b) change the
name of the Telephony Group to the TCI Ventures Group and redefine the
assets and liabilities attributed to such Group, (c) make corresponding
changes to the terms of the other existing series of
Tele-Communications, Inc. Common Stock, to reflect the redesignation of
the Telephony Group Common Stock as TCI Ventures Group Common Stock,
and (d) provide for the reservation of shares of Series A TCI Ventures
Group Common Stock for issuance upon conversion, exercise or exchange
of certain options and convertible notes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE the adoption of an amendment to the Restated
Certificate of Incorporation of Tele-Communications, Inc. which would
permit Tele-Communications, Inc. to redeem the Liberty Media Group
Common Stock for stock of a less than wholly owned subsidiary of
Tele-Communications, Inc. that holds, directly or indirectly, all the
assets and liabilities of the Liberty Media Group if
Tele-Communications, Inc.'s ownership of and voting interest in such
subsidiary is sufficient to satisfy the requirements of the Internal
Revenue Service for a distribution of Tele-Communications, Inc.'s
interest in such subsidiary to the holders of Liberty Media Group
Common Stock to be tax free to such holders.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
================================================================================
Proposal of certain stockholders- The directors recommend a vote "AGAINST" the
following proposal.
4. PROPOSAL TO ACT UPON, if presented by two stockholders of
Tele-Communications, Inc. at the Annual Meeting, a proposal of such
stockholders with respect to the elimination of election of directors
by classes.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon any other
business as may properly come before the Annual Meeting.
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
---------------------
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK [X]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 448
[TELE-COMMUNICATIONS, INC. LETTERHEAD]
July 31, 1997
Dear Shareholder,
We believe it is important that you, as a TCI shareholder, understand TCI and
participate in decisions regarding its future direction. Enclosed are a number
of documents developed to provide you with important information for these
purposes. They include:
PROXY STATEMENT: This document explains the proposals that will be acted
on by shareholders at our 1997 Annual Meeting. Included with the proxy
statement is a proxy card which should be voted and returned in the
self-addressed, stamped envelope.
TCI'S 1996 ANNUAL REPORT TO STOCKHOLDERS: This report contains in-depth
financial information as of year-end 1996 regarding TCI and its family of
companies.
TCI SHAREHOLDER REPORT: This summary report gives shareholders an overview
of the TCI family of companies and discusses their recent performance. It
also outlines management's future goals for TCI and explains management's
strategy to achieve these goals.
We trust that these documents will give you a clearer picture of TCI, as well
as an understanding of our vision for the future. We value your ownership in
TCI's family of companies, and we thank you for your continuing support.
Sincerely yours,
/s/ JOHN C. MALONE /s/ LEO J. HINDERY, JR.
John C. Malone Leo J. Hindery, Jr.
Chairman and CEO President and COO
Tele-Communications, Inc. Tele-Communications, Inc.
<PAGE> 449
Tele-Communications, Inc.
Shareholder Report
[GRAPHIC]
[TCI LOGO]
<PAGE> 450
TCI HIGHLIGHTS
TCI GROUP
<TABLE>
<CAPTION>
Year end Dec. 31 (In millions) 1996 1995 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenue $ 6,790 $ 5,145 32%
- --------------------------------------------------------------------------------
Operating Cash Flow 2,112 1,972 7%
(total revenue minus
operating and SG&A expense)
- --------------------------------------------------------------------------------
Net Earnings (Loss) (778) (144) (440)%
- --------------------------------------------------------------------------------
Total Assets 27,154 23,059 18%
- --------------------------------------------------------------------------------
Total Debt 14,924 12,960 15%
- --------------------------------------------------------------------------------
Combined Equity 1,863 2,936 (37)%
- --------------------------------------------------------------------------------
Shares Outstanding (in millions)
(net of shares held by subsidiaries)
Series A TCI Group Common Stock 579 572 --
Series B TCI Group Common Stock 85 85 --
</TABLE>
<TABLE>
<CAPTION>
LIBERTY MEDIA GROUP
Year end Dec. 31 (In millions) 1996 1995 % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenue $1,339 $ 1,441 (7)%
- --------------------------------------------------------------------------------
Operating Cash Flow 164 15 993%
(total revenue minus
operating and SG&A expense)
- --------------------------------------------------------------------------------
Net Earnings (Loss) 1,056 (56) N/A
- --------------------------------------------------------------------------------
Total Assets 3,059 2,518 21%
- --------------------------------------------------------------------------------
Total Debt 2 251 (99)%
- --------------------------------------------------------------------------------
Combined Equity 2,397 1,613 49%
- --------------------------------------------------------------------------------
Shares Outstanding (in millions)
Series A Liberty Media
Group Common Stock 228 225 --
Series B Liberty Media
Group Common Stock 21 21 --
</TABLE>
ORGANIZATION CHART
[CHART]
The Company is strategically structured to combine the strengths of its parallel
businesses. TCIGroup includes domestic and international cable operations,
non-cable assets and non-programming investments. Liberty Media Group reflects
interests in entertainment and information programming, electronic retailing and
related businesses. TCI Satellite Entertainment, Inc. was spun off to TCI Group
shareholders in December 1996.
FORWARD-LOOKING STATEMENTS
In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that certain statements
contained in this report are forward-looking in nature. These forward-looking
statements include matters such as business strategies, market potential,
future financial performance, product deployments and other future-oriented
matters. Such matters inherently involve many risks and uncertainties
(including risks and uncertainties associated with changes in competitive and
market conditions, changes in regulation and technology and changes in customer
acceptance of new products), which can cause actual results to differ
materially from those projected in the forward-looking statements.
<PAGE> 451
MESSAGE FROM THE CHAIRMAN
JOHN C. MALONE
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF TCI
Since 1968, Tele-Communications, Inc. (TCI) has grown from a small,
regional antenna company to a diversified global media company and the largest
multiple-system cable operator in the United States. Careful management,
strategic planning, entrepreneurial opportunism and employee dedication have
created a multinational company with a more than $30 billion portfolio of
compatible and complementary assets, ranging from cable television and
programming to telecommunications services.
1996 was a pivotal year in TCI's growth, and one in which we experienced
mixed financial and operating results. Our programming business, international
operations and technology ventures business performed well, growing at healthy
rates, while expanding and creating new opportunities.
However, the Company's domestic cable operations did not perform as well.
