<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-26264
TELE-COMMUNICATIONS INTERNATIONAL, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1289408
- - ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- - --------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of Tele-Communications International,
Inc.'s common stock as of July 31, 1996, was:
Series A common stock - 106,960,873 shares; and
Series B common stock - 11,700,000 shares.
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
Assets 1996 1996
- - ------ -------------- ----------------
Cash and cash equivalents (note 3) $ 36,756 133,109
Trade and other receivables, net 28,599 19,066
Film inventory and other prepaid expenses 54,684 36,465
Investment in TeleWest Communications plc
("TeleWest") (note 7) 484,041 550,216
Investment in other affiliates, accounted
for under the equity method, and related
receivables (note 8) 424,131 354,133
Other investments (note 9) 89,412 83,839
Property and equipment, at cost:
Land 277 277
Distribution systems 138,200 118,705
Support equipment and buildings 44,148 29,321
--------- ---------
182,625 148,303
Less accumulated depreciation 49,001 35,314
--------- ---------
133,624 112,989
--------- ---------
Franchise costs and other intangible assets 616,329 583,862
Less accumulated amortization 43,509 29,030
--------- ---------
572,820 554,832
--------- ---------
Deferred financing costs and other assets,
net of amortization 14,807 6,062
--------- ---------
$1,838,874 1,850,711
========= =========
(continued)
I-1
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Consolidated Balance Sheets, continued
June 30, December 31,
1996 1995
--------- -----------
Liabilities and Stockholders' Equity amounts in thousands,
- - ------------------------------------ except share amounts
Accounts payable $ 22,718 25,010
Accrued liabilities 55,416 40,774
Multithematiques Obligation (note 8) 65,934 65,876
Debt (note 10) 502,026 192,718
Deferred income tax liability 149,722 186,126
Other liabilities 12,227 6,500
--------- --------
Total liabilities 808,043 517,004
--------- --------
Minority interests in equity of subsidiaries 151,320 122,358
Stockholders' equity:
Preferred stock, $.01 par value
Authorized 10,000,000 shares; none issued -- --
Series A Common Stock, $1 par value
Authorized 300,000,000 shares; issued
106,960,873 and 106,487,500 shares in
1996 and 1995, respectively 106,961 106,488
Series B Common Stock, $1 par value
Authorized 12,000,000 shares; issued
11,700,000 shares in 1996 and 1995 11,700 11,700
Additional paid-in capital 1,186,788 1,177,271
Accumulated deficit (145,624) (75,036)
Cumulative foreign currency translation
adjustment (6,624) (8,550)
Unrealized holding losses for available-
for-sale securities (2,719) (152)
---------- ----------
1,150,482 1,211,721
Due from Tele-Communications, Inc.
("TCI") (note 12) (270,971) (372)
---------- ----------
Total stockholders' equity 879,511 1,211,349
---------- ----------
Commitments and contingencies
(notes 7, 8, 12, and 13) $1,838,874 1,850,711
========== =========
See accompanying notes to financial statements.
I-2
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Statement of Operations
(unaudited)
<TABLE>
Three months Six months
ended ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
amount in thousands
except per share amounts
<S> <C> <C> <C> <C>
Revenue:
Cable $51,210 35,722 100,741 41,020
Programming 22,800 10,070 35,893 19,989
------- ------ ------- ------
74,010 45,792 136,634 61,009
------- ------ ------- ------
Operating costs and expenses:
Cable (note 12) 31,043 22,932 59,390 27,211
Programming 29,099 12,884 44,534 24,882
Programming rights provision 8,706 -- 8,706 --
General and administrative:
Allocated from TCI (note 12) 774 466 1,493 926
Other 3,205 1,184 4,944 2,743
Adjustment to stock compensation:
Allocated from TCI (note 12) (49) 827 (958) 742
Other (1,119) -- (648) --
Depreciation and amortization 12,759 8,619 24,885 11,229
------- ------- ------- -------
84,418 46,912 142,346 67,733
------- ------- ------- -------
Operating loss (10,408) (1,120) (5,712) (6,724)
Other income (expense):
Share of losses of TeleWest (note 7) (39,606) (13,875) (70,203) (26,161)
Share of losses of other affilates
(note 8) (18,871) (16,093) (36,836) (22,343)
Interest expense:
TCI (note 12) (187) (2,994) (375) (2,994)
Other (8,912) (4,505) (17,127) (4,822)
Interest income:
(TCI (note 12) 4,723 -- 6,937 --
Other 1,307 340 4,260 426
Minority interests' share of losses 6,261 3,308 10,469 5,921
Unrealized foreign currency
transaction gains (losses) 2,145 (930) 3,449 549
Other, net (note 9) (103) 137 4,337 253
------- ------- ------- -------
(53,243) (34,612) (95,089) (49,171)
------- ------- ------- -------
Loss before income taxes (63,651) (35,732) (100,801) (55,895)
Income tax benefit 19,474 4,188 30,213 9,587
------- ------- ------- -------
Net loss $(44,177) (31,544) (70,588) (46,308)
======== ======= ======= =======
Net loss per common share (note 1)
Historical $ (.37) -- (.60) --
======== ======= ======= =======
Pro forma $ -- (.32) -- (.47)
======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
I-3
<PAGE>
<TABLE>
<CAPTION>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Statement of Stockholders' Equity
(unaudited)
Unrealized
Cumulative holding
foreign losses for
Additional currency available-
Preferred Common Stock paid-in Accumulated translation for-sale
-----------------
stock Series A Series B capital deficit adjustment securities
------ -------- -------- --------- ----------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 106,488 11,700 1,177,271 (75,036) (8,550) (152)
Net loss -- -- -- -- (70,588) -- --
Issuance of common
stock -- 473 -- 9,517 -- -- --
Foreign currency
translation
adjustment -- -- -- -- -- 1,926 --
Unrealized holding
losses for available-
for-sale securities -- -- -- -- -- -- (2,567)
Net loan to TCI (note 12) -- -- -- -- -- -- --
Other changes in due
from TCI (note 12) -- -- -- -- -- -- --
------ ------- ------ --------- --------- ------- -------
Balance at June 30, 1996 $ -- 106,961 11,700 1,186,788 (145,624) (6,624) (2,719)
======= ======= ====== ========= ========= ======= =======
Total
Due from stockholders'
TCI equity
--------- ------------
Balance at January 1, 1996 (372) 1,211,349
Net loss -- (70,588)
Issuance of common
stock -- 9,990
Foreign currency
translation
adjustment -- 1,926
Unrealized holding
losses for available-
for-sale securities -- (2,567)
Net loan to TCI (note 12) (269,630) (269,630)
Other changes in due
from TCI (note 12) (969) (969)
----------- ---------
Balance at June 30, 1996 (270,971) 879,511
=========== =========
</TABLE>
See accompanying notes to financial statements.
I-4
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(see note 1)
Statements Of Cash Flows
(unaudited)
Six months ended
June 30,
--------------------
1996 1995
------ ------
amounts in thousands
(see note 3)
Cash flows from operating activities:
Net loss $ (70,588) (46,308)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 24,885 11,229
Programming rights provision 8,706 --
Adjustment to stock compensation (1,606) 742
Share of losses of TeleWest 70,203 26,161
Share of losses of other affiliates 36,836 22,343
Minority interests' share of losses (10,469) (5,921)
Unrealized foreign currency
transaction gains (3,449) (549)
Accretion of discount on
Multithematiques obligation 3,163 --
Deferred income tax benefit (36,048) (12,861)
Changes in operating assets
and liabilities, net of the effect
of acquisitions:
Change in receivables (3,913) 7,465
Change in film inventory and
other prepaid expenses (6,324) (14,001)
Change in deferred financing costs (9,800) --
Change in payables, accruals,
other liabilities and the cash
intercompany account included in
due from TCI (5,701) 5,728
--------- -------
Net cash used in operating
activities (4,105) (5,972)
--------- -------
I-5
(continued)
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Statements Of Cash Flows, continued
(unaudited)
Six months ended
June, 30
-----------------------
1996 1995
--------- ---------
amounts in thousands
(see note 3)
Cash flows from investing activities:
Investments in and loans to affiliates and others (102,204) (83,984)
Cash invested in certificate of deposits (23,604) --
Cash received (paid) in connection with
acquisitions, net 5,205 (173,836)
Capital expended for property and equipment (23,569) (18,489)
Cash paid to purchase minority interest in IVS
Cable Holdings Limited (4,636) --
Other, net 4,944 (1,134)
-------- --------
Net cash used in investing activities (143,864) (277,443)
-------- --------
Cash flows from financing activities:
Issuance of debentures 345,000 --
Loan to TCI (336,375) --
Repayments received on loan to TCI 66,745 --
Borrowings of debt 36,549 205,586
Repayments of debt (73,261) (10,524)
Issuance of common stock 9,990 --
Contributions from minority interest owners 3,288 --
Contributions from TCI -- 98,967
------- -------
Net cash provided by financing activities 51,936 294,029
------- -------
Effect of exchange rate changes on cash and cash
equivalents (320) 60
------- -------
Net increase (decrease) in cash and cash
equivalents (96,353) 10,674
Cash and cash equivalents:
Beginning of period 133,109 5,736
------- -------
End of period $36,756 16,410
======= =======
See accompanying notes to financial statements.
I-6
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
June 30, 1996
(unaudited)
(1) Basis of Presentation
---------------------
Tele-Communications International, Inc. ("TINTA"), a majority-owned
subsidiary of TCI, operates broadband cable television and telephony
distribution networks in, and provides diversified programming services to,
selected markets outside the United States.
Beginning in 1994, TCI restructured its assets into four distinct business
units. As part of that restructuring, during the fourth quarter of 1994 and
the first quarter of 1995, TCI contributed its indirect ownership interests
in substantially all of its international cable and telephony assets and
certain of its international programming assets to TINTA (the
"Contributions"). For purposes of this discussion, except to the extent the
context otherwise requires, the term the "Company" refers to (i) such
contributed ownership interests before the February 28, 1995 completion
date of the Contributions and (ii) TINTA and its direct and indirect
subsidiaries and affiliates on and after such completion date. Unless the
context indicates otherwise, references to "TCI" herein are to TCI and its
consolidated subsidiaries (other than the Company).
On July 18, 1995, TINTA completed its initial public offering (the "IPO"),
in which 20,000,000 shares of Series A Common Stock, $1 par value per share
("Series A Common Stock") were sold to the public for aggregate cash
consideration of $320.0 million, before deducting related expenses
(approximately $18.7 million). At June 30, 1996, TCI owned approximately
83% of the aggregate issued and outstanding common stock of TINTA and 91%
of the aggregate voting interest represented by such issued and outstanding
stock.
(continued)
I-7
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
In connection with the IPO, TINTA amended and restated its Certificate of
Incorporation to, among other things, (i) increase its authorized capital stock
and (ii) divide its common stock into two series. At the same time, TINTA
effected a reclassification pursuant to which the 1,000 shares of common stock
held by TCI were reclassified and changed into 85,800,000 shares of Series A
Common Stock and 11,700,000 shares of Series B Common Stock, $1 par value per
share ("Series B Common Stock"). The accompanying consolidated balance sheets of
the Company reflect the foregoing amendment and restatement of TINTA's
Certificate of Incorporation and the related reclassification. The pro forma net
loss per share set forth in the accompanying combined statements of operations
for the three and six months ended June 30, 1995 assumes that the 97.5 million
shares issued in connection with the above-described change in capital structure
were issued and outstanding since January 1, 1995. The historical loss per
common share for the three and six months ended June 30, 1996 was computed by
dividing the Company's net loss by the weighted average number of common shares
outstanding of 118.5 and 118.3, respectively. Common stock equivalents were not
included in the weighted average shares outstanding because their inclusion
would be anti-dilutive.
During the periods covered by the accompanying financial statements, the most
significant entities that were reflected in the Company's financial statements
on a consolidated basis were engaged in (i) the multi-channel video distribution
business (the "cable" business) in Puerto Rico (the "Consolidated Puerto Rico
Entities"), in Buenos Aires, Argentina (since the April 25, 1995 acquisition of
a 51% ownership interest in CableVison S.A. and certain affiliated companies
("CableVision"), as further described in note 4) and (ii) the distribution and
production of programming for multi-channel video distribution systems (the
"programming" business) in the UK and other parts of Europe through the
Company's majority voting interest in Flextech plc.
The Company maintained a 60.4% ownership interest in Flextech plc (together with
its consolidated subsidiaries, "Flextech") through May 1995 and a 48.8%
ownership interest from June 1995 through March 1996. Flextech's April 1996
issuance of additional non-voting shares resulted in a decrease in the Company's
ownership interest in Flextech's issued and outstanding share capital to 46.5%.
Since June 1995, the Company has maintained a 50.9% voting interest in Flextech.
See note 4.
(continued)
I-8
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
At June 30, 1996, Flextech's most significant consolidated subsidiaries were
comprised of its 100% ownership interests in Bravo Classic Movies Limited
("Bravo Ltd."), Starstream Limited ("Starstream"), Flextech Television Limited
("FTV"), the International Family Channel UK (the "Family Channel") and
Maidstone Studios Limited, and its 78.7% interest in HSN Direct Joint Venture
("HSN Direct") and its 51% ownership interest in Playboy TV UK/Benelux Limited
("PBTV"). Flextech maintained a 74.9% ownership interest in Starstream through
May 1995, and since June 1995, Flextech has maintained a 100% ownership interest
in Starstream. Bravo Ltd. owns "Bravo", a provider of "classic" movies and
programming. Starstream owns "TCC" (formerly marketed as "The Children's
Channel"), a provider of programming oriented to 3-15 year old children. FTV
provides management services to various entities engaged in the programming
business. PBTV owns "Playboy TV," a provider of adult entertainment. The Family
Channel owns The Family Channel, a provider of family entertainment. HSN Direct
is engaged in the domestic and foreign "infomercial" business. In April 1996,
Flextech acquired the 61% ownership interest in the Family Channel, which
Flextech did not already own, and an indirect ownership interest in HSN Direct.
See note 4.
Due to timing considerations, CableVision and Flextech were included in the
Company's financial statements on a one-month time delay through the third
quarter of 1995. The Company eliminated such time delay from its December 31,
1995 financial statements. See note 2.
As further described in note 12, the accompanying statements of operations
separately present certain allocated corporate expenses of TCI. Although such
allocated corporate expenses are not necessarily indicative of the costs that
would have been incurred by the Company on a stand-alone basis, management
believes the allocated amounts are reasonable.
The accompanying interim 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 financial statements should be read in
conjunction with the Company's December 31, 1995 audited financial statements
and notes thereto.
(continued)
I-9
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
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. In accordance with Statement No. 121, the Company periodically reviews
the carrying amount of its long-lived assets, franchise costs and certain other
assets to determine whether current events or circumstances warrant adjustments
to such carrying amounts. The Company considers historical and expected future
net operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows
of other groups of assets ("Assets"). The Company deems Assets to be impaired if
the Company is unable to recover the carrying value of 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 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts have been reclassified for comparability with the 1996
presentation.
Unless otherwise indicated, convenience translations of foreign currencies into
U.S. dollars are calculated using the applicable spot rate at June 30, 1996.
(continued)
I-10
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(2) Elimination of Reporting Delay
------------------------------
Through the third quarter of 1995, the Company included CableVision and
Flextech in its financial statements on a one-month time delay. The Company
eliminated such time delay from its December 31, 1995 financial statements.
As a result, the Company's consolidated statements of operations and cash
flows for the three and six months ended June 30, 1996 include
CableVision's and Flextech's results of operations and cash flows for such
periods, and the Company's combined statements of operations and cash flows
for the three and six months ended June 30, 1995 include (i) Flextech's
operating results and cash flows for the three and six months ended May 31,
1995, and (ii) CableVision's operating results and cash flows for the
period following the April 25, 1995 acquisition date through June 30, 1995.
See note 4.
(3) Supplemental Disclosures to Statements of Cash Flows
----------------------------------------------------
The Company's cash and cash equivalents are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Denomination 1996 1995
------------ -------- ------------
<S> <C> <C> <C>
TINTA U.S. dollars $ 371 46,065
Subsidiaries:
Flextech UK pounds 35,854 85,163
CableVision Argentine pesos -- 1,837
Consolidated Puerto Rico
Entities U.S. dollars 531 44
-------- ---------
$ 36,756 133,109
======== =========
</TABLE>
The cash and cash equivalent balances of Flextech and CableVision are
available to be applied toward the respective liquidity requirements of
Flextech and CableVision, and, with the exception of the repayment of
certain principal and interest owed to TINTA by Flextech, it is not
anticipated that any significant portion of such cash balances will be
distributed or otherwise made available to TINTA.
Cash paid for interest was $8.2 million during the six months ended June
30, 1996. Cash paid for interest during the six months ended June 30, 1995,
and cash paid for income taxes during the six months ended June 30, 1996
and 1995, was not material.
(continued)
I-11
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Cash paid (received) for acquisitions is as follows (amounts in thousands):
Six months ended
June 30,
----------------
1996 1995
------ ------
Recorded value of assets acquired $ 65,182 546,165
Issuance of notes payable (1,000) (86,755)
Liabilities assumed (including
deferred income tax liabilities
of $174.7 million in 1995) (26,164) (285,574)
Increase in minority interests in
equity of subsidiaries due to
issuance of shares by Flextech (43,223) --
-------- --------
Cash paid (received) for acquisitions $ (5,205) 173,836
======== ========
For a description of certain non-cash activities, see notes 4, 5, 8
and 12.
(4) Acquisitions
------------
(a) IFE
On April 22, 1996, Flextech acquired from International Family
Entertainment, Inc. ("IFE") (i) the 61% ownership interest in the Family
Channel, 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 (Pounds)31.0 million ($47.8 million using the
applicable exchange rate), of which (Pounds)3.0 million ($4.5 million
using the applicable exchange rate) was paid in cash and the remaining
balance was satisfied by Flextech's issuance of 5,792,008 convertible
non-preference shares (the "IFE Consideration Shares"). In connection
with the above-described transactions (collectively, the "IFE
Acquisitions"), TINTA granted to IFE the right to put the IFE
Consideration Shares to TINTA after June 1, 1997 if the IFE
Consideration Shares have not become convertible into Flextech ordinary
shares ("Flextech Ordinary Shares") by that date. The put price per IFE
Consideration Share is the greater of (i) (Pounds)3.64 ($5.65) or (ii)
the market value of a Flextech Ordinary Share at the time of the
exercise of the put option. TINTA has the option to satisfy the put
option price in cash or in shares of Series A Common Stock. As a result
of the IFE Acquisitions, the Company's ownership interest in Flextech's
issued and outstanding share capital decreased from 48.8% to 46.5%. Due
primarily to the Company's contingent purchase obligations under the
above-described put option, the Company recognized no gain in connection
with the dilution of the Company'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 June 30, 1996
consolidated balance sheet.
