-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhsoKVv0SouyHf5sJdGLwTY8JXt7bDaXUb9unTlCrfUYF/TrIvZzxsS04+Bz6Qh1 04aPMtoUJtGSB8KIBaHF9Q== 0000950134-97-002382.txt : 19970329 0000950134-97-002382.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950134-97-002382 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELE COMMUNICATIONS INC /CO/ CENTRAL INDEX KEY: 0000925692 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841260157 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-65497 FILM NUMBER: 97567902 BUSINESS ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3032675500 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 90111 FORMER COMPANY: FORMER CONFORMED NAME: TCI LIBERTY HOLDING CO DATE OF NAME CHANGE: 19940620 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ____ to ____ Commission File Number 0-20421 TELE-COMMUNICATIONS, INC. ---------------------------------------------------------- (Exact name of Registrant as specified in its charter) State of Delaware 84-1260157 - -------------------------------- ------------------------------------ (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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Tele-Communications, Inc. Series A TCI Group common stock, par value $1.00 per share Tele-Communications, Inc. Series B TCI Group common stock, par value $1.00 per share Tele-Communications, Inc. Series A Liberty Media Group common stock, par value $1.00 per share Tele-Communications, Inc. Series B Liberty Media Group common stock, par value $1.00 per share Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share Indicate by check mark whether the Registrant(1) has 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 and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.______ The aggregate market value of the voting stock held by nonaffiliates of Tele-Communications, Inc., computed by reference to the last sales price of such stock, as of the close of trading on January 31, 1997, was $12,415,086,846. The number of shares outstanding of Tele-Communications, Inc.'s common stock (net of shares held by subsidiaries), as of January 31, 1997, was: Tele-Communications, Inc. Series A TCI Group common stock - 597,497,573 shares, Tele-Communications, Inc. Series B TCI Group common stock - 84,647,065 shares, Tele-Communications, Inc. Series A Liberty Media Group common stock - 228,558,926 shares, and Tele-Communications, Inc. Series B Liberty Media Group common stock - 21,187,969 shares. Documents Incorporated by Reference ----------------------------------- Portions of the Registrant's definitive Proxy Statement to be used in connection with the 1997 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. 2 TELE-COMMUNICATIONS, INC. 1996 ANNUAL REPORT ON FORM 10-K Table of Contents
PAGE ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . I- 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . I- 53 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . I- 54 Item 4. Submission of Matters to a Vote of Security Holders . . I- 62 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . II- 1 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . II- 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . II- 9 Item 8. Financial Statements and Supplementary Data . . . . . . II-49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . II-49 PART III Item 10. Directors and Executive Officers of the Registrant . . . III- 1 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . III- 1 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . III- 1 Item 13. Certain Relationships and Related Transactions . . . . . III- 1 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . IV- 1
3 PART I. Item 1. Business. (a) General Development of Business Tele-Communications, Inc. ("TCI" or the "Company"), through its subsidiaries and affiliates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems and the provision of satellite-delivered video entertainment, information and home shopping programming services to various video distribution media, principally cable television systems. The Company also has investments in cable and telecommunications operations and television programming in certain international markets as well as investments in companies and joint ventures involved in developing and providing programming for new television and telecommunications technologies. The Company is a Delaware corporation and was incorporated in 1994. TCI Communications, Inc. ("TCIC"), a subsidiary of TCI, and its predecessors have been engaged in the cable television business since the early 1950's. On August 3, 1995, the stockholders of TCI approved an amendment to the Company's charter to (i) authorize two new series of common stock of the Company, designated the Tele-Communications, Inc. Series A Liberty Media Group Common Stock, par value $1.00 per share and the Tele-Communications, Inc. Series B Liberty Media Group Common Stock, par value $1.00 per share (collectively, the "Liberty Group Stock"), and (ii) redesignate the Company's Class A Common Stock, par value $1.00 per share, as the Tele-Communications, Inc. Series A TCI Group Common Stock, par value $1.00 per share, and the Class B Common Stock, par value $1.00 per share, as the Tele-Communications, Inc. Series B TCI Group Common Stock, par value $1.00 per share (the Series A and Series B TCI Group Common Stock are referred to collectively herein as the "TCI Group Stock"). The Liberty Group Stock reflects the separate performance of "Liberty Media Group", which currently consists of the Company's businesses and investments in businesses that are engaged in: (i) the production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products and (ii) electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing. At December 31, 1996, the TCI Group Stock reflects the separate performance of the Company's businesses and assets ("TCI Group") not included in Liberty Media Group. The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty Media Group. On March 12, 1997, the TCI stockholders approved an amendment to the Company's charter to authorize two new series of the Company's common stock, par value $1.00 per share (the "Common Stock"), (and a corresponding increase in the total number of authorized shares of Common Stock) to be designated Tele-Communications, Inc. Series A Telephony Group Common Stock and Tele-Communications, Inc. Series B Telephony Group Common Stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. I-1 4 Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of the Company attributable to Telephony Group, in addition to the separate performance of the Company's domestic cable distribution business; telephony distribution and communications business (other than the investments attributed to Telephony Group); international cable, telephony and programming businesses; technology/venture capital business; and any other business of the Company not attributed to either Liberty Media Group or Telephony Group. As shares of Telephony Group Stock are issued and distributed or sold, the percentage of the common stockholders' equity value of the Company attributable to the Telephony Group that is reflected in the TCI Group Stock will be reduced accordingly. The composition of Liberty Media Group was not affected by the authorization, and will not be affected by the issuance, of Telephony Group Stock. As of April 29, 1996, the Company and The News Corporation Limited ("News Corp.") formed two sports programming ventures. In the United States, the Company, through Liberty Media Group, and News Corp. formed the Liberty/Fox U.S. Sports LLC ("Fox Sports") into which the Company contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. The Company received a 50% interest in Fox Sports and $350 million in cash. Internationally, News Corp. and the Company formed a venture ("Fox Sports International") to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. The Company, through Liberty Media Group and Tele-Communications International, Inc. ("TINTA"), owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. The Company contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. The Company also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24- hour sports services available via multichannel, multipoint distribution systems or cable television. On July 31, 1996, pursuant to certain agreements entered into among TCIC, TCI, Viacom International, Inc. and Viacom Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. I-2 5 Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into $625,796,100 in aggregate face value of shares of 5% Class A Senior Cumulative Exchangeable Preferred Stock ("Exchangeable Preferred Stock") of Cable Sub. The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group for each share of Exchangeable Preferred Stock exchanged. On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Prior to the TBS/Time Warner Merger, the Company owned shares of TBS common stock and shares of a class of TBS preferred stock that were convertible into TBS common stock. In connection with the TBS/Time Warner Merger, the Company received approximately 50.6 million shares of a Time Warner security with limited voting rights (the "TW Exchange Stock") in exchange for its TBS holdings. Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would own, directly or indirectly, the TW Exchange Stock and the business of Southern Satellite Systems, Inc., a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"). Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. I-3 6 Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. During 1996, the Company, through certain subsidiaries, issued $500 million in face value of 8.72% Trust Originated Preferred SecuritiesSM and $500 million in face value of 10% Trust Preferred Securities for aggregate net cash proceeds of $971 million. The Company used the proceeds from such issuances to retire commercial paper and to repay certain other indebtedness. During March 1997, the Company through certain subsidiaries, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. I-4 7 At December 31, 1996, the Company, through various subsidiaries, owned approximately 45% of the outstanding common stock of DMX, Inc. ("DMX"). DMX is primarily engaged in programming, distributing and marketing a premium digital music service which provides 24-hour per day, commercial free, CD quality music programming. On February 6, 1997, the Company, DMX and TCI Music, Inc., a wholly-owned subsidiary of the Company ("TCI Music Co."), entered into an Agreement and Plan of Merger (the "TCI Music Co. Merger Agreement"). Pursuant to the TCI Music Co. Merger Agreement, DMX will become a wholly-owned subsidiary of TCI Music Co. Subject to DMX shareholder and regulatory approvals and to certain other conditions, the transactions contemplated by the TCI Music Co. Merger Agreement are expected to occur during the second or third quarter of 1997. However, no assurance can be given that such transactions will occur. Effective January 13, 1997, the Company issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned. During 1996, the Company announced that the Board had approved the filing of a request for a ruling from the Internal Revenue Service with respect to the tax-free nature of the distribution of its entire equity ownership interest in TINTA to holders of TCI Group Stock. The Board also approved the filing of a similar request with respect to the distribution of the Company's remaining equity ownership interest in Liberty Media Corporation, after giving effect to the Spin-Off, to holders of Liberty Group Stock. The Company cannot presently predict whether or when such distributions will occur. (b) Financial Information about Industry Segments The Company is organized based upon four lines of business: Domestic Cable and Communications; Programming; International Cable and Programming; and Technology/Venture Capital. Within the Domestic Cable and Communications line of business, the Company operates three strategic business units: Cable, Telephony and Internet. Relevant information with respect to the Company's International Cable and Programming unit, Technology/Venture Capital unit, Telephony unit and Internet unit are contained in the discussion of the Company's Cable and Communications unit due to their relative insignificance. Accordingly, the Company has significant operations principally in two industry segments: cable and communications services and programming services. Financial information related to the Company's industry segments can be found in the footnotes to the Company's consolidated financial statements found in Part II of this report. (c) Narrative Description of Business CABLE AND COMMUNICATIONS SERVICES Domestic Cable General. Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. I-5 8 Cable operators have traditionally used coaxial cable for transmission of television signals to subscribers. Optical fiber is a technologically advanced transmission medium capable of carrying cable television signals via light waves generated by a laser. Optical fiber, when used as an alternative to coaxial cable, can improve system reliability and provide for additional capacity which should enable the provision of incremental revenue-producing services. During 1992, the Company began upgrading and installing optical fiber in its cable systems. At December 31, 1996, approximately 68% of the Company's cable television systems had bandwidth capacities ranging from 400 megahertz to 750 megahertz, which generally permit a cable television system to carry from 54 to 112 analog channels, respectively. Compressed digital video technology converts on average as many as fourteen analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which sends the signal back down to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal back into analog channels that can be viewed on a normal television set. The Company conducted a beta test of its digital cable television service in late 1996 and began offering such service to selected paying customers in three markets during the first quarter of 1997. Imedia, a small high technology firm, has developed a technology which represents a significant advancement in increasing the number of digital television programs delivered over a single satellite transponder or channel on a cable system. Without requiring any change in fielded digital receiving equipment in either the cable system headend or the customer's home, and without requiring significant upgrades to the existing cable plant, the introduction of Imedia's StatMux(TM) technology significantly increases the transportation capacity of the operator's system. The Company anticipates that it will incorporate such technology with its digital service in strategic cable systems during 1997. Service Charges. The Company offers a limited "basic service" ("Basic TV") (primarily comprised of local broadcast signals and public, educational and governmental access channels) and an "expanded" tier (primarily comprised of specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly fee for "basic service" generally ranges from $8.00 to $11.00, and the monthly service fee for the "expanded" tier generally ranges from $13.00 to $18.00. The Company offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films, as well as live and taped sports events, concerts and other programming. The Company offers Pay-TV services for a monthly fee generally ranging from $9.00 to $15.00 per service, except for certain movie or sports services (such as various regional sports networks and certain pay-TV channels) offered at $1.00 to $5.00 per month, pay-per-view movies offered separately generally at $4.00 per movie and certain pay-per-view events offered separately at $10.00 to $50.00 per event. Charges are usually discounted when multiple Pay-TV services are ordered. As further enhancements to their cable services, customers may generally rent converters and/or remote control devices for a monthly charge ranging from $0.10 to $5.00 each, as well as purchase a channel guide for a monthly charge ranging from $1.50 to $2.00. Also a nonrecurring installation charge (which is limited by the FCC's rules which regulate hourly service charges for each individual cable system) of up to $60.00 is usually charged. I-6 9 Monthly fees for basic and Pay-TV services to commercial customers vary widely depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty. As noted below, the Company's service offerings and rates were affected by rate regulations issued by the FCC in 1993 and 1994. See Regulation and Legislation below. Customer Data. TCI operates its cable television systems either through its operating divisions or through certain other subsidiaries or affiliated companies. Domestic basic and Pay-TV cable customers served by TCI and its consolidated subsidiaries are summarized as follows (amounts in millions):
Basic TV customers at December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Managed through the Company's operating divisions 13.4 11.9 10.7 9.8 9.4 Other non-managed subsidiaries 0.5 0.6 0.5 0.5 0.5 ---- ---- ---- ---- ---- 13.9 12.5 11.2 10.3 9.9 ==== ==== ==== ==== ==== Pay TV subscriptions at December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Managed through the Company's operating divisions 14.7 13.4 11.5 9.5 8.8 Other non-managed subsidiaries 0.4 0.4 0.4 0.4 0.5 ---- ---- ---- ---- ---- 15.1 13.8 11.9 9.9 9.3 ==== ==== ==== === ====
TCI, its subsidiaries and affiliates operate cable television systems throughout the continental United States, Hawaii, Puerto Rico and Argentina and, through certain joint ventures accounted for under the equity method, have cable television systems and investments in the United Kingdom, other parts of Europe, Asia, Latin America and certain other foreign countries. In addition to cable television service, the Company provides satellite service to C-band satellite customers through its subsidiary Superstar/Netlink Group LLC ("Superstar/Netlink"). At December 31, 1996, Superstar/Netlink provided service to approximately 980,000 subscribers. Local Franchises. Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise. Franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to subscribers; rate regulation; provision of service to certain institutions; provision of channels for public access and commercial leased-use; and maintenance of insurance and/or indemnity bonds. The Company's franchises also typically provide for periodic payments of fees, not to exceed 5% of revenue, to the governmental authority granting the franchise. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee. I-7 10 Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. The Company believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. Most of the Company's present franchises had initial terms of approximately 10 to 15 years. The duration of the Company's outstanding franchises presently varies from a period of months to an indefinite period of time. Approximately 1,200 of the Company's franchises expire within the next five years. This represents approximately twenty-seven percent of the franchises held by the Company and involves approximately 4.5 million basic subscribers. Competition. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theatres, video cassettes and other sources of information and entertainment including directly competitive cable television operations and Internet service providers. Both the 1992 Cable Act and the Telecommunications Act of 1996 ("1996 Telecom Act") are designed to increase competition in the cable television industry. See Regulation and Legislation below. There are alternative methods of distributing the same or similar video programming offered by cable television systems. Further, these technologies have been encouraged by Congress and the FCC to offer services in direct competition with existing cable systems. I-8 11 DBS. During 1996, the Company has experienced a competitive impact from medium power and high power direct broadcast satellites ("DBS") that use high frequencies to transmit signals that can be received by dish antennas ("HSDs") much smaller in size than traditional HSDs. The Primestar partners distribute a multi-channel programming service via a medium power communications satellite to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the Company provided this satellite delivered service. DirecTv, Inc., United States Satellite Broadcasting Corporation and EchoStar Communications Corp. ("Echostar"), transmit from high power satellites and generally use smaller dishes to receive their signals. Alphastar, Inc. began offering medium power service in the second quarter of 1996. On February 24, 1997, News Corp. and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar and that the companies will combine their DBS businesses into a new company, which will operate under the name Sky. The two companies contend that Sky, which is scheduled to launch in early 1998, will offer 500 channels of digital television, Internet services and local broadcast network television signals, capable of reaching more than 50% of all television households upon the launch of Sky and 75% of all television households by the end of 1998. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. Estimated DBS customers nationwide increased from approximately 2.2 million at the end of 1995 to approximately 4.4 million at the end of 1996, and the Company expects that competition from DBS will continue to increase. DBS has advantages and disadvantages as an alternative means of distributing video signals to the home. Among the advantages are that the capital investment (although initially high) for the satellite and uplinking segment of a DBS system is fixed and does not increase with the number of subscribers receiving satellite transmissions; that DBS is not currently subject to local regulation of service and prices or required to pay franchise fees; and that the capital costs for the ground segment of a DBS system (the reception equipment) are directly related to, and limited by, the number of service subscribers. DBS's disadvantages presently include limited ability to tailor the programming package to the interests of different geographic markets, such as providing local news, other local origination services and local broadcast stations; signal reception being subject to line of sight angles; and technology which requires a customer to rent or own one set-top box (which is significantly more expensive than a cable converter) for each television on which they wish to view DBS programming. Although the effect of competition from these DBS services cannot be specifically predicted, it is clear there has been significant growth in DBS subscribers and the Company assumes that such DBS competition will be substantial in the near future as developments in technology continue to increase satellite transmitter power and decrease the cost and size of equipment needed to receive these transmissions and enable DBS to overcome the aforementioned disadvantages. Further, the extensive national advertising of DBS programming packages, including certain sports packages not currently available on cable television systems, will likely continue the growth in DBS subscribers. I-9 12 Telephone Company Entry. The 1996 Telecom Act eliminated the statutory and regulatory restrictions that prevented local telephone companies from competing with cable operators for the provision of video services by any means. See Regulation and Legislation section. The 1996 Telecom Act allows local telephone companies, including the regional bell operating companies ("RBOCs"), to compete with cable television operators both inside and outside their telephone service areas. The Company expects that it will face substantial competition from telephone companies for the provision of video services, whether it is through wireless cable, or through upgraded telephone networks. The Company assumes that all major telephone companies have already entered or soon will enter the business of providing video services. The Company is aware that telephone companies have already built, or are in the process of building, competing cable system facilities in a few of the Company's franchise areas. Most major telephone companies have greater financial resources than the Company, and the 1992 Cable Act ensures that telephone company providers of video services will have access to acquiring all of the significant cable television programming services. The specific manner in which telephone company provision of video services will be regulated is described under Regulation and Legislation below. Additionally, the 1996 Telecom Act eliminates certain federal restrictions on utility holding companies and thus frees all utility companies to provide cable television services. The Company expects this could result in another source of significant competition in the delivery of video services. Although long distance telephone companies had no legal prohibition on the provision of video services, they have historically not been providers of such services in competition with cable systems. However, such companies may prove to be a source of competition in the future. The long distance companies are expected to expand into local markets with local telephone and other offerings (including video services) in competition with the regional bell operating companies. MMDS/LMDS. Another alternative method of distribution is multi-channel multi-point distribution systems ("MMDS"), which deliver programming services over microwave channels received by customers with special antennas. MMDS systems are less capital intensive, are not required to obtain local franchises or pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. The 1992 Cable Act also ensures that MMDS operators have the opportunity to acquire all significant cable television programming services. Although there are relatively few MMDS systems in the United States currently in operation, virtually all markets have been licensed or tentatively licensed. The FCC has taken a series of actions intended to facilitate the development of wireless cable systems as an alternative means of distributing video programming, including reallocating the use of certain frequencies to these services and expanding the permissible use of certain channels reserved for educational purposes. The FCC's actions enable a single entity to develop an MMDS system with a potential of up to 35 analog channels, and thus compete more effectively with cable television. Developments in digital compression technology will significantly increase the number of channels that can be made available from MMDS. Further, in 1995, several large telephone companies acquired significant ownership in numerous MMDS companies. This infusion of money into the MMDS industry was expected to accelerate its growth and its competitive impact. However, in 1996 telephone company support of MMDS appeared to diminish as both Bell Atlantic Corporation and NYNEX Corporation suspended their investments in two major MMDS companies. Finally, an emerging technology, local multipoint distribution services ("LMDS"), could also pose a significant threat to the cable television industry, if and when it becomes established. LMDS, sometimes referred to as cellular television, could have the capability of delivering more than 100 channels of video programming to a customer's home. The potential impact of LMDS is difficult to assess due to the recent development of the technology and the absence of any current fully operational LMDS systems. I-10 13 Within the cable television industry, cable operators may compete with other cable operators or others seeking franchises for competing cable television systems at any time during the terms of existing franchises or upon expiration of such franchises in expectation that the existing franchise will not be renewed. The 1992 Cable Act promotes the granting of competitive franchises. An increasing number of cities are exploring the feasibility of owning their own cable systems in a manner similar to city-provided utility services. Private Cable. The Company also competes with Master Antenna Television ("MATV") systems and Satellite MATV ("SMATV") systems, which provide multi-channel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities. Further, the FCC is now considering new rules that would restrict or eliminate the ability of cable operators to maintain ownership of cable wiring inside multi-unit buildings, thereby potentially making it less expensive for SMATV competitors to reach those customers. In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. As the cable television industry has developed additional programming, its advertising revenue has increased. Cable operators sell advertising spots primarily to local and regional advertisers. The Company has no basis upon which to estimate the number of cable television companies and other entities with which it competes or may potentially compete. There are a large number of individual and multiple system cable television operators in the United States but, measured by the number of basic customers, the Company is the largest provider of cable television services. The full extent to which other media or home delivery services will compete with cable television systems may not be known for some time and there can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future. Regulation and Legislation. The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. On February 8, 1996, the President signed into law the 1996 Telecom Act. This new law alters the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it reduces the scope of cable rate regulation. The 1996 Telecom Act requires the FCC to implement numerous rulemakings, the final outcome of which cannot yet be determined. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect the Company's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of the Company's cable systems. I-11 14 Cable Rate Regulation. The 1992 Cable Act imposed extensive rate regulation on the cable television industry. All cable systems are subject to rate regulation, unless they face "effective competition" in their local franchise area. Under the 1992 Cable Act, the incumbent cable operator can demonstrate "effective competition" by showing either low penetration (less than 30% of the local population subscribes to basic service) or the presence (measured collectively as 50% availability, 15% subscriber penetration) of other multichannel video programming distributors ("MVPDs"). The 1996 Telecom Act expands the existing definition of "effective competition" to create a special test for a competing MVPD (other than a DBS distributor) affiliated with a local exchange carrier ("LEC"). There is no penetration minimum for a LEC affiliate to qualify as an effective competitor, but it must offer comparable programming services in the franchise area. Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or "LFAs") are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier ("BST"), which typically contains local broadcast stations and public, educational and government access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. The FCC itself directly administers rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if an LFA first receives at least two complaints from local subscribers within 90 days of a CPST rate increase and then files a formal complaint with the FCC. When new CPST rate complaints are filed, the FCC now considers only whether the incremental increase is justified and will not reduce the previously established CPST rate. Under the FCC's rate regulations, the Company was required to reduce its BST and CPST rates in 1993 and 1994, and has since had its rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with delays in implementing rate increases. Operators also have the opportunity of bypassing this "benchmark" structure in favor of traditional cost-of-service regulation in cases where the latter methodology appears favorable. However, the FCC significantly limited the inclusion in the rate base of acquisition costs in excess of the historical cost of tangible assets. As a result, the Company pursued cost of service justifications in only a few cases. Premium cable services offered on a per channel or per program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. It also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC. I-12 15 Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the 1996 Telecom Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The 1996 Telecom Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that LFAs can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase in period beginning in 2001, if the cable operator provides telecommunications service, as well as cable service, over its plant. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the 1996 Telecom Act intended to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. Review of the FCC's initial interconnection order is now pending before the Eighth Circuit Court of Appeals. Telephone Company Entry Into Cable Television. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable company cross-ownership ban and the FCC's video dialtone regulations. This will allow LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service. Under the 1996 Telecom Act, a LEC providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless the LEC elects to provide its programming via an "open video system" ("OVS"). LECs providing service through an OVS can proceed without a traditional cable franchise, although an OVS operator will be subject to general rights-of-way management regulations and can be required to pay franchise fees to the extent it provides cable services. To be eligible for OVS status, the LEC itself cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures between cable operators and LECs in the same market. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition. The "rural exemption" permits buyouts where the purchased system serves an area with fewer than 35,000 inhabitants outside an urban area, and the cable system plus any other system in which the LEC has an interest do not represent 10% or more of the LEC's telephone service area. The 1996 Telecom Act also provides the FCC with the power to grant waivers of the buyout prohibition in cases where: (1) the cable operator or LEC would be subject to undue economic distress; (2) the system or facilities would not be economically viable; or (3) the anticompetitive effects of the proposed transaction are clearly outweighed by the effect of the transaction in meeting community needs. The LFA must approve any such waiver. I-13 16 Electric Utility Entry Into Telecommunications/Cable Television. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of homes nationwide that a cable operator may reach through cable systems in which it holds an attributable interest (attributable for these purposes is defined as a 5% or greater ownership interest or the existence of any common directors), with an increase to 35% if the additional cable systems are minority controlled. However, the FCC stayed the effectiveness of its ownership limits pending the appeal of a September 16, 1993 decision by the United States District Court for the District of Columbia which, among other things, found unconstitutional the provision of the 1992 Cable Act requiring the FCC to establish such ownership limits. If the ownership limits are determined on appeal to be constitutional, they may affect the Company's ability to acquire interests in additional cable systems. The FCC also adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest (using the same attribution standards as were adopted for its limits on the number of homes nationwide that a cable operator may reach through its cable systems) to 40% of the first 75 activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. Channels beyond the first 75 activated channels are not subject to such limitations, and the rules do not apply to local or regional programming services. The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The 1996 Telecom Act also eliminates the three year holding period required under the 1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect "must carry," and more popular stations typically elect "retransmission consent." Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse affect on the Company's business. Additionally, cable systems are required to obtain retransmission consent for all "distant" commercial television stations (except for commercial satellite-delivered independent "superstations" such as WTBS). The constitutionality of the must carry requirements has been challenged and is awaiting a decision from the U.S. Supreme Court. I-14 17 Access Channels. LFAs can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its channel capacity (either 10% or 15%) for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. In February of 1997, the FCC released revised rules which mandate a modest rate reduction and could make commercial leased access a more attractive option for third party programmers. "Anti-Buy Through" Provisions. Federal law requires each cable system to permit subscribers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in December 2002, but the FCC may extend that period if deemed necessary. Access to Programming. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring cable operators over competitors and requires such programmers to sell their programming to other multichannel video distributors (such as DBS and MMDS). This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to the Company. Other FCC Regulations. In addition to the FCC regulations noted above, there are other FCC regulations covering such areas as equal employment opportunity, subscriber privacy, programming practices (including, among other things, syndicated program exclusivity, network program nonduplication, local sports blackouts, indecent programming, lottery programming, political programming, sponsorship identification, and children's programming advertisements), registration of cable systems and facilities licensing, maintenance of various records and public inspection files, frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards, and consumer electronics equipment compatibility. The FCC is expected to impose new Emergency Alert System requirements on cable operators in 1997. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Two pending FCC proceedings of particular competitive concern involve inside wiring and navigational devices or converter boxes. The former FCC proceeding is considering ownership of cable wiring located inside multiple dwelling unit ("MDU") complexes. If the FCC concludes that such wiring belongs to, or can be unilaterally acquired by the MDU owner, it will become easier for MDU owners to terminate service from the incumbent cable operator in favor of a new entrant. The latter FCC proceeding is considering whether cable customers should be permitted to purchase cable converters from third party vendors. If the FCC concludes that third party sale of converters is required, and does not make appropriate allowances for signal piracy concerns, it may become more difficult for cable operators to combat theft of service. I-15 18 Copyright. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect the Company's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The 1996 Telecom Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. Proposed Changes in Regulation. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated and there can be no assurance that the Company's business will not be affected adversely by future legislation, new regulation or deregulation. I-16 19 International Cable and Programming The Company, through TINTA, owns interests in companies that operate multi-channel video and telecommunications distribution networks in, and provides diversified programming services to, selected markets outside the United States. TINTA seeks to operate in markets with favorable regulatory environments and with long-term strategic partners. As of December 31, 1996, TCI owns 83% of the issued and outstanding stock of TINTA, representing 91% of the voting power of TINTA. Included among TINTA's distribution assets are an indirect 26.6% interest in Telewest Communications plc ("Telewest") and a 40% interest in Jupiter Telecommunications Co, Ltd. ("Jupiter"). Telewest and Jupiter provide cable television and residential and business cable telephony in the United Kingdom and Japan, respectively. TINTA also has a 51% ownership interest in Cablevision S.A., which provides cable television service in and around Buenos Aires, Argentina. TINTA's programming interests include a majority interest in Flextech p.l.c. ("Flextech"), a 33.3% interest in MultiThematiques, S.A. ("MultiThematiques") and a 50% interest in Jupiter Programming Co., Ltd. ("JPC"). Flextech provides multi-channel video programming to cable television and direct-to-home ("DTH") satellite providers in the United Kingdom through its interests in 14 programming channels. MultiThematiques and JPC provide multi-channel programming to cable television and DTH satellite providers in France and Japan, respectively. Certain of the MultiThematiques channels are also carried in Poland, Germany and Spain. Through certain other joint ventures with strategic partners, TINTA has distribution and programming interests in Puerto Rico, Chile, Poland, Ireland, Malta, Israel, France, Dominican Republic, Singapore, and New Zealand. Telephony The Company is currently in the developmental stage of its cable telephony business, which provides conventional telephone service via TCI's cable plant to residential and small business customers in certain of the geographic areas served by TCI's cable television systems. The Company is currently in the process of evaluating the customer acceptance and economic attractiveness of the residential telephony opportunity utilizing upgraded cable plant. As part of this evaluation, the Company began offering residential telephony service commercially in Hartford, Connecticut in October 1996 and in Arlington Heights, Illinois in January 1997. TCI is currently testing the provision of residential telephony service over its cable plant in Fremont, California, and anticipates commercially launching the service there in the first half of 1997. In addition, the Company has investments in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide under the "Sprint" brand (the "PCS Ventures"), and an investment in Teleport Communications Group Inc., a Delaware corporation ("TCG" or "Teleport"), which is a competitive local exchange carrier. The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P. (collectively, "Sprint PCS" or the "Sprint PCS Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The Company has a 30% interest as a partner in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. As of March 15, 1997, the Company has a 30.7% equity interest (which represents a 37.4% voting interest) in TCG. I-17 20 Sprint PCS is the largest broadband wireless personal communications services company in the United States in terms of total licensed "Pops," with licenses (including those owned by licensees that are affiliated or have agreed to affiliate with Sprint PCS (including PhillieCo)) to provide service to MTAs (or metropolitan trading areas) covering over 190 million Pops. The term "Pops" refers to the population covered by a license or group of licenses and, as used in this Form 10-K is based on the Donnelley Marketing Service estimate of the December 31, 1995 population of a geographic area. Sprint PCS is in the process of initiating wireless communications services nationwide under the Sprint brand name and, as of December 31, 1996, had eight markets operational. Teleport, the largest competitive local exchange carrier in the United States as measured by route miles, offers a wide range of local telecommunications services in major metropolitan markets nationwide, primarily to businesses, long-distance carriers and resellers, and wireless communications companies. TCI also holds a 50% partnership interest in Kansas City Fiber Network, L.P. and a 40% partnership interest in NHT Partnership, which are competitive access providers serving the Kansas City and Buffalo metropolitan areas, respectively. As part of its telephony business, the Company operates Western Tele-Communications, Inc., a wholesale provider of long distance, voice, data and other telecommunications services. Technology/Venture Capital The Company is a developer of, and an investor in, new television and telecommunications technologies and services. This role is carried out through investments in companies and joint ventures as well as internal development. Areas of technological development include set-top box functionality, architecture, performance and security of broadband networks and digital video compression. The development of new services is focused on broadening interactive services to the television, giving consumers access to a variety of new information and entertainment services and advertisers new opportunities to reach consumers. The Company owns and operates the National Digital Television Center ("NDTC") in Denver. This facility provides services to the cable television and satellite entertainment industries which include production, digital video compression, satellite uplinking and transponder management as well as signal authorization and encryption. The NDTC's "Headend in the Sky" ("HITS") provides cable operators with the ability to securely encrypt and control viewer access for analog and digital subscribers from a single centralized location. In addition to HITS, the NDTC contains 20,000 square feet of video production space and operates post production facilities in New York, Hollywood and Hong Kong. In January 1996, the Company acquired a controlling interest in United Video Satellite Group, Inc. ("UVSG"), which operates (i) Prevue Channel, the leading electronic programming guide, (ii) Superstar Satellite Entertainment, a direct-to-home C-band satellite provider, (iii) SpaceCom Systems, a satellite service provider to the paging industry and others, and (iv) UVTV, which distributes the superstation WGN and other networks to cable operators and satellite customers. UVSG also has a 70% interest in SSDS, Inc., which provides information technology consulting and software development services to large organizations with complex computer needs. I-18 21 ETC w/tci, Inc. ("ETC") was launched in February of 1996 to consolidate TCI's various education initiatives and focus on a growing market for the use of telecommunications technologies in education, training and communication. ETC provides a wide range of programs delivered via cable or satellite, addressing the needs of customers at school, in the office and at home. ETC w/CareerTrack, a subsidiary of ETC is a leading developer, producer and marketer of business and educational seminars and related publications. ETC w/NSCI, another subsidiary of ETC, is a provider of conference and satellite-delivered staff development programming for educators. Ingenious, another subsidiary of ETC, is a developer of education software products designed to facilitate learning in the classroom. In addition, ETC manages the Company's investments in educational ventures such as The Lightspan Partnership, Inc. and Academic Systems Corporation. The Company's investment portfolio includes Acclaim Entertainment, Inc., a publisher of entertainment software, Netscape Communications Corporation, a provider of internet and intranet software and Antec Corporation ("Antec"), a producer and distributor of cable television equipment. The Company's investment in Antec was acquired through the February 1997 merger between Antec and TSX Corporation. Internet Services In May 1995, the Company and Kleiner Perkins Caufield & Byers ("KPCB") formed a new company, At Home Corporation ("@Home"), that develops high speed, next generation Internet services for homes and businesses over cable television systems and fiber optic networks. In August 1996, the Company, KPCB, Comcast and Cox consummated a series of transactions which resulted in the Company having a 45.35% equity interest (which represents a 76.77% voting interest in @Home). A key element of the @Home service is the underlying network. @Home proposes to operate a national, high speed, Internet Protocol-based network connecting to both information providers and cable operators on a turnkey basis. This national network will reach local customers through local headends. Distribution over cable systems based on both upgraded fiber/coaxial cable designs as well as older, non-upgraded systems using telephone return paths is planned. @Home affiliates plan to provide customers with the required broadband cable modem, which in turn connect to customers' personal computers using existing standard data communications interfaces. The Company began offering @Home to TCI customers in September 1996 and currently offers @Home in Arlington Heights, Illinois; Fremont, California; and Hartford, Connecticut. @Home's other cable partners are currently marketing high-speed Internet services in Orange County, California; Baltimore, Maryland; and Sarasota, Florida. I-19 22 PROGRAMMING SERVICES Liberty Media Group, through Liberty Media Corporation ("Liberty") its subsidiaries and affiliates, is an investor in and manager of entities engaged in the production, acquisition and distribution through all available formats and media, including cable television systems, broadcast television stations, by C-Band satellite delivery systems ("C-Band") and by DBS to HSDs, on-line and interactive services, home video and traditional retail outlets, of branded entertainment and informational programming and software, including multimedia products, delivered in both analog and digital form. The various entertainment and information programming and programming-related businesses in which Liberty Media Group has interests fall into five categories: movie services; general entertainment and information services; sports programming services; broadcasting and satellite; and electronic retailing, which includes direct marketing, advertising sales relating to programming services, infomercials and transaction processing. The following table sets forth Liberty Media Group's programming interests which are held directly and indirectly through partnerships, joint ventures, common stock investments and instruments convertible or exchangeable into common stock. Ownership percentages in the table are approximate, calculated as of March 14, 1997 and, where applicable (or except as otherwise noted), assume conversion to common stock by the Company and, to the extent known by the Company, other holders. In some cases, Liberty Media Group's interest may be subject to buy/sell procedures, repurchase rights or, under certain circumstances, dilution.
- --------------------------------------------------------------------------------------------------------------------- LIBERTY MEDIA SUBSCRIBERS SUBSCRIBERS GROUP ATTRIBUTED AT 12/31/96 AT 12/31/95 YEAR OWNERSHIP ENTITY (000'S) (000'S) LAUNCHED % - --------------------------------------------------------------------------------------------------------------------- MOVIE SERVICES Encore Media Corporation 90% Encore 10,154 7,468 1991 plex 1,120 475 1995 Love Stories 1,681 860 1994 Westerns 3,261 1,517 1994 Mystery 2,708 1,515 1994 Action 1,664 834 1994 True Stories 1,660 832 1994 WAM! America's Kidz Network 1,661 833 1994 STARZ! 4,925 3,187 1994 48%(1) STARZ!2 537 N/A 1996 Request TV 39,639(2) 32,242(2) 1985 40%(3) Viewer's Choice 44,889(2) 38,404(2) 1985 10%
I-20 23
- ---------------------------------------------------------------------------------------------------------------------- LIBERTY MEDIA SUBSCRIBERS SUBSCRIBERS GROUP ATTRIBUTED AT 12/31/96 AT 12/31/95 YEAR OWNERSHIP ENTITY (000'S) (000'S) LAUNCHED % - ---------------------------------------------------------------------------------------------------------------------- ENTERTAINMENT AND INFORMATION SERVICES Bay TV 1,390 1,200 1994 49% BET Holdings, Inc. (NYSE-BTV) 22% BET Cable Network 47,000 44,234 1980 BET Action Pay-Per-View 9,000(2) 7,200(2) 1990 BET on Jazz 2,200 N/A 1996 BET Movies/STARZ!3 N/A N/A 1997 36% Court TV 26,453 20,646 1991 33%(3) Discovery Communications, Inc. 49% Animal Planet 14,900 N/A 1996 Discovery Channel 70,556 66,534 1985 The Learning Channel 53,992 43,248 1980 Discovery Science (4) N/A 1996 Discovery Civilization (4) N/A 1996 Discovery Travel & Living (4) N/A 1996 Discovery Kids (4) N/A 1996 Discovery Asia 4,452 1,441 1994 Discovery India 4,625 N/A 1996 Discovery Japan 1,500 N/A 1996 Discovery Europe 13,018 11,075 1989 Discovery Germany not available N/A 1996 Discovery Italy/Africa not available N/A 1996 Discovery Latin America 6,251 N/A 1996 Discovery Kids-Latin America 1,200 N/A 1996 Discovery Channel Online N/A(5) N/A(5) 1995 DMX Inc. (Nasdaq-TUNE) 10%(3) DMX 19,400(2) 18,250(2) 1991 E! Entertainment Television 41,872 37,300 1990 10%(6) International Channel 7,355 7,062 1990 45% International Family Entertainment, Inc. (NYSE-FAM) 20% The Family Channel 65,700 62,000 1977 FIT TV 11,800 5,610 1993 25% MacNeil/Lehrer Productions N/A N/A 67% Odyssey (f/k/a Faith & Values 26,800 25,354 1993 49% Channel) The Box Worldwide, Inc. (f/k/a Video Jukebox Network, 5% Inc.) (Nasdaq-BOXW) The Box 22,189 22,241 1985 Time Warner Inc. (NYSE-TWX) 9% Time Warner/Turner Programming Services(7)
I-21 24
--------------------------------------------------------------------------------------------------------------------------- LIBERTY MEDIA SUBSCRIBERS SUBSCRIBERS GROUP ATTRIBUTED AT 12/31/96 AT 12/31/95 YEAR ECONOMIC(8) ENTITY (000'S) (000'S) LAUNCHED % --------------------------------------------------------------------------------------------------------------------------- SPORTS SERVICES REGIONAL SPORTS NETWORKS Fox Sports Arizona 744 N/A 1996 50% Fox Sports Intermountain West 617 559 1990 50% Fox Sports Midwest 1,222 670 1989 50% Fox Sports Northwest 2,416 2,299 1988 50% Fox Sports Pittsburgh 1,698 2,310 1985 50% Fox Sports Rocky Mountain 1,690 1,690 1988 50% Fox Sports South 5,228 4,768 1990 44% Fox Sports Southwest 4,751 4,509 1983 50% Fox Sports West 3,956(9) 4,560 1985 50% Fox Sports West 2 N/A N/A 1997 50% Home Team Sports 3,835 3,149 1984 17% SportsChannel Chicago 2,707 2,533 1984 25%(3) SportsChannel Pacific 4,083 3,553 1990 25%(3) SportsChannel Philadelphia/PRISM 2,534 2,465 1983 17%(3) Sunshine Network 3,706 3,582 1988 27%(3) NATIONAL SPORTS NETWORKS fX Network(10) 31,136 24,664 1994 50% Fox Sports Americas 1,682 1,524 1993 25% Fox Sports Direct(11) 3,731 2,270 1989 50% Fox Sports Net 23,632(2) N/A 1996 50% NewSport 7,623 6,279 1994 25%(3) Prime Network 48,620(2) 50,325(2) 1989 25%(3) INTERNATIONAL SPORTS PROGRAMMING Fox Sports Australia 171 80 12.5% Fox Sports Americas 2,120 1,394 25% STAR TV(12) 220,200(12) 3.75% Torneos y Competencias, SA N/A N/A 9%
I-22 25
- ------------------------------------------------------------------------------------------------------------------------- LIBERTY MEDIA GROUP SUBSCRIBERS AT SUBSCRIBERS AT ATTRIBUTED 12/31/96 12/31/95 YEAR OWNERSHIP ENTITY (000'S) (000'S) LAUNCHED % - ------------------------------------------------------------------------------------------------------------------------- BROADCASTING AND SATELLITE Superstar/Netlink 981 947 N/A 50%(13) Netlink Wholesale 1,364(14) 1,316(14) N/A 100% Southern Satellite Systems, 66,735 62,495 N/A 100% Inc.(15) HSN, Inc. (f/k/a Silver King Communications, Inc.) 21%(16) (Nasdaq-HSNI) SKTV, Inc. 28,302(17) 28,000(17) 1986 SF Broadcasting 1,800(18) 1,800(18) ELECTRONIC RETAILING HSN, Inc. (Nasdaq-HSNI) 21%(16) HSN 70,694(2)(19) 69,189(2)(19) 1985 37% America's Store 11,116(2) 12,000(2) 1986 37% ISN N/A(5) N/A(5) 1995 37% HSN-Germany 7,000(2) N/A 1996 11% Shop Channel (Japan) 300(2) N/A 1996 11% QVC, Inc. 43%(3) QVC, Network 59,669(2) 54,611(2) 1986 Q2 13,111(2) 13,031(2) 1994 QVC-The Shopping 5,750(2) 4,029(2) 1993 Channel (UK) QVC-Germany 4,500(2) N/A 1996 iQVC N/A(5) N/A(5) 1995