During 1996 we encountered industry-wide delays in the development of certain
technologies, heightened competition and increased programming and other
infrastructure development costs. Nonetheless, the fundamentals of this
business remain sound and we have moved forward aggressively to fortify and
leverage the strengths of our operations within the context of our dynamic
industry.
NEW STRATEGIC DIRECTION
We continually seek to maximize the power of the assets within the TCI
family of companies to promote growth and to enhance shareholder value. As we
move toward the next millennium, we are taking a variety of steps to achieve
these goals. We are reinvigorating our cable operations and building on the
success of our programming business. We are continuing our commitment to
diversification, while seeking to organize the Company to make it more easily
understood by investors. And at every turn, we remain committed to achieving
our goal of steady, sustainable financial and operational results.
A SIMPLER TCI
We have long recognized the benefits of diversification to better manage
risk, identify and leverage new market opportunities, and combine the strengths
of parallel businesses. We have been very successful in these efforts. However,
as TCI has grown, it has become an increasingly complex company, and we have
decided to organize our business structure so shareholders and lenders can
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
[Picture of John C. Malone]
1
<PAGE> 452
better understand TCI and realize the combined value of our many and varied
businesses.
In 1995, TCI reorganized its equity structure and issued common equity
securities that track the performance of specific assets. These securities,
known as tracking stocks, facilitate market recognition and provide investors
with a method by which to measure the value and contributions of our diverse
businesses. Tracking stocks also provide investors with the opportunity to
invest in separate securities that reflect the performance of specific
companies and to participate in the Company's equity investment in those
companies, whether or not they are publicly traded.
To continue these efforts, we have proposed the creation of a new tracking
stock, named TCI Ventures Group, that will further segregate our business
activities. TCI common stock is currently traded through two tracking stocks:
Liberty Media Group (Nasdaq: LBTYA/LBTYB) and TCI Group (Nasdaq: TCOMA/
TCOMB). Liberty Media Group reflects the performance of Liberty Media
Corporation, which owns interests in entertainment and information programming
and in related businesses. TCI Group primarily reflects the performance of
TCI's domestic cable operations, composed of TCI Communications, Inc. (TCIC),
TKR Cable Company, and other relatively small domestic cable systems held by
the TCI parent company.
TCI Group also includes the Company's interests in United Video Satellite
Group; At Home Corporation, a high-speed Internet services company; @Home by
TCI.NET, the Company's high-speed Internet distribution service; TCI Technology
Ventures, Inc., which manages the Company's investments in various technology
companies; Tele-Communications International, Inc. (TINTA), the Company's
international cable and programming businesses; Teleport Communications Group,
a large independent alternative access communications provider; and Sprint
Spectrum Holding Company, L.P. and PhillieCo, L.P., providers of wireless
personal communications services.
If approved by shareholders at the Annual Stockholders' Meeting in August,
the new tracking stock, TCI Ventures Group, will include the Company's
international assets and substantially all of TCI's non-cable and
non-programming domestic assets and investments. TCI Group thereafter will be
composed primarily of the Company's domestic cable operations and its
high-speed Internet and residential telephony distribution services. I invite
you to review the enclosed proxy statement for details regarding this important
proposal.
FOCUSING ON OUR STRENGTHS
Strategic diversification has worked well at TCI and will continue to be
important in 1997. However, at the very heart of TCI are its powerful cable and
programming operations. These two businesses make a potent partnership, and we
will continue to focus on ways to reap maximum value from their alliance.
INTERNATIONAL SERVICE AREAS
[GRAPHIC]
Committed to global expansion and market leadership,
Tele-Communications International, Inc. operates in
countries around the world, including:
Argentina, Brazil, France, Germany, Japan, Mexico,
Spain and the United Kingdom.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
2
<PAGE> 453
CABLE
At TCI, we continue to believe that a hybrid fiber-coaxial terrestrial
network is the most cost-effective way to provide the broad array of
communications services that consumers will demand in the future. This kind of
network has the unique ability to provide broad-based, high-speed,
bi-directional video, voice and data connectivity. As compression technologies
evolve and the Internet phenomenon grows, the optimal timing and nature of new
service offerings continue to change.
In preparation for these new product offerings, TCI invested heavily in its
operating infrastructure. However, deployment was delayed due to technological,
regulatory and other factors that were difficult to predict. Moreover, among
other things, rising programming costs eroded our cable operating profit
margins and placed upward pressure on monthly cable rates. As we passed these
costs through to our customers, some elected to reduce or disconnect their
cable services.
Management took immediate steps to strengthen our cable operations. We cut
most executive compensation, reduced our work force by 6 percent, implemented
rigid cost containment and carefully examined all of our programming contracts,
subsequently entering into negotiations with a number of our programming
suppliers to secure better programming arrangements.
We also sharply curtailed and redirected planned 1997 capital spending,
recognizing that advances in compression technology would soon allow us to
offer the majority of our customers digital video and data services utilizing
existing coaxial plant, modified by fiber trunking. This configuration is not
only more cost-effective, but also far faster to deploy than total analog
system rebuilds. Long term, these same advances should make TCI less vulnerable
to direct broadcast satellite (DBS) competition. I am pleased to report that
our new capital spending plans, programming agreements and cost reduction
activities have had an immediate impact, improving the Company's cable
unadjusted operating cash flow by more than 40 percent by the end of the first
quarter of 1997, as compared to the same period last year. Adjusting for
acquisitions and dispositions, operating cash flow increased 24 percent
compared to similarly adjusted 1996 first quarter.
While our cable operations are not yet where we would like them to be,
early results indicate that their progress is on target. We face the future
with renewed vigor, enthusiasm and challenging new goals. To provide both
leadership and expertise on our mission, I appointed Leo J. Hindery, Jr. to the
posts of TCI President and Chief Operating Officer and TCIC President and Chief
Executive Officer in early 1997. Leo will also be the Chief Executive Officer
of the proposed TCI Ventures Group. Leo was previously Chief Executive Officer
and founder of InterMedia Partners, one of the nation's top 10 multiple-system
cable operators.