(continued)
I-12
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(b) HSN Acquisition
On April 10, 1996, Flextech made an initial capital contribution of
(Pounds)525,000 ($815,000) and assumed certain liabilities in
connection with the acquisition of an indirect controlling interest in
the "infomercial" business of the HSN Direct Joint Venture ("HSN
Direct") from the Home Shopping Network, Inc. and certain individuals
(the "HSN Acquisition"). In connection with the HSN Acquisition,
Flextech loaned $4.9 million to HSN Direct. In exchange for assuming
20% of Flextech's initial capital contribution and the amounts loaned
to HSN Direct, TINTA will acquire a 20% indirect ownership interest in
the acquired business.
(c) Starstream
In June 1995, Flextech paid (Pounds)9.8 million ($15.3 million using
the applicable exchange rate) to acquire the 25.1% minority interest
in Starstream not already owned by Flextech. Such payment has been
recorded as an intangible asset due to the fact that the minority
interests' cost basis in Starstream had previously been reduced to
zero. In connection with the aforementioned acquisition of the 25.1%
minority interest, Flextech also paid (Pounds)5.3 million ($8.5
million using the applicable exchange rate) to purchase Starstream's
unsecured promissory notes. Due to the one-month time delay that was
in effect through September 30, 1995, the effects of Flextech's
acquisition of the 25.1% minority interest in Starstream have not been
reflected in the Company's combined statements of operations and cash
flows for the periods ended June 30, 1995. See note 2.
(continued)
I-13
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL,INC.
(See note 1)
Notes to Financial Statements
(d) CableVision
On April 25, 1995, the Company acquired a 51% ownership interest in
CableVision for an adjusted purchase price of $282.0 million, before
liabilities assumed and subject to adjustment as further described
below (the "CableVision Acquisition"). The purchase price was paid
with cash consideration of $195.2 million (including a previously paid
$20.0 million deposit) and the Company's issuance of $86.8 million
principal amount of secured negotiable promissory notes (the
"CableVision Notes") payable to the selling shareholders. See note 10.
The Company has an option during the two-year period ended April 25,
1997 to increase its ownership interest in CableVision to up to 80%
at a cost per subscriber similar to the initial purchase price,
adjusted however for certain fluctuations in applicable foreign
currency exchange rates. In connection with the CableVision
Acquisition, the Company (i) assumed CableVision's liabilities on
April 25, 1995 (approximately $118.6 million), (ii) borrowed $155.2
million from TCI pursuant to a $200.0 million revolving credit
facility between the Company and TCI (the "TCI Credit Facility"), and
(iii) received a $23.5 million capital contribution from TCI. During
the third quarter of 1995, the Company used a portion of the proceeds
from the IPO to repay the $155.2 million principal amount that was
borrowed pursuant to the TCI Credit Facility.
In accordance with the purchase method of accounting, the purchase
price has been allocated using the estimated fair values of the net
assets acquired and CableVision has been included in the Company's
financial statements since the April 25, 1995 acquisition date. None
of CableVision's 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) CableVision's liabilities exceeded the minority
interest's historical cost basis in CableVision's assets at June 30,
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 Company 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 six months ended June 30, 1996 and
1995, the Company would have allocated $9.9 million and $2.2 million,
respectively, of CableVision's net earnings (exclusive of the effect
of purchase accounting) to the minority interest.
(continued)
I-14
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Unaudited pro forma summarized operating results of the Company assuming
the IFE Acquisitions, HSN Acquisition and CableVision Acquisition had been
consummated on January 1, 1995, are as follows (amounts in thousands):
Six months ended June 30,
-------------------------
1996 1995
--------- ---------
Revenue $ 145,674 139,047
========= =========
Net loss $ (72,699) (44,998)
========== =========
Pro forma net loss per
common share $ (.61) (.46)
=========== =========
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 IFE Acquisitions, HSN Acquisition and
CableVision Acquisition actually occurred on January 1, 1995.
(5) Flextech
--------
At June 30, 1996, the Company owned 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. Based upon the (Pounds)5.05 ($7.84) per share closing price of the
Flextech Ordinary Shares on the London Stock Exchange, the Flextech
Ordinary Shares owned by the Company had an aggregate market value of
(Pounds)284.5 million ($441.8 million) at June 30, 1996.
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"). The Flextech Non-Preference
Shares are convertible at the option of the holder into Flextech Ordinary
Shares on a one-for-one basis at any time after the Company ceases to own
at least 50.01% of the voting interest attributable to Flextech's then
outstanding ordinary share capital. The Hallmark Subscription and the U S
WEST Subscription are collectively referred to herein as the "Flextech
Transactions." Due to the one-month time delay that was in effect through
September 30, 1995, the effects of the Flextech Transactions have not been
reflected in the Company's combined statements of operations and cash flows
for the periods ended June 30, 1995. See note 2.
(continued)
I-15
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Under the terms of the Hallmark Subscription, HC Crown Corp.
("Crown"), a subsidiary of Hallmark, purchased 9,322,763 Flextech Ordinary
Shares and 2,337,541 Flextech Non-Preference Shares in exchange for
(Pounds)48.4 million ($77.2 million using the applicable exchange rate) in
cash. In connection with the U S WEST Subscription, (i) U S WEST (UK), a
subsidiary of U S WEST, purchased 8,181,392 Flextech Ordinary Shares and
2,337,541 Flextech Non-Preference Shares in exchange for 340,000
convertible redeemable preferred shares of Thomson Directories Limited (the
"TDL Securities") and (ii) Flextech borrowed (Pounds)43.7 million ($69.7
million using the applicable exchange rate) pursuant to a bank credit
facility (the "Flextech Bank Facility"). See notes 9 and 10. Under certain
circumstances, U S WEST (UK) and Crown have the right to require TINTA to
purchase the Flextech Ordinary Shares and the Flextech Non-Preference
Shares acquired by U S WEST (UK) and Crown pursuant to the Flextech
Transactions. See note 13.
(6) IVS Subsidiary Sale
-------------------
The Company consolidates Flextech's ownership interest in IVS Cable
Holdings Limited ("IVS"). Prior to the sale of its cable television
subsidiaries, IVS was engaged in the construction and operation of cable
television and telephony systems in the U.K. On October 17, 1995, IVS
completed the sale of a group of cable television subsidiaries to an
unaffiliated third party for aggregate cash proceeds of (Pounds)62.6
million ($98.9 million using the applicable exchange rate) (the "IVS
Subsidiary Sale"). Following the IVS Subsidiary Sale, IVS's only remaining
cable television asset consisted of its 59.2% ownership interest in Jersey
Cable Limited ("Jersey"), which owns the cable television franchise for the
area of Jersey, Channel Islands. Flextech, which, at the time, indirectly
owned 91.7% of IVS, received (Pounds)59.3 million ($93.7 million using the
applicable exchange rate) of the cash proceeds from the IVS Subsidiary
Sale. In connection with the IVS Subsidiary Sale, (i) Flextech paid
(Pounds)3.3 million ($5.1 million) (the majority of which was not paid
until 1996) to acquire the remaining minority interest in IVS that was not
already owned by Flextech (the "IVS Minority Interest Buyout"), (ii) IVS
received cash and notes receivable aggregating (Pounds)663,000 ($1.0
million) as consideration for the sale of Flextech's ownership interest in
Jersey to the former minority interest owners of IVS (the "Jersey Sale"),
and (iii) IVS received (Pounds)643,000 ($999,000) in repayment of Jersey's
intercompany payable to IVS. Flextech's aggregate $1.7 million loss (before
deducting the minority interests' share) on the Jersey Sale and the IVS
Minority Interest Buyout was reflected as a reduction of the $52.8 million
non-operating gain (before deducting the minority interests' share) that
was recognized by the Company during the fourth quarter of 1995 in
connection with the IVS Subsidiary Sale. Other than in connection with the
repayment of certain principal and interest owed to TINTA by Flextech, it
is not anticipated that any significant portion of Flextech's share of the
cash proceeds from the IVS Subsidiary Sale will be distributed or otherwise
made available to TINTA.
(7) Investment in TeleWest
----------------------
At January 1, 1995, TCI and certain affiliates of U S WEST (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 TeleWest Communications Cable Limited (formerly
TeleWest Communications plc) ("Old TeleWest").
(continued)
I-16
<PAGE>
TELE-COMMUNICATIONS, INC.
(See note 1)
Notes to Financial Statements
During the second quarter of 1995, the Old TeleWest shares owned by the
Company and the U S WEST Affiliates were contributed to TW Holdings, L.L.C.
("TW Holdings"), an entity in which the Company and the U S WEST Affiliates
each hold a 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 Company's 38% 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 the Company's
ownership interest in TeleWest, the Company 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 issued U.S. dollar denominated senior debentures
having an aggregate principal amount at maturity of $1.8 billion (the
"TeleWest Debentures"). As a result of such issuance, 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 six months ended June 30, 1996, TeleWest experienced a $72.8 million
foreign currency transaction loss resulting from the translation of the
TeleWest Debentures into UK pounds sterling and the adjustment of a foreign
currency option contract to market value.
At June 30, 1996, the Company, indirectly owned, through TW Holdings,
132,638,250 or 26.7% of the issued and outstanding non-voting TeleWest
convertible preference shares and 246,111,750 or 26.8% (assuming no
conversion of the TeleWest convertible preference shares) of the issued and
outstanding TeleWest ordinary shares. On June 30, 1996, the reported
closing price on the London Stock Exchange of TeleWest's ordinary shares
was (Pounds)1.615 ($2.51).
The functional currency of TeleWest is the UK pound sterling. The average
exchange rate used to translate the Company's share of TeleWest's operating
results from UK pounds to U.S. dollars was 1.5327 to 1 and 1.5965 to 1
during the six months ended June 30, 1996 and 1995, respectively. The spot
rate used to translate the Company's share of TeleWest's net assets from UK
pounds to U.S. dollars was 1.5529 to 1 and 1.5530 to 1 at June 30, 1996 and
December 31, 1995, respectively.
(continued)
I-17
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Summarized unaudited results of operations of TeleWest are as follows
(amounts in thousands):
Six months ended
June 30,
--------------------
1996(1) 1995
--------- ---------
Revenue $ 204,164 88,446
Operating, selling, general and
administrative expenses (215,036) (108,067)
Depreciation and amortization (103,524) (38,808)
--------- ---------
Operating loss (114,396) (58,429)
Interest income 17,578 9,683
Share of losses of affiliates (11,457) (9,001)
Interest expense (79,933) (3,916)
Foreign currency transaction loss (72,825) (8,380)
Other, net 23 21
--------- ---------
Net loss $(261,010) (70,022)
========= =========
_____________________
(1) TeleWest's summarized unaudited results of operations for the six
months ended June 30, 1996 reflect the effects of the above-
described SBCC Transaction.
(8) Investments in Other Affiliates
-------------------------------
The Company's affiliates other than TeleWest 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. Most of
the Other Affiliates have incurred net losses since their respective
inception dates. As such, substantially all of the Other Affiliates are
dependent upon external sources of financing and capital contributions in
order to meet their respective liquidity requirements.
In this regard, the Company is obligated to make further loans to or
investments in certain of the Other Affiliates. At June 30, 1996, the
aggregate U.S. dollar equivalent of the unfunded portion of such
commitments was $63.9 million, of which $15.5 million represented
commitments of Flextech.
The Company and/or other subsidiaries of TCI have guaranteed notes payable
and other obligations of certain of the Other Affiliates (the "Guaranteed
Obligations"). At June 30, 1996, the U.S. dollar equivalent of the amounts
borrowed pursuant to the Guaranteed Obligations aggregated $26.8 million.
Certain of the Guaranteed Obligations allow for additional borrowings in
future periods. See note 12.
(continued)
I-18
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Certain of the Other Affiliates are general partnerships and any subsidiary
of the Company 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 Company's investment in certain of the Other
Affiliates contain (i) buy-sell and other exit arrangements whereby the
Company could be required to purchase another investor's ownership interest
and (ii) performance guarantees whereby the Company and/or other
subsidiaries of TCI have guaranteed the performance of the Company's
subsidiary that directly holds the related investment. See note 12.
The following table reflects the Company's carrying value (including
receivables) and share of earnings (losses) of the Other Affiliates
(amounts in thousands):
<TABLE>
<CAPTION>
Share of earnings (losses)
Carrying value -------------------------------
---------------------------------- Six months ended June 30,
June 30, December 31, -------------------------------
1996 1995 1996 1995
------------ ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Flextech Affiliates (a) $ 114,790 123,156 (7,307) (7,019)
Multithematiques S.A.
("Multithematiques") (b) 86,055 89,705 (3,015) --
TINTA/Liberty LLC (c) 75,339 29,118 (2,783) --
Bresnan International Partners
(Chile), L.P. ("BIP Chile") (d) 55,052 59,286 (4,124) (1,736)
Jupiter Telecommunications
Co., Ltd. ("Jupiter") (e) 37,749 16,268 (4,737) (2,642)
United International
Investments ("UII") 25,791 26,293 (169) (1,499)
Bresnan International Partners
(Poland), L.P. 22,090 16,739 (1,527) (307)
TeleWest Europe Group
("TeleWest Europe") (f) -- (16,800) -- 2,386
Asia Business News (Singapore)
PTE Ltd. 11,432 10,472 (4,698) (2,851)
DMX , Inc.("DMX ") (g) 2,183 6,981 (5,004) (6,213)
Other (6,350) (7,085) (3,472) (2,462)
------------ ---------------- ------------- -------------
$ 424,131 354,133 (36,836) (22,343)
============ ================ ============= =============
</TABLE>
(continued)
I-19
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(a) Flextech Affiliates
At June 30, 1996, the "Flextech Affiliates" were comprised of European
Business News Partners (30%-owned by Flextech), HIT Entertainment plc (28%-
owned by Flextech), Preview Investments B.V. ("Preview") (33%-owned by
Flextech), Scottish Television plc ("STV") (20%-owned by Flextech), UK Gold
Television Limited ("UKGL") (25%-owned by Flextech) and UK Living Limited
("UKLL") (31%-owned by Flextech). In April 1996 Flextech acquired the 61%
interest in the Family Channel, which Flextech did not already own. See
note 4. Prior to such acquisition, the "Flextech Affiliates" also included
Flextech's 39% interest in the Family Channel.
(b) Multithematiques
On December 13, 1995, TINTA invested 123.1 million French francs ("FF")
($24.7 million at the applicable exchange rate) in Multithematiques, a
newly formed European programming company that is one-third-owned by each
of the Company and two French media companies, CANAL + S.A. ("Canal +") and
Generale d'Images S.A. ("GDI") (the "Multithematiques Transaction"). TINTA
also has agreed to contribute to Multithematiques FF105.0 million ($20.3
million), FF100.0 million ($19.3 million) and FF164.0 million ($31.7
million) no later than December 13, 1996, February 13, 1997 and December
13, 1997, respectively.
Whereas Canal + and GDI are not required to make additional contributions
on a pro rata basis, TINTA's obligation to make the above-described
additional FF369.1 million ($71.3 million) has been viewed as additional
consideration to be paid by TINTA to acquire its one-third interest in
Multithematiques. Accordingly, the U.S. dollar equivalent of the estimated
net present value of such future contributions (using a discount rate of
10%) has been reflected as a liability (the "Multithematiques Obligation")
in the accompanying balance sheets. As the Multithematiques Obligation is
denominated in French francs, the Company will experience realized and
unrealized foreign currency transaction gains and losses with respect to
the Multithematiques Obligation. During the six months ended June 30, 1996,
the Company experienced a $3.1 million unrealized foreign currency
transaction gain with respect to the Multithematiques Obligation.
(continued)
I-20
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(c) TINTA/Liberty LLC
Effective April 29, 1996, TINTA, Liberty Media Corporation ("Liberty") and
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 and certain other defined geographic areas. News Corp. owns a 50%
interest in the Sports Venture with the remaining 50% owned by
TINTA/Liberty LLC, a limited liability company owned by TINTA and Liberty
(the "LLC"). As of June 30, 1996, TINTA had contributed to the LLC $49
million 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 TINTA 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. TINTA
acquired its 35% ownership interest in Torneos from the selling
stockholders of Torneos (the "Torneos Stockholders") on July 28, 1995 for
aggregate consideration of $30.0 million (exclusive of certain contingent
obligations to pay additional consideration, which obligations were assumed
by the Sports Venture). The carrying value and the Company's share of
earnings (losses) of Torneos prior to its contribution to the LLC have been
included with the LLC in the above table.
TINTA is obligated to make additional cash contributions totaling $29
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, which delivery is expected to occur
in 1996, News Corp. is entitled to receive from the LLC $20 million and
rights under various Asian sports programming agreements. Star Television
Limited operates a satellite-delivered television platform in Asia.
On April 19, 1996, TINTA, Torneos and the two individual shareholders of
Torneos entered into an agreement (the "TINTA/Torneos Sports Agreement")
whereby TINTA 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, TINTA will
acquire 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). In addition, it is
the intention of TINTA and Torneos to form a joint venture company (50/50)
to be the exclusive agent and distributor of two sports channels (to be
formed by the Sports Venture) in Argentina, Bolivia, Paraguay and Uruguay.
The Company's obligations under the TINTA/Torneos Sports Agreement are
subject to the completion of TINTA's due diligence, which is expected to
occur in the third quarter of 1996.
(continued)
I-21
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
On May 8, 1996, Tele Red Imagen S.A. ("TRISA") filed for and was granted
the Argentine equivalent of a temporary restraining order ("TRO") with
respect to the portion of the TINTA/Torneos Sports Agreement dealing with
Futbol de Primera in the interior of Argentina. Such TRO was dismissed on
May 23, 1996.
The parties anticipate that TINTA will assign to the Sports Venture the
portions of the TINTA/Torneos Sports Agreement which fit within the
geographic area and business plan of the Sports Venture. The minimum
periodic payments associated with any sports rights to be so assigned has
not yet been determined.