(1) An entity attributed to TCI Group owns a 50.1% interest in STARZ!; Liberty owns a 29.9% direct interest and Encore Media Corporation owns a 20% interest. (2) Number of subscribers to whom service is available. (3) The interests of Liberty Media Group in these entities are presently or will become subject to buy-sell procedures under which one owner may initiate the procedure by giving notice setting forth a value for the entity and the other owner(s) may then elect either to buy the interest of the initiating owner or to sell their interests to the initiating owner at a price equal to the value specified by the initiating owner multiplied by the ownership percentage of the selling partner. (4) Digital services to be launched on TCI's digital ALL TV service. (5) Internet service. I-23 26 (6) In connection with the exercise of a buy/sell provision triggered in October 1996, in which Comcast agreed to purchased Time Warner's interest in E!, Liberty agreed that its interest in E! will be subject to a put/call arrangement which replaces the prior buy/sell agreement. Beginning in 2002, Liberty will have the right to require E! to purchase, and E! will have the right to require Liberty to sell, its interest in E! at fair market value. (7) Includes CNN, Cartoon Network, Headline News, TNT, Turner Classic Movies, TBS Superstation, CNNfn, CNN/SI, CNN International, TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe, TNT and Cartoon Network Asia, HBO, Cinemax, Comedy Central, HBO Ole, HBO Asia, TVKO and WB Television Network. Following consummation of the TBS/Time Warner merger on October 10, 1996, Liberty is no longer reporting subscriber numbers for these programming services. (8) "Economic" interests and "ownership" interests may vary for certain sports services. (9) Prior years included subs now reported in Fox Sports-Arizona. (10) fX Network is a general entertainment and sports network included in the Liberty/Fox Sports joint venture described below. (11) f/k/a Liberty Satellite Sports, distributor of sports programming to C-Band and DBS markets. (12) STAR TV is a satellite-delivered television platform. Programming services on STAR TV's platform include STAR Sports, STAR Plus, Phoenix Chinese Channel, STAR Movies and ZEE TV, among others. STAR TV reaches approximately 220 million people in Asia, India and the Middle East. (13) UVSG, an entity controlled by the TCI Group, owns the remaining 50% interest. (14) Aggregate number of units. Netlink Wholesale uplinks 6 broadcast stations. (15) Distributes TBS Superstation in the US and Canada. (16) Mergers of Silver King Communications, Inc. ("Silver King") with Home Shopping Network, Inc. and Savoy Pictures Entertainment, Inc. were consummated in December 1996 and Silver King subsequently changed its name to HSN, Inc. ("HSNI"). Liberty owns direct and indirect interests in various HSNI and Home Shopping Network, Inc. securities which, if converted or exchanged for HSNI common stock would result in an ownership interest in HSNI of approximately 36.5%. See description of the Silver King transactions in "Broadcasting" below. Liberty holds nominal voting interest in HSNI. (17) Number of television households in areas of SKTV, Inc.'s owned and operated broadcast stations. (18) Number of television households in areas of SF Broadcasting's owned and operated broadcast stations. (19) Includes broadcast households and cable subscribers. I-24 27 Movie Services. Encore Media Corporation ("EMC") produces and distributes a variety of movie services. Its principal service is "Encore," launched in 1991, which primarily airs hit movies from the 1960s, 1970s and 1980s. As of December 31, 1996, the service was being offered by cable operators and other distribution technologies to approximately 34.5 million households, of which approximately 10 million subscribed to Encore. The service is generally offered as a single premium service or in conjunction with other premium services. In either case, the subscription price paid by the subscriber for Encore is generally lower than the prices charged for other premium movie services. During 1994, EMC launched six thematic multiplex services: "Love Stories," "Westerns," "Action," "True Stories," and "WAM! America's Kidz Network." As of December 31, 1996, the thematic multiplex services were available, primarily by DBS services such as DIRECTV and Primestar, as well as by cable operators and other distribution technologies, to approximately 6.5 million households. As of December 31, 1996, these generated subscriptions to approximately 12.6 million units (one household may subscribe to as many as 6 multiplex services, which would constitute 6 "units"). "plex," a cable service which offers theme-by-day movies, was launched by EMC in 1995. As of December 31, 1996, plex was being offered by cable operators and other distribution technologies to approximately 3.4 million households, of which approximately 1.1 million subscribed to plex. As of December 31, 1996, EMC's distribution was approximately 24 million total aggregate units (Encore, thematic multiplex services and plex). Cable operators and other distributors pay EMC a per subscriber fee for the services. EMC obtains rights to air movies by entering into film licensing agreements with the holders of distribution rights. EMC has entered into library agreements the majority of which extend beyond 2002 and several of which extend beyond 2005, with various distributors to exhibit certain films. "STARZ!" is a first-run premium movie programming service which is managed by EMC. As of December 31, 1996, STARZ! was offered by cable operators and other multi-channel video distribution technologies to approximately 25.1 million subscribers, of which approximately 4.9 million elected to receive STARZ!. As of December 31, 1996, approximately 53% of the subscribers electing to received STARZ! were customers of cable systems which purchase STARZ! pursuant to an affiliation agreement with Satellite Services, Inc. ("SSI"), a wholly owned subsidiary of TCIC. SSI purchases programming services from programming suppliers and then makes such services available to TCI's subsidiaries and affiliates. Customers served by cable television systems eligible to purchase programming services through SSI ("SSI Subscribers") represented approximately 24.5% of U.S. households which received cable or satellite delivered programming at December 31, 1996 (based on estimates by Paul Kagan Associates, Inc. of cable, C-Band, DBS and MMDS subscribers). To the extent that the ratio of SSI Subscribers to overall subscribers for any programming service in which the Liberty Media Group has an interest significantly exceeds 24.5%, such information is provided below. I-25 28 STARZ! is operated and distributed by a partnership ("QE+") owned 29.9% by Liberty Starz, Inc. ("Liberty Starz"); 50.1% by TCI Starz, Inc. ("TCIS"), an entity included in TCI Group, and 20% by EMC. The QE+ agreement provides that TCIS will be required to make special capital contributions to QE+ through July 1, 2005, up to a maximum aggregate capital contribution of $350 million (the "TCIS Contribution"). QE+ is obligated to pay TCIS a preferred return of 10% per annum on the first $200 million of the TCIS Contribution beginning five years from the date of the contribution or five years from January 1, 1996, whichever is later. Any amount of the TCIS Contribution in excess of $200 million will be entitled to a preferred return of 10% per annum from the date of the contribution. QE+ will be required to apply 75% of its available cash flow (as defined) to repay the TCIS Contribution and any preferred return payable thereon. To the extent QE+ has incremental cash requirements, TCIS and Liberty Starz will have the option to fund 50.1% and 49.9%, respectively, of any such additional capital requirements. To the extent TCIS and Liberty Starz elect to fund such additional capital requirements, EMC's interest will be proportionately diluted. As of December 31, 1996, the amount of the TCIS Contribution was approximately $203 million. EMC is paid a fee for managing the STARZ! service equal to 20% of the "managed costs" (as defined) of the service. In addition, effective July 1, 1995, Liberty Starz began earning a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. The Content Fee was approximately $3,735,000 for the year ended December 31, 1996 and $972,000 for the six months ended December 31, 1995. The Content Fee agreement expires on June 30, 2001, subject to renewal on an annual basis thereafter. Payment of the Content Fee is subordinated to the repayment of the TCIS Contribution, including any preferred return, and any other obligations of QE+ to its partners. Cable operators and other distributors pay STARZ! a per subscriber fee for the service. QE+ has entered into first run output agreements, the majority of which extend through 2003, where the license fees are contingent upon future production, sales and certain other criteria. In addition, EMC provides library programming for a fee to QE+ under a shared programming agreement. Liberty also has interests in "Request TV" and "Viewer's Choice" which provide pay-per-view movies and pay-per-view events to cable operators. Both Request TV and Viewer's Choice act as intermediaries between movie studios and event promoters, on the one hand, and cable operators, on the other hand, providing scheduling for movies to be sold on a pay-per-view basis, satellite distribution of such movies, marketing and promotion, and, in some instances, billing and collection services. For providing these services, they are paid a negotiated percentage of pay-per-view revenue generated by their respective affiliated cable operators. Entertainment and Information Services. "Bay TV" is a local news and entertainment service located in the San Francisco Bay area. Liberty acquired its interest in Bay TV in 1996. At December 31, 1996, Bay TV was received by approximately 1.4 million subscribers, approximately 80% of which were SSI subscribers. I-26 29 BET Holdings, Inc. ("BET") primarily operates cable television programming services and magazines targeted to the interests and concerns of African-Americans. "BET Cable Network" provides a broad mix of programming which is produced in-house or acquired from a variety of sources. The network's productions include hosted music video programs, talk shows, sports, news and public affairs, children's programs and comedy shows. Acquired programs include situation comedies, gospel music programs and sports and entertainment specials. "BET on Jazz," launched in January 1996, is an advertiser-supported basic cable network featuring jazz concerts, music videos and interviews with jazz artists. In June 1996, BET on Jazz began providing programming in the United Kingdom and South Africa. "BET Action Pay-Per-View" is a pay-per-view service which distributes films produced by major studios and independent film companies. BET also publishes Emerge magazine, retails a line of skin care products and musical recordings, and has ownership interests in BET Film Productions (a joint venture with EMC) and BET Pictures which produce low-budget feature length motion pictures. In September 1996 EMC, QE+ and BET formed BET Movies/STARZ3, a premium movie service dedicated to the development and exhibition of Black oriented feature length films. BET Movies/STARZ!3 launched in February 1997 to approximately 200,000 subscribers, all of which are SSI Subscribers. "Court TV" provides live and/or tape delayed coverage and analysis of selected criminal and civil legal proceedings. The Court TV service was received by approximately 26.5 million subscribers at December 31, 1996, approximately 26% of which were SSI Subscribers. Discovery Communications, Inc. ("Discovery") operates four business units. The first of these, Discovery Networks, U.S., consists of three advertiser-supported basic cable networks: "Discovery Channel," "The Learning Channel" and "Animal Planet"; and four newly created networks for the digital platform: "Discovery Science," "Discovery Civilization," "Discovery Travel & Living" and "Discovery Kids." Discovery Channel provides nature, science and technology, history, exploration and adventure programming and is distributed to customers in virtually all U.S. pay television homes. The Learning Channel provides a variety of educational and non-fiction programming. Animal Planet, launched in June 1996, offers a range of animal programming, including children's programs, game shows, comedies, dramas, feature films, wildlife documentaries, how-to pet care shows, event reportage and series featuring television's favorite animal heroes. The four digital networks were launched in 1996 on TCI's digital service, ALL TV. Discovery Networks International includes Discovery Europe, Discovery Asia, Discovery India, Discovery Latin America and the recently launched Discovery Kids-Latin America, Discovery Germany, Discovery Japan and Discovery Italy/Africa. Discovery's international networks serve more than 30 million customers in 140 countries outside the U.S. Discovery Enterprises Worldwide includes Discovery Channel Multimedia, Discovery Channel Online, Discovery Channel Video and Discovery Channel Publishing. The fourth Discovery business unit, Discovery Retail and Theme, operates 16 Discovery Channel Stores, 113 stores of The Nature Company and three Scientific Revolution stores in the US. Discovery also operates two locations of The Nature Company in Canada and two locations in the UK. Discovery purchased the assets of The Nature Company in June 1996. In addition to the stores, these assets included distribution facilities and The Nature Company's catalog business. The Nature Company is a specialty retail chain and mail order business providing products designed to enhance appreciation of the natural world. In October 1996, Discovery entered into an agreement with Sony to create in San Francisco a Discovery Channel Destination flagship store which will feature a combination of retailing and interactive, hands-on entertainment elements related to the programming concepts of Discovery. I-27 30 Discovery also operates Your Choice TV ("YCTV"). YCTV is a development stage business designed to take advantage of the promise of the digital television platform by offering increased access to popular television programs. In 1996, Discovery entered into a memorandum of understanding with the BBC to pursue the possibility of jointly developing and launching non-fiction networks in international markets. These networks would have access to the vast program libraries and strong brand identities of each partner. The agreement also calls for a program development relationship which would make Discovery the primary co-production partner of the BBC in North America. DMX Inc. is primarily engaged in programming, distributing and marketing a premium digital music service, "DMX," which provides 24-hour per day, commercial-free, CD quality music programming. DMX is delivered, for a monthly per subscriber license fee, by C-Band and DBS for distribution to residential and commercial subscribers. Both cable and DBS subscribers receive DMX through a specially designed tuner to their stereo systems. Approximately 61% of DMX's domestic enabled tuners are in the homes of SSI Subscribers. On February 6, 1997, TCI, DMX Inc. and TCI Music, Inc. ("TCI Music"), a wholly-owned subsidiary of TCI attributed to the TCI Group, entered into an Agreement and Plan of Merger (the "TCI Music Merger Agreement") pursuant to which DMX Inc. will become a wholly-owned subsidiary of TCI Music and each share of DMX Inc. common stock will be converted into the right to receive (i) one-half share of TCI Music Series A Common Stock ("TCI Music Common Stock") and (ii) one right (a "Right") with respect to each whole share of TCI Music Series A Common Stock (the "DMX Merger"). Each Right will entitle the holder to require TCI to purchase from such holder one share of TCI Music Common Stock for $4.00 per share (the equivalent of $2.00 per share of DMX Inc. common stock) payable at the election of TCI, in cash, a number of shares of TCI Group Stock or a combination thereof, if during the one-year period beginning on the effective date of the DMX Merger, the price of TCI Music Common Stock does not equal or exceed $4.00 per share for a period of at least 20 consecutive trading days. Assuming consummation of the DMX Merger, Liberty will own 3,029,531 Rights and 3,029,531 shares of TCI Music Common Stock, representing approximately a 2% equity interest and less than a 1% voting interest in TCI Music. "E! Entertainment Television" is a 24-hour network devoted to the world of celebrities and entertainment. The network's programming mix includes entertainment news reports, original programs and exclusive live coverage of major awards shows and celebrity events. International Family Entertainment, Inc.'s ("IFE") principal business is "The Family Channel," an advertiser-supported basic cable television network that provides family oriented entertainment programming in the United States. In addition, IFE owns MTM Entertainment, Inc., a producer and worldwide distributor of television series and made-for-television movies and the owner of a significant library of television programming; FiT TV, an advertiser-supported health and fitness cable network; and Calvin Gilmore Productions, a producer of live musical variety shows. On April 22, 1996, IFE consummated the sale of its television production studio in Maidstone, England and its 61% interest in The Family Channel (UK) to Flextech pursuant to an agreement dated as of March 20, 1996. Flextech previously owned a 39% interest in The Family Channel (UK). As consideration for this transaction, IFE received cash and shares of Flextech's convertible, redeemable non-voting common stock. This common stock is convertible, under certain circumstances, beginning in June 1997 at IFE's option, into Flextech's voting ordinary shares which are listed on the London Stock Exchange. TINTA owns an interest in Flextech. I-28 31 "International Channel" is a basic cable service providing multi-lingual programming in the U.S. The International Channel is planning to launch several single language pay services designed primarily to serve viewers who use English as their second language. These services will be launched on the digital platform. Approximately 27% of International Channels' subscribers are SSI Subscribers. "Odyssey" (f/k/a The Faith & Values Channel), a national basic cable network, is managed by representatives of the National Interfaith Cable Coalition, a group of 64 U.S. denominations and faith groups. The channel provides its viewers with non-denominational religious and values-based entertainment and informational programming. Approximately 27% of Odyssey's subscribers are SSI subscribers. Time Warner is the world's leading media company, and has interests in three fundamental areas of business: Entertainment, consisting principally of interests in recorded music and music publishing, filmed entertainment, broadcasting, theme parks and cable television programming; News and Information, consisting principally of interests in magazine publishing, book publishing and direct marketing; and Telecommunications, consisting principally of interests in cable television systems. TBS is a diversified information and entertainment company. Through its subsidiaries, TBS owns and operates four domestic entertainment networks--"TBS Superstation," Turner Network Television ("TNT"), the Cartoon Network and Turner Classic Movies ("TCM"); four international entertainment networks--TNT Latin America, Cartoon Network Latin America, TNT & Cartoon Network Europe, and TNT & Cartoon Network Asia; and four news networks--Cable News Network ("CNN"), Headline News, Cable News Network International ("CNNI") and CNN Financial News Network ("CNNfn"). TBS produces and distributes entertainment and news programming worldwide, with operations in motion picture, animation and television production, home video, television syndication, licensing and merchandising, and publishing. On October 10, 1996, Time Warner and TBS consummated the TBS/Time Warner Merger whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock held could have been converted. After an extensive review of the transaction by the staff of the Federal Trade Commission ("FTC") and in order to eliminate certain concerns raised by the FTC staff regarding possible effects of the transaction, Time Warner, TBS, TCI, and Liberty entered into an Agreement Containing Consent Order with the FTC, dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). The FTC Consent Decree received final approval by the FTC on February 7, 1997 following public comment. Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received by it in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one- hundredth (1/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock have no other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock is convertible at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. I-29 32 Subject to a number of conditions including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the holders of Liberty Media Group stock, TCI agreed to the FTC Consent Decree that it would distribute in the form of a stock dividend (the "Spin-Off") to the holders of Liberty Media Group stock the stock of a separate company ("Spinco") which would own, directly or indirectly, the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary attributed to Liberty Media Group that distributes the TBS SuperStation ("WTBS") signal in the United States and Canada. The level of the Company's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time such restriction will be eased for Spinco. The FTC Consent Decree also contains provisions imposing certain separations between Spinco, TCI and Liberty. If the Spin-Off occurs, the FTC Consent Decree requires certain control stockholders of TCI to exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corproate transactions involving Spinco. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable at Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. "The Box" is a viewer interactive music video service produced by The Box Worldwide, Inc. (f/k/a Video Jukebox Network, Inc.) ("VJN") and offered through cable television systems and low-power television stations. Viewers may select the music videos they desire to watch by calling a designated 900 or 976 telephone number, in which case they pay a fee to VJN for their selections. Alternatively, viewers may passively view the music videos selected by others, in which case there is no additional charge for the service. MacNeil/Lehrer Productions ("MLP") is the primary producer of the "News Hour" on PBS and a producer of other high-quality documentary and public affairs programming. Liberty is attempting to increase the level of production at MLP by finding new markets for MLP documentary and public affairs programming. These markets may include cable, as well as broadcast networks, on line services and CD-ROM applications. Sports Programming Services. As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed the Liberty/Fox U.S. Sports LLC ("Fox Sports") into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fX cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. I-30 33 Internationally, News Corp. and a limited liability company ("Liberty/TINTA") formed by a wholly-owned subsidiary of Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia, the United Kingdom, Japan and New Zealand where prior arrangements presently preclude collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, (renamed Fox Sports Americas) a Spanish language sports service distributed in Latin America and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via MMDS or cable television. In connection with the TBS/Time Warner Merger, TBS sold its interest in Fox Sports South (formerly, SportSouth Network), a regional sports cable network, to Fox Sports for approximately $60 million. Additionally, Time Warner granted Liberty an option (the "Sunshine Option") to purchase Time Warner's interest in Sunshine Network, a Florida- based sports cable network, for approximately $14 million. Liberty has contributed the Sunshine Option, which has not yet been exercised, to Fox Sports. Affiliated Regional Communications Ltd. ("ARC") is a partnership through which interests in several of the regional sports networks are held. In 1996, prior to the formation of Fox Sports, Liberty's interest in ARC increased from approximately 65% to approximately 87%. Following the contribution of ARC to Fox Sports, on March 13, 1997, Fox Sports increased its economic interest in ARC to 100%, resulting in a proportionate increase in the Liberty Media Group's attributed economic interest in the sports networks owned through ARC. Regional Sports Programming Services. Fox Sports has varying interests in 15 regional sports networks (the "Sports Networks"), which acquire, develop, produce, syndicate and distribute sports programming of primarily local and regional interest by satellite to cable television operators, to other multi-channel video programming distributors, and to HSD owners, in specified geographic areas. The following table sets forth for each of the Sports Networks the state service areas and significant teams with respect to whose games the network currently has programming rights:
Sports Network Service Area Current Teams - -------------- ------------ ------------- Fox Sports Arizona AZ Arizona Diamondbacks Phoenix Coyotes Arizona State University University of Arizona Fox Sports Intermountain West ID, MT, Utah Jazz NV, UT, WY Fox Sports Midwest IA,IL, Indianapolis Pacers IN, MO St. Louis Cardinals St. Louis Blues Fox Sports Northwest AK, ID, Seattle Mariners MT, OR, Seattle Supersonics WA Big Sky Conference Oregon State University University of Oregon University of Washington Washington State University
I-31 34
Sports Network Service Area Current Teams - -------------- ------------ ------------- Fox Sports Pittsburgh PA, OH Pittsburgh Penguins WV Pittsburgh Pirates Pittsburgh Lumberjacks University of Pittsburgh Fox Sports -Rocky Mountain CO, KS, Colorado Avalanche NE, NM Colorado Rockies SD, WY Denver Nuggets Kansas City Royals Colorado State University Denver University US Air Force Academy Fox Sports -South AL, GA, Atlanta Braves MS, NC, Atlanta Hawks SC, TN Charlotte Hornets Southeast Conference Atlantic Coast Conference Southern Conference Ohio Valley Conference Fox Sports Southwest AR, LA, Dallas Mavericks NM, OK, Houston Aeros TX Houston Astros Houston Rockets Dallas Stars Texas Rangers San Antonio Spurs Fox Sports West CA,HI Los Angeles Lakers NV Los Angeles Kings California Angels University of Southern California UCLA San Diego State University Pepperdine University Long Beach Ice Dogs Anaheim Piranha Fox Sports West 2 CA, HI, Anaheim Mighty Ducks NV Los Angeles Dodgers Los Angeles Clippers University of Southern California UCLA Pepperdine University Home Team Sports DC, DE, Baltimore Orioles MD, NC, Washington Bullets PA, VA, Washington Capitals WV Colonial Conference Atlantic 10 Conference Atlantic Coast Conference SportsChannel Chicago IA, IL, Chicago Blackhawks IN, WI Chicago Bulls Chicago White Sox University of Notre Dame Big 10 Conference
I-32 35