With almost 30 years of industry, investment banking and finance
experience, Leo will guide the strategic shift in our cable business,
[GRAPHIC]
An on-screen interactive guide provides customers
with a user-friendly way to manage the large
variety of programming available through digital
cable television.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
3
<PAGE> 454
THE PROPOSED TCI VENTURES GROUP
AS OF 7/15/97
<TABLE>
<CAPTION>
TELE-COMMUNICATION TELEPORT
INTERNATIONAL, UNITED VIDEO SATELLITE AT HOME COMMUNICATIONS
INC. GROUP, INC. CORPORATION GROUP, INC. SPRINT PCS
- ---------------------------------------------------------------------------------------------------------------------------------
NASDAQ: TINTA NASDAQ: UVSGA NASDAQ: ATHM NASDAQ: TCGI
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DESCRIPTION The Company's A provider of A provider of A provider of A provider of wireless
primary vehicle satellite-delivered video, high-speed competitive communications
for the conduct audio, data and program multimedia local exchange services, using radio
of its promotion services to cable Internet carrier service. spectrum for broadband
international television systems, services and personal communications
cable, satellite dish owners, the Company's services to residential
telephony and radio stations and private interest in and business customers
programming network users primarily other nationwide.
businesses. throughout North America Internet-related
assets.
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Interest Equity Interest Equity Interest Equity Interest Equity Interest
PERCENT 85% 40% 39% 30% 30%
OWNERSHIP Voting Control Voting Control Voting Control Voting Control
92% 85% 72% 37%
</TABLE>
while working closely with me in the day-to-day management of TCI. Leo
discusses his plans for TCI and for TCIC in his Letter to Shareholders,
beginning on page six.
PROGRAMMING
Our programming operations are led by Robert (Dob) Bennett, Liberty Media's
new President and Chief Executive Officer. Dob succeeded Peter Barton, who left
Liberty in early 1997 following a very successful career. Dob, who served as
Liberty's Executive Vice President and Chief Financial Officer since 1990, has
the knowledge and experience to continue Liberty's outstanding record of
success.
Most of Liberty's affiliated networks experienced strong subscriber growth
in 1996; this trend continues in 1997, as DBS and other forms of video
distribution businesses expand the number of pay television households.
Subscriber growth contributed to a 62 percent increase in the attributed cash
flow of Liberty's developed businesses in 1996.
Several of Liberty's affiliates successfully launched new networks in 1996,
such as Fox Sports Net, BET Movies/Starz!3 and Discovery's Animal Planet.
Discovery also launched four new services designed for the digital platform:
Discovery Science, Discovery Civilization, Discovery Travel & Living and
Discovery Kids. These services will be included in TCI's new digital cable
services. The established networks also continue to invest in expansion of
their brands in Latin America, Asia and Europe.
During 1996 and the first half of 1997, Liberty was involved in several
significant transactions, each of which served the goal of increasing
shareholder value. Among these were the Turner/Time Warner merger; the Home
Shopping Network/Silver King merger; the proposed sale of Liberty's interest in
International Family Entertainment, Inc.; and the April 1996 sports partnership
with The News Corporation, followed in June 1997 by a planned alliance with
Cablevision, through which Fox/Liberty Sports
[GRAPHIC]
Liberty Media has a 10 percent, non-voting equity interest
in Time Warner.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
4
<PAGE> 455
THE PROPOSED TCI VENTURES GROUP
AS OF 7/15/97
<TABLE>
<CAPTION>
TCI SUMMITRAK OF TEXAS, INC. TCI NATIONAL DIGITAL
WESTERN TELE-COMMUNICATIONS, INC. ETC W/TCI, INC. AND TCI SUMMITRAK L.L.C. TELEVISION CENTER
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DESCRIPTION The Company's wholly-owned A subsidiary of the Wholly-owned subsidiaries of A provider of digital
subsidiary which provides long Company that develops and the company that provide an compression and
distance transport of video, voice distributes for-profit integrated network-based authorization services
and data traffic and other education, training and information management to programming
telecommunications services to communication services system to certain of TCI's suppliers and to video
telecommunications carriers on a and products. cable systems. distribution outlets.
wholesale basis using primarily a
digital broadband microwave
network located throughout a
12-state region.
- ---------------------------------------------------------------------------------------------------------------------------------
PERCENT Equity Interest Equity Interest Equity Interest Equity Interest
OWNERSHIP 100% 80% 100% 100%
</TABLE>
will acquire 40 percent of Cablevision's regional sports networks and its
Madison Square Garden business and will own 50 percent of a new national sports
network. Dob comments on Liberty's success and on his future plans in his
Letter to Shareholders, beginning on page 12.
My appointments of Leo and Dob bolster our senior management team with two
seasoned industry veterans and mark a new era of partnership and cooperation
between TCI's cable and programming interests.
A BRIGHT FUTURE
The events of the past year have positioned TCI to compete more effectively
in the future. We have clearly demonstrated our ability to respond swiftly and
decisively to changes in market conditions and technology. As indicated by our
first quarter results, we have also shown that by exercising careful management,
sound judgment, steady operating discipline and rigorous cost containment, we
can deliver solid results to our shareholders. We must now show that we can
sustain these results over time. We are respectful of the management challenges
ahead, and we face each challenge with enthusiasm and a clear focus on the
mission at hand.
In our remarkably fast-paced industry, we expect further change in 1997.
One thing however will never change at TCI: we are built on the entrepreneurial
philosophy and character of our founder and Chairman, Bob Magness, who passed
away last November. Bob had a vision -- a dream -- that drove a small, regional
antenna company to become a cable systems and programming powerhouse. He knew
that the source of TCI's strength was in the continuing support of our investors
and in the dedication, creativity and talent of our approximately 34,000
employees. In this spirit, Leo, Dob and I are working hard to ensure that TCI
remains at the forefront of this exciting, rewarding and challenging industry.
/s/ JOHN C. MALONE
JOHN C. MALONE
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER OF TCI
JULY 1997
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
5
<PAGE> 456
MESSAGE FROM THE PRESIDENT & COO
LEO J. HINDERY, JR.
PRESIDENT AND CHIEF OPERATING OFFICER OF TCI
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF TCIC
Through the creative foresight and long-range planning of TCI Chairman John
Malone and the late Bob Magness, TCI has gathered perhaps the most commanding
portfolio of assets in our industry. My charter as TCI's new president is to
develop a powerful, unified relationship among those assets to promote
thoughtful growth and increase shareholder value.
Our cable operations are among the strongest of our assets. Through TCI's
domestic cable operations, TCI delivers analog basic and expanded basic,
premium and pay-per-view video services to more than 14 million customers. As
the largest multiple-system cable operator with the broadest reach in the
United States, TCI has long been the leader and most prominent player in the
cable industry.