(d) BIP Chile
On February 7, 1996, BIP Chile's 50%-owned affiliate, Cordillera
Comunicaciones Limitada ("Cordillera"), and Compania de Telecomun-icaciones
de Chile S.A. ("CTC") (a subsidiary of the Spanish telephone company
Telefonica de Espana S.A.), entered into certain definitive agreements (the
"Chile Restructuring Agreements") that provide for, among other matters,
the contribution of all the cable subscribers within each party's cable
systems to a new Chilean company called Metropolis-Intercom S.A.
("Metropolis-Intercom"). Cordillera owns a 60% interest in Metropolis-
Intercom and CTC, Comercial Canelo S.A. and Empresa El Mercurio S.A.P. own
jointly a combined 40% interest. The Chile Restructuring Agreements also
provided that all of the cable distribution assets excluding the headends
(the "Acquired Distribution Assets") of Cordillera be sold to CTC. In June
1996, the parties finalized the transactions contemplated by the Chile
Restructuring Agreements and the Acquired Distribution Assets were sold to
CTC for cash proceeds of approximately $120 million ($101.4 million of
which has been received by Cordillera). Subject to any applicable legal or
contractual restrictions, it is anticipated that some portion of BIP
Chile's 50% share of such cash proceeds may be used to reduce the amounts
owed by BIP Chile to TINTA pursuant to a subordinated loan agreement. As a
result of the foregoing transactions, CTC will (i) service 77 analog
channels and any additional channels required by Metropolis-Intercom, (ii)
expand and operate the Distribution Assets and (iii) provide technical
service pursuant to a services agreement. Under the Chile Restructuring
Agreements, Cordillera, BIP Chile and the Company have agreed not to
compete with Metropolis-Intercom and not to pursue telephone opportunities
in Chile, and CTC has agreed not to compete with Metropolis-Intercom and
not to pursue cable-related opportunities in Chile (other than through
Metropolis-Intercom). The Chile Restructuring Agreements contemplate that
the aforementioned service agreement will have a term of 30 years (with an
option to renew) and that the associated payments to CTC will reflect the
number of channels provided, the current market conditions and the agreed
valuation of the underlying assets.
(continued)
I-22
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(e) Jupiter
On January 18, 1995, the Company 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 Company and Sumitomo own 40% and 60%, respectively, of
Jupiter. The functional currency of Jupiter is the Japanese yen ("(Yen)").
Through June 30, 1996, the Company had made aggregate contributions to
Jupiter of (Yen)5.0 billion ($49.7 million at the applicable exchange
rates). Based on the original business plan, the Company, at June 30 1996,
was obligated to pay (Yen)200 million ($1.8 million) to Sumitomo by March
31, 1997. As a result of a number of recent developments which management
believes are favorable to Jupiter, the Company and Sumitomo are in the
process of revising the original business plan to increase the rate at
which Jupiter would acquire additional franchises and develop its network.
Management of the Company estimates that if Jupiter's business plan is
accelerated in the manner currently under discussion, Jupiter will require
additional funding, which additional funding may be significant. If
Jupiter's business plan is so accelerated, the Company anticipates that the
additional funding will be obtained through a combination of capital
contributions by the Company and Sumitomo, on a pro rata basis, and, to the
extent available on acceptable terms, debt financing by Jupiter.
(f) TeleWest Europe
The Company, effective January 1, 1996, discontinued accounting for
TeleWest Europe using the equity method, and began accounting for TeleWest
Europe as an investment held for disposition. Accordingly, the Company's
negative investment in TeleWest Europe has been classified within "Other
investments" in the Company's June 30, 1996 consolidated balance sheet. See
note 9.
(g) DMX
Prior to May 1996, the Company owned 49% of the outstanding stock of DMX
Europe N.V. ("DMX Europe"). DMX owned the remaining 51% interest in DMX
Europe. TCI-Euromusic, Inc. ("TCI-E"), an indirect wholly-owned subsidiary
of TINTA, was formed to hold the Company's ownership interest in DMX
Europe. In May 1996, TCI-E merged with and into DMX, with DMX as the
surviving corporation ("the DMX Merger"). In effecting the DMX Merger, the
Company exchanged all of its shares of TCI-E common stock for 10,841,624
shares or 18% of DMX common stock. Including shares of DMX common stock
owned by the Company, TCI owned 45% of the issued and outstanding DMX
common stock at June 30, 1996. In consideration of TCI's overall percentage
interest in DMX, the Company accounts for DMX using the equity method. At
June 30, 1996, the market value of the DMX common stock was $1.25 per
share.
(continued)
I-23
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Other
Jupiter Programming Co., Ltd.
In February 1996, the Company and Sumitomo formed a joint venture that will
create Japan's first multi-channel programming company. The new company, which
is called Jupiter Programming Co., Ltd. ("JPC"), is owned equally (50/50) by the
Company and Sumitomo. As of June 30, 1996, the Company has made contributions to
JPC of (Yen)300.1 million ($2.8 million using the applicable exchange rate).
Additionally, the Company and Sumitomo will contribute their respective 18% and
82% ownership interests in the Cable Soft Network to JPC. The Company will make
an equalizing payment in the amount of (Yen)444 million ($4.1 million) in
connection with the above-described contribution of the Cable Soft Network.
Mundo Ole Joint Venture
In April 1996, Flextech entered into an agreement in principle with respect to a
joint venture with Sony Entertainment, Time Warner and Ole Investments LDC
("Ole") for the launch of "Mundo Ole," a digital satellite delivered channel
broadcast to Latin America and Brazil. Such agreement in principle proposes that
Flextech and Ole will enter into a 50/50 joint venture, which joint venture will
in turn hold 65% of the new channel, with the balance being held by HBO Ole
Partners, a joint venture between Sony Entertainment, Time Warner and Ole. If
the transaction were to proceed, it is anticipated that Flextech would have a
funding commitment to the joint venture. The amount of such commitment has not
yet been determined.
Summarized unaudited results of operations of the Other Affiliates for the
periods in which they were owned by the Company are as follows (amounts in
thousands):
Six months ended
June 30,
----------------------
1996 1995
------- ------
Combined Operations
-------------------
Revenue $ 260,383 218,831
Operating, selling, general and
administrative expenses (270,220) (223,982)
Depreciation and amortization (36,207) (25,328)
---------- ----------
Operating loss (46,044) (30,479)
Interest expense (19,311) (22,243)
Other, net (6,802) (4,705)
----------- ----------
Net loss $ (72,157) (57,427)
=========== ==========
(continued)
I-24
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(9) Other Investments
-----------------
The components of other investments are set forth below (amounts in
thousands):
June 30, December 31,
1996 1995
------- ------------
TDL Securities (a) $ 67,790 67,794
Certificates of deposit (b) 23,604 --
TeleWest Europe (c) (15,017) --
Other 13,035 16,045
-------- -------
$ 89,412 83,839
======== =======
(a) TDL Securities
The TDL Securities were acquired by Flextech in connection with the U
S WEST Subscription. Flextech's rights to require U S WEST (UK) to
repurchase the TDL Securities under a put/call agreement are pledged
as security for the Flextech Bank Facility. On July 8, 1996, U S WEST
(UK) purchased the TDL Securities at a price per share of (Pounds)
128.39 ($199.38). See notes 5, 10 and 14.
(b) Certificates of Deposit
During the second quarter of 1996 Bravo Ltd. invested its excess cash
in certificates of deposit with a weighted average interest rate of
5.97% and maturities of up to one year.
(c) TeleWest Europe
U S WEST Cable Europe, Inc. ("U S WEST Europe"), an indirect wholly-
owned subsidiary of U S WEST, and the Company each own 50% of TeleWest
Europe. TeleWest Europe owns a 91.7% paid-in interest in United
Communications International ("UCI").
UCI is a general partnership between TeleWest Europe and United and
Phillips Communications B.V. ("UPC"). UCI owns (i) an effective
economic interest of 100% in NorKabelgruppen A/S ("NorKabel"), (ii)
minority interests in Swedish Cable and Dish AB and SCD Invest AB
(collectively, "Swedish Cable"), and (iii) joint venture interests in
KabelKom Holding Co. and KabelKom Management Co. (collectively,
"KabelKom").
(continued)
I-25
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
During the first quarter of 1996, the Company and U S WEST Europe
entered into an agreement to contribute additional capital to
Swedish Cable and to amend certain provisions of the TeleWest
Europe joint venture agreement which govern a dissolution of the
TeleWest Europe joint venture upon a sale of the assets of
NorKabel, Swedish Cable and KabelKom. The partners agreed to
negotiate an amendment to the joint venture agreement that would
(i) eliminate any return to the Company in the event the proceeds
from an asset sale were not to exceed a specified threshold, (ii)
create an alternative preferential distribution allowing each
partner to recoup its share of payments to Swedish Cable under
recent capital calls, and (iii) cancel the Company's obligation
to fund any negative capital account balance existing after the
final accounting of the joint venture. In light of the terms of
this agreement, the Company anticipates that it will not provide
any additional funding to TeleWest Europe that will not be
returned to the Company upon the liquidation or dissolution of
TeleWest Europe.
In connection with the execution of the above-described
agreement, the Company and U S WEST Europe agreed to initiate a
course of action designed to result in the liquidation and
dissolution of TeleWest Europe. In light of the terms of the
above-described agreement and the partners' agreement to pursue
the liquidation and dissolution of TeleWest Europe, the Company,
effective January 1, 1996 discontinued accounting for TeleWest
Europe using the equity method, and began accounting for TeleWest
Europe as an investment held for disposition. Accordingly the
Company's negative investment in TeleWest Europe has been
reclassified to "Other investments" within the June 30, 1996
consolidated balance sheet.
During the first quarter of 1996, the Company received a $4.1
million payment from UPC in satisfaction of the Company's
receivable from Swedish Cable that had been included in the
Company's negative investment in TeleWest Europe. Such payment
has been included in "Other, net" in the accompanying
consolidated statement of operations for the six months ended
June 30, 1996.
(continued)
I-26
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(10) Debt
----
The components of debt are as follows (amounts in thousands):
June 30, December 31,
1996 1995
------------ -----------
TINTA:
Debentures (a) $345,000 --
CableVision Notes (b) 39,040 65,066
---------- -------
384,040 65,066
---------- -------
Subsidiaries:
Flextech
Flextech Bank Facility (c) 67,791 67,794
STV Bank Credit Facility (d) -- --
Other 1,000 --
--------- -------
68,791 67,794
--------- -------
CableVision
Bank loans (e) 47,843 58,166
Other 1,352 1,692
--------- -------
49,195 59,858
--------- -------
$502,026 192,718
========= =======
(a) On February 8, 1996, TINTA 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
Series A Common Stock at a price of $27.30 per share of Series A Common
Stock, subject to anti-dilution adjustments. Interest on the Debentures
is payable on February 15 and August 15 of each year, commencing August
15, 1996. The Debentures may be redeemable by TINTA in whole or in
part, at any time on or after February 15, 1999. Pending its use by
TINTA, the net proceeds from the sale of the Debentures were loaned to
TCI pursuant to an unsecured promissory note (the "TCI Note
Receivable"). See note 12.
(b) The CableVision Notes are secured by the Company'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%). The CableVision Notes are
scheduled to be repaid in equal monthly installments through March 31,
1997. See note 4.
(continued)
I-27
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(c) Represents the U.S. dollar equivalent of the aggregate outstanding
borrowings ((Pounds)43.7 million) pursuant to the Flextech Bank
Facility. Flextech entered into the Flextech Bank Facility in
connection with the U S WEST Subscription. Borrowings pursuant to the
Flextech Bank Facility (i) mature on June 5, 1998, (ii) are secured by
Flextech's rights under a put/call agreement, which, among other
matters, provides that Flextech has the right to require U S WEST (UK)
to repurchase the TDL Securities and (iii) bear interest at a variable
rate (6.5% at June 30, 1996). On July 8, 1996, US West (UK) purchased
the TDL Securities. Flextech used the sales proceeds from such purchase
to repay in full amounts borrowed under the Flextech Bank Credit
Facility. See notes 5, 9 and 14.
(d) Flextech entered into a second bank credit facility on August 30, 1995
(the "STV Bank Facility"). Borrowings pursuant to the STV Bank Facility
are secured by the ordinary shares of STV that are owned by Flextech,
and bear interest at variable rates. Subject to certain conditions, the
STV Bank Facility provides for borrowing availability through August
30, 1998 not to exceed the lesser of (i) (Pounds)28.0 million ($43.5
million) or (ii) 66.67% of the market value of the STV ordinary shares
that are pledged as security for the STV Bank Facility. Flextech is
also required to make quarterly payments with respect to an annual
commitment fee of 3/8% of the unborrowed funds. See note 8.
(e) Represents CableVision's bank debt, which is denominated in U.S.
dollars, and bears interest at fixed rates. Including value added tax,
the weighted average rate of CableVision's bank debt at June 30, 1996
was 7.68%. Borrowings of approximately $32.3 million are secured by
credit card collections of subscriber fees and the remaining
outstanding balance is unsecured. Of the outstanding borrowings at June
30, 1996, $27.8 million and $20.0 million mature during the remainder
of 1996 and the year ended December 31, 1997, respectively.
With the exception of the Debentures, which had a fair value of $298.0
million at June 30, 1996, the Company believes that the fair value and the
carrying value of the Company's debt were approximately equal at June 30,
1996.
(11) Income Taxes
------------
TINTA and its 80%-or-more-owned domestic subsidiaries (the "TINTA Tax
Group") are included in the consolidated federal and state income tax
returns of TCI. The Company's income taxes include those items in the
consolidated calculation applicable to the TINTA Tax Group ("intercompany
tax allocation") and any income taxes of TINTA'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 June 30, 1995.
Beginning with the July 1, 1995 implementation of the tax sharing agreement
among TINTA, TCI and certain other subsidiaries of TCI (the "Tax Sharing
Agreement"), the intercompany tax allocation has been included as a
component of "Due from TCI," as reflected in the accompanying consolidated
balance sheets.
(continued)
I-28
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
As described above, the Tax Sharing Agreement was implemented effective
July 1, 1995. The 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. The Tax Sharing Agreement encompasses
U.S. federal, state, local and foreign tax consequences and relies upon the
U.S. Internal Revenue Code of 1986 as amended, and any applicable state,
local and foreign tax law and related regulations. Beginning on the July 1,
1995 effective date, TINTA is responsible to TCI for its share of current
consolidated income tax liabilities. TCI is responsible to TINTA to the
extent that the TINTA Tax Group's income tax attributes generated after the
effective date are utilized by TCI to reduce its consolidated income tax
liabilities. Accordingly, all tax attributes generated by the TINTA Tax
Group's operations after the effective date including, but not limited to,
net operating losses, tax credits, deferred intercompany gains, and the tax
bases of assets are inventoried and tracked for the entities comprising the
TINTA Tax Group. See note 12.
(12) Related Party Transactions
--------------------------
Due from TCI
Prior to April 25, 1995 (when TINTA borrowed $155.2 million under the TCI
Credit Facility to provide funding for the CableVision Acquisition, as
described in note 4), the effects of transactions between the Company and
TCI (other than those involving the Company's deferred income taxes) were
reflected in equity. From April 25, 1995 through the July 18, 1995 closing
date of the IPO (see note 1), (i) cash advances from TCI that were used to
fund the Company's existing contractual commitments to make capital
contributions and loans to its affiliates were accounted for as adjustments
of the outstanding borrowings under the TCI Credit Facility and (ii) the
net effect of all remaining transactions between the Company and TCI (other
than those involving the Company's deferred income taxes) were accounted
for as a capital contribution from TCI. Following the July 18, 1995 IPO,
the effects of all transactions between the Company and TCI have been
reflected as intercompany payables or receivables to be settled (i) in the
case of certain non-cash income tax and stock compensation allocations (the
Non-Cash Intercompany Account"), at some future date (as described below),
(ii) in the case of amounts outstanding pursuant to the TCI Note Receivable
(see note 10), as mutually agreed from time to time by TCI and TINTA, and
(iii) in the case of all other intercompany transactions, within thirty
days following notification (the "Cash Intercompany Account"). Any amounts
within the Cash Intercompany Account that remain outstanding after such
thirty-day period generally are treated as adjustments of the outstanding
borrowings pursuant to the TCI Credit Facility. The components of "Due from
(to) TCI" are as follows (amounts in thousands):
June 30, December 31,
1996 1995
---------- -------------
TCI Note Receivable (a) $269,630 --
TCI Credit Facility (b) -- --
Non-Cash Intercompany Account (c) 3,948 2,990
Cash Intercompany Account (2,607) (2,618)
--------- --------
$270,971 372
========= ========
(continued)
I-29
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(a) 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 June 30, 1996). Principal and interest
is due and payable as mutually agreed from time to time by TCI and
TINTA. During the six months ended June 30, 1996, interest income
related to the TCI Note Receivable aggregated $6.9 million.
(b) The TCI Credit Facility is a subordinated unsecured revolving credit
facility that provides for loans from TCI to the Company in an
aggregate outstanding principal amount of up to $200 million. From the
April 25, 1995 closing date of the CableVision Acquisition through the
July 18, 1995 closing date of the IPO, TINTA used borrowings pursuant
to the TCI Credit Facility to provide a portion of the funding for the
CableVision Acquisition and to fund the Company's existing contractual
commitments to make capital contributions and loans to its affiliates.
Subsequent to TINTA's July 18, 1995 receipt of the IPO proceeds, TINTA
used $184.6 million of such cash proceeds to repay the principal and
interest owed to TCI at July 18, 1995 pursuant to the TCI Credit
Facility. See notes 1 and 4.
Borrowings under the TCI Credit Facility, together with all accrued
interest thereon, will be payable in full on April 25, 2000. Prior to
April 25, 2000, borrowings repaid by TINTA under the TCI Credit
Facility will be available for reborrowing, subject to certain
conditions to borrowing. Borrowings under the TCI Credit Facility bear
interest at 13% per annum. If at any time TCI shall beneficially own
capital stock of TINTA representing less than a majority in voting
power of the outstanding shares of TINTA capital stock entitled to vote
for the election of directors, TCI may terminate its obligation to make
further loans under the TCI Credit Facility upon two business days
prior notice to TINTA. The principal of and interest on all outstanding
loans shall become due and payable on the first anniversary of the
receipt by TINTA of such notice. Upon the closing of the IPO, the
Company paid a $2.0 million commitment fee to TCI. Additionally, the
Company pays TCI an annual credit facility fee in an amount equal to
.375% of the unused borrowing availability under the TCI Credit
Facility.