Sports Network Service Area Current Teams - -------------- ------------ ------------- SportsChannel Pacific CA, NV, Golden State Warriors HI Oakland A's Sacramento Kings San Francisco Giants San Jose Sharks Stanford University University of Cal-Berkeley SportsChannel Philadelphia/PRISM DE, NJ, Philadelphia Flyers PA Philadelphia Phillies Philadelphia 76ers Atlantic 10 Conference Big East Conference Sunshine Network FL Orlando Magic Florida State University Tampa Bay Lightning Florida Marlins Miami Heat Orlando Predators Tampa Bay Storm Florida Bobcats Sunshine State Conference University of Florida Orlando Solar Bears
Fox Sports has entered into multi-year agreements granting rights to Fox Sports Net for national distribution of certain sports events of the PAC-10 Conference, Big 12 Conference and Conference USA, which will be distributed in part through the Sports Networks and in part through other distribution media. In November 1995, Fox Sports entered into a 4-year, non-exclusive agreement with Major League Baseball ("MLB"), commencing with the 1997 regular season games, for 2 cable-exclusive nights per week for 26 weeks for national distribution. MLB games will be carried on fX and through Fox Sports Net, the Sports Networks. The Sports Networks derive revenue from two principal sources: (1) fees paid by multichannel video programming distributors pursuant to affiliation agreements entered into with the Sports Networks and (2) the sale of advertising time to local, regional and national advertisers plus infomercials. Each cable operator or other distributor is typically charged a monthly fee per subscriber in its systems receiving the programming service, which fees vary depending on whether the service is offered as a basic, expanded basic or Pay-TV service and the proximity of the cable system to the venue of the major sporting events distributed by the network. The affiliation agreements generally provide for limited increases during their term in the fees charged by the networks. In addition to owning interests in and operating the Sports Networks, Fox Sports also provides various services to affiliated and non-affiliated networks. Fox Sports, through Fox Sports Direct, acts as a marketing agent to C-Band HSD owners and distributors to C-Band HSD owners for certain of the Sports Networks with which it is affiliated. In addition, Fox Sports provides support services, such as master control and satellite uplinking services, and certain program scheduling, post-production and editing services, to certain of its affiliated networks. I-33 36 Each of the Sports Networks sells advertising time to local, regional and national advertisers. In general, each network's own sales force markets and sells advertising time to local and regional advertisers, which accounts for approximately 60% of the total advertising revenue of the Sports Networks. The remaining 40% of such advertising revenue is sold nationally through Fox Sports Net Sales, a national advertising group headquartered in New York. Advertising revenue as a percentage of each network's total revenue varies from network to network, with the more established networks generally deriving a greater percentage of their revenue from advertising sales than the newer networks with fewer subscribers. The cost of acquiring sports programming rights and production of events are the principal expense categories of the Sports Networks. The Sports Networks typically enter into rights contracts with one or more professional sports teams in their regions and acquire rights to collegiate sporting events through arrangements with regional conferences, individual schools and programming syndicators. The duration of the rights agreements with the professional teams ranges from one to fifteen years. The rights contracts for collegiate sporting events typically range from two to five years. Pursuant to the professional sports rights agreements, the Sports Networks usually acquire the exclusive right to distribute via cable and other forms of pay television, in their respective regions, a specified number of games that are not subject to national cable or broadcast contracts. In some cases, the contract requires the network to exhibit a minimum number of games and permits exhibition of additional games, up to a fixed maximum number. The arrangements with respect to collegiate sports are more varied, but usually provide exclusive regional cable distribution rights (other than via free over-the-air broadcast television) to a specified number of events. Both professional and collegiate rights granted under such agreements are generally subordinate to rights granted under league or conference national broadcast and national cable contracts. The fee arrangements for the rights granted to the Sports Networks under the professional and collegiate sports agreements also vary from contract to contract. In most cases, the contract provides for a charge per game or event, subject to limited increases over the term of the contract, with either a minimum annual exhibition requirement or a minimum payment requirement or both. In certain recent cases a Sports Network has also acquired broadcast or radio rights to professional teams or collegiate events and has sub-licensed such rights to broadcast or radio distributors. Certain factors such as player strikes, bankruptcy of leagues or individual teams, or team relocations may have an adverse effect on the revenue of the Sports Networks. The value of the exhibition rights granted under sports rights contracts, and in some cases the financial commitments incurred thereunder, are subject to certain contingencies that are not within the control of the Sports Networks, such as the relocation of a professional team to a different region, changes in the schools participating in a particular collegiate conference, the terms of applicable national broadcast or cable contracts, and the rules and regulations of the applicable professional or collegiate league, conference or association. As the Sports Networks are regional in nature, to the extent that TCI is the predominant cable provider in a specific region, the percentage of SSI subscribers to certain of the Sports Networks may significantly exceed 24.5%. I-34 37 National Sports Programming Services. "Fox Sports Net" a national service, distributing network programming to the Sports Networks, other regional sports networks, and certain other local cable or broadcast affiliates. It consists of sports news, professional and collegiate sports events and other sports programming not subject to territorial restrictions (including the national MLB games referred to above), college football and basketball games, (including games from the PAC-10, Big 12 and Conference USA packages referred to above), college baseball, professional tennis, auto racing, soccer, golf, boxing and skiing. Fox Sports Net has recently created a sports news program, "Fox Sports News," which is part of the Fox Sports Net network programming. The establishment of Fox Sports Net allows Fox Sports to supplement the local and regional sports programming on each Sports Network with high quality national sports programming. "Prime Network" is another national sports service. Several Sports Networks are contractually obligated to carry certain programming from Prime Network. Prime Network primarily supplies secondary sports programming, also used to supplement the Sports Networks programming service. "NewSport" is a national service primarily dedicated to the production and delivery of sports news and related programming. NewSport is distributed primarily to regional sports networks to be used as either backdrop programming or a stand-alone second service. The term "backdrop service" is used to distinguish between original programming produced by a regional sports network and ancillary programming purchased by a regional sports network from others to supplement its programming service. "fX" is a general entertainment channel that will be featuring MLB games once a week and the syndicated series of NYPD Blue, X-Files, Picket Fences along with a number of other high-quality series. Approximately 37% of the subscribers to fX are SSI Subscribers. In January 1997, Fox Sports entered into a six-year agreement to clear broadcast of certain Fox Sports programming on WBIS, a New York City broadcast station. Fox Sports will provide up to 25 hours per week of its sports programming during WBIS's sports programming block in the evenings and on weekends, including its "Fox Sports News" and other national sporting event programming. Fox Sports paid a fee to WBIS for broadcast of the sports programming and will be entitled to a share of the net advertising revenue derived from such programming. I-35 38 Competition-Programming Companies. The business of distributing pro-gramming for cable television is highly competitive. The number of analog channels available to the average subscriber of a domestic cable television system is 60 or less. The various sports, entertainment and information Programming Companies described above in which Liberty Media Group has interests (the "Programming Companies") directly compete with other programming services for distribution on a limited number of cable television channels and, when distribution is obtained, the programming offered by the Programming Companies competes, in varying degrees, for viewers and advertisers with other cable programming services and off-air broadcast television, radio, print media, motion picture theaters, video cassettes, internet services and other sources of information and entertainment. Important competitive factors are the prices charged for programming, the quantity, quality and variety of the programming offered and effectiveness of marketing efforts. With the advent of new compression technologies, which are intended to increase channel capacity, competition for channel capacity may substantially decrease, although additional competitors may have the opportunity to enter the marketplace thereby increasing competition for subscriber fees and advertising revenue. No predictions can be made with respect to the viability of these technologies or the extent to which they will ultimately impact the availability of channel capacity. In addition to competition for cable distribution, viewers and advertisers, the Programming Companies also compete, to varying degrees, for programming. With respect to the acquisition of sports programming rights, the Programming Companies compete for national rights principally with the national broadcast television networks; a number of national cable services that specialize in or carry sports programming; television "superstations," which distribute sports and other programming to cable television systems by satellite; and with independent syndicators that acquire and resell such rights nationally, regionally and locally. They also compete for local and regional rights with those competitors, with local broadcast television stations and with other local and regional sports networks. The owners of distribution outlets such as cable television systems may also contract directly with the sports teams in their service areas for the right to distribute a number of such teams' games on their systems. Four professional sports leagues have each entered into agreements with national DBS distribution outlets for the distribution of selected league games. With respect to the acquisition of non-sports programming (such as syndicated programs and movies) which is not produced by or specifically for the Programming Companies, competitors include the national broadcast television networks, local broadcast television stations, suppliers of pay-per-view programs and other cable program suppliers. As set forth in Regulation-Programming Companies below, the FCC's "financial interest and syndication" rules had limited the ability of the three major broadcast networks to distribute network programs through syndication to broadcast stations and to acquire certain financial interests or domestic syndication rights in first-run non-network programs. However, the FCC repealed these rules in September 1995. Elimination of these restrictions permits a myriad of broadcast station/network production/exhibition arrangements, further increasing competition to the Programming Companies in the acquisition and sale of programming. I-36 39 In a series of decisions, federal courts had invalidated the statute prohibiting telephone companies from providing video programming and other information directly to subscribers in their telephone service areas. Although those decisions had been subject to review, telephone companies had begun to invest in and/or form entities for the production and/or acquisition of programming. Such entities will provide further competition to the Programming Companies in the creation, acquisition and/or sale of programming. The 1996 Telecom Act eliminated that statutory prohibition and any remaining uncertainty. Therefore telephone company investment in, development of, and/or acquisition of programming may be expected to continue and may increase. However, the telephone companies through their entry into video distribution could increase the number of outlets for programming sold by the Programming Companies. Satellite Transponder Agreements. The Programming Companies lease satellite transponders under varying terms on both domestic and international communications satellites. Domestic communications satellite transponders may be leased full or part time on a "protected," "transponder protected" or "unprotected" basis. When the carrier provides services to a customer on a "protected" basis, replacement transponders are reserved on board the satellite for use in the event the "protected" transponder fails. Should there be no reserve transponders available, the "protected" customer will displace an "unprotected" transponder customer on the same satellite. In certain cases, the carrier also maintains a protection satellite and should a satellite fail completely, all of the lessees' "protected" services would be moved to the protection satellite. The customer who leases an "unprotected" transponder has no reserve transponders available, and may have its service interrupted for an indefinite period when its transponder is required to restore a "protected" service. The availability of replacement satellites and transponder time beyond current leases is dependent on a number of factors over which Liberty Media Group has no control, including the market demand for additional transponder capacity by other prospective users and the normal uncertainties surrounding the launch of new satellites and the on- orbit failure of existing satellites, which, collectively, determine the future price of satellite transponders as the demand versus supply ratio fluctuates. Although the Company believes that the Programming Companies have taken reasonable steps to ensure its continued satellite transmission capability, there can be no assurance that termination or interruption of satellite transmissions will not occur. Such a termination or interruption of service by one or more of these satellites could have a material adverse effect on the results of operations and financial condition of Liberty Media Group. The Company began deployment of compressed digital video transmission in Hartford, CT, during 1996. This technology converts on average as many as fourteen analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The industry is currently developing standards for sending and receiving compressed signals. Several of Liberty Media Group's transponder leases provide the right to use the transponders to provide compressed services. Use of compressed service may result in greater transponder capacity. I-37 40 Regulation-Programming Companies. The FCC regulates the providers of satellite communications services and facilities for the transmission of programming services, the cable television systems that carry such services and to some extent the programming services themselves. Cable television systems are also regulated by municipalities or other state and local government authorities. Municipalities generally have the jurisdiction to grant and to review the transfer of franchises, to review rates charged to subscribers, and to require public, educational, governmental or leased-access channels, except to the extent that such jurisdiction is preempted by federal law. Any such rate regulation or other franchise conditions could place downward pressure on subscriber fees earned by the Programming Companies, and such regulatory carriage requirements could adversely affect the number of channels available to carry the Programming Companies. The 1992 Cable Act expanded greatly the scope of federal and local regulation. Liberty Media Group believes that the legislation taken as a whole and as presently implemented is having a material adverse impact upon the cable industry in general and upon Liberty Media Group's programming operations specifically. The 1996 Telecom Act, also made significant changes in the regulation of and competition among telecommunications-related industries, including the cable television industry. See "Cable and Communications Services--Domestic Cable--Regulation and Legislation" above, for a more detailed summary of such changes. Among other things, the 1996 Telecom Act eliminated the statutory prohibition of telephone companies providing video programming in their service areas; established a regulatory alternative for open video systems; eliminated rate regulation of cable programming service tiers immediately for small cable systems and on March 31, 1999, for all cable systems; extended the program access and anti-discrimination rules to satellite cable programming vendors owned by telephone companies and other common carriers; and imposed closed- captioning requirements for video programming. A number of provisions of the 1996 Telecom Act remain subject to implementation through rulemaking proceedings by the FCC. Certain of the more significant areas of regulation imposed by the 1992 Cable Act as revised by the 1996 Telecom Act that relate to or may affect programming operations are discussed below. Regulation of Program Licensing. The 1992 Cable Act directed the FCC to promulgate regulations regarding the sale and acquisition of cable programming between multichannel video program distributors (including cable operators) and programming services in which a cable operator has an attributable interest. The legislation and the implementing regulations adopted by the FCC preclude virtually all exclusive programming contracts between cable operators and programmers affiliated with any cable operator (unless the FCC first determines the contract serves the public interest) and generally prohibit a cable operator which has an attributable interest in a programmer from improperly influencing the terms and conditions of sale to unaffiliated multichannel video distributors. Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and competing video technologies such as MMDS and DBS services on terms and conditions that do not unfairly discriminate among such technologies. The 1996 Telecom Act has extended this requirement to programming services in which telephone companies and other common carriers have attributable ownership interests. Regulation of Carriage of Programming. Under the 1992 Cable Act, the FCC has adopted regulations prohibiting cable operators from requiring a financial interest in a program service as a condition to carriage of such service, coercing exclusive rights in a programming service or favoring affiliated programmers so as to restrain unreasonably the ability of unaffiliated programmers to compete. I-38 41 Regulation of Cable Service Rates. Cable systems are subject to extensive rate regulation as summarized above in "Regulations and Legislation - Regulation of Cable Service Rates." The 1996 Telecom Act eliminates rate regulation of CPSTs in all cable systems as of March 31, 1999. Such comprehensive regulations include provisions controlling rate increases for changes in costs, including programming costs, and for additional channels. The FCC's rate regulations permit cable operators to adjust rates to account for inflation and increases in certain external costs, including increases in programming costs to the extent such increases exceed the rate of inflation. In 1995, the FCC adopted an alternative methodology for adjusting regulated rates to account for such cost increases and for the costs of adding channels which provides cable operators with increased flexibility to recover such costs. Cable television systems also may adjust rates when regulated tiers are affected by channel additions or deletions. Additional programming costs resulting from channel additions can be accorded the same external treatment as other program costs increases, and cable operators presently are permitted to recover a mark-up on their programming expenses. However, a cable operator may pass through increases in the cost of programming services affiliated with such cable operator to the extent such costs exceed the rate of inflation only if the price charged by the programmer to the affiliated cable operator reflects prevailing prices offered in the marketplace by the programmer to unaffiliated third parties or the fair market value of the programming. The FCC's rate regulations have impaired the willingness and ability of cable operators to add programming services and to invest in additional cable plant to expand channel capacity. Consequently, the cumulative impact of the FCC's rate regulation is likely to continue to have an adverse impact on Liberty Media Group's programming interests. Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted broadcasters a choice of "must carry" rights or "retransmission consent" rights. Cable operators are required to secure permission from broadcasters that elected retransmission consent rights before retransmitting the broadcasters' signals. Local and distant broadcasters can require cable operators to make payments as a condition to carriage of such broadcasters' station on a cable system. (Established "superstations" were not granted such rights.) Alternatively, commercial broadcasters have the right to deny such carriage unless they grant retransmission consent. I-39 42 The 1992 Cable Act also imposed obligations to carry "local" broadcast stations for such stations which chose a "must carry" right, as distinguished from the "retransmission consent" right described above. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must carry and, depending on a cable system's channel capacity, non-commercial television broadcast signals. In July 1993, the FCC ruled that stations predominantly used for the transmission of sales presentations or program-length commercials operate in the public interest and are entitled to choose "must carry" status. HSNI's full- time broadcast affiliates have all requested "must carry" status in lieu of a retransmission fee. A petition for reconsideration of the FCC's ruling currently remains pending before the FCC, which petition has been opposed by HSNI. The United States Supreme Court is currently reviewing the constitutionality of the must carry regulations and is expected to rule on their constitutionality in 1997. The "must-carry" and "retransmission consent" statutory provisions and regulations remain in effect pending the outcome of these ongoing judicial proceedings. Such statutorily mandated carriage of broadcast stations coupled with the provisions of the 1984 Cable Act, which require cable television systems with 36 or more "activated" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for public, educational and governmental access, could adversely affect some or substantially all of the Programming Companies by limiting the carriage of such services in cable systems with limited channel capacity. As a result of "must carry," HSNI has experienced increased cable distribution of its programming due to an increase in the number of cable systems that carry HSNI programming. On February 4, 1997, the FCC released revised rules for calculating the maximum rate for leased commercial access to tiered channels. The newly-adopted formula yields a lower maximum rate than the current rate such that the use of leased access may be expected to increase, thereby further restricting the channel capacity available for carriage of the Programming Companies. Ownership Regulations. The 1992 Cable Act required the FCC to, among other things, (1) prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that will be allowed to carry programming in which the owner of such cable system has an attributable interest and (2) consider the necessity and appropriateness of imposing limitations on the degree to which multichannel video programming distributors (including cable operators) may engage in the creation or production of video programming. In 1993, the FCC adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest (using the same attribution standards as were adopted for its limits on the number of homes nationwide that a cable operator may reach through its cable systems) to 40% of the first 75 activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. Channels beyond the first 75 activated channels are not subject to such limitations, and the rules do not apply to local or regional programming services. These rules may limit carriage of Liberty Media Group's programming services on certain systems of cable operators affiliated with Liberty Media Group. In the same rulemaking, the FCC concluded that additional restrictions on the ability of multichannel distributors to engage in the creation or production of video programming presently are unwarranted. I-40 43 Closed Captioning Regulation. The 1996 Telecom Act also requires the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. On January 17, 1997, the FCC released proposed new rules which would require substantial closed captioning. Depending upon the rules and implementation schedule ultimately adopted by the FCC, the Programming Companies may incur significant additional costs for closed captioning. Voluntary Parental Television Guidelines. On January 17, 1997, the National Association of Broadcasters, the National Cable Television Association, and the Motion Picture Association of America submitted a joint proposal to the FCC proposing a voluntary ratings system for video programming. Under this proposal, television programming would be rated according to one of the six following categories: TV-Y (designed for all children), TV-Y7 (designed for children age 7 and above), TV-G (designed for all ages), TV-PG (parental guidance suggested), TV-14 (parents strongly cautioned, programming may contain material that many parents would find unsuitable for children under 14 years of age), and TV-M (mature audience only, programming may be unsuitable for children under 17 years of age). The FCC requested comment on this proposal on February 7, 1997. Under Sections 551(b) and 551 (e)(1)(A) of the 1996 Telecom Act, the FCC, in consultation with public interest groups and interested individuals from the private sector, has the authority to prescribe television rating guidelines and procedures if the voluntary industry proposal is not "acceptable." Several petitions filed with the FCC seeking reconsideration of various aspects of the regulations implementing the 1992 Cable Act remain undecided. Petitions for judicial review of regulations adopted by the FCC, as well as other court challenges to the 1992 Cable Act and the FCC's regulations, also remain pending. The FCC also has initiated numerous rulemakings to implement the 1996 Telecom Act. The Company is uncertain how the courts and/or FCC ultimately will rule or whether such rulings will materially change any existing rules or statutory requirements. Further, virtually all are subject to revision at the discretion of the appropriate governmental authority. Proposed Changes in Regulation. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. This process continues in the context of legislative proposals for new laws and the adoption or deletion of administrative regulations and policies. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that Liberty Media Group's business will not be affected adversely by future legislation, new regulation or deregulation. I-41 44 Satellites and Uplink. In general, authorization from the FCC must be obtained for the construction and operation of a communications satellite. The FCC authorizes utilization of satellite orbital slots assigned to the United States by the World Administrative Radio Conference. Such slots are finite in number, thus limiting the number of carriers that can provide satellite transponders and the number of transponders available for transmission of programming services. At present, however, there are numerous competing satellite service providers that make transponders available for video services to the cable industry. Certain satellites are more valuable than others to cable television programmers based on whether a particular satellite is used by other programmers of popular cable services. Factors that may affect the Programming Companies' ability to meet their transponder needs in the future include the market demand for additional transponder capacity by other prospective users and the normal uncertainties surrounding the launch of new satellites and the on-orbit failure of existing satellites, which, collectively, determine the future price of satellite transponders as the demand versus supply ratio fluctuates. Under current policy, the carriers from whom the Programming Companies obtain transponder services are not subject to the market exit provisions of Section 214 of the Communications Act of 1934, as amended (the "Communications Act"), and may therefore cease providing communications services to customers on short notice, provided that such action is just, reasonable and non- discriminatory, and subject to any additional rights or remedies to which the customer and the carrier may have agreed. The Company has no reason to believe that such service providers have any intention to cease providing transmission services via their respective satellite systems. The FCC also grants licenses to construct and operate satellite uplink facilities which transmit signals to satellites. These licenses are generally issued without a hearing if suitable frequencies are available. A number of the Programming Companies, as well as HSN and Southern, have been granted licenses for the construction and operation satellite uplink facilities and others obtain satellite uplink services from established service providers. Financial Interest and Syndication. The FCC's "financial interest and syndication" rules had limited the ability of the three major broadcast networks to distribute network programs through syndication to broadcast stations. The major broadcast networks have not been restricted from distributing network programs to cable or satellite programmers, such as the Programming Companies. However, under the FCC's modified financial interest and syndication rules adopted in 1993, the three major networks had been prohibited from: (a) actively syndicating any prime-time entertainment or first-run non-network programming to television stations in the United States, (b) acquiring financial interests or domestic syndication rights in any first-run non-network program or series distributed in the United States unless that program or series was produced solely "in-house" by the network, and (c) warehousing programming by withholding it from the syndication market beyond certain defined periods. The FCC eliminated these rules in September 1995. Elimination of these restrictions permits a myriad of broadcast station/network production/exhibition arrangements that only cable operators and the major broadcast networks (to the extent of distributing to cable and satellite programmers) were permitted to undertake, further increasing competition to the Programming Companies in the acquisition and sale of programming. The grant of expanded syndication powers to the three major networks could lessen the attractiveness and/or availability of the major networks' programming to cable system operators and programmers because they would have to compete directly for such programming with broadcast stations and could be less likely to secure cable/broadcast network exclusive distribution and other arrangements. I-42 45 Broadcasting. Netlink USA, ("Netlink") a subsidiary of the Company atrributed to the Liberty Media Group, has two lines of business: packaging, marketing and distributing programming to the U.S. C-Band market (the "Retail Business"); and uplinking the signals of broadcast television stations to C-Band packagers and cable systems (the "Wholesale Business"). Effective April 1, 1996, UVSG, an entity controlled by the TCI Group, and Netlink combined the Retail Businesses of Netlink and Superstar Satellite Entertainment ("Superstar"), another large distributor of programming to the C-Band market, owned by UVSG. The resulting venture, Superstar Netlink Group LLC ("Superstar/Netlink"), owned 50% by each of UVSG and Netlink, is the nation's largest provider of programming to C-Band customers with approximately 42% of the C-Band market. This includes approximately 36,000 subscribers added through Superstar/Netlink's acquisition in 1996 of the retail C-Band business of Jones Satellite Programming. Liberty Media Group retained 100% ownership of the Wholesale Business of Netlink ("Netlink Wholesale"). Superstar/Netlink acquires rights to market various satellite- transmitted programming, including services such as ESPN, CNN, HBO, WTBS and Discovery Channel, to C-Band HSD households. Superstar/Netlink offers C-Band HSD households various packages of programming for monthly, quarterly, semi-annual and annual subscription periods. Once a subscriber has ordered service by telephone or through a C-Band HSD retailer, Superstar/Netlink transmits an authorization code to the customer's descrambler, allowing customers to receive the programming. Superstar/Netlink markets its C-Band services through direct retail efforts and satellite equipment dealers. During 1996, approximately 29% of Superstar/Netlink's new subscribers were generated through satellite equipment dealers. During 1996, Superstar/Netlink paid commissions to more than 6,000 dealers. Direct marketing includes advertising in publications targeted at C-Band HSD households, telemarketing and direct mail. During 1996, Netlink Wholesale uplinked and sold the signals of six broadcast television stations to C-Band packagers and cable systems in the U.S. As of December 31, 1996, approximately 613,000 C-Band HSD households subscribed to one or more of such stations offered by Netlink Wholesale through C-Band packagers and cable companies. The C-Band packagers and cable companies pay Netlink Wholesale a fee for the right to sell these services to their customers. Competition-Netlink. Superstar/Netlink competes with other C-Band program packagers, some of which are affiliated with well-known, large programmers and cable television system operators. Because a significant portion of Superstar/Netlink's sales are generated through C-Band HSD dealers, Superstar/Netlink also competes for dealer relationships on the basis of commission rates and quality of service offered to the dealer and its customers. In addition, the C-Band market faces significant competition from cable television as well as DBS services, which were launched in 1994. DBS uses higher power Ku-Band frequencies that can be received by significantly smaller HSDs than HSDs that receive C-Band frequencies. Because of the smaller dish size, DBS may be more widely accepted than C-Band systems in urban markets. The Company believes that the entry of DBS will serve to decrease the size of the C-Band market in the short and long term. During 1996, the C-Band industry decreased 4% to 2.3 million subscribers. I-43 46 During 1996 Netlink Wholesale leased six satellite transponders on an "unprotected" or "transponder unprotected" basis on a communications satellite. Netlink Wholesale has "seniority status" on such satellite transponders which results in Netlink Wholesale having favorable ranking should transponders be required to restore a "protected" service. See "Satellite Transponder Agreements" above. In uplinking and selling the signals of broadcast television stations in the U.S., Netlink Wholesale is subject to the FCC regulations and Copyright Act provisions described below under "Transmission of TBS Superstation ("WTBS")--Regulation--Southern". Pursuant to such regulations, Netlink Wholesale may only distribute the signals of network broadcast stations to "unserved households" which are outside the Grade B contours of a primary station affiliated with such network. Netlink Wholesale has entered into an agreement in principle with representatives of the National Association of Broadcasters and of its television network affiliate members to identify by zip code those geographic areas which are "unserved" by network affiliated stations. Depending upon finalization of the agreement and such identification, Netlink Wholesale may be required to disconnect a substantial number of existing subscribers which would have a material adverse effect upon the operations of Netlink Wholesale. Transmission of TBS SuperStation ("WTBS"). Southern and its wholly owned subsidiary, Royal Communications, Inc. ("Royal"), transmit the signal of WTBS, a 24-hour independent UHF television station originated by TBS, from the uplinking facilities of LMC SatCom, Inc., a wholly owned subsidiary of Southern, in and near Atlanta, Georgia, to a protected transponder on the Galaxy V Satellite. Southern leases such transponder from TBS pursuant to a sublease that expires in the year 2000. Southern makes the WTBS signal available to cable television system operators and operators of other non-broadcast distribution media who receive the signal on their earth stations and offer the service to their subscribers. Southern also makes the WTBS signal available to C-Band HSD owners through program packagers. A substantial portion of Southern's consolidated revenue for 1996 was derived from the C-Band market. No payment to TBS is required for the transmission by Southern of the WTBS signal. See "Regulation-Southern" below. At December 31, 1996, Southern (and Royal) transmitted WTBS to an estimated 67 million homes throughout the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Cable and other operators pay Southern a per-subscriber fee for this service, generally pursuant to written service agreements, the expiration dates of which range from 1997 to 2005. Cable television system operators serving approximately 76.7% of the U.S. cable subscribers to whom the WTBS service was made available at December 31, 1996, are served either on a non-contract basis or pursuant to service agreements which expire in the next five years. Royal began distribution in Canada of the WTBS signal in 1991. Canadian agreements expire between 1997 and 2001. Southern provides the WTBS signal to the U.S. and Canadian C-Band HSD markets for a per-subscriber fee pursuant to program packager agreements, all of which are currently on automatic rollover of one year increments. Southern also has agreements with DBS distributors including Primestar, DIRECTV, Inc., AlphaStar, EchoStar and Express Vu (Canadian). Such agreements expire between 1997 and 1998 except the agreement with EchoStar which expires in 1999. I-44 47 In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Wanrer in converting WTBS from a superstation into a copyright paid cable programming service. Also in connection with the TBS/Time Warner Merger, subject to a number of conditions, TCI agreed in the FTC Consent Decree that it would Spin-off to holders of Liberty Media Group stock the stock of a separate company, the assets of which would include Southern. For a more detailed description of the terms of the Contract Option, the Distribution Contract and the Spin-off, see the description of the TBS/Time Warner Merger in "Entertainment and Information" above. Competition-Southern. Although Southern is currently the sole satellite carrier of WTBS, other independent television stations are transmitted by other carriers. Southern does not have an agreement with TBS with respect to the retransmission of the WTBS signal and there are no specific statutory or regulatory restrictions that would prevent any satellite carrier from transmitting the WTBS signal so long as the carrier meets the passive carrier requirements of the Copyright Act, and any applicable requirements of the Communications Act or, if the carrier serves C-Band HSD owners, so long as the carrier meets the requirements of the Satellite Home Viewer Act of 1988 (the "SHV Act"). Further, Southern has no control over the programming on such stations. TBS produces and distributes other cable programming services, including "TNT," a basic cable entertainment service, and TBS has and may be expected to continue to give priority to the programming needs of such services in allocating programming owned by it or to which it has national distribution rights. Southern's business could be adversely affected by any change in the type, mix or quality of the programming on WTBS that results in the service being less desirable to cable operators and their subscribers. TBS derives significant revenues from the sale of advertising time on WTBS, however, and Liberty Media Group therefore believes that TBS has an economic incentive to maintain the audience appeal of WTBS's programming. Regulation-Southern. Southern is subject to a number of FCC and Copyright Act regulations. In addition to the copyright and licensing requirements summarized below, Southern is subject to the Regulation of Program Licensing adopted by the FCC under the 1992 Cable Act as summarized above in the discussion under "Regulation-Programming Companies." Copyright Regulations. The Copyright Act provides cable television operators with a compulsory copyright license for retransmission of broadcast television programming without having to negotiate program rights with the stations or individual copyright owners. However, see "Regulation-Programming Companies-Regulation of Carriage of Broadcast Stations" above regarding the imposition of retransmission consent for broadcast stations. Therefore, cable systems that carry distant broadcast signals, such as WTBS, must pay royalty fees to the Register of Copyrights, the amount of which is based upon a formula utilizing the amount of the system's semi-annual gross receipts and the number and type of distant signals carried by the system. Any increases in the required fees could adversely affect the competitive position of WTBS and therefore, Southern. The Copyright Act empowers the Copyright Office to review periodically and adjust copyright royalty rates based on inflation and/or petitions for adjustments due to modifications of FCC rules. Further, the FCC has recommended to Congress the abolition of the compulsory license for cable television carriage of broadcast signals, a proposal that has received substantial support from members of Congress. If the compulsory license is abolished, a cable operator would not be permitted to retransmit WTBS unless such cable operator reached a licensing agreement with the copyright owners or licensees of the programming contained on the WTBS signal being retransmitted. I-45 48 Southern is not permitted to provide the WTBS signal to C-Band HSD owners under the separate compulsory license extended to cable systems. Under regulations adopted by the Copyright Office, satellite carriers such as Southern are not "cable systems" within the meaning of the Copyright Act. In 1994 the United States Court of Appeals for the Eleventh Circuit upheld such regulations in an action challenging their validity brought by Southern and other satellite carriers, and the Supreme Court declined to review that decision. Instead, Southern markets the WTBS signal through program packagers to C-Band HSD owners. Pursuant to the SHV Act, Congress granted a compulsory copyright license to satellite carriers retransmitting the broadcast signals of "superstations," such as WTBS, and network stations to the public for private home viewing. In 1994, Congress extended this license until December 31, 1999. Pursuant to the provisions of the SHV Act, on May 1, 1992 the Copyright Royalty Tribunal ("CRT") adopted an increase in the compulsory license fees for the C-Band market effective January 1, 1993, which Congress has extended through July 1, 1997, thus increasing Southern's copyright payment by 17%. New fees after July 1, 1997 will be determined either through negotiations with the copyright owners of the signals being carried or, if no agreement can be reached, by an arbitration panel in a proceeding now being conducted under the auspices of the Copyright Office in which the copyright owners are seeking substantially higher fees. If the license granted under the SHV Act is not further extended, satellite carriers will be required to negotiate private licenses for the retransmission of copyrighted material to C- Band HSD owners after 1999. Syndicated Exclusivity. The FCC's syndicated exclusivity rules, which became effective January 1, 1990, require cable systems with more than 1,000 subscribers to delete programming from distant broadcast signals if exclusive local broadcast rights to such programming have been purchased by a television station which broadcasts in the locale of the cable system and such station requests the cable system to "black out" such programming. These rules could have an adverse effect on Southern's business if WTBS were to carry a material amount of programming subject to deletion. TBS has stated that it is programming WTBS to avoid blackouts and that, because it has a reasonable basis for believing that deletions of its programming will not be required, it is offering, as permitted by the FCC, to indemnify cable operators that carry WTBS in order to ensure that its programming is not blacked out. However, Southern cannot control TBS's programming decisions with respect to WTBS. FCC Licensing. Satellite carriers, including carriers like Southern that lease transponders from others rather than owning a satellite, may provide their services as a private carrier and/or as a common carrier. Common carriers are required, pursuant to the Communications Act, to provide services on terms and conditions that are just, reasonable and non-discriminatory. Private carriers are subject to a lesser degree of regulation by the FCC. The Copyright Act exempts any carrier from liability for copyright infringement in delivering television broadcast signals to cable television systems if it meets the passive carrier requirements of the Copyright Act. HSN, Inc. In December 1996, Silver King Communications, Inc. ("Silver King") consummated mergers with Savoy Pictures Entertainment, Inc. ("Savoy") )the "Savoy Merger") and with Home Shopping Network, Inc. ("HSN") and subsequently changed its name to HSN, Inc. ("HSNI"). Following such mergers, HSNI's principal areas of business are electronic retailing and television broadcasting. Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger"). Each outstanding share of HSN Common Stock was converted into the right to receive .45 of a share of HSNI's Common Stock. Each outstanding share of HSN Class B Common Stock was converted into the right to receive .54 of a share of HSNI's Class B Common Stock except for a portion of the HSN Common Stock and the HSN Class B Common Stock owned by the Liberty Media Group, the treatment of which is discussed below. I-46 49 Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of the Company in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Prior to the HSN Merger, HSN was a consolidated subsidiary of the Company attributed to Liberty Media Group. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received: (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. Pursuant to an Exchange Agreement between Liberty Media Group and Silver King, the shares of HSN held by Liberty Media Group following the HSN Merger are mandatorily exchangeable from time to time for shares of common stock and Class B common stock of Silver King (in the same ratio as the merger ratio in the HSN Merger) (x) upon the occurrence of certain events or changes in laws, rules or regulations which would entitle Liberty Media Group to own directly a greater number of shares of Silver King or (y) in connection with the sale of the shares of Silver King to be received in the exchange to a third party who would be entitled to own such shares under applicable law. If all shares of Silver King stock issuable pursuant to the Contingent Right and the Exchange Agreement were issued, Liberty Media Group's beneficial ownership of Silver King stock would increase from 21.37% to approximately 36.5% of the outstanding common equity (with such shares and the shares owned by BDTV-I and BDTV-II representing approximately 77% of the total voting power of the Silver King common equity). I-47 50 Liberty Media Group's shares of nonvoting stock of BDTV-I and BDTV-II are convertible into voting stock upon the occurrence of certain events (including a change in law), which would permit Liberty Media Group to own directly and to vote the Silver King stock held by BDTV-I and BDTV-II, respectively, pursuant to the rules and regulations of the FCC (a "Change in Law"). At such time as a Change in Law occurs, Liberty Media Group will have the right to acquire Mr. Diller's shares of BDTV-I and BDTV-II for an amount equal to Mr. Diller's investment in such shares, plus interest. Following a Change in Law, Liberty Media Group and Mr. Diller have agreed that they will vote upon a slate of directors of Silver King, of which a majority will be Liberty Media Group designees, and the remainder will be designees of Mr. Diller, and Liberty Media Group will vote, and will cause its director designees to vote, in the same manner as Mr. Diller, except with respect to certain fundamental matters and certain matters related to Mr. Diller's employment with Silver King. The BDTV Agreement grants Mr. Diller the right, so long as he owns a minimum number of shares of Silver King stock and is President, Chief Executive Officer or Chairman of the Board of Silver King, to exchange shares of Silver King Class B common stock owned by Liberty Media Group (10 votes per share) or held by BDTV-I or BDTV-II for shares of Silver King common stock (one vote per share) held by Mr. Diller, except to the extent that such exchange would result in Liberty Media Group beneficially owning securities representing less than 50% of the voting power of Silver King. The BDTV Agreement also contains restrictions on transfers of shares of Silver King stock by Liberty Media Group and Mr. Diller; rights of first refusal on permitted transfers of shares (except to a controlled affiliate); and a right of Mr. Diller to sell his Silver King shares to Liberty Media Group, if he ceases to be the President, Chief Executive Officer or Chairman of the Board of Silver King following the third anniversary of the BDTV Agreement (other than for cause). If Mr. Diller exercises his "put" right, the purchase price for such shares will be their "Appraised Value" (as defined) and such purchase price may be paid in cash or in any publicly traded securities of TCI or Liberty. The BDTV Agreement contemplates the creation of additional companies ("BDTV Entities") with the same capital structure as BDTV-I and BDTV-II, to which Liberty Media Group may contribute shares of Silver King received pursuant to the Contingent Right. HSNI, through its SKTV, Inc. subsidiary ("SKTV") and through Savoy's broadcasting operations ("SF Broadcasting"), acquired as a result of the Savoy Merger, controlled, as of December 31, 1996, 18 full-power television broadcast stations, including three satellite stations. HSNI also owned 26 low-power television stations (the "LPTV Stations") and two low-power translators. SKTV owns and operates 12 independent full-power UHF television stations, including one television satellite station (the "SKTV Stations"), which affiliate with and primarily broadcast HSN retail sales programming. To a limited extent, the SKTV Stations also broadcast syndicated programming, locally produced public affairs and public interest programming and commercial-free children's programming. The SKTV Stations serve 10 of the 16 largest metropolitan television markets in the U.S. The LPTV Stations also broadcast HSN programming. In addition, SKTV holds notes receivable and/or equity interests in six other entities that hold broadcast licenses or authorizations in nine television markets. I-48 51 Each SKTV Station, through the applicable HSNI subsidiary, has entered into an affiliation agreement with HSN pursuant to which such SKTV Station broadcasts HSN's electronic retail sales programming for 164 hours per week. No decision has been made by HSNI regarding whether SKTV will continue to broadcast HSN programming or whether SKTV will, instead, develop and broadcast programming independently of HSN. Because HSN has obtained carriage of its programming in many of SKTV's markets through long-term cable affiliation agreements, HSNI is evaluating the process for an orderly termination of the affiliation agreements between SKTV and HSN in the event the agreements are not renewed, and HSNI has initiated preliminary discussions in a number of markets for the purpose of securing alternative carriage of HSN programming. If SKTV elects to develop programming independently of HSN, substantial expenditures would be required to develop SKTV programming and promotions, requiring significant capital expenditures, which, during this developmental and transitional stage, will not be offset by sufficient revenues. There can be no assurance that, if SKTV ceases to broadcast HSN programming, SKTV will be successful in its strategy to develop and broadcast its own programming, whether on a local or national basis, or that HSN will be able to find other means of distributing its programming on favorable terms to the households in the broadcast areas currently served by the SKTV Stations. SF Broadcasting owns and operates 6 full-power stations (the "SF Stations"), including two satellite stations, and two low-power translators. Each of the SF Stations has entered into affiliation agreements with Fox Broadcasting Company ("Fox"). A subsidiary of HSNI owns a 50% equity and 100% voting interests in the SF Stations. Fox owns the remaining 50% non-voting equity interests and has the right to exchange all of such non-voting interests for voting interests in the SF Stations beginning in the third and fourth quarters of 1997, subject to necessary regulatory approvals. As summarized above in "Regulation of Carriage of Broadcast Stations," the Supreme Court is reviewing the constitutionality of the "must-carry" regulations. The outcome of the Supreme Court's review of the case cannot be predicted. Termination of carriage of the SKTV Stations could have an adverse impact on HSNI due to HSN revenue loss. In addition, the elimination of "must-carry" regulations would adversely affect HSNI's ability to obtain carriage of programming that it may develop in the future. Electronic Retailing Services. The Liberty Media Group currently provides electronic retailing services through an equity affiliate, QVC, Inc. ("QVC"), and HSN which was a subsidiary until December 20, 1996, when, as a result of the HSN Merger, described above, HSN became an equity affiliate of the Liberty Media Group. Upon consummation of the HSN Merger, HSNI owned 80.1% of the equity of HSN and the Liberty Media Group owned 19.9% of the equity of HSN. After the HSN