TCI also develops and provides diverse, high-quality programming to our
customers through our programming business, Liberty Media Corporation. Liberty
and TCI's domestic cable operations work together to maximize the value of
Liberty's programming investments and to provide the Company's cable operations
with quality programming at reasonable rates.
If approved by our stockholders at the August Annual Meeting, TCI will
create a third tracking stock, TCI Ventures Group. This Group will include the
Company's investments in United Video Satellite Group; At Home Corporation, a
high-speed Internet services company; Tele-Communications International, Inc.
(TINTA), which encompasses the Company's non-U.S. video, telephony and
programming assets; the Teleport and Sprint PCS telephony investments; and
various technology ventures and investments. Through these three business
units, TCI helps develop and introduce new products that continue to position
the Company as the leader in our industry and provide growth opportunities.
ENERGIZING OUR CABLE BUSINESS
Our cable operations represent a large piece of TCI's assets and contribute
a significant portion of its cash flow. Accordingly, we continue to energize our
organization, so we can more effectively manage the cable systems we own and
constructively support the management of our affiliated operators.
[PICTURE]
LEO J. HINDERY, JR.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
6
<PAGE> 457
@HOME BY TCI.NET SPEED COMPARISON
<TABLE>
<CAPTION>
[PICTURE] [PICTURE] [PICTURE]
CABLE MODEM ISDN 28.8 MODEM
<C> <C> <C>
1.6 SECONDS TO DOWNLOAD 2 MINUTES 6 SECONDS TO DOWNLOAD 9 MINUTES 20 SECONDS TO DOWNLOAD
A 2 MEGABYTE FILE A 2 MEGABYTE FILE A 2 MEGABYTE FILE
</TABLE>
In sharp contrast to conventional services that rely on telephone modems, @Home
by TCI.NET provides round-the-clock cable access and rapid downloading -
hundreds of times faster than a typical phone modem. This high-speed Internet
service delivers rich multimedia national and local content including news,
sports, weather and children's topics, a customized browser and e-mail
connectivity via a high-speed cable modem.
LISTENING TO OUR CUSTOMERS
In an industry dependent upon the loyalty and satisfaction of our
customers, it is crucial that we maintain a keen focus on customer needs. We
believe that ours is essentially a local business; we attempt to address
customers at the local level and demonstrate that we listen to them and respond
to their wishes.
With this in mind, our cable operation's strategy is to get as close as
possible to our customers by reaching out to them in their home markets. To
facilitate this, we have decentralized and reorganized our cable operations
into six regional units, each representing between 2 and 2.5 million customers.
Within a newly empowered and localized business structure, managers now have
both the authority and the accountability to make local product and service
decisions quickly, thereby enhancing customer satisfaction. With better support
from central staff functions, managers can now engage more effectively in
targeted marketing and sales programs, community efforts and public relations
for maximum impact. This structure should help us to nurture our franchise
relationships through proactive involvement, partnering with our franchise
authorities in the common goal of customer satisfaction.
To strengthen our position in defined markets, over the past year and a
half we have made select acquisitions of key cable systems such as Viacom Cable
and the remaining interest in TKR Cable. We have also engaged in strategic
system exchanges. More recently, we have agreed to
[PICTURE]
Vital to enhancing customer satisfaction,
TCI's customer service representatives
are available 24 hours a day, seven
days a week.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
7
<PAGE> 458
EXISTING PLANT STATUS
AS OF 3/31/97
<TABLE>
<CAPTION>
HOMES PLANT PERCENT OF
BANDWITH HEADENDS PASSED MILES TOTAL PLANT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
220 - 270 MHz 125 423 6,554 2%
300 - 350 MHz 657 7,398 90,949 35%
400 MHz 89 2,502 26,261 10%
- -------------------------------------------------------------------------------------------------------------------
Total less than 450 MHz 871 10,323 123,764 47%
- -------------------------------------------------------------------------------------------------------------------
450 MHz 207 4,661 49,294 19%
550 - 750 MHz 218 8,793 89,926 34%
- -------------------------------------------------------------------------------------------------------------------
Total greater than 450 MHz 425 13,454 139,220 53%
- -------------------------------------------------------------------------------------------------------------------
Total 1,296 23,777 262,984 100%
===================================================================================================================
Fiber Sheath Miles 18,778 7%
Fiber Miles 600,896
</TABLE>
enter into several joint ventures and affiliations with quality cable operators
which have records of outstanding customer service. This effort is expected to
benefit the Company in numerous ways. For example, in each case a market or
region will be consolidated, which should result in substantially reduced
operating costs per customer and improved customer service. In addition, in
aggregate the joint ventures should serve to deleverage the Company's cable
operations to the benefit of our shareholders. Finally, we are now partners
with a number of well-respected cable operators who share our values and
commitment to quality customer service.
We are excited about the implications and potential of these new joint
ventures. We believe that these ventures, combined with our customer focus and
local strategy, give the Company a tremendous market advantage -- one that will
energize our core cable business and differentiate TCI in an increasingly
competitive environment.
A NEW VIEW ON THE MARKET
Providing cutting-edge technology to our customers is a TCI trademark, and
an effort to which we have dedicated significant financial resources. In the
past 18 months, advances in digital compression technology have changed
[PICTURE]
Recognizing that cable service is a local business, dependent on customer
loyalty and satisfaction, TCI targets customers in local markets
with a variety of direct marketing and sales promotion programs.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
8
<PAGE> 459
REGIONAL MAP OF THE UNITED STATES
AS OF 3/31/97
[MAP]
To reach out to customers at the local level, TCI decentralized its cable
operations into six regional units, each serving approximately 2.5 million
customers. In late 1996 and early 1997, the Company introduced its digital
cable television and high-speed Internet and residential telephony distribution
services to residents in several major cities.
our industry. These advances mean that digital compression technology,
performed by TCI's Headend in the Sky (HITS) facility in Denver, will be able
to compress an average of 14 digital channels into the bandwidth previously
occupied by just one analog channel, vastly enhancing our distribution
capabilities with little additional cost. In addition, these advances allow us
to offer our customers the range of products they desire at a minimum 450 MHz
bandwidth, as opposed to the 550 or 750 MHz bandwidth that was previously
thought to be required. As such we expect our capital expenditures to be
one-fourth to one-third less than what would have been required to upgrade our
entire plant to 750 MHz.