(continued)
I-30
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(c) At June 30, 1996, the Non-Cash Intercompany Account was comprised of
$1.0 million due to TCI with respect to TINTA's share of TCI's
compensation liability arising from certain stock appreciation rights
and stock options (the "TCI Compensation Liability") and $4.9 million
due from TCI with respect to the allocation of current intercompany
income tax benefits pursuant to the Tax Sharing Agreement (the "TCI Tax
Receivable"). The TCI Compensation Liability, which represents TINTA's
share of TCI's stock compensation expense for periods subsequent to
July 18, 1995 (the date that the IPO was consummated), will be settled
in cash only to the extent that TCI is required to make cash payments
to satisfy the TCI Compensation Liability. The TCI Tax Receivable,
which represents TINTA's current intercompany income tax benefit for
periods subsequent to July 1, 1995 (the date that the Tax Sharing
Agreement was implemented), will be settled in cash only upon the
deconsolidation of TINTA for purposes of TCI's federal income tax
returns. See note 11. As described below, changes in the TCI
Compensation Liability have been included in the accompanying
statements of operations.
Other Related Party Transactions
Certain key employees of TINTA hold stock options with tandem stock
appreciation rights with respect to certain common stock of TCI. Estimates
of the compensation relating to the options and/or stock appreciation
rights granted to employees of TINTA have been recorded in the accompanying
financial statements, but are subject to future adjustments based upon the
market value of the underlying TCI common stock and, ultimately, on the
final determination of market value when the rights are exercised. Such
estimates resulted in increases (decreases) to TINTA's share of
TCI's stock compensation liability of $(958,000) and $742,000 during the
six months ended June 30, 1996 and 1995, respectively.
TCI allocates its corporate expenses to its business units based upon the
estimated cost of general and administrative services provided to the
respective divisions. The amounts allocated to the Company for the six
months ended June 30, 1996 and 1995 aggregated $1.5 million and $926,000,
respectively. Following the completion of the IPO, such allocations were
made pursuant to a services agreement between TCI and TINTA.
The Consolidated Puerto Rico Entities purchase programming services from
a subsidiary of TCI. The charges, which approximate such TCI
subsidiary's cost and are based on the aggregate number of subscribers
served by the Consolidated Puerto Rico Entities, aggregated $2.2 million
and $1.6 million during the six months ended June 30, 1996 and 1995,
respectively. Through December 31, 1995, the Consolidated Puerto Rico
Entities also had management arrangements with certain subsidiaries of TCI
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 $295,000 during the six months ended June 30, 1995. The
above-described programming and management fee charges are included in
"Operating costs and expenses - Cable" in the accompanying statements of
operations.
(continued)
I-31
<PAGE>
TELE-COMMUNICATIONS, INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
CableVision purchases programming services from certain affiliates. The
related charges generally are based upon the number of CableVision's
subscribers that receive the respective services. During the six months
ended June 30, 1996 and 1995, such charges aggregated $7.6 million and $1.7
million, respectively. Additionally, certain of CableVision's general and
administrative functions are provided by affiliates. The related charges,
which generally are based upon the respective affiliate's cost of providing
such functions, aggregated $2.0 million and $152,000 during the six months
ended June 30, 1996 and 1995, respectively. The above-described programming
and general and administrative charges are included in "Operating costs and
expenses - Cable" in the accompanying statements of operations.
As further described in notes 7, 8 and 13, certain subsidiaries of TCI have
provided guarantees and other credit enhancements on the Company's behalf.
In this respect, the Company has entered into an indemnification agreement
with TCI whereby the Company will indemnify TCI for any loss, claim or
liability that TCI may incur by reason of certain guarantees and credit
enhancements made by TCI on the Company's behalf.
(13) Commitments and Contingencies
-----------------------------
Through April 25, 1995, the Company relied upon capital contributions from
TCI in order to meet a significant portion of its liquidity requirements.
Since April 25, 1995, TCI has made funds available to the Company primarily
through the TCI Credit Facility. Following the IPO, TCI has not and, it is
anticipated, will not make further capital contributions to the Company in
the future. Notwithstanding the cash proceeds received by the Company in
connection with the IPO and the sale of the Debentures, the Company
believes that it will continue to be dependent upon financing from TCI
and/or external sources in order to meet its liquidity requirements. There
is no assurance that any such sources of financing will be available on
terms acceptable to the Company.
The Company leases business offices, has entered into pole rental and
transponder lease agreements, and uses certain equipment under lease
arrangements. It is expected that in the normal course of business, leases
that expire generally will be renewed or replaced by leases on other
properties. Most of the Company's operating lease commitments relate to
transponder lease agreements that require payment in European Currency
Units.
(continued)
I-32
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Flextech has a production and output agreement with Hallmark Entertainment,
Inc., a subsidiary of Hallmark ("Hallmark Entertainment"), whereby Hallmark
Entertainment will, on behalf of Flextech, produce in Europe for Flextech
up to 30 made-for-television films and six animated projects for use in
both the UK and certain European territories. In addition, Flextech has
entered into an agreement to acquire UK television rights to 70 made-for-
television movies, 6 mini-series and four other series from Hallmark
Entertainment's U.S. network television production output through August
1996 (collectively, the "Hallmark Programming"). Through June 30, 1996,
Hallmark Programming with an aggregate contractual value of (Pounds)16.4
million ($25.5 million) has been delivered to Flextech. At June 30, 1996,
it is estimated that Flextech's remaining commitments to purchase Hallmark
Programming will range from (Pounds)6.8 million ($10.6 million) to
(Pounds)15.4 million ($23.9 million). Flextech also has agreed to purchase
certain programming from STV during the next two years. Flextech's
aggregate remaining obligations at June 30, 1996 under such STV programming
agreements were expected to range from (Pounds)2.3 million ($3.6 million)
to (Pounds)7.3 million ($11.3 million).
The Company 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
Company believes that the aggregate payments pursuant to such obligations
could be significant. If the Company were to fail to fulfill its
obligations under the guarantee, the beneficiaries have the right to demand
an aggregate payment from the Company of approximately $58.0 million. In
connection with this guarantee, the Company has agreed to maintain a
defined net worth (cash equivalents plus the fair value of securities
listed on an exchange less liabilities) of at least $150.0 million. If the
Company's net worth (as defined) were to fall below $150.0 million, TCI has
agreed to subordinate any intercompany amounts owed by the Company to TCI
to the Company's obligation pursuant to this guarantee.
On November 20, 1995, TINTA announced its intention to form a strategic
partnership with News Corp. and two of Latin America's leading media
companies for the purpose of developing and operating a direct-to-home
satellite service for the Latin American region. TINTA has also agreed to
form similar partnerships with News Corp. and local media companies in the
North American (primarily Mexico) and Brazilian regions. The Latin
American, North American and Brazilian partnerships are collectively
referred to as the "DTH Ventures". At June 30, 1996, TINTA had contributed
$2.6 million to the DTH Ventures. It is anticipated that TINTA could be
required to make cash contributions totaling $65 million over the next
three years in connection with the DTH Ventures.
For information concerning the Company's commitments and contingent
liabilities with respect to certain affiliates, see notes 7 and 8.
(continued)
I-33
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
Certain of the agreements underlying the Flextech Transactions (see note 5)
provide that if the Flextech Non-Preference Shares do not become
convertible by June 1, 1997, Crown and/or U S WEST (UK) can require the
Company, at any time, to purchase all of their Flextech Non-Preference
Shares for a price equal to the then current market price per share of the
Flextech Ordinary Shares.
If at any time (i) the aggregate of the amount of Flextech securities held
by the Company and the remaining amount of Crown's and U S WEST (UK)'s
interest in Flextech acquired pursuant to the Hallmark Subscription and the
U S WEST Subscription exceeds 75% of Flextech's issued and outstanding
share capital, or (ii) 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 Company of any of its
rights as a Flextech shareholder, the Company shall be obligated to offer
to purchase from Crown and U S WEST (UK) any Flextech Ordinary Shares or
Flextech Non-Preference Shares held by them and which were originally
acquired pursuant to the Hallmark Subscription or the U S WEST
Subscription, 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 Company for any Flextech Ordinary Shares or Flextech Non-
Preference Shares during the preceding 12 month period.
In the event the Company 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 Series A Common Stock, or in certain
securities of TCI.
TINTA assumed a similar put obligation with respect to certain Flextech
Non-Preference Shares that were issued in connection with Flextech's
acquisition of the 61% ownership interest in the Family Channel, which
Flextech did not already own. See note 4.
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 TINTA 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 TCI
ceases to own at least 50.01% of the voting interest attributable to
Flextech's then outstanding ordinary share capital.
(continued)
I-34
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
In connection with Flextech's August 1995 acquisition of a 33.3% ownership
interest in Preview, Flextech entered into a shareholders' agreement with
Infinity Investments B.V. ("Infinity"), the owner of the remaining 66.7%
interest in Preview, pursuant to which Flextech will have the right to
require Infinity to sell to Flextech (the "Call Option"), and Infinity will
have the right to require Flextech to purchase (the "Put Option"),
Infinity's entire interest in Preview at a price equal to a multiple of the
average of Preview's consolidated profit (before interest and taxes) for
the fiscal years ended May 31, 1998, 1999 and 2000, subject to a maximum
purchase price of NGL 100.0 million ($58.4 million) and a minimum purchase
price of NGL 50.0 million ($29.2 million). The Call Option and the Put
Option are exercisable at any time between June 1, 2000 and December 31,
2000, subject to the approval of Flextech's shareholders, if such approval
is required under the Listing Rules of the London Stock Exchange at the
time of exercise. If the Put Option is exercised and Flextech's
shareholders do not give such approval, Flextech has agreed to pay NGL 5.0
million ($2.9 million) to Infinity, though in this case, the last date for
exercise of the Call Option will be extended to December 31, 2002, and such
payment will be treated as a (Pounds)2.0 million ($3.1 million) payment on
account of the purchase price payable upon exercise of the Call Option.
As previously reported, TINTA has adopted, subject to shareholder approval,
the Tele-Communications International, Inc. 1995 Stock Plan (the "1995
Plan"). In addition, on April 11, 1996, the Board of Directors of TINTA
adopted a stock option plan for the Company's directors (the "Director
Plan"). The Director Plan provides for grants to be made of options to
purchase a maximum of one million shares of Series A Common Stock. Under
the Director Plan, each of the Company's five directors who were not
employees of the Company or any subsidiary of the Company as of April 11,
1996 has been granted, subject to stockholder approval of the Director
Plan, an option to purchase 50,000 shares of Series A Common Stock. The
options vest evenly over a five year period. At June 30, 1996 there were
1,642,000 shares of Series A Common Stock reserved for issuance pursuant to
grants under the 1995 Plan and the Director Plan.
Flextech has granted to certain employees under its 1992 and 1995 stock
option schemes, options to purchase approximately (i) 535,000 Flextech
Ordinary Shares at a per share price of (Pounds)3.24 ($5.03), (ii) 500,000
Flextech Ordinary Shares at a price per share of (Pounds)5.03 ($7.81),
(iii) 150,000 Flextech Ordinary Shares at a price per share of
(Pounds)3.775 ($5.86) and (iv) 15,000 Flextech Ordinary Shares at a price
per share of (Pounds)5.06 ($7.86) (the "Flextech Milestone Options"). The
Flextech Milestone Options are exercisable during various periods from 1997
to 2006, only if certain performance conditions are satisfied. As none of
the performance conditions have been satisfied, Flextech has not yet
recorded any compensation expense with respect to the Flextech Milestone
Options. The Company is unable to predict the extent, if any, that
compensation expense will be incurred with respect to the Flextech
Milestone Options.
In July 1995, Flextech shareholders approved the adoption of a sharesave
scheme (the "Sharesave Scheme") that, under certain circumstances, could
cause Flextech to record compensation expense. At June 30, 1996,
approximately 133,000 Flextech Ordinary Shares had been granted to
employees under the Sharesave Scheme. Through June 30, 1996, compensation
expense with respect to the Sharesave Scheme was not material.
(continued)
I-35
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1)
Notes to Financial Statements
(14) Subsequent Events
-----------------
On July 8, 1996, US WEST (UK) purchased the TDL Securities at a price per
share of (Pounds) 128.39 ($199.38). Flextech used the sales proceeds from
such purchase to repay in full amounts borrowed under the Flextech Bank
Credit Facility. See notes 5,9 and 10.
I-36
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
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 Company's financial statements, included elsewhere herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
- - --------------------------------------------------------------------------
Operations included in the Company's Annual Report on Form 10-K for the year
- - ----------
ended December 31, 1995. With respect to trends, risks and uncertainties
affecting the Company's results of operations and financial condition, the
following discussion addresses only changes in such matters that have occurred
during 1996 through the date of this Quarterly Report on Form 10-Q.
As described in greater detail below, the Company reported net losses of
$(70.6 million) and $(46.3 million) during the six months ended June 30, 1996
and 1995, respectively. The Company expects 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 telecommunications industry. Any improvements in the
Company's results of operations are largely dependent upon the ability of the
Company's operating subsidiaries and affiliates to increase their respective
subscriber bases. There can be no assurance that any such subscriber base
increases will occur.
A significant portion of the Company's operations are conducted through
corporations and partnerships in which the Company holds a 20%-50% ownership
interest. As the Company generally accounts for such ownership interests using
the equity method of accounting, the financial condition and results of
operations of such entities are not reflected on a consolidated basis within the
Company's financial statements.
On April 22, 1996, Flextech acquired from IFE (i) the 61% ownership
interest in the Family Channel, which Flextech did not already own and (ii) a
100% ownership interest in TVS. On April 10, 1996, Flextech acquired an indirect
controlling interest in the "infomercial" business of HSN Direct. For a more
detailed description of these transactions, see note 4 to the accompanying
financial statements. The Family Channel, TVS and HSN Direct have been included
in the Company's financial statements since their respective dates of
acquisition. Flextech's 51%-owned subsidiary, PBTV, commenced operations in
November 1995 with the launch of Playboy TV. The following table sets forth
summary information with respect to the results of operations for the Family
Channel, TVS and HSN Direct (as adjusted for the effects of purchase accounting)
from the respective acquisition dates through June 30, 1996 and PBTV from
January 1, 1996 through June 30, 1996 (amounts in thousands):
Revenue $ 6,843
Operating costs and expenses (12,342)
Depreciation and amortization (3,867)
----------
Operating loss $ (9,366)
==========
(continued)
I-37
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
General (continued)
- - -------------------
On April 25, 1995, the Company acquired a 51% ownership interest in
CableVision. In accordance with the purchase method of accounting, the purchase
price has been allocated using the estimated fair values of the net assets
acquired and CableVision has been included in the Company's financial statements
since the April 25, 1995 acquisition date. At June 30, 1996, CableVision owned
cable television systems serving approximately 450,000 basic subscribers. The
following table sets forth summary information with respect to CableVision's
results of operations (as adjusted for the effects of purchase accounting) for
the indicated periods (amounts in thousands):
April 25, 1995
Six months ended through
June 30, 1996 June 30, 1995
------------------ --------------
Revenue $ 88,174 100% $29,956 100%
Operating costs and expenses
before depreciation and
amortization (50,767) (58%) (17,686) (59%)
-------- ----- -------- -----
Operating income before
depreciation and amortization(1) 37,407 42% 12,270 41%
Depreciation and amortization (18,146) (20%) (5,884) (20%)
-------- ----- -------- -----
Operating income $ 19,261 22% $ 6,386 21%
======== ===== ======== =====
- - ----------------
(1) Operating income before depreciation and amortization ("Operating Cash
Flow") is a commonly used measure of value and borrowing capacity.
Operating Cash Flow is not intended to be a substitute for a measure of
performance in accordance with generally accepted accounting principles and
should not be relied upon as such.
Through the third quarter of 1995, the Company included CableVision and
Flextech in its financial statements on a one-month time delay. The Company
eliminated such time delay from its December 31, 1995 financial statements. As
a result, the Company's consolidated statements of operations and cash flows for
the three and six months ended June 30, 1996 include CableVision's and
Flextech's results of operations and cash flows for such periods, and the
Company's combined statements of operations and cash flows for the three and six
months ended June 30, 1995 include (i) Flextech's operating results and cash
flows for the three and six months ended May 31, 1995, and (ii) CableVision's
operating results and cash flows for the periods following the April 25, 1995
acquisition date through June 30, 1995. See note 4 to the accompanying
financial statements.
The IFE Acquisitions, HSN Acquisition, CableVision Acquisition and the
launch of Playboy TV detract from the period to period comparability of revenue
and expense amounts. See "Material Changes in Results of Operations" below.
------------------------------------------
Similarly, these acquisitions and certain other transactions have also impacted
the Company's liquidity and capital resources. See "Material Changes in
-------------------
Financial Condition" below.
- - ------------------- (continued)
I-38
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations
- - -----------------------------------------
Revenue
-------
Cable revenue increased $59.7 million or 146% during the six months ended
June 30, 1996, as compared to the corresponding prior year period. Such
increase is primarily attributable to the effect of the CableVision Acquisition,
as described under "General" above. An increase in the revenue of the
-------
Consolidated Puerto Rico Entities accounted for the remaining increase in cable
revenue.
The areas serviced by CableVision are also serviced by other cable
providers. During the second quarter of 1996 one of these cable providers began
offering cable services at rates substantially below that charged by
CableVision. The Company cannot predict the impact competition will have on
CableVision's result of operations.
Programming revenue increased $15.9 million or 80% during the six months
ended June 30, 1996, as compared to the corresponding prior year period. A
significant portion of such increase is attributable to the inclusion of the
Family Channel, HSN Direct, PBTV and TVS in the Company's results of operations,
as described under "General" above. Additionally, 33% and 13% increases in the
---------
revenue generated by Bravo Ltd. and Starstream, respectively, contributed to
such increase. Substantially all of the increase in Bravo Ltd's revenue is
attributable to a 23% gain in the viewership of Bravo and to an increase in the
revenue per viewer of Bravo. The higher revenue per viewer of Bravo is primarily
attributable to a price increase in April 1996 and to increased advertising
revenue. The increase in Starstream's revenue is primarily attributable to an
increase in the average price received for TCC, as TCC's viewership was
relatively constant during the 1996 and 1995 periods. In connection with
Flextech's August 1995 acquisition of an ownership interest in a programming
service that has a target audience in Holland similar to that of TCC, it was
agreed that, effective January 1, 1996, TCC would discontinue providing service
to approximately 850,000 viewers in Holland. The January 1, 1996 loss of such
viewers in Holland largely offset the viewership gains experienced by TCC
through December 31, 1995. Approximately $2.2 million of the remaining increase
in programming revenue is attributable to fees received pursuant to a management
agreement, which was terminated in July 1996.