Merger, at such time from time to time as Liberty or its permitted transferee may be allowed under applicable regulations to hold additional shares of HSNI's stock, and after exercise in full of the Contingent Rights, Liberty will exchange its HSN Common Stock and HSN Class B Common Stock for shares of HSNI Common Stock and HSNI Class B Common Stock at the same ratio as the merger ratio in the HSN Merger. Upon completion of such exchange, HSN would become a wholly-owned subsidiary of HSNI. I-49 52 HSN through its Home Shopping Club, Inc. ("HSC") subsidiary, sells a variety of consumer goods and services by means of live, customer-interactive electronic retail sales programs which are transmitted twenty-four hours a day, seven days per week, via satellite to cable television systems, affiliated broadcast television stations and HSDs. HSN retail sales programming is currently carried on two separate networks, The Home Shopping Network ("THSN") and America's Store (formerly "Spree"). Both networks are carried by cable television systems and broadcast television stations throughout the country. America's Store programming is available in one-hour segments, which enables broadcast and cable affiliates to air America's Store in available time slots that would not otherwise produce revenue for the affiliate. HSN fulfillment subsidiaries store, service and ship merchandise from warehouses located in Salem, Virginia and Waterloo, Iowa. During 1996, HSN moved its St. Petersburg fulfillment operations to Salem, Virginia. HSN purchases merchandise made to its specifications, merchandise from manufacturers' lines and overstock inventories of wholesalers. During 1996, HSN continued to change its purchasing strategy to emphasize price point, variety, continuity sales, product sourcing and events. The mix of products and source of such merchandise depends upon a variety of factors including price and availability. HSC generally does not have long-term commitments with its vendors and there are various sources of supply available for each category of merchandise sold. HSN's product offerings include: jewelry; hardgoods, which include consumer electronics, collectibles, housewares, and consumables; cosmetics, softgoods, which consist primarily of apparel, and fashion accessories. HSN liquidates short lots and returned merchandise through its liquidation center and four outlet stores located in Florida. Merchandise that is damaged is liquidated by HSN through traditional channels. HSN produces retail sales programs in its studios located in St. Petersburg, Florida. These programs are distributed to cable television systems, broadcast television stations, DBS and C-Band HSDs by means of HSN's satellite uplink facilities to satellite transponders leased by HSN. HSN has lease agreements securing full-time use of three transponders, one of which is sublet to a third party, on three domestic communications satellites. Each of the transponder lease agreements grants HSN "protected" rights. The terms of two of the leases are for the life of the satellites, which are projected to be through 2004. The term of the third lease, which is currently being sublet, is through December 31, 2006, subject to earlier termination under certain circumstances. I-50 53 HSN enters into affiliation agreements with cable system operators to carry THSN, America's Store or both. HSN has a standard form of affiliation agreement which has a term of five years, is automatically renewable for subsequent one-year terms, and obligates the cable operator to assist the promotional efforts of HSN by carrying commercials regarding THSN and America's Store and distributing HSN's marketing materials to the cable operator's subscribers. The standard form of affiliation agreement provides that the cable operator will receive a commission of five percent of the net sales of merchandise sold within the cable operator's franchise area (from cable and broadcast households). However, particularly with larger, multiple system operators, HSN has agreed to provide additional compensation. In the past, this has included the purchase of advertising availabilities from cable operators on other programming networks and the establishment of commission guarantees committing HSN to a certain level of payments. Although a number of these contracts remain in effect, as a general rule, HSN is no longer entering into agreements that provide for advertising availability and commission guarantee compensation. These forms of compensation were replaced with cable distribution fees primarily consisting of up-front payments, based on commitment to transmit HSN programming to a certain number of subscribers, and/or performance bonus commissions that are intended to increase sales by compensating the cable operators for promotional efforts which result in higher net sales levels for HSN. Additional Subsidiary Businesses. In addition to the electronic retailing and broadcasting businesses, HSNI's subsidiaries are involved in Internet shopping and other businesses complementary to electronic retailing. These include: HSN Mail Order, Inc. which markets a variety of merchandise through four mail order catalogs; Vela Research, Inc. which develops and markets high technology audio and video MPEG compression/decompression products to the cable, computer and telecommunications industries; Internet Shopping Network, Inc. ("ISN") which operates an interactive shopping service on the Internet, specializing in small office and computer equipment. ISN is also engaged in exploring business opportunities for merchandising products via digital interactive television services and other new digital retailing vehicles. National Call Center, Inc. ("NCII"), performs telemarketing services using toll free 800 numbers. NCCI performs direct response telemarketing and provides services on a contractual basis to HSN and third parties using inbound and outbound telemarketing. NCCI can perform any number of related functions, including fulfillment and credit card clearing services. International Ventures. During 1996 and in 1997, HSN entered into two international ventures as a minority participant. Germany. HSN acquired a 29% interest in Home Order Television ("HOT"), a venture based in Munich. HOT broadcasts television shopping 24 hours per day, 12 of which are devoted to live shopping. HOT is carried via cable and satellite to several million households in Germany and Austria. Japan. HSN acquired a 30% interest in Shop Channel, a venture based in Tokyo. Shop Channel broadcasts televised shopping 24 hours a day, with 18 hours per week devoted to live shopping. Shop Channel currently is carried by cable affiliates to approximately one-half million households. I-51 54 Effect on HSN of the 1992 Cable Act. HSC's full-time, full power broadcast affiliates have all requested "must carry" status in lieu of a retransmission fee and most have obtained "must carry" status. (See "Regulation of Carriage of Broadcast Stations" above for a discussion of "must-carry"). The U.S. District court for the District of Columbia has twice upheld the constitutionality of the "must carry" rules. The Supreme Court is expected to rule on their constitutionality in 1997. Due to the possibility of "must carry" being found unconstitutional, HSN embarked on an aggressive campaign to bring the "must carry" households under contract by volunteering to pay commissions to cable operators required to transmit HSN's programming and by offering certain other incentives. Due to HSC's success in obtaining long-term carriage commitments, in the event "must carry" is ruled unconstitutional, HSN does not believe the ruling will have a material adverse impact on HSN or result in any significant loss in carriage. Competition-HSN. HSN operates in a highly competitive environment. It is in direct competition with businesses which are engaged in retail merchandising, other electronic retailers, direct marketing retailers such as mail order companies, companies that sell from catalogs, and other discount retailers and companies that market through computer technology. HSN also competes for access to its customers with broadcasters and alternative forms of entertainment and information, such as programming for network and independent broadcast television stations, basic and pay cable television services, newspapers, radio, magazines, outdoor advertising, transit advertising, yellow page directories and direct mail. In particular, the price and availability of programming for cable television systems affects the availability of these channels for HSN's programs and the compensation which must be paid to the cable operators for carriage of HSN programming. HSN was the first specialty retailer to market merchandise by means of live, nationally televised sales programs. There are other companies, some having an affiliation or common ownership with cable operators (including TCI), that now market merchandise by means of live television. A number of other entities are engaged in direct retail sales businesses which utilize television in some form and which target the same markets in which HSN operates. HSN cannot predict the degree of success with which it will meet competition in the future. In addition to the above factors, HSN's affiliation with broadcast television stations creates another set of competitive conditions. These stations compete for television viewers primarily within local markets. HSN's affiliated broadcast television stations are located in highly competitive markets and compete against both VHF and UHF stations. Due to technical factors, a UHF television generally requires greater power and a high antenna to secure substantially the same geographical coverage as a VHF television station. Under present FCC regulations, additional UHF commercial television broadcasting stations may be licensed in all such markets with the possible exception of New York City. HSN cannot quantify the competitive effect of the foregoing or any other sources of video programming on any of HSN's affiliated television stations, nor can it predict whether such competition will have a material adverse effect on its operations. For a more detailed discussion of HSNI's businesses, please refer to HSNI's Annual Report on Form 10-K for the year ended December 31, 1996 (commission File No. 0-20570). QVC.The Liberty Media Group owns a 42.6% interest in QVC. Substantially all of the remaining 57.4% of QVC is held by a subsidiary of Comcast, which manages the day-to-day operations of QVC. I-52 55 QVC markets and sells a wide variety of consumer products and services primarily by means of its televised shopping programs, known as "QVC" and "Q2". Cable television system operators that have entered into affiliation agreements with QVC carry its programming as part of their basic service and pursuant to such agreements receive from QVC commissions equal to 5% of the net sales of merchandise sold to customers located in the cable operator's service area. QVC is also a joint venturer in the operation of a British televised shopping service. QVC also operates iQVC, an online shopping service which is available on the Internet and via the Microsoft Network. iQVC is offering a wide variety of consumer products. During 1996, QVC launched a televised shopping service in Germany and in January 1997, formed a joint venture in Japan to produce twelve 1/2 hour programs. GENERAL Legislative, administrative and/or action may change all or portions of the foregoing statements relating to competition and regulation. The Company has not expended material amounts during the last three fiscal years on research and development activities. There is no one customer or affiliated group of customers to whom sales are made in an amount which exceeds 10% of the Company's consolidated revenue. Compliance with Federal, state and local provisions which have been enacted or adopted regulating the discharge of material into the environment or otherwise relating to the protection of the environment has had no material effect upon the capital expenditures, results of operations or competitive position of the Company. At December 31, 1996, the Company had approximately 35,000 employees, the majority of which are employees of TCIC. Of these employees, approximately 1,400 were located in its corporate headquarters and most of the balance were located at the Company's various facilities in the communities in which the Company owns and/or operates cable television systems or programming services. (d) Financial Information about Foreign & Domestic Operations and Export Sales The Company has neither material foreign operations nor export sales. Item 2. Properties. The Company owns its executive offices in a suburb of Denver, Colorado. It leases most of its regional and local operating offices. The Company owns many of its head-end and antenna sites. Its physical cable television properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. The Company's cable television facilities are, in the opinion of management, suitable and adequate by industry standards. Physical properties of the Company are not held subject to any major encumbrance. I-53 56 Item 3. Legal Proceedings. There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject, except as follows: On September 30, 1994, an action captioned The Carter Revocable Trust by H. Allen Carter and Sharlynn Carter as Trustees v. Tele-Communications, Inc.; IR-Daniels Partners III; Daniels Ventures, Inc.; Cablevision Equities IV; Daniels & Associates, Inc.; and John V. Saeman, 94-N-2253, was filed in the United States District Court for the District of Colorado. The suit alleges that all the defendants violated disclosure requirements under the Securities Exchange Act of 1934, and that defendants IR-Daniels Partners III (now known as IR-TCI Partners III), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.) and Daniels & Associates, Inc. (now known as TCI Cablevision Associates, Inc. or "D&A") breached a fiduciary duty to plaintiff and other limited partners of American Cable TV Investors 3 (the "ACT 3 Partnership"), in connection with (i) the sale to TCI Communications, Inc. of ACT 3 Partnership's ownership interest in the Redlands System and (ii) the sale to affiliates of TCIC of ACT 3 Partnership's ownership interests in other cable television systems (the "ACT 3 Transactions"). Plaintiff brought this action on behalf of himself and on behalf of all persons who were limited partners of the ACT 3 Partnership as of the close of business on October 1, 1993 and who had their proxies solicited by the defendants in connection with the ACT 3 Transactions that allegedly "resulted in the dissolution of the ACT 3 Partnership and the loss of their limited partnership interests." Plaintiff seeks unspecified damages that allegedly include, but are not limited to (i) the difference between the value of ACT 3 Partnership's interest in the Redlands System (as a percentage of the appraised value of that system as determined by a 1992 appraisal) and the amount paid by TCIC for the ACT 3 Partnership's interest in the Redlands System, plus the amount of a fee paid to D&A, and (ii) the difference between the fair market value of the limited partnership interests owned by members of a putative class and value received by members of the putative class pursuant to the ACT 3 Transactions. Plaintiff also seeks interest and consequential damages. Plaintiffs moved for class certification which was granted by the Court on November 3, 1995. Factual discovery in this case is complete. Defendants have filed a Motion for Summary Judgment within the scheduling deadlines ordered by the Court. The case is set for trial on September 29, 1997. Management of the Company believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. On September 30, 1994, an action captioned WEBBCO v. Tele-Communications, Inc.; IR-Daniels Partners II; Daniels Ventures, Inc.; Cablevision Equities III; Daniels & Associates, Inc.; and John V. Saeman, 94-N-2254, was filed in the United States District Court for the District of Colorado. The suit alleges that all the defendants violated disclosure requirements under the Securities Exchange Act of 1934, and that defendants IR-Daniels Partners II (now known as IR-TCI Partners II), Daniels Ventures, Inc. (now known as TCI Ventures, Inc.) and D&A breached a fiduciary duty to plaintiff and other limited partners of American Cable TV Investors 2 (the "ACT 2 Partnership"), in connection with the sale to TCIC of ACT 2 Partnership's ownership interest in the Redlands System (the "ACT 2 Transaction"). Plaintiff brought this action on behalf of himself and on behalf of all persons who were limited partners of the ACT 2 Partnership as of the close of business on October 1, 1993 and who had their proxies solicited by the defendants in connection with the ACT 2 Transaction that allegedly "resulted in the dissolution of the ACT 2 Partnership and the loss of their limited partnership interests." I-54 57 Plaintiff seeks unspecified damages that allegedly include, but are not limited to (i) the difference between the value of ACT 2 Partnership's interest in the Redlands System (as a percentage of the appraised value of that system as determined by a 1992 appraisal) and the amount paid by TCIC for ACT 2 Partnership's interest in the Redlands System, plus the amount of a fee paid to D&A, and (ii) the difference between the fair market value of the limited partnership interests owned by members of a putative class and value received by members of the putative class pursuant to the ACT 2 Transaction. Plaintiff also seeks interest and consequential damages. Plaintiffs moved for class certification which was granted by the Court on November 3, 1995. Factual discovery in this case is complete. Defendants have filed a Motion for Summary Judgment within the scheduling deadlines ordered by the Court. The case is set for trial on September 29, 1997. Management of the Company believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. Intellectual Property Development Corporation v. UA-Columbia Cablevision of Westchester, Inc. and Tele-Communications, Inc. On September 1, 1994, plaintiff filed suit in federal court in New York for the alleged infringement of a patent for an invention used in broadcasting systems with fiber optic transmission lines. Plaintiff seeks injunctive relief and unspecified treble damages. The patent at issue expired on January 16, 1996, thereby eliminating any claim for injunctive relief by plaintiff. The issues now center around whether defendants owe past damages up to the time the patent expired. Discovery is currently ongoing. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of this action, the ultimate disposition of this action should not have a material adverse effect upon the financial condition of the Company. Turner Broadcasting Systems, Inc. Shareholder Litigation. Following the announcement of the proposed merger (the "TBS-Time Warner Merger") between Turner Broadcasting Systems, Inc. ("TBS") and Time Warner, Inc. ("Time Warner") several purported class action lawsuits were filed by TBS shareholders in Fulton County Superior Court, Georgia. On November 1, 1995, plaintiffs in thirteen of the cases filed a second amended class action Complaint in what will be a consolidated action styled Lewis v. TBS, Inc. C.A. No. B-41500. The defendants include, among others, Tele-Communications, Inc., John Malone, Peter Barton and Fred Vierra. The claims and defendants in the actions other than the Lewis action are substantially the same as set forth in the second amended complaint in the Lewis action. Plaintiffs allege in the second amended complaint in the Lewis action that defendants have injured the public stockholders of TBS in conjunction with the TBS-Time Warner Merger proposal by (a) misrepresenting the extent to which defendants Time Warner, TCI, John Malone and R.E. Turner ("Turner") have acted for their own benefit and not for the benefit of TBS or its stockholders, (b) failing to adequately disclose the full nature and value of special considerations granted to TCI and Turner in connection with the TBS-Time Warner Merger proposal, (c) failing to engage in arms' length bargaining or give any consideration to maximizing TBS stockholder value, (d) proposing to provide the public holders of TBS stock with unfair consideration in the TBS-Time Warner Merger, and (e) seeking to entrench certain of the TBS officers and directors. Plaintiffs in the Lewis action seek to enjoin the consummation of the TBS-Time Warner Merger, enjoin the transfer of any assets to TCI in connection with the TBS-Time Warner Merger, or to rescind the TBS-Time Warner Merger or transfer of assets if such acts are consummated. Plaintiffs also seek unspecified compensatory and punitive damages. On December 20, 1996, the Georgia State Court dismissed the plaintiffs third amended complaint in the Lewis action. Plaintiffs have stated their intention to appeal the dismissal order and filed a fourth amended complaint on January 16, 1997. Discovery has not commenced in any of the actions. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. I-55 58 QVC Shareholders Litigation. In July 1994, eight putative class action lawsuits were filed by certain shareholders of the company in the Delaware Court of Chancery on behalf of unspecified classes of holders of QVC common stock. On August 3, 1994, these actions were consolidated under the caption In re QVC Shareholders Litigation, Consolidated Civil Action No. 13590 (Court of Chancery, New Castle County, State of Delaware) (the "Consolidated Action"). The defendants named in the designated complaint in the Consolidated Action included QVC and its then directors (Barry Diller, Bruce R. Ramer, Linda J Wachner, William F. Costello, J. Bruce Llewellyn, Brian L. Roberts, Ralph J. Roberts and Joseph M. Segal). In their designated complaint in the Consolidated Action, plaintiffs alleged, among other things, that the QVC directors breached their fiduciary duties by failing to take all possible steps to seek out and encourage the best offer for QVC following the announcement by Comcast of a merger proposal to acquire QVC. Plaintiffs sought, among other things, an injunction ordering the defendants to auction QVC and an award of unspecified damages to the members of the plaintiff class. On July 22, 1994, Comcast and Liberty made a merger proposal to QVC in order to acquire the remaining shares of QVC common stock that Comcast and Liberty collectively did not already own. During early August 1994, counsel for the plaintiffs in the Consolidated Action advised counsel for Liberty that they were preparing to amend the designated complaint to name Comcast and Liberty as defendants. On August 3-4, 1994, plaintiffs' counsel negotiated with counsel for Liberty with respect to a proposed increase in the consideration to be paid to QVC's public shareholders as well as the accelerated payment of such consideration, as bases for the possible settlement of the Consolidated Action. On August 5, plaintiffs, defendants, Comcast and Liberty executed a memorandum of understanding which contemplated the settlement and dismissal with prejudice of the Consolidated Action. On August 4, 1994, Comcast, Liberty, QVC Programming Holdings, Inc. and the Company executed a merger agreement which, among other things, reflected the parties' agreement to the terms and transactions contemplated by the memorandum of understanding. On August 19, 1994, as contemplated by the memorandum of understanding, plaintiffs filed a consolidated amended class action complaint with the Delaware Court of Chancery against QVC, the company's directors, Comcast and Liberty. The settlement of the Consolidated Action was approved by the Delaware Court of Chancery on February 5, 1997 and will result in the dismissal with prejudice of the Consolidated Action, and a complete release of all claims, known or unknown, arising out of or related to the acts, transactions or occurrences that are alleged in the Consolidated Action. Defendants in the Consolidated Action have entered into the memorandum of understanding and have entered into the stipulation of settlement for the Consolidated Action solely because the proposed settlement would eliminate the distraction, burden and expense of the litigation. This represents the final resolution of this matter, and accordingly, it will not be reported in future filings. HSN Shareholder Litigation. During August 1996, five putative class action complaints were filed with the Delaware Court of Chancery in C.A. Nos. 15179, 15187, 15188, 15189 and 15195 by stockholders of Home Shopping Network, Inc. ("HSN"). The complaints were filed following the announcement of the proposed HSN merger. The defendants in the actions include HSN, Silver King, Tele-Communications, Inc. ("TCI"), Liberty Media Corporation ("Liberty") and the directors of HSN (Barry Diller, James G. Held, Peter R. Barton, Robert R. Bennett, Leo J. Hindery, Jr., H. Norman Schwarzkopf and Mr. Eli Segal). Messrs. Barton and Bennett are executive officers of Liberty. Mr. Hindery is an executive officer of TCI. The foregoing actions have been consolidated for all purposes pursuant to an order by the court which specifies that the complaint in C.A. No. 15188 is the designated complaint in the consolidated action. I-56 59 The gravamen of the complaint in C.A. No 15188 is that the HSN directors breached their fiduciary duties by approving the merger agreement. Plaintiffs also claim that TCI and Liberty, by supporting the proposed merger, breached their asserted fiduciary duties as controlling stockholders of HSN. Specifically, plaintiffs allege that the proposed merger is designed to allow Silver King and, indirectly, TCI and Liberty to acquire HSN without paying adequate consideration to the public holders of HSN common stock by timing the transaction at a time when the price of HSN common stock is low and by ignoring the anticipated positive prospects of HSN. Plaintiffs further allege that TCI and Liberty will be unjustly enriched because, under the merger agreement, they would receive a premium for their shares of HSN Class B stock while retaining what plaintiffs assert to be a controlling interest in Silver King through their ownership of Silver King Class B stock. According to plaintiffs, Silver King has knowingly aided and abetted these alleged breaches of fiduciary duties. Plaintiffs seek to enjoin the consummation of the proposed merger or, should the proposed merger proceed, rescission or rescissory damages. Plaintiffs also seek unspecified compensatory damages, fees and costs. The consolidated action remains pending and discovery has not commenced. 