[PICTURE]
TCI provides family-oriented programming
and cable television service to more
than 14 million direct customers and 3
million affiliated customers.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
9
<PAGE> 460
This important development has resulted in a strategic shift for our cable
operations. We are now focused on optimizing the existing broadband network or
upgrading it as necessary to serve our customers' needs. We apply a "best fit"
architecture approach to each market, through which we examine the upgrade
costs, demographics, revenue potential and other factors to develop a business
plan that makes the greatest economic sense for the specific market and
delivers the best return on investment.
We can now deploy new revenue-generating services more quickly and reduce
capital spending, redirecting it to the upgrade of our headend equipment and to
the installation of fiber optic cable, which increases system reliability and
reduces plant maintenance costs.
[PICTURE]
Service technicians perform maintenance on the Company's cable
system in preparation for making digital cable
television available to TCI's customers.
In addition to our planned achievement of substantially decreased capital
spending, we continue our focus on rigid operating cost control. In his letter,
John Malone describes a number of the successful corporate cost control
measures that have contributed to improved operating margins. None are as
important as our efforts to contain programming rate increases, which in 1996
rose by more than 20 percent. Through a series of negotiations with programming
suppliers, we have emerged with agreements that will provide our cable
operations with more flexibility and will deliver greater value to our
customers. Operating margins have already been favorably impacted in the first
quarter of 1997.
[PICTURE]
TCI uses fiber optics to provide its customers
with reliable and cost-efficient communication
service.
NEW PRODUCTS, NEW TECHNOLOGIES
With our ability and commitment to capitalize on our broadband network
capabilities while still serving our customers' needs, we continue to develop
and deliver a range of new integrated products and services. We have
successfully tested three new products: digital cable television, access to
Internet services and telephony. All three tests have provided valuable market
intelligence upon which we will build in the future.
DIGITAL TELEVISION
The most immediate and promising of these new products is digital cable
television. We
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
10
<PAGE> 461
expect digital cable television to allow us to expand our cable offerings in an
appealing and cost-efficient manner, while generating additional revenue and
cash flow and enhancing our competitive position.
Response in our initial markets indicates that customers are very pleased
with the picture, sound, programming choices and ease of use capabilities of
digital cable television. In late 1997, we expect to make digital cable
television available to the majority of the homes passed by the Company's cable
systems.
INTERNET
As part of our plan to provide integrated services over our broadband
network, we have begun to roll out a high-speed Internet service, @Home by
TCI.NET. For a one-time installation fee and a monthly subscription charge,
customers in these markets will have unlimited Internet use, including e-mail,
chat, a customized @Home browser and access to local news, weather, sports and
business, all delivered over a very high-speed cable modem. Unlike conventional
dial-up services, the @Home by TCI.NET service is always accessible, allowing
users to retrieve information from the Internet much faster than the typical
telephone modem, with no additional usage charges. The @Home by TCI.NET service
is currently available to residents of Fremont, California; Hartford,
Connecticut; Arlington Heights, Illinois; and Seattle, Washington.
[PICTURE]
In fall 1996, the Company's installation team
assisted in the introduction of @Home by TCI.NET
to residents in the San Francisco Bay area.
TELEPHONY
We continue to explore ways to provide telephone services via the Company's
cable systems. Test marketing has shown that the technology is effective;
continued testing will allow us to evaluate customer acceptance and the
economic attractiveness of our wireline service.
THE FUTURE
As the industry leader, we are excited about the future of our cable
business. We now have a customer-focused strategy that invites loyalty and
satisfaction; we have a solid broadband distribution network that can
accommodate not just today's technology, but also tomorrow's; we have a strong
sense of partnership between our cable and programming businesses; and we have
a number of promising technology investments and new customer products in
development or test market. As we move ahead, we will leverage these strengths,
improve our financial and operational flexibility and focus on new ways to set
us apart from the competition, with a constant goal of maximizing value for
TCI's shareholders.
/s/ LEO J. HINDERY, JR.
LEO J. HINDERY, JR.
PRESIDENT AND CHIEF OPERATING OFFICER OF TCI
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF TCIC
JULY 1997
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
11
<PAGE> 462
MESSAGE FROM THE PRESIDENT & CEO OF LIBERTY MEDIA
ROBERT R. BENNETT
EXECUTIVE VICE PRESIDENT OF TCI
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF LIBERTY MEDIA CORPORATION
Liberty Media is one of the nation's largest and most diverse providers of
television programming. We conduct our business through more than 25 affiliated
companies in which we have a broad range of ownership interests. These
companies offer movies, sports, documentaries, home shopping and entertainment
programming to millions of viewers nationwide and around the world.
At Liberty, we have a simple objective that we pursue with discipline and
focus: to maximize the per share value of our equity over a rolling five- to
10-year horizon. Our strategy for meeting this objective has three principal
components. First, we seek to increase the distribution and cash flow of the
individual networks in order to make each of these investments more valuable.
Second, we encourage our affiliates to lay the foundation for future growth by
creating new networks in the United States and abroad. Third, we engage in
strategic transactions that are intended to make our overall portfolio of
businesses more valuable. All of the above are complemented by cooperation with
other companies in the TCI family and leveraged by opportunistic repurchases of
our stock. The past 18 months have been very productive on all these fronts.
INTERNAL GROWTH
Cable and satellite programming networks are enjoying a period of robust
growth, driven by the continuing increase in the number of television
households subscribing to some form of pay television and by the migration of
viewers from traditional television networks to cable and satellite networks.
These two factors are driving double-digit growth in revenue without
corresponding increases in expenses, resulting in healthy increases in cash
flow.
The talented entrepreneurs/owners who manage our businesses took full
advantage of these environmental factors to create a 62 percent increase in the
attributed cash flow of our developed businesses in 1996. A few examples:
Discovery Channel cash flow rose by 22 percent over the prior year; Encore cash
flow more than tripled; cash flow of our regional sports businesses increased
by 44 percent; Home Shopping Network staged a dramatic turnaround; and QVC
continued its record of growth with an 18 percent cash flow increase.