Operating Costs and Expenses
----------------------------
Cable operating costs and expenses increased $32.2 million or 118% during
the six months ended June 30, 1996, as compared to the corresponding prior year
period. Such increase is primarily attributable to the effect of the
CableVision Acquisition, as described under "General" above. An increase in the
-------
operating costs and expenses of the Consolidated Puerto Rico Entities accounted
for the remaining increase in cable operating costs and expenses.
CableVision and the Consolidated Puerto Rico Entities purchase programming
under contracts that expire at various dates in the future. No assurance can be
given that future contracts will contain terms as favorable as those contained
in the existing programming contracts of CableVision and the Consolidated Puerto
Rico Entities.
(continued)
I-39
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- - -----------------------------------------------------
Programming operating costs and expenses increased $19.7 million or 79%
during the six months ended June 30, 1996, as compared to the corresponding
prior year period. Such increase is attributable to (i) the inclusion of the
Family Channel, HSN Direct, PBTV and TVS in the Company's 1996 results of
operations, as described under "General" above, and (ii) increased programming
---------
costs. Increases in programming costs are attributable to (i) the amortization
of the cost of programming rights acquired by Flextech in 1995 and 1996 pursuant
to an agreement with Hallmark Entertainment and (ii) the acquisition of higher
quality programming for Bravo and TCC as a part of Flextech's efforts to
increase the viewership of such services. It is anticipated that the
amortization of the costs associated with the programming delivered by Hallmark
Entertainment and STV will represent a significant component of programming
costs and expenses in future periods. For information concerning Flextech's
commitments pursuant to such programming rights agreements, see note 13 to the
accompanying financial statements.
During the second quarter of 1996, the Company revised its estimate of
future revenue to be earned from certain programming rights. As a result of such
revisions, the Company has recorded an adjustment of $8.7 million to reduce the
carrying value of the affected programming rights.
TINTA incurred corporate general and administrative expenses of $6.4
million and $3.7 million during the six months ended June 30, 1996 and 1995, of
which $1.5 and $926,000, respectively, were allocated from TCI. General and
administrative allocations from TCI are generally based upon the estimated cost
of the services provided to the Company. Corporate general and administrative
expenses have increased as a result of the Company's expanded operations. Such
expenses represented 5% and 6% of revenue for the six months ended June 30, 1996
and 1995, respectively.
Estimated changes in (i) TINTA's stock compensation liability and (ii)
TINTA's share of TCI's stock compensation liability are reflected in the
Company's statements of operations. Estimated increases (decreases) in such
compensation liabilities aggregated $(1.6 million) and $742,000 during the six
months ended June 30, 1996 and 1995, respectively. Such estimated compensation
liabilities are subject to future adjustment based upon market value and,
ultimately, upon the final determination of the market value of the stock
appreciation rights at the time they are exercised.
The $13.7 million or 122% increase in depreciation and amortization expense
during the six months ended June 30, 1996, as compared to the corresponding
prior year period, is the result of increases in the Company's assets that are
subject to depreciation and amortization. The increases in such assets were
primarily attributable to acquisitions and capital expenditures.
(continued)
I-40
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- - -----------------------------------------------------
Other Income and Expense
------------------------
TeleWest, which is currently constructing broadband cable television and
telephony networks in the UK, has incurred losses since its inception. It is
expected that the current construction requirements of TeleWest will be
substantially complete within the next five years. As described in note 7 to
the accompanying financial statements, the Company's indirect ownership interest
in TeleWest decreased from 38% to 26.8% in October 1995. Despite such decreased
ownership interest, the Company's share of TeleWest's net losses increased $44.0
million or 168% during the six months ended June 30, 1996, as compared to the
corresponding prior year period. In general, such increase is attributable to
the fact that increases in TeleWest's operating costs and expenses (including
depreciation and amortization) have exceeded increases in TeleWest's revenue.
The increase also includes the Company's share of certain effects of the SBCC
Transaction. In connection with the SBCC Transaction, TeleWest received net
cash proceeds of $1.2 billion upon the issuance of 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 depreciation,
amortization and interest expense were significantly higher in the first half of
1996 as compared to the amounts incurred by Old TeleWest during the
corresponding prior year period. In addition, TeleWest experienced a $72.8
million foreign currency transaction loss during the second quarter of 1996
which resulted from the translation of the TeleWest Debentures into UK pounds
sterling and the adjustment of a foreign currency option contract to market
value. 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 Company's share of the losses of its affiliates other than TeleWest
increased $14.5 million or 65% during the six months ended June 30, 1996, as
compared to the corresponding prior year period. The majority of such increase
is attributable to (i) the Company's share of losses of affiliates that were
acquired subsequent to June 30, 1995, (ii) increased losses of certain of its
affiliates in 1996, and (iii) a $2.4 million change in the Company's share of
TeleWest Europe's operating results. As further described in note 9 to the
accompanying financial statements, the Company, effective January 1, 1996,
discontinued accounting for TeleWest Europe using the equity method, and began
accounting for TeleWest Europe as an investment held for disposition.
The minority interests' share of net losses was $10.5 million and $5.9
million during the six months ended June 30, 1996 and 1995, respectively. 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
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 June 30, 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 Company 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 six months ended
June 30, 1996 and 1995, the Company would have allocated $9.9 million and $2.2
million, respectively of CableVision's net earnings (exclusive of the effects of
purchase accounting) to the minority interest.
(continued)
I-41
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Results of Operations (continued)
- - -----------------------------------------------------
The Company recognized unrealized foreign currency transaction gains of
$3.4 million and $549,000 during the six months ended June 30, 1996 and 1995,
respectively. The 1996 amount includes a $3.1 million unrealized gain with
respect to the remeasurement into the U.S. dollar of the French franc
denominated Multithematiques Obligation, and the 1995 amount includes a $1.7
million unrealized gain with respect to the remeasurement into the U.S. dollar
of the UK pound sterling denominated intercompany debt owed by Flextech to an
indirect subsidiary of TINTA.
Income Taxes
------------
The Company's income tax benefit was $30.2 million and $9.6 million during
the six months ended June 30, 1996 and 1995, respectively. A Tax Sharing
Agreement among TINTA, 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. For additional information, see note 11 to the accompanying
financial statements.
Material Changes in Financial Condition
- - ---------------------------------------
On July 18, 1995, TINTA completed the IPO in which 20,000,000 shares of
TINTA's Series A Common Stock were sold to the public for net proceeds of
approximately $301.3 million. Prior to the IPO, the Company had relied upon
capital contributions from TCI in order to meet most of the Company's liquidity
requirements. Since April 25, 1995, TCI has made funds available to the Company
primarily through the TCI Credit Facility, and, since the IPO, TCI has not made,
and it is anticipated will not make, further capital contributions to the
Company in the future.
The Company's operating activities used cash of $4.1 million and $6.0
during the six months ended June 30, 1996 and 1995, respectively. Although the
operating activities of CableVision (which became a 51% owned subsidiary of
TINTA on April 25, 1995) and the Consolidated Puerto Rico Entities historically
have generated positive cash flow, the Company believes that the operating
activities of TINTA will continue to produce net cash flow deficits for the
foreseeable future. Furthermore, because the Company's assets consist primarily
of ownership interests in foreign subsidiaries and affiliates, the repatriation
of any cash provided by such subsidiaries' and affiliates' operating activities
in the form of dividends, loans or other payments is subject to, among other
things, exchange rate fluctuations, tax laws and other economic considerations,
as well as applicable statutory and contractual restrictions. Moreover, the cash
balances of the Company's foreign subsidiaries are generally intended to be
applied towards the respective liquidity requirements of such foreign
subsidiaries, and, other than in connection with the repayment of certain
principal and interest owed to TINTA by Flextech, it is not presently
anticipated that any significant portion of such cash balances will be
distributed or otherwise made available to TINTA. Accordingly, there can be no
assurance that the Company will have access to any cash generated by its foreign
operating subsidiaries and affiliates. In this regard, $35.9 million of the
Company's cash balances were held by foreign subsidiaries at June 30, 1996.
(continued)
I-42
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Condition (continued)
- - ---------------------------------------------------
During the six months ended June 30, 1996 and 1995, cash used by the
Company's investing activities aggregated $143.9 million and $277.4 million,
respectively, of which $102.2 million and $84.0 million, respectively, was used
by the Company to fund investments in, and loans to, affiliates. See the
statements of cash flows included in the accompanying financial statements.
The Company expects that it will continue to have significant cash
requirements with respect to its investing activities. In this regard the
Company, as of June 30, 1996, is contractually obligated to make loans or
capital contributions to its affiliates as follows:
<TABLE>
<CAPTION>
Commitment U.S. dollar
amount at equivalent at
June 30, June 30,
Affiliate Currency 1996 1996
- - --------- -------- ---------- -------------
amounts in thousands
<S> <C> <C> <C>
TINTA/Liberty LLC (1) U.S. dollar $ 29,000 $29,000
Flextech Affiliates (2) UK pounds sterling ("Pounds") 9,961 15,468
BIP Chile (3) U.S. dollar $ 8,990 8,990
Other Various 10,411
-------
$63,869
=======
</TABLE>
_______________
(1) Represents the Company's aggregate unfunded obligations to make additional
capital contributions. See note 8 to the accompanying financial
statements.
(2) Represents 100% of Flextech's aggregate unfunded obligations to provide
debt and equity financing to the Flextech Affiliates.
(3) Represents the Company's aggregate unfunded obligations to provide equity
financing to BIP Chile.
At June 30, 1996, the Company and Sumitomo had satisfied substantially all
of the contractual funding requirements with respect to Jupiter. The Company
and Sumitomo are currently discussing the need to provide additional funding to
Jupiter. See note 8 to the accompanying financial statements.
The $65.9 million U.S. dollar equivalent of the estimated net present value
of the additional capital contributions that TINTA is required to make to
Multithematiques through December 1997 has not been reflected in the foregoing
table since such amount has been reflected as a liability in the Company's June
30, 1996 consolidated balance sheet. See note 8 to the accompanying financial
statements for additional information concerning the Multithematiques
Obligation.
(continued)
I-43
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Condition (continued)
- - ---------------------------------------------------
The Company believes that its actual future cash requirements, including cash
requirements in connection with the funding of capital expenditures and
operating activities of its affiliates, will exceed the amounts that the Company
currently is contractually obligated to fund. The Company is not able to more
precisely predict the timing or amount of the future funding requirements of its
affiliates because such future cash requirements are dependent upon a variety of
factors.
Although TeleWest has required significant amounts of capital in order to
fund its construction program and operating losses, the Company has not provided
any funding to TeleWest since the November 1994 consummation of the TeleWest
IPO. As described in note 7 to the accompanying financial statements, the SBCC
Transaction was completed on October 3, 1995. In connection therewith, TeleWest
received $1.2 billion in net cash proceeds from the issuance of the TeleWest
Debentures. TeleWest used approximately $251.0 million of such proceeds to repay
outstanding borrowings pursuant to a SBCC loan facility that has been
terminated. The remaining proceeds will be available to satisfy TeleWest's
existing and future cash requirements. It is not anticipated that any portion of
such remaining proceeds will be distributed or otherwise made available to
TINTA. The Company has no present intention to make any significant additional
capital contributions or loans to TeleWest in order to assist TeleWest in
meeting its existing liquidity requirements.
As further described under note 8 to the accompanying financial statements,
the Company has guaranteed borrowings of, and has certain other contingent
liabilities with respect to, the Other Affiliates.
The Company's significant commitments under certain lease and programming
agreements and its significant contingent liabilities with respect to certain
share repurchase arrangements, guarantees, investments and other matters are
described under notes 8 and 13 to the accompanying financial statements.
During the year ended December 31, 1995, CableVision (from April 25, 1995
through December 31, 1995), Flextech and the Consolidated Puerto Rico Entities
accounted for $21.4 million, $28.7 million (of which $23.0 million was
attributable to IVS) and $7.8 million, respectively, of the Company's aggregate
capital expenditures of $57.9 million. Although the Company expects that the
future capital expenditure requirements of CableVision, Flextech (exclusive of
IVS) and the Consolidated Puerto Rico Entities will equal or exceed historical
levels, the Company currently believes that the internally generated funds and
other sources of liquidity of such entities generally will be sufficient to
satisfy the foreseeable capital expenditure requirements of such entities.
(continued)
I-44
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Condition (continued)
- - ---------------------------------------------------
During the year ended December 31, 1995, the Company consummated the
CableVision Acquisition, the Flextech Transactions, the IVS Subsidiary Sale, the
Multithematiques Transaction and certain other transactions. For information
concerning the effects of such transactions on the Company's liquidity and
capital resources, see notes 4, 5, 6, 8, 10 and 13 to the accompanying financial
statements.
On February 7, 1996, Cordillera and CTC entered into the Chile
Restructuring Agreements. It is anticipated that some portion of BIP Chile's
50% share of the cash proceeds generated by the transactions associated with the
Chile Restructuring Agreements may be used to reduce the amounts owed by BIP
Chile to TINTA pursuant to a subordinated loan agreement. For additional
information, see note 8 to the accompanying financial statements.
On February 8, 1996, the Company received net cash proceeds of
approximately $336 million from the issuance of the Debentures. Pending its use
by TINTA, the net proceeds from the sale of the Debentures have been loaned to
TCI pursuant to an unsecured promissory note. For additional information, see
notes 10 and 12 to the accompanying financial statements.
In February 1996, the Company and Sumitomo formed JPC. In connection
therewith, the Company and Sumitomo will contribute their respective 18% and 82%
ownership interests in the Cable Soft Network to JPC. The Company will make an
equalizing payment in the amount of (Yen) 444 million ($4.1 million) in
connection with the above-described contribution of the Cable Soft Network. See
note 8 to the accompanying financial statements.
In April 1996, Flextech acquired (i) a controlling interest in the
"infomercial" business of HSN Direct and (ii) consummated the IFE Acquisitions.
In connection with the IFE Acquisitions, TINTA assumed certain put obligations.
For additional information concerning the effects of such transactions on the
Company's liquidity and capital resources, see note 4 to the accompanying
financial statements.
On April 19, 1996, TINTA, Torneos and the two individual shareholders of
Torneos entered into an agreement whereby TINTA 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. Subject to the Company's
completion of due diligence, the parties anticipate that TINTA will assign to
the Sports Venture the portions of this agreement which fit within the
geographic area and business plan of the Sports Venture. TINTA has contributed
its 35% interest in Torneos to the Sports Venture. For additional information,
see note 8 to the accompanying financial statements.
(continued)
I-45
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
(See note 1 to the accompanying financial statements)
Material Changes in Financial Condition (continued)
- - ---------------------------------------------------
TINTA, Liberty and News Corp. formed the Sports Venture to conduct a sports
programming business on a multinational basis, excluding the United States and
certain other defined geographic areas. News Corp. owns a 50% interest in the
Sports Venture with the remaining 50% owned by the LLC. TINTA contributed to the
LLC $49 million and its 35% equity interest in Torneos. Liberty 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 TINTA and Liberty
to the Sports Venture. TINTA is obligated to make an additional cash
contribution of $29 million to the LLC to fund the operations of the Sports
Venture. For additional information, see note 8 to the accompanying financial
statements.
On April 30, 1996, TINTA issued 473,373 shares of Series A Common Stock to
Canal + for an aggregate cash purchase price of $10.0 million.
In April 1996, Flextech entered into an agreement in principle with respect
to a joint venture with Sony Entertainment, Time Warner and Ole Investments LDC
("Ole") for the launch of "Mundo Ole" a digital satellite delivered channel
broadcast to Latin America and Brazil. Flextech's maximum funding commitment, if
the transaction were to proceed, would be $14.0 million. For additional
information, see note 8 to the accompanying financial statements.
On November 20, 1995, TINTA announced its intention to form a strategic
partnership with News Corp. and two of Latin America's leading media companies
for the purpose of developing and operating a direct-to-home satellite service
for the Latin American region. TINTA has also agreed to form similar
partnerships with News Corp and local media companies in the North American
(primarily Mexico) and Brazilian regions. The Latin American, North American and
Brazilian partnerships are collectively referred to as the "DTH Ventures". At
June 30, 1996, TINTA had contributed $2.6 million to the DTH Ventures. It is
anticipated that TINTA could be required to make cash contributions totaling $65
million over the next three years in connection with the DTH Ventures.
On July 8, 1996, US WEST (UK) purchased the TDL Securities at a price per
share of (Pounds) 128.39 ($199.38). Flextech used the sales proceeds from such
purchase to repay in full amounts borrowed under the Flextech Bank Credit
Facility. See note 14 to the accompanying financial statements.
At June 30, 1996, $36.4 million of the Company's $36.8 million of cash and
cash equivalents were held by its subsidiaries. Exclusive of amounts held by its
subsidiaries, TINTA held cash and cash equivalents of $371,000 at June 30, 1996.
TINTA believes that such cash and cash equivalents, the net cash proceeds from
the sale of the Debentures (which net cash proceeds have been loaned to TCI as
described above), borrowing availability pursuant to the TCI Credit Facility and
any funds generated by the operating or financing activities of TINTA's
operating subsidiaries and affiliates will be sufficient for the next year to
(i) fund the Company's existing capital contribution and lending commitments to
its affiliates and (ii) fund the Company's working capital, debt service and
capital expenditure requirements. Although TINTA's ability to obtain dividends
or advances from certain of its operating subsidiaries and affiliates is
limited, TINTA's liquidity requirements with respect to its operating
subsidiaries and affiliates are reduced to the extent that such operating
subsidiaries and affiliates are able to generate funds through their respective
operating or financing activities. To the extent that the Company seeks to make
significant acquisitions or is required to meet significant future liquidity
requirements in addition to those described above, the Company anticipates that
it will need to obtain additional debt or equity financing. Other events could
occur involving TINTA, including required payments under certain share
repurchase, guarantee and indemnification agreements, that could require TINTA
to obtain significant additional funds. No assurance can be given, however, that
TINTA or its subsidiaries or affiliates will be able to obtain additional
financing on terms acceptable to them, or at all.