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 a material adverse effect upon the financial condition of the Company. In re Liberty Media Corporation Shareholder Litigation, Cons. C.A. No. 13168 (Del. Ch.). In October 1993, after the announcement that Liberty would recombine with TCI through the mergers of TCIC and Liberty with subsidiaries of a newly formed holding company, seven putative class action lawsuits were filed by Liberty stockholders in the Court of Chancery of the State of Delaware (the "Delaware Chancery Court") on behalf of unspecified classes of the holders of Liberty common stock (other than defendants). The original defendants included certain directors of Liberty (Bob Magness, John C. Malone, Peter R. Barton, H.F. Lenfest, Robert L. Johnson and Paul A. Gould), Liberty and TCI. These actions were consolidated by the Delaware Chancery Court on October 27, 1993 under the caption In re Liberty Media Corporation Shareholder Litigation, Cons. C.A. No. 13168 (the "Liberty Stockholder Action"). On December 21, 1994, plaintiffs were permitted by the Delaware Chancery Court to file a second consolidated amended complaint against the defendants named in the pending complaint and Liberty directors David Wargo and David Rapley. The pending complaint is on behalf of a putative class consisting of all holders of Liberty common stock (except the defendants and their affiliates) from and after October 7, 1993 through the date of the TCI/Liberty Combination. Plaintiffs alleged that the Liberty stockholders received inadequate consideration in the TCI/Liberty Combination, that the defendants impeded the ability of third parties to seek to acquire Liberty, and that the defendants failed to conduct an auction or market check following the announcement of the proposed TCI/Liberty Combination. Plaintiffs sought to rescind the TCI/Liberty Combination, to require defendants to take all appropriate steps to enhance Liberty's value as an acquisition candidate, to account to the plaintiff class for all profits obtained by defendants, and to require defendants to pay unspecified damages to the plaintiff class. In February 1997, the parties to the action reached an agreement, in principle, to settle the litigation in exchange for the payment by TCI of (i) $44 million (in TCI Group stock or cash) to the Liberty stockholders at the time of the TCI/Liberty Combination and (ii) fees for plaintiffs' counsel. Formal settlement papers are expected to be filed with the Delaware Chancery Court by April 30, 1997. This represents the final resolution of this matter, and accordingly, it will not be reported in future filings. I-57 60 Time Warner Stockholder Litigation. In November 1995, two derivative action lawsuits on behalf of and for the benefit of Time Warner, Inc. were filed in the Delaware Chancery Court by purported stockholders of Time Warner. These actions, which have identical claims and allegations, are styled as Bernard v. Time Warner, Inc., C.A. No. 14651, and Parnes v. Time Warner, Inc., C.A. No. 14660, respectively. The defendants named in both complaints are Time Warner, Inc., Tele-Communications, Inc., and the following individuals who are directors of Time Warner: Gerald M. Levin, Merv Adelson, Beverly Sills Greenough, Michael A. Miles, Donald S. Perkins, Raymond S. Trough, Edward S. Finkelstein, Carla A. Hills, Henry Luce, III, Reuben Mark, Francis T. Vincent, Jr., Lawrence B. Buttenweiser, David T. Kearns, J. Richard Munro, and Richard D. Parsons. In both cases, plaintiffs allege among other things that the Time Warner directors breached their fiduciary duties in establishing the terms of Time Warner's proposed merger with Turner Broadcasting System, Inc. Specifically, plaintiffs contend in both cases that the Time Warner directors impermissibly sought to entrench themselves and that TCI aided and abetted the Time Warner directors' alleged breaches of fiduciary duty. Plaintiffs complain in both cases that, in connection with the proposed TBS-Time Warner Merger, TCI will receive (i) a premium for its TBS stock with a value of nearly 7% over the value of the merger consideration to be received by other TBS stockholders, (ii) exclusive programming benefits at discounted prices from TBS, (iii) an agreement to purchase TBS's and Time Warner's interests in two regional sports networks, and (iv) five million additional shares of Time Warner stock in exchange for giving Time Warner an option to purchase a subsidiary of TCI. In exchange for these alleged benefits, TCI allegedly facilitated efforts by the Time Warner directors and Time Warner's management to entrench themselves by allowing the Time Warner voting stock to be received by TCI upon consummation of the TBS-Time Warner Merger to be placed in a voting trust controlled by defendant Levin, who is the chairman and chief executive officer of Time Warner. Plaintiffs seek in both actions to enjoin the consummation of the proposed TBS-Time Warner Merger, to rescind the TBS-Time Warner Merger if it is consummated, and to enjoin the transfer of Time Warner's assets or stock to TCI in connection with the TBS-Time Warner Merger. TCI moved to dismiss these actions on November 22, 1995. Discovery has not commenced in these actions. On December 5, 1995, plaintiffs in both actions agreed to stay any proceedings pending regulatory developments regarding the proposed TBS-Time Warner Merger. The TBS-Time Warner Merger was consummated on October 10, 1996. Based upon the facts available, management believes that, although no assurances can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. DMX Shareholders Litigation. In September 1996, a putative class action complaint was filed with the Delaware Court of Chancery in C.A. No 15206 by a stockholder of DMX Inc. ("DMX"). The complaint was filed following the announcement of a proposed business combination in which TCI Music, Inc. ("TCI Music"), a newly formed entity, would acquire DMX. The proposed business combination contemplates that the shareholders of DMX, including subsidiaries of TCI that currently own approximately 45% of DMX's outstanding stock, would receive shares of TCI Music Class A common stock having one vote per share and representing approximately 19% of TCI Music's outstanding shares. TCI would hold TCI Music Class B common stock having ten votes per share and representing approximately 81% of the TCI Music common equity outstanding immediately after the transaction. TCI would acquire those shares in exchange for consideration that includes DMX subscriber accounts held by TCI subsidiaries and equipment used by those subsidiaries to distribute the DMX music service to TCI subscribers. The defendants in the action include DMX, TCI and the directors of DMX (Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman and Menon Bhaskar). Mr. Fisher is a director of and a consultant to TCI. Mr. Hindery is an executive officer of TCI. Mr. Sparkman is a director of TCI. I-58 61 The gravamen of the complaint is that the DMX directors would breach their fiduciary duties by approving the proposed business combination. Specifically, plaintiff alleges that, due to TCI's alleged control over the DMX board, the DMX directors are unwilling to negotiate with TCI to maximize the value for the public stockholders of DMX. Plaintiff claims that the proposed consideration to be paid the public stockholders of DMX is grossly unfair, inadequate and substantially below the fair value of DMX. Plaintiff seeks to enjoin the consummation of proposed business combination or, should the proposed transaction proceed, to rescind the transaction. Plaintiff also seeks unspecified rescissory and compensatory damages, fees and costs. The action remains pending and discovery has not commenced. 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 a material adverse effect upon the financial condition of the Company. Interactive Network, Inc. Shareholder Litigation. In January of 1995, two class action complaints ("Actions") were filed against Interactive Network, Inc. ("Interactive") and certain of its then current and former officers and directors (collectively the "Interactive Defendants") in the United States District Court for the Northern District of California which sought unspecified damages for alleged violations of the disclosure requirements of the federal securities laws. The Actions were filed on behalf of a class of shareholders that purchased the stock of Interactive during the period August 15, 1994 through November 22, 1994. Pursuant to an order of the Court, the Actions were consolidated and in April 1995, a Consolidated Amended Class Action Complaint captioned In re Interactive Network Inc. Securities Litigation ("Consolidated Case") was filed in the same court which again sought damages against the Interactive Defendants for violations of the disclosure requirements of the federal securities laws, which violations allegedly occurred during the period May 2, 1994 through March 31, 1995. On June 17, 1996, a Third Amended Consolidated Class Action Complaint was filed in the Consolidated Case against the Interactive Defendants and also added Tele-Communications, Inc., TCI Communications, Inc., TCI Development Corporation and Gary Howard as defendant parties (collectively, the "TCI Defendants"). The Third Amended Consolidated Class Action Complaint which was served upon the TCI Defendants (except Gary Howard) on June 28, 1996, continues to seek damages against the Interactive Defendants for violation of disclosure requirements of the federal securities laws and also seeks similar unspecified damages against the TCI Defendants predicated upon the allegation that they were "controlling persons" of Interactive at the time the alleged wrongs took place. During a mandatory settlement conference on November 19, 1996, plaintiffs estimated their alleged damages at $25 million. 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 a material adverse effect upon the financial condition of the Company. Clarence L. Elder, both individually and as the group Representative vs. Tele-Communications, Inc. et al. On December 11, 1995, plaintiff filed suit in the Circuit Court for Baltimore City, Case No. 95345001/CL205580 against UCTC L.P. Company, UCTC of Baltimore, Inc., UTI Purchase Company, Inc. and Tele-Communications, Inc. The allegations made in the complaint pertain to plaintiff's interest in United Cable Television of Baltimore Limited Partnership. Plaintiff claims he was wrongfully denied certain preference distributions, rights to purchase stock, rights to escrow funds, and tax distributions. Plaintiff claims entitlement to compensatory damages in excess of $70,000,000 plus punitive damages in excess of $450,000,000. Plaintiff asserts claims for: breach of contract; negligent misrepresentation; negligence; unjust enrichment; conversion; fraud; and breach of fiduciary duty. The Court granted defendants' Motion for Summary Judgment and plaintiff has filed an 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 a material adverse effect upon the financial condition of the Company. I-59 62 Les Dunnaville v. United Artists Cable, et al. On February 9, 1994, Les Dunnaville and Jay Sharrieff, former employees of United Cable Television of Baltimore Limited Partnership, filed an amended complaint in the Circuit Court for Baltimore City against United Cable Television of Baltimore Limited Partnership, TCI Cablevision of Maryland, Tele-Communications, Inc. and three company employees, Roy Harbert, Tony Peduto, and Richard Bushey (the suit was initially filed on December 3, 1993, but the parties agreed on December 30, 1993 that no responsive pleading would be due pending filing of an amended complaint). The action alleges, inter alia, intentional interference with contract, tortious interference with prospective advantage, defamation, false light, invasion of privacy, intentional infliction of emotional distress, civil conspiracy, violation of Maryland's Fair Employment Practices Act, and respondeat superior with respect to the individual defendants. Six counts in the complaint each seek compensatory damages of $1,000,000 and punitive damages of $1,000,000; the intentional infliction of emotional distress count seeks compensatory damages of $1,000,000 and punitive damages of $2,000,000; and the count which alleges violation of Maryland's Fair Employment Practices Act seeks damages of $500,000. By order dated May 18, 1994, the Court dismissed the respondeat superior claim. Defendants filed Motions for Summary Judgment in December 1995 and January 1996 on all remaining counts of plaintiffs' complaint. The Court granted summary judgment in defendants' favor on March 18, 1996. The plaintiffs have appealed the Circuit Court ruling to the Maryland Court of Special Appeals and such appeal is pending. 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 a material adverse effect upon the financial condition of the Company. Donald E. Watson v. Tele-Communications, Inc., et al. On March 10, 1995, Donald Watson, doing business under the name of Tri-County Cable, filed suit in Superior Court for the District of Columbia against TCI, TCI East, Inc., District Cablevision Limited Partnership, District Cablevision, Inc., TCI of D.C., Inc., TCI of Maryland, Inc., TCI Development Corporation, United Cable Television of Baltimore Limited Partnership, TCI of Pennsylvania, Inc. and two individuals, Richard Bushey and Roy Harbert. The action alleges breach of settlement agreement, intentional misrepresentations, tortious interference with prospective advantage, tortious interference with contract, tortious interference with economic relations, and discrimination on the basis of race. Three counts in the Complaint seek compensatory damages of $2,500,000 and punitive damages of $25,000,000; one count seeks compensatory damages of $2,500,000 and punitive damages of $40,000,000; and two counts each seek compensatory damages of $20,000,000 and punitive damages of $40,000,000. 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 a material adverse effect upon the financial condition of the Company. I-60 63 Louis Beverly v. Tele-Communications, Inc., et al. On July 27, 1995, Louis Beverly, a former employee of United Cable Television of Baltimore Limited Partnership filed a complaint in United States District Court for the District of Maryland against Tele-Communications, Inc., United Artists Cable of Baltimore, Inc., United Cable Television of Baltimore Limited Partnership, UCTC of Baltimore, Inc., and TCI East, Inc. The plaintiff alleges, in part, that his termination on September 11, 1987, was the result of racial discrimination. Plaintiff filed five counts, including race discrimination (Title VII), violation of 42 USC 1981, defamation, invasion of privacy (false light), and assault and battery. Each count seeks $3,000,000 in compensatory and $6,000,000 in punitive damages, an award of all bonuses and other compensation lost due to defendants' actions as well as attorneys' fees, costs, and pre-judgment interest. On February 14, 1996, the Court granted defendants' Motion dismissing Tele-Communications, Inc., and TCI East, Inc. as parties, along with various counts asserted by the plaintiffs including 42 USC 1981, defamation, invasion of privacy, and assault and battery. United Artists Cable of Baltimore was also dismissed from the Title VII claim for race discrimination. Currently, the only damages available to plaintiff are those which existed prior to the amendment to the Civil Rights Act of 1991. As the case currently stands, the remaining defendants are faced with one count without exposure to punitive damages. Based upon the facts available, management believes that, although no assurances can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. C. Lamont Smith, et al. v. Mile Hi Cable Partners, et al. On December 9, 1996, C. Lamont Smith and The Black Movie Channel, LLC filed suit in the District Court for the City and County of Denver against subsidiaries of Tele- Communications, Inc. (TCI Communications, Inc.; Mile Hi Cable Partners, LP; Liberty Media Corporation and Encore Media Corporation); Black Entertainment Television; Steve Santamaria; Media Management Group, Inc. and Virginia Butler. Plaintiffs assert, in part, that the defendants misappropriated plaintiffs' concept for the development of a 24 hours a day, seven days a week, cable or satellite premium channel which would broadcast movies made by or featuring African Americans, as well as educational programming and community oriented programming of interest to both the Hispanic and Black communities. Plaintiffs claim anticipated annual net profits from such a network would exceed $600 million. Plaintiffs also assert that the franchise agreement with the City and County of Denver has been breached for alleged implied covenants of good faith and fair dealing under the Denver franchise; promissory estoppel and breach of implied contract; misappropriation of confidential information and trade secrets; breach of confidence; breach of fiduciary duty; as well as unjust enrichment; fraud; negligent misrepresentation; non-disclosure and concealment; civil conspiracy; and violation of the Colorado Antitrust Act of 1992. Plaintiffs seek an award of consequential, special and restitutionary damages in an unspecified amount as well as exemplary damages, prejudgment interest, expert witness fees, attorneys fees and costs. 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 a material adverse effect upon the financial condition of the Company. I-61 64 James Dalton, et al. v. Tele-Communications, Inc., et al. On February 24, 1997, James Dalton, et al. filed suit in District Court for Arapahoe County, Colorado, Case No. 97-CV421, against Tele-Communications, Inc. ("TCI") and certain officers of TCI. Plaintiffs filed this action under the Colorado Securities Act and Colorado common law on behalf of all persons who purchased TCI securities from January 10, 1996 through October 24, 1996 ("the class period"). Plaintiffs claim, in part, that the defendants made false and misleading statements during the class period concerning TCI's revenue and cash flow growth, subscriber growth, and expansion and diversification into a multi-business platform; and that TCI failed to disclose the performance of its various operations. Plaintiffs claim further, in part, that TCI's cash flow growth was weak and below levels necessary to fund a multi-business diversification program and that TCI was competitively disadvantaged and would likely be threatened by adverse conditions impacting its business. Plaintiffs are seeking nationwide class certification and claim that the amount in controversy is less than $75,000 per named plaintiff, exclusive of interest and costs. TCI intends to defend such claims vigorously. Based upon the facts available, management believes that, although no assurances can be given as to the outcome of this action, the ultimate disposition should not have a material adverse effect upon the financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. I-62 65 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. On August 3, 1995, the stockholders of Tele-Communications, Inc. ("TCI" or the "Company") authorized the Board of Directors (the "Board") of TCI to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes cable television programming services ("Liberty Media Group"). Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. At December 31, 1996, the TCI Group Stock reflects the performance of those businesses of the Company not attributed to Liberty Media Group. Prior to the Distribution, shares of TCI's Class A and Class B common stock were traded on the Nasdaq National Market Tier of the Nasdaq Stock Market under the symbols TCOMA and TCOMB, respectively. Subsequent to the Distribution, shares of Series A and Series B TCI Group Stock and Series A and Series B Liberty Group Stock are traded on the Nasdaq National Market Tier of the Nasdaq Stock Market under the symbols TCOMA, TCOMB, LBTYA and LBTYB, respectively. The table below sets forth the range of high and low sales prices in United States dollars of shares of common stock of TCI for the periods indicated as furnished by Nasdaq. The prices have been rounded up to the nearest eighth, and do not include retail markups, markdowns, or commissions. On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of the Company's common stock, par value $1.00 per share (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of March 24, 1997, no shares of Telephony Group Stock have been issued. Effective January 13, 1997, the Company issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). All Liberty Group Stock sales prices and share amounts have been adjusted to give effect to the Liberty Group Stock Dividend. II-1 66
Tele-Communications, Inc. ------------------------- Class A Class B ---------------- ----------------- High Low High Low -------- ------ --------- ------ 1995: ----- First quarter 23-3/4 19-7/8 25 20-3/4 Second quarter 24-1/2 17-1/4 24 18-1/4 Third quarter (through the Distribution) 26-1/4 22-5/8 26-1/4 22-1/4 TCI Group Stock --------------- Series A Series B ---------------- ----------------- High Low High Low -------- ------ --------- ------ 1995: ----- Third quarter (from the Distribution through September 30, 1995) 20 16-7/8 20 17-1/2 Fourth quarter 21-1/4 16-5/8 21-1/4 16-3/4 1996: ----- First quarter 22-3/8 18-3/8 22-3/4 18-1/2 Second quarter 20-1/8 17-3/8 20-1/2 17-1/2 Third quarter 18-1/2 13-1/8 18 13-3/4 Fourth quarter 15 11-3/8 15 11-5/8 Liberty Group Stock ------------------- Series A Series B ---------------- ----------------- High Low High Low -------- ------ --------- ------ 1995: ----- Third quarter (from the Distribution through September 30, 1995) 18 3/4 15-3/4 19-3/4 16-1/4 Fourth quarter 18-3/4 15-1/4 19-3/8 16 1996: ----- First quarter 19-1/2 17-1/8 20-3/4 17-3/8 Second quarter 20-3/4 17-1/4 21 18 Third quarter 19-5/8 13-3/4 19-7/8 15-3/8 Fourth quarter 19-7/8 14-3/4 19-1/2 15-3/4
As of January 31, 1997, there were 8,437 holders of record of Series A TCI Group Stock, 587 holders of record of Series B TCI Group Stock, 7,807 holders of record of Series A Liberty Group Stock and 570 holders of record of Series B Liberty Group Stock (which amounts do not include the number of stockholders whose shares are held of record by brokerage houses but include each brokerage house as one stockholder). II-2 67 The Company has not paid cash dividends on its common stock and has no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by the Board in light of the Company's earnings, financial condition and other relevant considerations. The Company is a holding company and its assets consist almost entirely of investments in its subsidiaries. As a holding company, the Company's ability to pay dividends on any classes or series of its stock is dependent on the earnings of, or other funds available to, the Company's subsidiaries and the distribution or other payment of such earnings or other funds to the Company in the form of dividends, loans or other advances, payment or reimbursement of management fees and expenses and repayment of loans and advances from the Company. Certain of the Company's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds by such subsidiaries to the Company in the form of dividends, loans, or advances, and require that such subsidiaries' indebtedness to the Company be subordinate to the indebtedness under such loan agreements. The amount of net assets of subsidiaries subject to such restrictions exceeds the Company's consolidated net assets. For further discussion of such restrictions, see the Tele-Communications, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations. On August 8, 1994, the Company issued 70,559 shares of Convertible Preferred Stock, Series C with a liquidation value of $2,375 per share ("Series C Preferred Stock") to Mr. Bill Daniels as partial consideration for an acquisition. The Company subsequently issued 16 additional shares of Series C Preferred Stock to Mr. Daniels in connection with post-closing adjustments related to the aforementioned acquisition. Each share of Series C Preferred Stock is convertible, at the option of the holder, into 116.24 shares of Series A TCI Group Stock and approximately 37 shares of Series A Liberty Group Stock. Effective September 13, 1994, the Company issued 5,555,555 shares of TCI Class A common stock in exchange for a 20% interest in Microsoft Online Services Partnership (the "Partnership"). The aggregate value attributed to such partnership interest was $130 million. In connection with the Distribution, the Company issued 2,083,332 shares of Liberty Group Stock. Effective October 14, 1996, the Company resigned as a member of the Partnership, and the Partnership returned the shares of Series A TCI Group Stock and Series A Liberty Group Stock that the Company originally contributed to the Partnership. During 1994, the Company, through a series of transactions, restructured certain of its operations. In connection with such restructuring, certain subsidiaries transferred assets to certain other subsidiaries and received shares of TCI Class A common stock and shares of Redeemable Convertible Preferred Stock, Series E ("Series E Preferred Stock") in return. An aggregate of 317,105 shares of TCI Class A common stock and 246,402 shares of Series E Preferred Stock were issued at an aggregate value of $23 million. Effective January 4, 1995, the Company issued an aggregate of 445,594 shares of TCI Class A common stock to Neely Productions Limited, JAKL, Inc. and William Morris Agency, Inc. in exchange for a 66-2/3% general partnership interest in MacNeil/Lehrer Productions. Such issued shares were valued at $10 million at the time of issuance. Effective January 26, 1995, the Company issued 13,343,274 shares of TCI Class A common stock to Comcast Corporation ("Comcast") as consideration for the purchase of Comcast's 19.9% ownership interest in Heritage Communications, Inc. Such issued shares were valued at $292 million at the time of issuance. Effective February 2, 1995, the Company issued 3,403,405 shares of TCI Class A common stock to Acclaim Entertainment, Inc. ("Acclaim") in exchange for 9.8% of Acclaim's outstanding stock. Such exchange was valued at $74 million. II-3 68 Effective February 14, 1995, the Company sold an aggregate of 1,348,314 shares of TCI Class A common stock to Sumitomo Corporation and Sumitomo Corporation of America for cash proceeds of $30 million. Effective June 30, 1995, a subsidiary of TCI transferred certain assets to another subsidiary of TCI in exchange for 42,667 shares of TCI Class A common stock. Such shares were valued at approximately $1 million at the time of issuance. In connection with the Distribution, the Company issued 355,141 shares of Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") to certain of its subsidiaries in exchange for shares of the Company's Class A common stock and preferred stock owned by such subsidiaries. Each share of Series F Preferred Stock is convertible into 1,496.65 shares of Series A TCI Group Stock. Effective March 29, 1996, the Company issued 11,056,500 shares of Series A TCI Group Stock and 4,146,188 shares of Series A Liberty Group Stock to the stockholders of The Chronicle Publishing Company ("Chronicle") as partial consideration for Chronicle's cable television assets. Such shares were valued at $265 million at the time of issuance. During 1994 and 1995 the Company issued 2,350,000 shares and 3,416 shares, respectively, of TCI Class A common stock upon conversion of $13,983,000 and $20,000 face value of certain notes payable. During 1996, the Company issued 1,623,800 shares of Series A TCI Group Stock and 608,925 shares of Liberty Group Stock upon conversion of an additional $9,662,000 face value of notes payable. Each of the above-described issuances of Class A common stock, Series A TCI Group Common Stock or other equity securities of the Company were made pursuant to the private placement exemption from the Securities Act of 1933 (the "Act") afforded by Section 4(2) of the Act, and, in certain cases, also pursuant to Rule 506 of Regulation D of the Act. Pursuant to various stock incentive plans, the Company has granted stock options, stock options with tandems stock appreciation rights and restricted stock awards to certain directors, officers and other key employees. The common stock which is issuable upon exercise of the options has been registered pursuant to various registration statements on Form S-8 filed by the Company. The aggregate number of options and restricted stock awards granted in 1994, 1995 and 1996 is as follows:
TCI Class A Series A Series A common stock TCI Group Stock Liberty Group Stock ------------ --------------- ------------------- 1994........... 3,520,000 -- -- 1995........... -- 7,837,500 3,924,000 1996........... -- 150,000 56,250
II-4 69 Item 6. Selected Financial Data. The following tables present selected information relating to the financial condition and results of operations of Tele-Communications, Inc. for the past five years. The following data should be read in conjunction with the Company's consolidated financial statements.