DEVELOPING NEW NETWORKS
In addition to managing the success of the established networks, our
affiliated companies invested in new businesses that will supplement the
fundamental growth of the more established networks. We successfully launched
Fox Sports Net and Animal Planet in late 1996, and STARZ! and FX each saw
significant distribution
[PICTURE]
ROBERT R. BENNETT
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
12
<PAGE> 463
[PICTURE] [PICTURE] [PICTURE]
Significant events among Liberty Media affiliates include Discovery Channel's
successful launch of the new Animal Planet network, the combination of Encore
and STARZ! national pay television movie services, and creation of a national
network of regional sports networks through partnerships with Fox Sports and
Cablevision.
gains. Also, virtually all of our businesses expanded the quality and reach of
their services in Latin America, Asia and Europe. While pursuing these
opportunities requires expenditure of time and money, such investments are
crucial to sustaining the growth rates we currently enjoy.
MANAGING THE PORTFOLIO
In 1996 and the first half of 1997, we initiated, participated in, or
completed more than a dozen transactions. Each of them served one or more of
the following objectives: enhanced our strategic positioning, combined similar
businesses to create scale economies for greater efficiency or market
positioning, captured unrealized value in a tax-efficient manner or created
liquidity. The following are a few highlights.
In the 1996 TBS/Time Warner merger, Liberty's 25 percent interest in
TBS was converted into a 10 percent interest in Time Warner, one of the world's
leading diversified media companies. We entered into this transaction because
we believed that it was financially attractive to Liberty and that the TBS
networks would be more valuable in the future as part of a larger and more
vertically integrated entity. We are pleased to report that halfway through
1997, our Time Warner shares have a value of approximately $2.8 billion, an
increase of $1.1 billion over the value of our TBS shares at the end of 1995.
In June of 1997, Fox Sports, our partnership with The News Corporation,
reached agreement for a strategic alliance and partnership with Cablevision
Systems Corporation, majority owner of several regional sports networks and
Madison Square Garden. This alliance will complete our long-held objective of
creating a nationwide network of regional sports networks. Going forward, Fox
Sports will have equity interests in 20 regional sports networks providing
service to more than 55 million subscribers coast to coast, including most of
the major television markets. In addition, Fox Sports and Cablevision will
create a national network that will provide sports programming and sell
national advertising for all of our regional networks as well as for several
independent networks. This will allow us, for the first time, to take advantage
of the high viewership ratings of our regional networks when we sell commercial
time to national advertisers.
In June of 1997, we agreed to sell our interest in International Family
Entertainment (IFE) for $345 million of preferred stock of Fox Kids Worldwide,
Inc., an affiliate of News Corp. By accepting preferred stock for our IFE
shares, we will be able to defer taxes on the substantial financial gain on the
transaction while earning a yield, significantly boosting our corporate
liquidity.
While our movie networks, Encore and STARZ!, have been managed together
since inception, their ownership interests were combined only in July of this
year. As a result, Liberty Media Group now owns 80 percent and TCI Group owns
20 percent of the new company,
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
13
<PAGE> 464
Encore Media Group ("EMG"). In connection with the transaction, TCI's domestic
cable operations entered into a new, long-term affiliation agreement under
which it will make fixed monthly payments to EMG. This agreement serves two
purposes: for TCI's domestic cable operations, it permits broad flexibility in
packaging and pricing the EMG services to its customers; and for Liberty, the
assured minimum level of revenue substantially reduces the risk of the
business. Ultimately, the success of EMG hinges on our ability to attain
significant levels of distribution outside of TCI's domestic cable operations,
but we believe this newly configured business has the potential to be one of
the largest contributors to our growth in value over the next five years.
FUTURE OPPORTUNITIES
As of the end of June, at the corporate level, Liberty had in excess of
$350 million in cash, no debt and $350 million of available credit lines. We
are confident our bank lines can be increased substantially and we are
reviewing alternatives for raising longer-term funds. We expect that these
sources, combined with internally generated cash flow, will be more than
adequate to take advantage of investment and acquisition opportunities as they
arise. Among these opportunities is our agreement to repurchase 6.7 million
Liberty Media Group shares that will be acquired as part of TCI Group's pending
acquisition of Kearns-Tribune Corporation. This transaction is consistent with
the 20 percent share repurchase authorization approved by the Board of
Directors. Depending on market conditions, availability of cash and the
suitability of other investment alternatives, we expect to repurchase
additional shares in the future.
Each of the 12 full-time employees who make up the Liberty corporate
staff is a shareholder and each is dedicated to achieving our objective of
shareholder equity appreciation. We are greatly assisted in this process by the
corporate vision and leadership of John Malone and Leo Hindery and by our
association and cooperation with the other companies in the TCI family. These
internal strengths, combined with the attractive environment for programming
businesses and our superior portfolio of well-managed assets, give us great
optimism for the future.
/s/ ROBERT R. BENNETT
ROBERT R. BENNETT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIBERTY MEDIA CORPORATION
JULY 1997
LIBERTY MEDIA GROUP ASSETS
MOVIE SERVICES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIBERS SUBSCRIBERS ATTRIBUTED
AT 3/31/97 AT 12/31/96 OWNERSHIP
ENTITY (in thousands) (in thousands) % at 7/15/97
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Encore Media Group 80%
Encore 10,538 10,154
MOVIEplex 9,452 1,120
Love Stories 1,876 1,681
Westerns 3,604 3,261
Mystery 3,053 2,708
Action 1,875 1,664
True Stories 1,876 1,660
WAM! America's Kidz Network 1,897 1,661
STARZ! 5,202 4,925
STARZ!2 556 537
BET Movies/STARZ!3 31 N/A 52%
Request TV 40,594 (1) 39,639 (1) 40% (2)
Viewer's Choice 48,880 (1) 44,889 (1) 10%
- ------------------------------------------------------------------------------
</TABLE>
ELECTRONIC RETAILING
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIBERS SUBSCRIBERS ATTRIBUTED
AT 3/31/97 AT 12/31/96 OWNERSHIP
ENTITY (in thousands) (in thousands) % at 7/15/97
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
HSN, Inc. (Nasdaq: HSNI) (3) (3)
HSN 70,330 (4) 69,665(4)
America's Store 11,012 (4) 11,700(4)
ISN On-line On-line
HSN-Germany 8,300 7,000 11%
Shop Channel (Japan) 846 300 11%
SKTV, Inc. 28,300 (5) 28,302(5)
SF Broadcasting 1,800 (5) 1,800(5)
QVC Inc. 43%
QVC Network 61,702 59,669
Q2 12,994 13,111
QVC-The Shopping
Channel (UK) 5,900 5,750
QVC-Germany 4,900 4,500
IQVC On-line On-line
- --------------------------------------------------------------------------------
</TABLE>
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
14
<PAGE> 465
ENTERTAINMENT AND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUBSCRIBERS SUBSCRIBERS ATTRIBUTED
AT 3/31/97 AT 12/31/96 OWNERSHIP
ENTITY (in thousands) (in thousands) % at 7/15/97
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bay TV 1,415 1,390 49%
BET Holdings, Inc. (NYSE: BTV) 22%
BET Cable Network 48,100 47,000
BET Action Pay-Per-View 10,000(1) 9,000(1)
BET on Jazz 3,000 2,200
Court TV 27,513 26,453 33%(2)
Discovery Communications, Inc. 49%
Discovery Channel 71,034 70,556
The Learning Channel 57,097 53,992
Animal Planet 18,090 14,900
Discovery Science (6) (6)
Discovery Civilization (6) (6)
Discovery Travel & Living (6) (6)
Discovery Kids (6) (6)
Discovery Asia 6,753 4,452
Discovery India 4,000 4,625
Discovery Japan 25 N/A
Discovery Europe 13,534 13,018
Discovery Germany 25 N/A
Discovery Italy/Africa 150 N/A
Discovery Latin America 6,742 6,251
Discovery Latin America
Kids Network 1,400 1,200
Discovery Channel On-line On-line On-line
The Box Worldwide, Inc.