I-46
<PAGE>
TELE-COMMUNICATIONS INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- - ------- ------------------
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended June
30, 1996 to which the Company or any of its consolidated subsidiaries
is a party or which any of its property is subject, except as follows:
Alan Robinson v. TCI/U S WEST Cable Communications, Inc.; TeleWest
------------------------------------------------------------------
Communications PLC; Tele-Communications, Inc.; U S WEST, Inc.; Stephen
----------------------------------------------------------------------
Davidson; Gary Bryson; Kleinwort Benson; and Kleinwort Benson of North
----------------------------------------------------------------------
America.
-------
On April 19, 1996, this action was filed in the United States District
Court, Austin District of Texas, Western Division, Case No. A 95 CA
833 JN. The complaint was amended on or about April 19, 1996. The
allegations in the amended complaint pertain to the plaintiff's
ownership of shares of stock in United Artist Communications London
South PLC and communications with the defendants concerning the
purchase of such stock by certain of the defendants. Plaintiff's
claims against the defendants are for: 10b-5 securities violations;
breach of fiduciary duty; negligence and gross negligence; fraud;
constructive trust; constructive trust (unjust enrichment);
constructive trust (violation of fair dealing); civil conspiracy;
tortuous interference with contract; breach of third-party contract by
Kleinwort-Benson; recision of contract for failure of consideration
and restitution; cancellation of contract for mutual mistake; and
racketeering influenced and corrupt organizations claim. Plaintiff
seeks actual damages of $9 million, consequential damages of an
additional $9 million, and punitive damages in the amount of $27
million.
On July 9, 1996, the Court dismissed this lawsuit for lack of subject
matter jurisdiction and forum non conveniens. The plaintiff has filed
his Notice of Appeal. Based upon the facts available, management
believes that, although no assurance can be given as to the outcome of
this action, the ultimate disposition should not have material effect
upon the financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K.
- - ------ --------------------------------
(a) Exhibits
10 - Material Contracts
10.1 - North America DTH Platform Memorandum of
Understanding
10.2 - Multi-Country DTH Platform Memorandum of
Understanding
27 - Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended June 30,
1996 - none
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELE-COMMUNICATIONS INTERNATIONAL, INC.
Date: August 14, 1996 By: /s/ Fred A. Vierra
----------------------------------------
Fred A. Vierra
Chief Executive Officer
Date: August 14, 1996 By: /s/ Graham Hollis
----------------------------------------
Graham Hollis
Vice President and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
<PAGE>
NORTH AMERICA DTH PLATFORM
MEMORANDUM OF UNDERSTANDING
A. This Memorandum of Understanding dated as of July __, 1996 ("MOU") sets
forth the principal terms of the agreement among Grupo Televisa, S.A.
("Televisa"), The News Corporation Limited ("News Corp."), and Tele-
Communications International, Inc. ("TINTA") with respect to the
development and distribution of television (other than free, conventional,
over-the-air broadcast television), audio and related entertainment (as may
be agreed by the Parties) program services through direct to home
("DTH") /*/ satellite transmission in Mexico, certain areas of the
Caribbean (depending on transponder coverage) and, subject to the terms of
this MOU, in the United States and Canada ("Territory"). This venture is
referred to herein as the "North America Platform". Televisa, News Corp.
and TINTA are collectively referred to herein as the "Parties", or each
individually as a "Party".
B. News Corp. has entered into an Agreement ("Master Agreement") to own and
operate a DTH platform with Globo Comunicacoes E Participacoes Ltda.
("Globo") relating to Brazil (the "Brazil Platform"). It is intended that
TINTA will join the Brazil Platform.
C. Globo, Televisa, News Corp. and TINTA intend to enter into an agreement to
own and operate a DTH platform for the territories in Latin America not
covered by the North America Platform or the Brazil Platform (the "Multi-
Country Platform"). Televisa, News Corp., Globo and TINTA intend to reach
agreement on a Memorandum of Understanding, with terms similar in nature to
the terms of this MOU, setting forth the principal terms of the Multi-
Country Platform. The North America Platform, the Brazil Platform and the
Multi-Country Platform are collectively referred to herein as the "DTH
Platforms".
1. General Terms. The Parties hereto agree to enter into a joint venture to
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develop, own and operate direct to home satellite systems ("DTH") for the
satellite transmission and distribution of program services directly to homes
and cable systems in the Territory. The purchase, production and packaging of
services may be carried out by the Parties jointly, independently or together
with third parties where appropriate. The Parties and
- - --------------------
/*/ DTH means the transmission of digital compressed encoded signals via
satellite directly to individual subscribers' integrated decoders/receivers
in a manner that will allow these subscribers to receive and be billed only
for the particular services or programs to which they subscribe or which
they have elected to view.
<PAGE>
Globo will enter into arrangements to coordinate the North America Platform and
the other DTH Platforms in areas of mutual interest, including technology and
programming.
2. Documentation. Upon the signing of this MOU, the Parties will prepare and
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execute as promptly as possible definitive long form documentation, including a
joint venture agreement and such other agreements as may be deemed necessary or
appropriate ("Definitive Documentation"), to more fully set forth the intent of
the Parties as provided in this MOU. The Definitive Documentation will contain
representations and warranties, covenants, exit provisions and indemnities
customary in such documentation. Until such time as the Definitive
Documentation is prepared and executed, this MOU (including the Schedule of
General Terms attached hereto) will constitute a binding agreement among
Televisa, News Corp., Globo and TINTA with respect to the subject matter hereof.
It is the intent of the Parties that the implementation of the transactions
contemplated by this MOU will require appropriate business plans and a program
strategy (providing for a broadly based, diversified range of program services)
which are mutually acceptable to the Parties. Each Party will designate
representatives who will be responsible for the negotiation of the Definitive
Documentation, the business plan and the program strategy.
3. Exclusivity / Discussions with Third Parties. The arrangements set forth
--------------------------------------------
in this MOU and in the Definitive Documentation will be exclusive as among the
Parties and Globo. The Parties and Globo agree that none of them will enter
into negotiations, discussions or arrangements with any third party relating to
the subject matter of this MOU or the Definitive Documentation without the
consent of the others. Any discussions or negotiations with third parties
contemplated by the terms of this MOU or the Definitive Documentation will be
undertaken by Televisa and News Corp. jointly.
4. Consents / Approvals. The Parties acknowledge that the terms of the North
--------------------
America Platform and its implementation as contemplated hereunder will require
obtaining all necessary regulatory and governmental approvals. Each Party will
provide such information, cooperation and assistance as may reasonably be
required to obtain approval or permits required by or made necessary as a result
of this MOU or the Definitive Documentation.
5. Confidentiality / Public Announcements. Each Party and Globo will keep
--------------------------------------
confidential and not disclose to third parties any confidential information
received from any other Party or Globo in connection with this MOU or the
transactions contemplated hereunder except as required by law or regulations.
Each Party and Globo will use such confidential information solely for the
purpose of the transactions contemplated by this MOU. A Party and Globo may
disclose such confidential information only to its officers, directors,
employees or advisors who have a need to know and have agreed to keep such
information confidential. There will be no public announcement made concerning
the
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<PAGE>
matters contemplated by this MOU without the Parties' prior consent, including
in relation to the content of any such announcement, except as required by law
or regulation.
6. Governing Law. The provisions of this MOU will be governed and interpreted
-------------
in accordance with the laws of the State of New York, United States of America,
without regard to principles of conflicts of law.
7. Prior Agreements. This MOU supersedes all prior understandings, whether
----------------
written or oral, between the Parties with respect to the transactions
contemplated herein, except for the PanAmSat Letter Agreement (defined in
Paragraph 8 below), which shall remain in full force and effect, other than
Paragraphs 3 and 4 thereof, which, as among the Parties and Globo, are
superseded hereby and by the MOU for the Multi-County Platform.
8. Satellites. The Parties acknowledge that Televisa, Globo, News Corp. and
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PanAmSat Corporation ("PanAmSat") have entered into a letter agreement dated
February 29, 1996 with respect to transponder capacity to be provided by
PanAmSat for the DTH Platforms ("PanAmSat Letter Agreement"). In that
connection and with respect to the North America Platform, the Parties and Globo
agree as follows:
(i) In the short-term (five years or less), the North America Platform
will utilize up to 7 transponders on the Solidaridad II satellite. Televisa will
assist the North America Platform in obtaining this transponder capacity.
(ii) In the longer-term (no later than five years), the North America
Platform will utilize the transponder capacity (12 transponders) previously
contracted for by Televisa on PAS-5, on the terms and conditions set forth in
the PanAmSat Letter Agreement.
(iii) If the short-term commitment and long-term commitment described
above overlap, the Parties will use all reasonable efforts to find alternative
uses for the short-term capacity during the remainder of the five-year period,
but will share all costs pro-rata, if unsuccessful.
(iv) The Parties will consider the alternatives for transponder capacity
in the United States and will make a determination with respect thereto as soon
as possible and in any event within 60 days of the date hereof.
9. Cable / MMDS Carriage. Each Party and Globo will use reasonable efforts to
---------------------
carry, or cause affiliates under its control to carry, any programming services
(partly or wholly owned by a Party or Globo) which are carried on the North
America Platform, on commercially reasonable terms and conditions (including
pricing and tiering), on any cable or MMDS systems in the Territory owned by
such Party or Globo, or their
3
<PAGE>
respective affiliates under their control. Without limiting the generality of
the foregoing, Televisa will use reasonable efforts to carry any programming
services (partly or wholly-owned by a Party or Globo) which are carried on the
North America Platform/Mexico, on commercially reasonable terms and conditions
(including pricing and tiering) on Televisa-owned cable and MMDS systems in the
Territory.
10. Additional Countries. Although Panama, Costa Rica, Nicaragua, Honduras, El
--------------------
Salvador, Guatemala, Belize and certain areas of the Caribbean (depending on
transponder coverage) are not included in the Territory, it is anticipated that
(i) the North America Platform/Mexico will provide SMS, conditional access and
other services which are necessary due to the use of the North America
Platform/Mexico's transponders in respect of Nicaragua, Honduras, El Salvador,
Guatemala, Belize and such areas of the Caribbean in exchange for a fee to cover
fully-allocated cost, except as the Parties may agree, and (ii) the Multi-
Country Platform may ask the North America Platform/Mexico to manage/administer
Panama and Costa Rica in exchange for a fee. The Parties acknowledge that areas
in the Caribbean including Puerto Rico which are best covered by the footprint
of the North America Platform/Mexico satellite transponders are included in the
North America Platform/Mexico Territory, while other areas in the Caribbean
(i.e., the islands in close proximity to South America) which are best covered
by the footprint of the Multi-Country Platform's satellite transponders are
included in the Multi-Country Platform Territory.
11. United States / Canada. The Parties will establish a DTH operation for
----------------------
transmission and distribution of predominantly Spanish and/or Portuguese
language television program, audio and related entertainment services (as set
forth in Recital A above) in the United States and Canada. For purposes of this
MOU, the activities of the North America Platform are referred to as (i) "North
America Platform/Mexico" with respect to activities in those countries of the
Territory other than the United States and Canada (it being agreed that Puerto
Rico is included in the North America Platform/Mexico) and (ii) "North America
Platform/U.S." with respect to activities in the United States and Canada. The
North America Platform/U.S. will be structured in such a manner as to reflect
the following relative economic interests in the operations of the North America
Platform/U.S.: Televisa - 55% and News Corp. - 45%, subject to the provisions
of Paragraph 6 of the Schedule of General Terms. Televisa and News Corp. will
enter into good faith discussions regarding the exact form and structure of the
North America Platform/U.S. and the necessary procedures by which such matters
as capital investments, costs and expenses, and distribution of revenues will be
apportioned, provided that in all cases the agreed structure and procedures will
reflect the relative economic interests of Televisa and News Corp. set forth in
the preceding sentence. It is contemplated that the North America Platform/U.S.
may utilize certain elements of the North America Platform/Mexico, including,
among other elements, transponders, uplink facilities, SMS and conditional
access in payment of a fee to cover fully allocated costs
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<PAGE>
related thereto, except as the Parties may agree. Notwithstanding the foregoing,
the Parties intend that, to the extent practicable, each of the North America
Platform/Mexico and the North America Platform/U.S. will enter into direct
arrangements with suppliers.
12. Miscellaneous. The Parties will agree on the legal jurisdictions of
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domicile and capital structure for the North America Platform based on an
analysis of factors (including tax and regulatory considerations), provided that
if the Parties cannot agree otherwise, the North America Platform/Mexico will be
a Mexican sociedad de responsabilidad limitada. The signatories hereto may
effect the transactions contemplated hereby through one or more wholly-owned
subsidiaries and will guarantee all obligations of their affiliates (it being
understood that PanAmSat is not an affiliate of Televisa).
[remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the Parties hereto and Globo have caused this
Memorandum of Understanding to be duly executed as of the date first written
above.
GRUPO TELEVISA, S.A. THE NEWS CORPORATION
LIMITED
By: /s/ Jaime Davila By: /s/ David Evans
------------------------- -------------------------
Name: Jaime Davila Name: David Evans
Title: CEO UNIVISA Title:
By: /s/ Jorge Alvarez
-------------------------
Name: Jorge Alvarez
Title:
Accepted and agreed:
GLOBO COMUNICACOES TELE-COMMUNICATIONS
E PARTICIPACOES LTDA. INTERNATIONAL, INC.
By: By: /s/ Fred A. Vierra
------------------------- -------------------------
Name: Name: Fred A. Vierra
Title: Title: Chief Executive Officer
6
<PAGE>
NORTH AMERICA DTH PLATFORM
Schedule of General Terms
1. Scope. The North America Platform will, to the extent set forth herein and
-----
as provided in Paragraph 11 of the MOU, be the sole vehicle for DTH operations
of the Parties and Globo in the Territory. Televisa agrees not to own any
interest in a DTH service in Brazil, and Globo agrees not to own any interest in
a DTH service in the Territory (except as contemplated hereby).
2. Commencement Date. The Parties will use all reasonable efforts to secure
-----------------
transponder capacity and take such other actions as are necessary to effect a
general consumer launch of the North America Platform as soon as possible.
3. Distribution. The Parties will agree on the most effective and efficient
------------
manner to distribute all proprietary, jointly-owned and third party owned
services to DTH distributors and, where appropriate, cable and MMDS distributors
in the Territory. The North America Platform will have guaranteed access to the
same programming services or channels (limited, with respect to the North
America Platform/U.S., to Spanish or Portugese language programming) made
available by each Party and Globo (including their respective affiliates under
their control) to cable and MMDS systems in the Territory, at a price not in
excess of the price at which such programming services or channels are made
available to cable or MMDS systems, to the extent such Party or Globo (or
affiliate under their control) may have such rights, it being understood that
such Party and Globo will use good faith efforts to obtain such rights. The
North America Platform may have one or more local distributors (each, a
"Distributor"). Each Distributor will be responsible for distribution and
related services as agreed between the Parties. The North American
Platform/Mexico will act as the Distributor in Mexico and may obtain ancillary
services from Televisa or its affiliates on an MFN basis or at fair market
value, whichever is less. For purposes of this MOU, arrangements shall be "on
an MFN basis" if such arrangements are on a "most favored nation" basis,
determined with reference to all similar arrangements in effect on the date of
this MOU or entered into from time to time hereafter, in each case with an
unaffiliated, third party. Any entity in which Televisa has a significant
equity interest may act (but shall not be required to act) as Distributor in its
area of operation, in each case on terms and conditions no more favorable to
such entity than those which would pertain in an arm's length transaction with a
third party Distributor in such area. For its services, each Distributor which
is not affiliated with Televisa will be paid a fee to cover its associated
costs, the structure and details of which will be set forth in the business plan
to be developed by the Parties. The selection of all Distributors and the
agreements to be entered into with each Distributor will be made by Televisa,
subject in each case to the approval of News Corp.
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<PAGE>
4. Operating Services. Certain services will be provided to the North America
------------------
Platform by an entity (the "Service Company") owned by the Parties and Globo.
Initially, the Service Company will be owned one-third each by Globo, News Corp.
and Televisa. If TINTA acquires an interest in the Platforms, TINTA will also
acquire a 10% interest in the Service Company, such dilution to be borne equally
by the other owners. The Service Company will be subject to the oversight of a
Board of Directors consisting of representatives of the Parties and Globo. In
addition to providing agreed upon management and coordination services to the
Multi-Country Platform, the Service Company will provide such services as may be
required and, in each case, as may be requested by the DTH Platforms to promote
the efficiency of the DTH Platforms, which may include the following: (i)
coordination of shared activities of the DTH Platforms, (ii) development and
maintenance of on-air promotions, (iii) advisory assistance to each of the DTH
Platforms in such areas as technology, marketing, distribution, sales and
finance, (iv) assistance for cash management clearing and reporting functions,
(v) acting as agent or on behalf of the DTH Platforms with third party service
providers or vendors (subject to the approval of the DTH Platforms and provided
contractual relationships are maintained by the DTH Platforms, with each
Platform having several and not joint liability), and (vi) establishment and
management of local operations for the DTH Platforms, as applicable, subject to
the approval of the relevant DTH Platform. In addition, it is contemplated that
an additional entity (the "Technical Company") will own certain assets to be
located in the United States and utilized by all of the DTH Platforms. The
Service Company and Technical Company will provide services to the DTH
Platforms, and the DTH Platforms may provide services to each other as deemed
appropriate, at fully-allocated cost, except as the Parties may agree, to be
apportioned among the DTH Platforms in an equitable manner. The Parties and
Globo will agree upon business plans, a budget and the structure of the Service
Company and Technical Company as soon as practicable.
5. Technology. The Parties have agreed to utilize technologies initially
----------
selected by News Corp. for SMS, MIS, conditional access and programming uplink
services and related technology and equipment required by the North America
Platform. The selected technologies will be designed to serve the best
interests of the North America Platform and to achieve a system which provides
for flexibility, growth and future technological development. The Parties shall
make available such additional technologies as may be required by the North
America Platform. Any technology or services acquired or licensed from a Party
or any of its affiliates (including News Digital Systems Limited and News
Datacom technology) shall be made available on an MFN basis. Such technology
shall be provided pursuant to a license to utilize such technology in the DTH
business and to manufacture and sell, or authorize others to manufacture and
sell, equipment using or relying upon such technology. The Parties acknowledge
and agree that, with respect to the North America Platform/Mexico, the pricing
of technology or services acquired or
8
<PAGE>
licensed from News Corp. and its affiliates will provide for ramp-ups, deferrals
or other arrangements during the early years (as set forth in the memorandum
dated June 28, 1996, from Eugenio Gamboa to Gorm Nielsen) which will enable the
North American Platform/Mexico to spread the financial burden. With respect to
the North America Platform/U.S., the pricing of technology or services acquired
or licensed from News Corp. and its affiliates may provide for such similar
ramp-ups, deferrals or other arrangements as may be agreed upon by the Parties
in good faith. The Parties acknowledge that the successful operation of a DTH
Service is dependent upon the total integration, interworking and
interoperability of all parts of technology used. The North America Platform
will obtain indemnities and remedies in the event that any technology is
defective, fails to operate on an integrated basis or fails to function as
required to achieve the objectives of the business plan. Equipment for the North
America Platform may be manufactured by the Parties (or their affiliates) and/or
by third parties, depending upon the best interests of the North America
Platform. In that connection, the Parties have agreed to enter into certain
arrangements with Pace Micro Technology, Ltd. ("Pace") for the manufacture,
distribution and installation of certain equipment required by the North America
Platform.