(Nasdaq: BOXW) 5%
The Box 23,745 22,189
TCI Music, Inc. (Nasdaq: TUNE) 2%
DMX 19,400(1) 19,400(1)
E! Entertainment Television 40,852 41,872 10%(2)
International Family Entertainment,
Inc. (NYSE: FAM) 20%(7)
The Family Channel 68,600 65,700
FiT TV 12,000 11,800 25%
International Channel 7,371 7,355 45%
MacNeil/Lehrer Productions N/A N/A 67%
Odyssey 30,100 26,800 49%
Time Warner Inc. (NYSE: TWX) 10%
Time Warner/Turner/Programming Services (8)
- -------------------------------------------------------------------------------------------
SATELLITE SERVICES
- -------------------------------------------------------------------------------------------
Superstar/Netlink 919 981 50%
Netlink Wholesale 2,862(9) 2,905(9) 100%
Southern Satellite
Systems, Inc.(10) 67,674 66,735 100%
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SPORTS SERVICES
- -------------------------------------------------------------------------------------------
SUBSCRIBERS SUBSCRIBERS ATTRIBUTED
AT 3/31/97 AT 12/31/96 ECONOMIC(11)
ENTITY (in thousands) (in thousands) % at 7/15/97
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regional Sports Networks (2)
Fox Sports-Arizona 721 744 50%
Fox Sports-
Intermountain West 630 617 50%
Fox Sports-Midwest 1,307 1,222 50%
Fox Sports-Pittsburgh 1,837 1,698 50%
Fox Sports-Northwest 2,440 2,416 50%
Fox Sports-Rocky Mountain 1,785 1,690 50%
Fox Sports-South 5,380 5,228 44%
Fox Sports-Southwest 4,743 4,751 50%
Fox Sports-West 3,972(12) 3,956(12) 50%
Fox Sports-West 2 N/A N/A 50%
Home Team Sports 3,880 3,835 17%
SportsChannel Chicago 2,747 2,707 25%
SportsChannel Pacific 4,160 4,083 25%
SportsChannel
Philadelphia/PRISM 2,560 2,534 17%
Sunshine Network 3,773 3,706 27%(2)
National Sports Networks
Fox Sports Americas (US) 2,233 1,682 25%
Fox Sports Direct (13) 4,488 3,731 50%
Fox Sports Net 31,790(1) 23,632(1) 50%
Fox Sports News 31,790(1) 23,632(1) 50%
FX 30,699 28,673 50%
Prime Network 54,611(1) 52,592(1) 25%
International Sports Programming
Fox Sports Australia 389 171 12.5%
Fox Sports Americas 3,369 2,120 25%
STAR TV (15) 220,000(14) 220,000(14) 3.75%
Torneos y Competencias, S.A 9%
- -------------------------------------------------------------------------------------------
</TABLE>
PUBLIC STOCK INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY CLASS SHARES AT 7/15/97
- -------------------------------------------------------------------------------------------
<S> <C> <C>
BET Holdings, Inc. A Common 1,831,600
(NYSE-BTV) B Common 1,831,600
----------
3,663,200(15)
TCI Music, Inc. (Nasdaq: TUNE) Common 1,514,765
HSN, Inc.(3) Common 12,799,999(16)
(Nasdaq: HSNI) B Common 7,966,645(16)
----------
20,766,644(16)
International Family
Entertainment, Inc. (7) C Common 7,088,732
(NYSE: FAM) Convertible Notes 2,587,500(17)
----------
9,676,232(15)
Time Warner, Inc.
(NYSE: TWX) Series LMCN-V Common(18) 57,061,942(15)
The Box Worldwide, Inc.
(Nasdaq: BOXW) A Common 1,203,464
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Number of subscribers to whom service is available.
(2) The interests of Liberty Media Group in these entities are presently or
will become subject to buy-sell procedures under which one owner may
initiate the procedure by giving notice setting forth a value for the
entity and the other owner(s) may then elect either to buy the interest of
the initiating owner or to sell their interests to the initiating owner at
a price equal to the value specified by the initiating owner multiplied by
the ownership percentage of the selling partner.
(3) Mergers of Silver King Communications, Inc. ("Silver King") with Home
Shopping Network, Inc. and Savoy Pictures Entertainment, Inc. were
consummated in December 1996 and Silver King subsequently changed its name
to HSN, Inc. ("HSNI"). Liberty owns direct and indirect interests in
various HSNI and Home Shopping Network, Inc. securities which, if converted
or exchanged for HSNI common stock, would result in an ownership interest
in HSNI of approximately 36.5%. Liberty currently owns approximately 21% of
HSNI.
(4) Includes broadcast households and cable subscribers.
(5) Number of television households in areas of owned and operated broadcast
stations.
(6) Digital services to be launched on TCI's digital TV service.
(7) Liberty has agreed to sell its IFE stock to Fox Kids Worldwide, Inc. for
$345 million of FKW Preferred Securities.
(8) Includes CNN, Cartoon Network, Headline News, TNT, Turner Classic
Movies, TBS Superstation, CNNfn, CNN/SI, CNN International, TNT, Latin
America, Cartoon Network Latin America, TNT & Cartoon Network Europe, TNT
and Cartoon Network Asia, HBO, Cinemax, Comedy Central, HBO Ole, HBO Asia,
TVKO and WB Television Network. Following consummation of the Time
Warner/Turner merger on October 10, 1996, Liberty is no longer reporting
subscriber numbers for these programming services.
(9) Aggregate number of units. Netlink uplinks six broadcast stations.
(10) Distributes TBS Superstation in the U.S. and Canada. Time Warner has an
option to acquire Southern for $213 million.
(11) "Economic" interests and "ownership" interests may vary for certain sports
services.
(12) Prior years include subscribers now reported in Fox Sports-Arizona.
(13) Formerly Liberty Satellite Sports, a distributor of sports programming to
C-Band home satellite dish and direct broadcast satellite markets.
(14) STAR TV is a satellite-delivered television platform. Programming services
on STAR TV's platform include STAR Sports, STAR Plus, Phoenix Chinese
Channel, STAR Movies and ZEE TV, among others. STAR TV reaches
approximately 220 million people in Asia, India and the Middle East.
(15) Total common equivalent shares.
(16) Common equivalent ownership assuming exchange and exercise of various HSNI
and HSN securities (see footnote 5).
(17) $23,000,000 face amount 6% Convertible Secured Notes due 2004, convertible
into 2,587,500 shares of Class C Common Stock.
(18) Convertible into an equivalent number of shares of Time Warner Common Stock
under certain circumstances.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
15
<PAGE> 466
BOARD OF DIRECTORS
TONY COELHO
Chairman and Chief Executive Officer
ETC w\tci, Inc. and Coelho Associates, LLC
DONNE F. FISHER
Business Executive; Consultant to TCI;
Former Executive Vice President of TCI
JOHN W. GALLIVAN
Chairman of the Board
Kearns-Tribune Corporation
PAUL A. GOULD
Managing Director
Allen & Company, Inc.
LEO J. HINDERY, JR.
President and Chief Operating Officer
Tele-Communications, Inc.
JEROME H. KERN
Business Consultant; Special Counsel to
Baker & Botts, L.L.P.
KIM MAGNESS
Business Executive
DR. JOHN C. MALONE
Chairman of the Board and Chief Executive Officer
Tele-Communications, Inc.
ROBERT A. NAIFY
President and Chief Executive Officer
Todd-AO Corporation
J C SPARKMAN
Consultant and Former
Executive Vice President of TCI
TELE-COMMUNICATIONS, INC. OFFICERS
DR. JOHN C. MALONE
Chairman of the Board and
Chief Executive Officer
LEO J. HINDERY, JR.
President and Chief Operating Officer
President and Chief Executive Officer
TCI Communications, Inc.
ROBERT R. BENNETT
Executive Vice President
President and Chief Executive Officer
Liberty Media Corporation
STEPHEN M. BRETT
Executive Vice President
General Counsel and Secretary
BRENDAN R. CLOUSTON
Executive Vice President
LARRY E. ROMRELL
Executive Vice President
President and Chief Executive Officer
TCI Technology Ventures, Inc.
FRED A. VIERRA
Executive Vice President
Vice Chairman and Chief Executive Officer
Tele-Communications International, Inc.
TELE-COMMUNICATIONS, INC. SHAREHOLDER REPORT
16
<PAGE> 467
SHAREHOLDER INFORMATION
INVESTOR RELATIONS
For more shareholder information, please contact:
TCI GROUP
Linda J. Dill
Vice President
Investor Relations
TCI Communications, Inc.
P.O. Box 5630
Denver, CO 80217
(303) 267-5048
LIBERTY MEDIA GROUP
Vivian J. Carr
Vice President
Liberty Media Corporation
8101 E. Prentice Avenue
Suite 500
Englewood, CO 80111
(303) 721-5406
SHAREHOLDER ACCOUNT ASSISTANCE
For account consolidation, registration changes and other shareholder services,
contact The Bank of New York at (800) 524-4458.
For address changes and lost stock certificates, contact Investor Relations at
(303) 267-5048.
TRANSFER AGENT AND REGISTRAR
The Bank of New York
P.O. Box 11258, 11E, Church Street Station
New York, NY 10286-1258
(800) 524-4458
(9 a.m. - 5 p.m. EST)
AUDITORS
KPMG Peat Marwick, LLP
Denver, Colorado
COUNSEL
Baker & Botts, L.L.P.
New York, New York
Sherman & Howard, LLC
Denver, Colorado
STOCK LISTINGS
Tele-Communications, Inc. is traded through the TCI Group and the Liberty Media
Group common stocks. TCI Group is traded on the National Market tier of the
Nasdaq Market ("Nasdaq") with Series A and Series B TCI Group Common Stock,
under the symbols of TCOMA and TCOMB, respectively. Also, the Company's Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock is traded on
Nasdaq under the symbol TCOMP. Liberty Media Group is traded on Nasdaq with
Series A and Series B Common Stock, under the symbols of LBTYA and LBTYB,
respectively. Tele-Communications International, Inc., which is traded on
Nasdaq under the symbol TINTA, is attributed to the TCI Group. TCI
Communications, Inc., the Company's domestic communications subsidiary, trades
its Cumulative Exchangeable Preferred Stock, Series A on Nasdaq under the
symbol TCICP, its 8.72% Trust Originated Preferred Securities on the New York
Stock Exchange under the symbol TFI/pr and its 10% and 9.72% Trust Preferred
Securities on the New York Stock Exchange under the symbols TFII and TFIV,
respectively.
TCI ON-LINE SERVICES
Additional information on the Company may be found on the Internet at
www.tci.com.
FORM 10-K
The Form 10-K filed with the Securities and Exchange Commission (SEC) may be
obtained without charge by calling the Investor Relations Department request
line at Tele-Communications, Inc., (303) 267-6651, or by accessing the
Company's home page at www.tci.com.
(C) 1997 Tele-Communications, Inc.
Printed on Recycled Paper
<PAGE> 468
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