6. Platform Interests. The respective interests in the North America Platform
------------------
will be as set forth on the attached Schedule 1. With respect to the North
America Platform/Mexico, the Parties have agreed that (i) News Corp. will
directly or indirectly transfer to TINTA or its wholly-owned subsidiary a 10%
voting interest in the North America Platform/Mexico from News Corp.'s interest,
and (ii) Televisa will have the right to directly or indirectly transfer to
PanAmSat (or its wholly-owned subsidiary) up to a 15% interest in the North
America Platform/Mexico from Televisa's interest (with Televisa retaining the
voting rights with respect to such interest). With respect to the North America
Platform/U.S., the Parties have agreed that (i) (A) News Corp. will directly or
indirectly transfer a 10% voting interest in the North America Platform/U.S. to
TINTA from News Corp.'s interest and (B) News Corp. may transfer up to 50% of
the remainder of its interest in the North America Platform/U.S. to Globo
pursuant to an option granted to Globo by News Corp., and (ii) (A) Televisa will
have the right to directly or indirectly transfer from the interests of Televisa
up to a 12% interest in the North America Platform/U.S. to PanAmSat (with
Televisa retaining the right to vote such interest) and (B) Televisa will have
the right to directly or indirectly transfer from the interests of Televisa such
interests in the North America Platform/U.S. as are required in order for
Televisa to comply with its previously disclosed contractual obligations to
third parties (as such obligations may exist from time to time; provided that
Televisa will not agree to any amendment, modification or replacement of those
obligations that materially increases the burden of those obligations to
Televisa from those in effect on the date hereof as disclosed to News Corp.).
The Parties agree that additional partners may be necessary to optimize the
value of the North America Platform and may agree to sell
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<PAGE>
additional interests to other parties on an as needed basis by mutual consent.
Except as provided above, no Party may, directly or indirectly, transfer its
interest in the North America Platform except (i) to a wholly-owned subsidiary
(provided that such an assignment will not relieve the original Party of its
obligations), (ii) in the case of News Corp., to any entity formed pursuant to
and in accordance with the Partnership Agreement dated as of August 2, 1995,
between MCI Joint Venture Holdings Corporation and News America Holding
Incorporated, or (iii) as mutually agreed. Any transferee of an interest from a
Party in the North America Platform will acquire such interest subject to all
the obligations of the transferring Party, including, without limitation,
obligations of exclusivity and non-competition.
7. Boards of Directors. A Board of Directors will be created to govern the
-------------------
operations of each of the North America Platform/Mexico and the North America
Platform/U.S. Representation on each of the Boards will be equal between
Televisa, on the one hand, and News Corp., its assignees and TINTA, on the other
hand. PanAmSat will not be entitled to representation on the Board of
Directors. If new partners are admitted, any expansion of the Board will
require the consent of Televisa and News Corp. Joint approval by Televisa and
News Corp. will be required for material decisions affecting the North America
Platform (including, but not limited to, annual budget and additional partners).
8. Management. The Chief Executive Officer ("CEO") will have broad day-to-day
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management responsibilities. A separate Chief Financial Officer ("CFO") will be
responsible for all budgetary, financial and cash management duties. The CEO
and the CFO will be nominated by Televisa and appointed subject to News Corp.'s
approval. The CEO and/or the CFO will be removed if Televisa and News Corp.
agree, and may be removed by Televisa or News Corp. at any time for reasonable
cause. If there is a deadlock on any of the "material decisions" referred to in
Paragraph 7 above, the issue in question will be referred to the respective
Chairmen of Televisa and News Corp. On all other decisions, deadlocks will be
resolved by the CEO.
9. Funding. All North America Platform requirements authorized in the
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business plan to be developed by the Parties will be funded pro rata by the
Parties (and by any permitted transferee of an interest from a Party, as
applicable) according to their respective interests in the North America
Platform.
10. Programming. The North America Platform's programming line-up will be
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determined as set forth below. No channel intended for Mexico may be used for a
program service directed toward pornography or religious or political advocacy.
(i) Each Party (including Globo) will be required to offer each of its
program services (including over-the-air, cable, sports and pay-per-view program
services but not
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<PAGE>
including productions which are not a program service), to the extent
contractually available (as previously disclosed to the Parties) to the North
America Platform on an exclusive basis as to DTH broadcast in the Territory and
on arm's length terms and conditions (subject to Paragraph 3 above). The
preceding sentence shall also apply to any future program services of the
Parties and Globo. No Party (including Globo) will be given exclusivity as to
program genre by the North America Platform.
(ii) Televisa, News Corp. and Globo will have the right to require the
North America Platform to carry 15, 10 and 10 channels, respectively, out of a
total of 150 channels on the North America Platform for its own programming
services ("Reserved Channels") (with TINTA having the right to require the North
America Platform to carry 6 out of a total of 150 channels following the
acquisition of its interest in the North America Platform), with a pro rata
ramp-up so that, for example, if 75 channels were available, Televisa, News
Corp. and Globo would have the right to require the North America Platform to
carry 7, 5 and 5 Reserved Channels (with TINTA having the right to require the
North America Platform to carry 3 channels following such acquisition),
respectively; provided, however, that News Corp. shall have the right to require
the North America Platform to carry within the Reserved Channels allocated to
News Corp. a sports, a children's (entertainment and educational) and a music
program service provided by News Corp. Televisa will have the same access to up
to 10 channels on the Brazil Platform. For the purposes of this Paragraph 10, a
Party or Globo shall be deemed to own a programming service in which it has a
40% or greater equity interest (or a 25% or greater equity interest, solely in
the case of TINTA, which is not primarily in the business of programming) and
shall be deemed not to own a programming service that it has licensed, or for
which it has acquired distribution rights, from a third party. The access
rights in this Paragraph 10 are personal to the Parties and Globo and may not be
transferred or assigned, except to a wholly-owned subsidiary of the relevant
Party or Globo, as the case may be. To the extent a Party or Globo does not use
all of its Reserved Channels, such Channels will be used by the North America
Platform, and as channels become open, they will be offered to the Parties as
Reserved Channels, subject to the numerical limits set forth above.
Notwithstanding any provision of this MOU to the contrary, the North America
Platform will not be required to carry any programming service as a Reserved
Channel unless such programming service is made available to the North America
Platform on an exclusive basis as to DTH broadcast in the Territory.
(iii) Program services will be offered on an a la carte basis and in
packages to be determined by majority vote of a programming committee made up of
four members appointed equally by Televisa and News Corp. with any deadlock
being resolved as provided in Paragraph 8 above.
(iv) Programs may be carried as follows:
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(a) The DTH Platform may license program services for a fee (which may be
fixed, based on subscriber fees and/or advertising sales).
(b) A programmer may use Distribution Services (as hereinafter defined)
for fully allocated cost (including an allocation of general and
administrative expenses) plus an agreed upon spread and will pay the
Platform a fee equal to 5% of net subscription revenues (such percentage to
be reviewed after an agreed upon period of time). For purposes hereof,
"Distribution Services" include, but are not limited to, the signal
distribution system (encoding, scrambling, encryption, multiplexing,
uplink, space segment, conditional access, broadcasting control automation,
playback facilities, SMS and bank interface), marketing and advertising. In
this alternative, the program service shall be offered as a separate tier
to subscribers, the programmer shall be entitled to make all pricing
decisions with respect to such tier and the programmer shall be entitled to
retain all revenue derived from such tier after deduction of the fees and
expenses described above. All promotion and advertising for any such tier
will be coordinated with and conducted by the DTH Platform in a manner
agreed upon in good faith between the programmer and the DTH Platform.
(c) A programmer may pay the DTH Platform the fully allocated cost of
Distribution Services for a program service plus an agreed upon spread, and
the signal will be offered free of charge to subscribers.
(d) A programmer may offer its program service free of charge to the DTH
Platform, which will bear the cost of Distribution Services, and the
division of subscriber fees and advertising sales will be negotiated case
by case.
Any program service (whether or not carried on a Reserved Channel) obtained from
a Party will be carried as provided in (a), (c) or (d) above; provided, however,
that if the Party and the DTH Platform are unable to agree upon the license fees
for such program under alternative (a), the Party, in its sole discretion, may
elect to have the program service carried under alternative (b) above.
Initially, programming provided by any Party under alternative (a) above to the
DTH Platform to be carried on such Party's Reserved Channels will be priced as
low as reasonably possible and increased periodically. The North America
Platform will provide all pay-per-view programming on the Platform, except that
a Party (or Globo) may use the North America Platform for pay-per-view services
owned by such Party (or deemed owned by such Party, as provided in (ii) above).
11. Costs. The North America Platform will assume the existing obligations of
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each Party which have been disclosed to the other Parties with respect to
contracts for equipment and technology adaptable to the North America Platform
(including previously identified expenses paid to Pace) and will assist a Party
to mitigate damages for other
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<PAGE>
contracts of the Parties not adaptable to the North America Platform. Any
expenses incurred to date (except under assumed contracts) will be borne by the
Party incurring such expenses except to the extent the services or work product
related thereto are in fact used by the North America Platform and the Parties
agree that the North America Platform will provide for reimbursement.
12. Non-Compete. Except as set forth herein, or as otherwise agreed, no Party
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will be subject to any non-compete.
13. Name. The Parties agree that (i) the North American Platform/Mexico will
----
have a perpetual and exclusive license from News Corp. (or one of its
affiliates) to use the name "Sky Entertainment Services" in its Territory in
exchange for a nominal fee of approximately $100, and (ii) the North American
Platform/U.S. will have an exclusive license from News Corp. (or one of its
affiliates) to use the name "Sky Entertainment Services" or a similar name
including the word "Sky" in its Territory in exchange for a nominal fee of
approximately $100 only if and for so long as the service is carried on the
ASkyB satellite system and is marketed in connection with the ASkyB service,
with all marketing, publicity and promotions using the mark(s) subject to the
approval of ASkyB, not to be unreasonably withheld.
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Schedule 1
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North America Platform Interests
--------------------------------
<TABLE>
<CAPTION>
News Corp. Globo Televisa TINTA
<S> <C> <C> <C> <C>
North America Platform/Mexico
- - -----------------------------
- - -- Initially 40% ---- 60% ---
- - -- Including TINTA 30% ---- 60% 10%
North America Platform/U.S.
- - ---------------------------
- - -- Initially 45% ---- 55% ---
- - -- Including TINTA 35% ---- 55% 10%
</TABLE>
14
<PAGE>
MULTI-COUNTRY DTH PLATFORM
MEMORANDUM OF UNDERSTANDING
A. This Memorandum of Understanding dated as of July ___, 1996 ("MOU") sets
forth the principal terms of the agreement among Globo Comunicacoes E
Participacoes Ltda. ("Globo"). Grupo Televisa, S.A. ("Televisa"), The News
Corporation Limited ("News Corp.") and Tele-Communications International,
Inc. ("TINTA") with respect to the development and distribution of
television (other than free, conventional, over-the-air broadcast
television), audio and related entertainment (as may be agreed by the
Parties) program services through direct to home ("DTH")* satellite
transmission in Argentina, Belize, Bolivia, certain areas of the Caribbean
(depending on transponder coverage), Chile, Colombia, Costa Rica, Ecuador,
El Salvador, Guatemala, Guyana and French Guyana, Honduras, Nicaragua,
Panama, Paraguay, Peru, Suriname, Uruguay and Venezuela (collectively, the
"Territory"). This venture is referred to herein as the "Multi-Country
Platform". Globo, Televisa, News Corp. and TINTA are collectively referred
to herein as the "Parties", or each individually as a "Party".
B. News Corp. and Globo have entered into an agreement ("Master Agreement") to
own and operate a DTH platform relating to Brazil (the "Brazil Platform").
It is intended that TINTA will join the Brazil Platform. News Corp. and
Globo intend to amend the Master Agreement to reflect the transactions
contemplated by this MOU.
C. Televisa, News Corp. and TINTA intend to enter into an agreement to own and
operate a DTH platform for Mexico, certain areas of the Caribbean
(depending on transponder coverage) and, subject to the terms of the
agreement, the United States and Canada (the "North America Platform").
Televisa, News Corp. and TINTA intend to reach agreement on a Memorandum of
Understanding, with terms similar in nature to the terms of this MOU,
setting forth the principal terms of the North America Platform. The
Multi-Country Platform, the Brazil Platform and the North America Platform
are collectively referred to herein as the "DTH Platforms".
- - ----------------------------
DTH means the transmission of compressed digital encoded signals via
satellite directly to individual subscribers' integrated decoders/receivers
in a manner that will allow these subscribers to receive and be billed only
for the particular services or programs to which they subscribe or which
they have elected to view.
<PAGE>
1. General Terms. The Parties hereto agree to enter into a joint venture to
-------------
develop, own and operate direct to home satellite systems ("DTH") for the
satellite transmission and distribution of program services directly to homes
and cable systems in the Territory. The purchase, production and packaging of
services may be carried out by the Parties jointly, independently or together
with third parties where appropriate. The Parties will enter into arrangements
to coordinate the Multi-Country Platform and the other DTH Platforms in areas of
mutual interest, including technology and programming.
2. Documentation. Upon the signing of this MOU, the Parties will prepare and
-------------
execute as promptly as possible definitive long form documentation, including a
joint venture agreement and such other agreements as may be deemed necessary or
appropriate ("Definitive Documentation"), to more fully set forth the intent of
the Parties as provided in this MOU. The Definitive Documentation will contain
representations and warranties, covenants, exit provisions and indemnities
customary in such documentation. Until such time as the Definitive
Documentation is prepared and executed, this MOU (including the Schedule of
General Terms attached hereto) will constitute a binding agreement among
Televisa, News Corp., Globo and TINTA with respect to the subject matter hereof.
It is the intent of the Parties that the implementation of the transactions
contemplated by this MOU will require appropriate business plans and a program
strategy (providing for a broadly based diversified range of program services)
which are mutually acceptable to the Parties. Each Party will designate
representatives who will be responsible for the negotiation of the Definitive
Documentation, the business plan and the program strategy.
3. Exclusivity / Discussions with Third Parties. The arrangements set forth
--------------------------------------------
in this MOU and in the Definitive Documentation will be exclusive as among the
Parties. The Parties agree that none of them will enter into negotiations,
discussions or agreements with any third party relating to the subject matter of
this MOU or the Definitive Documentation without the consent of the others. Any
discussions or negotiations with third parties contemplated by the terms of this
MOU or the Definitive Documentation will be undertaken by the Parties jointly.
4. Consents / Approvals. The Parties acknowledge that the terms of the Multi-
--------------------
Country Platform and its implementation as contemplated hereunder will require
obtaining all necessary regulatory and governmental approvals. Each Party will
provide such information, cooperation and assistance as may reasonably be
required to obtain approval or permits required by or made necessary as a result
of this MOU or the Definitive Documentation.
5. Confidentiality / Public Announcements. Each Party will keep confidential
--------------------------------------
and will not disclose to third parties any confidential information received
from any other Party in connection with this MOU or the transactions
contemplated hereunder except as
-2-
<PAGE>
required by law or regulations. Each Party will use such confidential
information solely for the purpose of the transactions contemplated by this MOU.
A Party may disclose such confidential information only to its officers,
directors, employees or advisors who have a need to know and have agreed to keep
such information confidential. There will be no public announcement made
concerning the matters contemplated by this MOU without the other Parties' prior
consent, including in relation to the content of any such announcement, except
as required by law or regulation.
6. Governing Law. The provisions of this MOU will be governed and interpreted
-------------
in accordance with the laws of the State of New York, United States of America,
without regard to principles of conflicts of law.
7. Prior Agreements. This MOU supersedes all prior understandings, whether
----------------
written or oral, between the Parties with respect to the transactions
contemplated herein, except for the PanAmSat Letter Agreement (defined in
Paragraph 8 below), which shall remain in full force and effect, other than
Paragraphs 3 and 4 thereof, which, as among the Parties, are superseded hereby
and by the MOU for the North America Platform.
8. Satellites. The Parties acknowledge that Televisa, Globo, News Corp. and
----------
PanAmSat Corporation ("PanAmSat") have entered into a letter agreement dated
February 29, 1996 with respect to transponder capacity to be provided by
PanAmSat for the DTH Platforms ("PanAmSat Letter Agreement"). In that
connection and with respect to the Multi-Country Platform, the Parties agree as
follows:
(i) In the short-term, the Parties agree that the Multi-Country Platform
will utilize certain transponder capacity previously contracted for by Televisa
on PAS-3 (4 transponders in northern South America and 4 transponders in
southern South America), on the terms and conditions set forth in the PanAmSat
Letter Agreement.
(ii) In the longer term, the Parties agree that the Multi-Country Plat-
form will utilize the transponder capacity (24 transponders) previously
contracted for by Televisa on PAS-6, on the terms and conditions set forth in
the PanAmSat Letter Agreement.
9. Cable / MMDS Carriage. Each Party will use reasonable efforts to carry, or
---------------------
cause affiliates under its control to carry, any programming services (partly or
wholly-owned by a Party) which are carried on the Multi-Country Platform, on
commercially reasonable terms and conditions (including pricing and tiering), on
any cable or MMDS systems in the Territory owned by such Party, or their
respective affiliates under their control.
10. Additional Countries. Although Panama, Costa Rica, Nicaragua, Honduras, El
--------------------
Salvador, Guatemala, Belize and certain areas of the Caribbean (depending on
-3-
<PAGE>
transponder coverage) are included in the Territory, it is anticipated that (i)
the North America Platform will provide SMS, conditional access and other
services which are necessary due to the use of the North America Platform's
transponders in respect of Nicaragua, Honduras, El Salvador, Guatemala, Belize
and certain areas of the Caribbean in exchange for a fee to cover fully-
allocated cost, except as the Parties may agree, and (ii) the Multi-Country
Platform may ask the North America Platform to manage/administer Panama and
Costa Rica in exchange for a fee. The parties acknowledge that areas in the
Caribbean (including Puerto Rico) which are best covered by the footprint of the
North America Platform satellite transponders are included in the North America
Platform territory, while other areas in the Caribbean (i.e., the islands in
close proximity to South America) which are best covered by the footprint of the
Multi-Country Platform satellite transponders are included in the Multi-Country
Platform Territory.
11. Miscellaneous. The Parties will agree on the legal jurisdiction(s) of
-------------
domicile and capital structure(s) for the Multi-Country Platform based on an
analysis of factors (including tax and regulatory considerations). The
signatories hereto may effect the transactions contemplated hereby through one
or more wholly-owned subsidiaries and will guarantee all obligations of their
affiliates (it being understood that PanAmSat is not an affiliate of Televisa).
[remainder of page intentionally left blank]
-4-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Memorandum of
Understanding to be duly executed as of the date first written above.
GRUPO TELEVISA, S.A. THE NEWS CORPORATION
LIMITED
By: /s/ Jaime Davila By: /s/ David Evans
--------------------------- ---------------------------
Name: Jaime Davila Name: David Evans
Title: CEO UNIVISA Title:
By: /s/ Jorge Alvarez
---------------------------
Name: Jorge Alvarez
Title:
GLOBO COMUNICACOES TELE-COMMUNICATIONS
E PARTICIPACOES LTDA. INTERNATIONAL, INC.
By: By: /s/ Fred A. Vierra
---------------------------- ------------------------------
Name: Name: Fred A. Vierra
Title: Title: Chief Executive Officer
-5-
<PAGE>
MULTI-COUNTRY DTH PLATFORM
Schedule of General Terms
1. Scope. The Multi-Country Platform will, to the extent set forth herein, be
-----
the sole vehicle for DTH operations of the Parties in the Territory.
2. Commencement Date. The Parties will use all reasonable efforts to secure
-----------------
transponder capacity and take such other actions as are necessary to effect a
general consumer launch of the Multi-Country Platform as soon as possible.
3. Distribution. The Parties will agree on the most effective and efficient
------------
manner to distribute all proprietary, jointly-owned and third party owned
services to DTH distributors and, where appropriate, cable and MMDS distributors
in the Territory. The Multi-Country Platform will have guaranteed access to the
same programming services or channels made available by each Party (including
affiliates under its control) to cable and MMDS systems in the Territory, at a
price not in excess of the price at which such programming services or channels
are made available to cable or MMDS systems, to the extent such Party (or
affiliates under its control) may have such rights, it being understood that
each Party will use good faith efforts to obtain such rights. The Multi-Country
Platform may have one or more local distributors (each, a "Distributor"). Each
Distributor will be responsible for distribution and related services as agreed
among the Parties. For its services, each Distributor which is not affiliated
with a Party will be paid a fee to cover its associated costs, the structure and
details of which will be set forth in the business plan to be developed by the
Parties. The selection of all Distributors and the agreements to be entered
into with each Distributor will in each case be subject to approval of the
Parties by a 75% super-majority vote, based upon relative voting interests.
4. Operating Services. Certain services will be provided to the Multi-Country
------------------
Platform by an entity (the "Service Company") owned by the Parties. Initially,
the Service Company will be owned one-third each by Globo, News Corp. and
Televisa. If TINTA acquires an interest in the Platforms, TINTA will also
acquire a 10% interest in the Service Company, such dilution to be borne equally
by the other owners. The Service Company will be subject to the oversight of a
Board of Directors consisting of representatives of the Parties. The Service
Company will provide agreed upon management and coordination services to the
Multi-Country Platform. In addition, the Service Company will provide such
services as may be required and, in each case, as may be requested by the DTH
Platforms to promote the efficiency of the DTH Platforms, which may include the
following: (i) coordination of shared activities of the DTH Platforms, (ii)
development and maintenance of on-air promotions, (iii) advisory
-6-
<PAGE>
assistance to each of the DTH Platforms in such areas as technology, marketing,
distribution, sales and finance, (iv) assistance for cash management clearing
and reporting functions, (v) acting as agent or on behalf of the DTH Platforms
with third party service providers or vendors (subject to the approval of the
DTH Platforms and provided contractual relationships are maintained by the DTH
Platforms), with each Platform having several and not joint liability, and (vi)
establishment and management of local operations for the DTH Platforms, as
applicable subject to the approval of the relevant DTH Platform. In addition, it
is contemplated that an additional entity (the "Technical Company") will own
certain assets to be located in the United States and utilized by all of the DTH
Platforms. The Service Company and Technical Company will provide services to
the DTH Platforms and the DTH Platforms may provide services to each other as
deemed appropriate, at fully-allocated cost, except as the Parties may agree, to
be apportioned among the DTH Platforms in an equitable manner. The Parties will
agree upon business plans, a budget and the structure of the Service Company and
Technical Company as soon as practicable.
5. Technology. The Parties have agreed to utilize technologies initially
----------
selected by News Corp. for SMS, MIS, conditional access and programming uplink
services and related technology and equipment required by the Multi-Country
Platform. The selected technologies will be designed to serve the best
interests of the Multi-Country Platform and to achieve a system which provides
for flexibility, growth and future technological development. The Parties shall
make available such additional technologies as may be required by the Multi-
Country Platform. Any technology or services acquired or licensed from a Party
or any of its affiliates (including News Digital Systems Limited and News
Datacom technology) shall be made available on an MFN basis. For purposes of
this MOU, arrangements shall be "on an MFN basis" if such arrangements are on a
"most favored nations" basis, determined with reference to all similar
arrangements in effect on the date of this MOU or entered into from time to time
hereafter. Such technology shall be provided pursuant to a license to utilize
such technology in the DTH business and to manufacture and sell, or authorize
others to manufacture and sell, equipment using or relying upon such technology.
The pricing of technology or services acquired or licensed from News Corp. and
its affiliates may provide for such ramp-ups, deferrals or other arrangements
(as may be agreed upon by the Parties in good faith) during the early years
which will enable the Multi-Country Platform to spread the financial burden.
The Parties acknowledge that the successful operation of a DTH Service is
dependent upon the total integration, interworking and interoperability of all
parts of technology used. The Multi-Country Platform will obtain indemnities
and remedies in the event that any technology is defective, fails to operate on
an integrated basis or fails to function as required to achieve the objectives
of the business plan. Equipment for the Multi-Country Platform may be
manufactured by the Parties (or their affiliates) and/or by third parties,
depending upon the best interests of the Multi-Country Platform. In that
connection, the Parties have
-7-
<PAGE>
agreed to enter into certain arrangements with Pace Micro Technology, Ltd.
("Pace") for the manufacture, distribution and installation of certain equipment
required by the Multi-Country Platform.
6. Platform Interests. The respective interests in the Multi-Country Platform
------------------
will be as set forth on the attached Schedule 1. Globo, Televisa and News Corp.
will directly or indirectly transfer to TINTA or its wholly-owned subsidiary a
10% voting interest in the Multi-Country Platform. In addition to its interest
in the Multi-Country Platform, TINTA will be entitled to acquire an interest in
the entity or entities through which the Multi-Country Platform operates in
Argentina and Chile such that each of the Parties will have equal economic
interests in the Multi-Country Platform's operations in Argentina and Chile.
Globo, News Corp. and TINTA have agreed that Televisa will have the right to
directly or indirectly transfer to PanAmSat or its wholly-owned subsidiary (a)
up to a 10% interest from Televisa's shares relating to Argentina and Chile
(with Televisa retaining the right to vote such interest), and (b) up to a 14%
interest from Televisa's share relating to the other countries of the Territory
(with Televisa retaining the right to vote such interest). The Parties will
enter into good faith discussions regarding the exact form and structure of the
portions of the Multi-Country Platform relating to each of (i) Argentina and
Chile, on the one hand, and (ii) all other countries of the Territory, on the
other, and the necessary procedures by which such matters as capital
investments, costs and expenses, and distribution of revenues among the Parties
will be apportioned, provided that in all cases the agreed structure and
procedures will reflect the relative economic interests of the Parties as set
forth in this Paragraph 6. The Parties agree that additional partners may be
necessary to optimize the value of the Multi-Country Platform and may agree to
sell additional ownership stakes to other parties on an as needed basis subject
to approval of the Parties by a 75% super-majority vote of the Multi-Country
Platform based on relative voting interests as provided in Paragraph 7 below.
Except as provided above, no Party may, directly or indirectly, transfer its
interest in the Multi-Country Platform except (i) to a wholly-owned subsidiary
(provided that such an assignment will not relieve the original Party of its
obligations), (ii) in the case of News Corp., to any entity formed pursuant to
and in accordance with the Partnership Agreement dated as of August 2, 1995
between MCI Joint Venture Holdings Corporation and News America Holdings
Incorporated, or (iii) as mutually agreed. Any transferee of an interest from a
Party in the Multi-Country Platform will acquire such interest subject to all
the obligations of the transferring Party, including, without limitation,
obligations of exclusivity and non-competition.
7. Board of Directors. A Board of Directors will be created to govern the
------------------
operations of the Multi-Country Platform with Globo, Televisa, News Corp. and
TINTA entitled to representation on the Board. Representation on the Board will
be proportional to the Parties' relative voting interests in the Multi-Country
Platform. PanAmSat will not be
-8-
<PAGE>
entitled to representation on the Board of Directors. If new partners are
admitted, any expansion of the Board will require approval of Globo, Televisa
and News Corp. A shareholders agreement will govern the relationships of the
Parties and provide for (i) a 75% super-majority vote of the Parties based upon
relative voting interests (Televisa being deemed to own any interest transferred
to PanAmSat) for material decisions affecting the Multi-Country Platform
(including, but not limited to, annual budget and additional partners) and (ii)
a unanimous vote of the Parties for material decisions relating solely to the
Multi-Country Platform's operations in Argentina or Chile.
8. Management. The Chief Executive Office ("CEO") will have broad day-to-day
----------
management responsibilities. A separate Chief Financial Officer ("CFO") will be
responsible for all budgetary, financial and cash management duties. The CEO
and the CFO may be nominated by any Party subject to approval of Globo,
Televisa and News Corp. The CEO and/or the CFO will be removed if Globo,
Televisa and News Corp. agree, and may be removed by Globo, Televisa or News
Corp. at any time for reasonable cause. If there is a deadlock on any of the
"material decisions" referred to in Paragraph 7 above, the issue in question
will be referred to the respective Chairmen of the Parties. On all other
decisions, deadlocks will be resolved by the CEO.
9. Funding. All Multi-Country Platform requirements authorized in the
-------
business plan to be developed by the Parties will be funded pro rata by the
Parties (and by any permitted transferee of an interest from a Party, as
applicable) according to their respective interests in the Multi-Country
Platform.
10. Programming. The Multi-Country Platform's initial programming line-up
-----------
will be determined by a 75% super-majority vote of a programming committee with
representation on the committee proportional to the Parties' relative voting
interests in the Multi-Country Platform. The CEO may change the initial line-up
and make other programming decisions and will regularly advise the Board of
Directors concerning all material issues relating to the Platform's programming.
(i) Each Party will be required to offer each of its program services
(including over-the-air, cable, sports and pay-per-view program services but not
including productions which are not a program service), to the extent
contractually available (as previously disclosed to the Parties), to the Multi-
Country Platform on an exclusive basis as to DTH broadcast in the Territory and
on arm's length terms and conditions (subject to Paragraph 3 above). The
preceding sentence shall also apply to any future program services of the
Parties. No Party will be given exclusivity as to program genre by the Multi-
Country Platform. The Multi-Country will be the only predominantly Spanish
and/or Portuguese language DTH pay-per-view platform which the Parties or the
equity owners of the Multi-Country Platform manage or own in the Territory.
-9-
<PAGE>
(ii) Globo, Televisa and News Corp. will each have the right to require
the Multi-Country Platform to carry 10 channels out of a total of 150 channels
on the Multi-Country Platform for its own programming services ("Reserved
Channels"). TINTA will have the right to require the Multi-Country Platform to
carry 10 Reserved Channels in Argentina and Chile, and 6 Reserved Channels in
all other countries, out of a total of 150 channels. The number of Reserved
Channels provided to each Party will be adjusted pro rata based on the total
number of channels available, so that, for example, if 75 channels were
available, Globo, Televisa and News Corp. would have the right to require the
Multi-Country Platform to carry 5 Reserved Channels (and TINTA's Reserved
Channels would also be proportionately reduced); provided, however, that News
Corp. shall have the right to require the Multi-Country Platform to carry within
the channels allocated to News Corp. a sports, a children's (entertainment and
educational) and a music program service provided by News Corp. For the purposes
of this Paragraph 10, a Party shall be deemed to own a programming service in
which it has a 40% or greater equity interest (or a 25% or greater equity
interest, solely in the case of TINTA, which is not primarily in the business of
programming) and shall be deemed not to own a program service that it has
licensed or for which it has acquired distribution rights from a third party.
The access rights in this Paragraph 10 are personal to the Parties and may not
be transferred or assigned, except to a wholly-owned subsidiary of the relevant
Party, as the case may be. To the extent a Party does not use all of its
Reserved Channels, such Channels will be used by the Multi-Country Platform, and
as channels become open, they will be offered to the Parties as Reserved
Channels, subject to the numerical limits set forth above. Notwithstanding any
provision of this MOU to the contrary, the Multi-Country Platform will not be
required to carry any programming service as a Reserved Channel unless such
programming service is made available to the Multi-Country Platform on an
exclusive basis as to DTH broadcast in the Territory.
(iii) Program services will be offered on an a la carte basis and in
packages to be agreed upon. Programs may be carried as follows:
(a) The Multi-Country Platform may license program services for
a fee (which may be fixed, based on subscriber fees and/or advertising
sales).
(b) A programmer may use Distribution Services (as hereinafter
defined) for fully allocated cost (including an allocation of general and
administrative expenses) plus an agreed upon spread and will pay the
Platform a fee equal to 5% of net subscription revenues (such percentage to
be reviewed after an agreed upon period of time). For purposes hereof,
"Distribution Services" include, but are not limited to, the signal
distribution system (encoding, scrambling, encryption, multiplexing,
uplink, space segment, conditional access, broadcasting control automation,
playback facilities, SMS and bank interface), marketing and
-10-
<PAGE>
advertising. In this alternative, the program service shall be offered as a
separate tier to subscribers, the programmer shall be entitled to make all
pricing decisions with respect to such tier and the programmer shall be
entitled to retain all revenue derived from such tier after deduction of
the fees and expenses described above. All promotion and advertising for
any such tier will be coordinated with and conducted by the DTH Platform in
a manner agreed upon in good faith between the programmer and the DTH
Platform.
(c) A programmer may pay the Multi-Country Platform the fully
allocated cost of Distribution Services for a program service plus an
agreed upon spread, and the signal will be offered free of charge to
subscribers.
(d) A programmer may offer its program service free of charge to
the Multi-Country Platform, which will bear the cost of Distribution
Services, and the division of subscriber fees and advertising sales will be
negotiated case by case.
Any program service (whether or not carried on a Restricted Channel) obtained
from a Party will be carried as provided in (a), (c) or (d) above; provided,
however, that if the Party and the Multi-Country Platform are unable to agree
upon the license fees for such program under alternative (a), the Party, in its
sole discretion, may elect to have the program service carried under alternative
(b) above. Initially, programming provided by any Party under alternative (a)
above to the Multi-Country Platform to be carried on such Party's Reserved
Channels will be priced as low as reasonably possible and increased
periodically. The Multi-Country Platform will provide all pay-per-view
programming on the Platform, except that a Party may use the Multi-Country
Platform for pay-per-view services owned by such Party (or deemed owned by such
Party, as provided in (ii) above).
11. Costs. The Multi-Country Platform will assume the existing obligations of
-----
each Party which have been disclosed to the other Parties with respect to
contracts for equipment and technology adaptable to the Multi-Country Platform
(including previously identified expenses paid to Pace) and will assist a Party
to mitigate damages for other contracts of the Parties not adaptable to the
Multi-Country Platform. Any expenses incurred to date (except under assumed
contracts) will be borne by the Party incurring such expenses except to the
extent the services or work product related thereto are in fact used by the
Multi-Country Platform and the Parties agree that the Multi-Country Platform
will provide for reimbursement.
12. Non-Compete. Except as set forth herein or as otherwise agreed, no Party
-----------
will be subject to any non-compete.
13. Name. The Multi-Country Platform will use the name "Sky Entertainment
----
Services", and the Parties agree that the Multi-Country Platform will have a
perpetual and
-11-
<PAGE>
exclusive license to use such name in the Territory from News Corp. (or one of
its affiliates) in exchange for a nominal fee of approximately $100.
-12-
<PAGE>
Schedule 1
----------
Multi-Country Platform Interests
--------------------------------
<TABLE>
<CAPTION>
News Corp. Globo Televisa TINTA
<S> <C> <C> <C> <C>
-- Excluding TINTA 33-1/3% 33-1/3% 33-1/3% ---
-- Including TINTA 30% 30% 30% 10%
</TABLE>
- - -----------------------------
* Includes an indirect 10% interest of TINTA held through News Corp.
** In addition to its indirect 10% interest in the Multi-Country Platform held
through News Corp., TINTA will be entitled to acquire an interest in the
entity or entities through which the Multi-Country Platform o perates in
Argentina and Chile such that each of the Parties will have equal economic
interests in the Multi-Country Platform's operations in Argentina and
Chile.
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,756
<SECURITIES> 0
<RECEIVABLES> 28,599
<ALLOWANCES> 0
<INVENTORY> 54,684
<CURRENT-ASSETS> 0
<PP&E> 182,625
<DEPRECIATION> 49,001
<TOTAL-ASSETS> 1,838,874
<CURRENT-LIABILITIES> 0
<BONDS> 502,026
0
0
<COMMON> 118,661
<OTHER-SE> 760,850
<TOTAL-LIABILITY-AND-EQUITY> 1,838,874
<SALES> 0
<TOTAL-REVENUES> 136,634
<CGS> 0
<TOTAL-COSTS> 112,630
<OTHER-EXPENSES> 24,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,502
<INCOME-PRETAX> (100,801)
<INCOME-TAX> (30,213)
<INCOME-CONTINUING> (70,588)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,588)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