December 31, --------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- amounts in millions Summary Balance Sheet Data: - --------------------------- Property and equipment, net $ 7,528 7,409 5,876 4,935 4,562 Franchise costs, net $15,436 12,230 9,444 9,197 9,300 Total assets $30,244 25,577 19,276 16,527 16,315 Debt $14,926 13,211 11,162 9,900 10,285 Minority interests in equity of consolidated subsidiaries $ 1,493 651 429 285 280 Redeemable preferred stock $ 658 478 170 18 110 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of TCI Communications, Inc. $ 1,000 -- -- -- -- Stockholders' equity $ 4,253 4,550 2,655 2,116 1,728 Common shares outstanding (net of shares held by subsidiaries): Class A common stock -- -- 491 403 382 Class B common stock -- -- 85 47 48 Series A TCI Group Stock 579 572 -- -- -- Series B TCI Group Stock 85 85 -- -- -- Series A Liberty Group Stock 228(a) 225(a) -- -- -- Series B Liberty Group Stock 21 21 -- -- --
- --------------- (a) Adjusted to give effect to the Liberty Group Stock Dividend. II-5 70
Years ended December 31, ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- amounts in millions, except per share data Summary Statement of Operations Data: - -------------------- Revenue $ 8,022 6,506 4,682 3,977 3,463 Operating income $ 632 542 788 916 864 Interest expense $(1,096) (1,010) (785) (731) (718) Share of losses of affiliates, other than Liberty Media Corporation, net $ (473) (193) (112) (76) (105) Gain (loss) on disposition of assets $ 1,593 49 (10) 42 9 Earnings (loss) from continuing operations $ 278 (171) 62 (5) 8 Net earnings (loss) attributable to common stockholders: TCI Class A and Class B common stock $ -- (71)(a) 54 (7) (22) TCI Group Stock (813) (107)(b) -- -- -- Liberty Group Stock 1,056 (27)(b) -- -- -- ------- -------- ------ ------ ----- $ 243 (205) 54 (7) (22) ======= ======== ====== ====== ===== Primary earnings (loss) from continuing operations attributable to common stockholders per common and common equivalent share: TCI Class A and Class B common stock $ -- (.11)(a) .10 (.02) (.01) TCI Group Stock $ (1.22) (.16)(b) -- -- -- Liberty Group Stock $ 3.97 (.11)(b)(c) -- -- -- Fully diluted earnings (loss) from continuing operations attributable to common stockholders per common and common equivalent share: TCI Class A and Class B common stock $ -- (.11)(a) .10 (.02) (.01) TCI Group Stock $ (1.22) (.16)(b) -- -- -- Liberty Group Stock $ 3.88 (.11)(b)(c) -- -- -- Weighted average common and common equivalent shares outstanding: TCI Class A and Class B common stock -- 648(a) 541 433 424 TCI Group Stock 665 656(b) -- -- -- Liberty Group Stock 249 (c) 246(b)(c) -- -- --
(a) From January 1, 1995 through the date of the Distribution. (b) From the date of the Distribution through December 31, 1995. (c) Adjusted to give effect to the Liberty Group Stock Dividend. II-6 71 The following tables present selected information relating to the financial condition and results of operations of Liberty Media Group for the past three years. The following data should be read in conjunction with Liberty Media Group's combined financial statements.
December 31, ------------------- 1996 1995 1994 ---- ---- ---- amounts in millions Summary Balance Sheet Data: - --------------------------- Investments in affiliates, accounted for under the equity method, and related receivables $ 545 299 279 Investment in Time Warner, Inc. $2,017 -- -- Investment in Turner Broadcasting System, Inc. $ -- 945 654 Other investments, at cost $ 82 111 103 Total assets $3,059 2,518 2,188 Debt $ 2 251 93 Combined equity $2,397 1,613 1,518 December 31, ------------------- 1996 1995 1994 ---- ---- ---- amounts in millions Summary Statement of Operations Data: - ------------------------------------- Revenue $ 1,339 1,441 1,371 Cost of goods sold, operating, selling, general and administrative expenses, including amounts to TCI Group $(1,175) (1,425) (1,299) Depreciation and amortization $ (61) (98) (49) Operating income (loss) $ 86 (111) 31 Share of earnings (losses) of affiliates, net $ 8 (15) 31 Gain (loss) on disposition of assets $ 1,537 (2) 181 Net earnings (loss) $ 1,056 (56) 135
II-7 72 The following tables present selected information relating to the financial condition and results of operations of TCI Group for the past three years. The following data should be read in conjunction with TCI Group's combined financial statements.
December 31, ------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Summary Balance Sheet Data: - -------------------------- Property and equipment, net $ 7,518 7,205 5,682 Franchise cost, net $15,436 12,230 9,444 Total assets $27,154 23,059 17,121 Debt $14,924 12,960 11,068 Minority interests in equity of consolidated subsidiaries $ 1,454 563 314 Redeemable preferred stocks $ 658 478 168 Trust Securities $ 1,000 -- -- Combined equity $ 1,863 2,936 1,137 Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Summary Statement of Operations Data: - ------------------------------------ Revenue $ 6,790 5,145 4,068 Operating, selling, general and administrative expenses $(4,678) (3,173) (2,284) Depreciation and amortization $(1,555) (1,274) (1,001) Operating income $ 546 653 788 Interest expense $(1,080) (993) (786) Share of losses of affiliates, net $ (469) (178) (117) Loss before earnings (loss) of Liberty Media Group through the date of Distribution $ (778) (115) (22) Earnings (loss) of Liberty Media Group through the date of Distribution -- (29) 135 ------- ------- ------- Net earnings (loss) (778) (144) 113 Dividend requirement on preferred stocks (35) (34) (14) ------- ------- ------- Net earnings (loss) attributable to common stockholders $ (813) (178) 99 ======= ======= =======
II-8 73 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. TELE-COMMUNICATIONS, INC. Summary of Operations As of January 27, 1994, TCI Communications, Inc. (formerly Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation ("Liberty") entered into a definitive merger agreement to combine the two companies (the "TCI/Liberty Combination"). The transaction was consummated on August 4, 1994 and was structured as a tax free exchange of Class A and Class B shares of both companies and preferred stock of Liberty for like shares of a newly formed holding company, TCI/Liberty Holding Company. In connection with the TCI/Liberty Combination, Old TCI changed its name to TCI Communications, Inc. ("TCIC") and TCI/Liberty Holding Company changed its name to Tele-Communications, Inc. On August 3, 1995, the stockholders of TCI authorized the Board to issue the Liberty Group Stock which reflects the separate performance of Liberty Media Group. Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock. The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the performance of those businesses of the Company not attributed to Liberty Media Group. Such businesses are referred to herein as "TCI Group". Liberty Media Group and TCI Group are sometimes herein after referred to individually as a "Group". On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of the Company's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group Common Stock and Tele-Communications, Inc. Series B Telephony Group Common Stock. The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. The Company is organized based upon four lines of business: Domestic Cable and Communications; Programming; International Cable and Programming ("TINTA"); and Technology/Venture Capital. Within the Domestic Cable and Communications line of business, the Company operates three strategic business units: Cable, Telephony and Internet. The Company's organizational structure provides for financial and operational independence in the four operating units, each under the direction of its own chief executive officer, while maintaining the synergies and scale economies provided by a common corporate parent. While the International Cable and Programming unit, Telephony unit, Internet unit or the Technology/Venture Capital unit is currently significant to the Company as a whole, the Company believes each unit has growth potential and each unit is unique enough in nature to warrant separate operational focus. II-9 74 Notwithstanding the foregoing, the Company currently has significant operations principally in two industry segments: cable and communications services and programming services. Home shopping is a programming service which includes a retail function. Separate amounts for home shopping services have been provided to enhance the readers understanding of the Company. The Technology/Venture Capital, Telephony, Internet and the International Cable and Programming portions of the Company's business have been included with cable and communications services due to their relative insignificance. The amounts provided for the Company's programming services segment represent the results of Liberty Media Group since the date of the TCI/Liberty Combination. Cable and Communications Services The table below sets forth for the periods presented, the percentage relationship that certain items bear to revenue. This summary provides trend data relating to the normal recurring operations of the Company. Other items of significance are discussed under separate captions below.
Years ended December 31, -------------------------------------------- 1996 1995 1994 -------------- ------------- ------------ dollar amounts in millions Revenue 100% $6,790 100% $5,145 100% $4,043 Operating, selling, general and administrative expenses (1) 69 4,678 61 3,173 56 2,275 Compensation (adjustment to compensation) relating to stock appreciation rights -- (30) 1 45 -- (5) Restructuring charges -- 41 -- -- -- -- Depreciation and amortization 23 1,555 25 1,274 25 992 --- ------ --- ------ --- ------ Operating income 8% $ 546 13% $ 653 19% $ 781 === ====== === ====== === ======
(1) Includes intercompany programming charges of $107 million, $80 million and $33 million in 1996, 1995 and 1994, respectively. Such programming charges eliminate in consolidation. The operation of the Company's cable television systems is regulated at the federal, state and local levels. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (together with the 1992 Cable Act, the "Cable Acts") established rules under which the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are regulated if a complaint is filed or if the appropriate franchise authority is certified. At December 31, 1996, approximately 78% of the Company's basic customers were served by cable television systems that were subject to such rate regulation. During the year ended December 31, 1996, 61% of the Company's revenue from Cable and Communications Services was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit the Company's ability to increase its service rates. II-10 75 Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"). Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. See note 7 to the accompanying consolidated financial statements for the effect of the Satellite Spin-off on the Company's results of operations and financial position. Revenue from Cable and Communications services increased 32% and 27% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior years. In the Company's regulated cable systems, the Company implemented rate increases for its Regulated Services in June 1996. As allowed by Federal Communications Commission ("FCC") regulations, such rate increases included amounts intended to recover increased programming costs incurred during the first five months of 1996 and not previously recovered, as well as interest on said amounts. The 1996 increase in revenue from Cable and Communications is due to the effect of certain acquisitions (18%), increases in the rates charged to the Company's customers due to inflation, programming cost increases as previously discussed and channel additions (7%), growth in the Company's satellite customers through the date of the Satellite Spin-off (3%), net growth in basic customer levels within the Company's cable television systems (1%) and an increase in the Company's international programming revenue, advertising sales and other revenue (3%). The 1995 increase in revenue from Cable and Communications is due to the effect of certain acquisitions (13%), growth in the Company's satellite customers (4%), increases in the rates charged to the Company's customers from inflation, programming cost increases and channel additions (4%), net growth in basic customer levels within the Company's cable television systems (4%) and an increase in the Company's long-distance voice and data service and other revenue (2%). Operating, selling, general and administrative expenses increased 47% and 39% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior year. Exclusive of the effects of acquisitions (21% and 13%) and Primestar (5% and 8%), such expenses increased 21% and 18%, respectively. Programming expenses accounted for the majority of such increase. In this regard, programming expenses, including intercompany programming charges, represented $1,782 million (38%), $1,331 million (42%) and $936 million (41%) of operating, selling, general and administrative expenses during 1996, 1995 and 1994, respectively. The Company cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. However, such programming costs have increased at a greater percentage than increases in revenue of Regulated Services. During the fourth quarter of 1995, the Company incurred $25 million in expenses related to payment of bonuses to the majority of its employees. During the fourth quarter of 1996, the Company restructured certain of its operating and accounting functions (the "Restructuring"). In connection with the Restructuring, the Company recognized a charge of $41 million related primarily to work force reductions. As of December 31, 1996, $8 million of such restructuring charges had been paid. The Company anticipates that the majority of the remaining charges will be paid during the six months ended June 30, 1997. II-11 76 The increase in the Company's depreciation expense in 1996 and 1995 is due to acquisitions, as well as increased capital expenditures due to a program to upgrade and install optical fiber technology in the Company's cable systems. The increase in amortization expense in 1996 and 1995 is due to acquisitions. The Company records compensation relating to stock appreciation rights and restricted stock awards granted to certain employees. Such compensation is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Programming Services The table below sets forth for the periods presented, the percentage relationship that certain items bear to revenue. This summary provides trend data relating to the normal recurring operations of the Company. Other items of significance are discussed under separate captions below.
Years ended December 31, -------------------------------------------------------- 1996 1995 1994 --------------- ----------------- ---------------- dollar amounts in millions Electronic Retailing Services: Net sales 100% $ 984 100% $ 920 100% $ 432 Cost of sales 61 605 66 603 61 263 Operating, selling, general and administrative expenses 31 306 37 342 34 145 Restructuring charges -- -- 2 17 -- -- Depreciation and amortization 4 37 4 43 3 15 ----- ----- ----- ----- ----- ----- Operating income (loss) 4% $ 36 (9)% $ (85) 2% $ 9 ===== ===== ===== ===== ===== ===== Other Programming Services: ----- Revenue (1) 100% $ 355 100% $ 521 100% $ 240 Operating, selling, general and administrative expenses 74 264 92 480 97 234 Compensation (adjustment to compensation) relating to stock appreciation rights 5 17 2 12 (1) (3) Depreciation and amortization 7 24 11 55 5 11 ----- ----- ----- ----- ----- ----- Operating income (loss) 14% $ 50 (5)% $ (26) (1)% $ (2) ===== ===== ===== ===== ===== =====
(1) Includes intercompany programming revenue of $107 million, $80 million and $33 million in 1996, 1995 and 1994, respectively. Such programming revenue eliminates in consolidation. II-12 77 Electronic Retailing Services This information reflects the results of Home Shopping Network, Inc. ("HSN"), which became a consolidated subsidiary of the Company in the TCI/Liberty Combination and ceased to be a consolidated subsidiary in December 1996 pursuant to the transactions described below. HSN's primary business is the sale of merchandise to viewers of the home shopping programming produced and distributed by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of HSN. Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. II-13 78 As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. During the year ended December 31, 1996, HSN's net sales increased 7%, as compared to the prior year. Such increase is due primarily to the net effect of an 11.5% increase in the number of packages shipped partially offset by an 8.5% decrease in the average price per unit sold. Net sales from electronic retailing services increased from $432 million in 1994 to $920 million in 1995. Such increase is due to the consolidation of HSN in August of 1994 in connection with the TCI/Liberty Combination. However, on an annualized basis, HSN's net sales decreased approximately 11%. Such annualized decrease is the net affect of a 19% decrease in the number of packages shipped, partially offset by a 9% increase in the average price per unit sold. For the year ended December 31, 1996, cost of sales increased $2 million or less than 1% as compared to 1995. As a percentage of net sales, cost of sales decreased from 66% to 61% from 1995 to 1996. Such decrease is due to promotional events in 1995 which had the effect of lowering revenue but not cost of sales and to a change in product sales mix in 1996. Cost of sales increased from $263 million in 1994 to $603 million in 1995. As a percent of sales, cost of sales increased from 61% in 1994 to 66% in 1995. The increase in the cost of sales percentages primarily relate to warehouse sales and other promotional events. Such events included price discounts to (i) facilitate the restructuring of HSN's distribution center, (ii) make room for new holiday merchandise and (iii) adjust inventory levels and product mix. In addition, cost of sales for the year ended December 31, 1995 includes a $12 million increase in HSC's inventory carrying value adjustment related to products which were inconsistent with HSN's then new sales and merchandise philosophy. HSN believes that seasonality does impact its business, but not to the same extent it impacts the retail industry in general. Other Programming Services On April 1, 1996, United Video Satellite Group, Inc. ("UVSG"), a subsidiary of TCI Group, and Netlink USA ("Netlink"), a subsidiary of Liberty Media Group, formed Superstar/Netlink Group LLC ("Superstar/Netlink"), a limited liability company comprised of UVSG's Superstar Satellite Entertainment and Netlink's retail C-band satellite business. Liberty Media Group and UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail C-band business is no longer consolidated with the financial results of Liberty Media Group. As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and TINTA formed two sports programming ventures both of which are accounted for using the equity method. In the United States, Liberty Media Group and News Corp. formed the Liberty/Fox U.S. Sports LLC ("Fox Sports") into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. II-14 79 Internationally, News Corp. and a limited liability company ("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multichannel, multipoint distribution systems or cable television. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. Revenue from the Company's Other Programming Services decreased $166 million or 32% from 1995 to 1996. Such decrease is due to the net effect of the deconsolidation of (i) the Company's sports programming entities upon the formation of Fox Sports and Fox Sports International and (ii) Netlink's retail C-band satellite business offset by a $50 million increase in revenue from Encore Media Corporation and a $9 million increase from other services. Revenue from the Company's Other Programming Services increased $281 million or 117% from 1994 to 1995, and operating costs and expenses before depreciation and amortization increased $246 million or 105%. Such increases are primarily due to the TCI/Liberty Combination. Other Income and Expense The Company's interest expense increased $86 million or 9% during 1996, as compared to 1995 and $225 million or 29% during 1995, as compared to 1994. The increase in 1996 is the net result of an increase due to higher debt balances partially offset by a decrease due to a lower weighted average interest rate. The 1995 increase is the result of higher interest rates and debt balances. The Company's weighted average interest rate on borrowings was 7.8%, 8.1% and 7.5% during 1996, 1995 and 1994, respectively. During the year ended December 31, 1996, in order to reduce future interest costs, the Company redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, the Company recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. Also, during the year ended December 31, 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, the Company recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. II-15 80 At December 31, 1996, the Company had an effective ownership interest of approximately 27% in Telewest Communications plc ("Telewest"), a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest, which is accounted for under the equity method, had a carrying value at December 31, 1996 of $488 million and comprised $109 million, $70 million and $43 million of the Company's share of its affiliates' losses in 1996, 1995, and 1994, respectively. The increase in the Company's share of losses of Telewest in 1996 and 1995 is due, in part, to an increase in Telewest's interest expense and foreign currency translation losses related to the 1995 issuance of U.S. dollar denominated debentures by Telewest. In addition, the Company has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other equity method investments had a carrying value of $422 million at December 31, 1996 and accounted for $79 million, $62 million and $50 million of the Company's share of its affiliates' losses in 1996, 1995 and 1994, respectively. Telewest was formed during the fourth quarter of 1995 upon the merger (the "TeleWest Merger") of TeleWest Communications plc (formerly TCI/US WEST Cable Communications Group) ("TeleWest Communications") with SBC (CableComms)(UK). Prior to the TeleWest Merger, the Company had an effective ownership interest of approximately 36% in TeleWest Communications, and subsequent to the TeleWest Merger the Company has an effective ownership interest of approximately 27% in Telewest. As a result of the TeleWest Merger, the Company recognized a gain of $165 million (before deducting the related tax expense of $58 million). Such gain represents the difference between the Company's recorded cost for TeleWest Communications and the Company's effective proportionate share of Telewest's net assets. There is no assurance that the Company will realize similar gains in future periods. As a result of the TeleWest Communications November 1994 initial public offering (the "TeleWest IPO") and the associated dilution of the Company's ownership interest of TeleWest Communications, the Company recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million) in 1994. The Company's share of losses of affiliates was $473 million, $193 million and $112 million (exclusive of share of earnings of Liberty prior to the TCI/Liberty Combination) in 1996, 1995 and 1994, respectively. The increases in 1996 and 1995 are due in part to the aforementioned share of losses of Telewest and the Company's other international investments. Additionally, included in share of losses of affiliates for the year ended December 31, 1996 is $168 million attributable to Sprint Spectrum Holding Company, L.P. ("Sprint Spectrum"). Such amount includes $34 million associated with prior periods. On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased 49.9% of Liberty's 50% general partnership interest in American Movie Classics Company ("AMC"). The gain recognized by Liberty in connection with the disposition of AMC was $183 million and is included in the Company's share of Liberty's earnings prior to the TCI/Liberty Combination. Teleport Communications Group Inc. ("TCG"), a competitive local exchange carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410,000,000. As a result of the TCG IPO, the Company's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, the Company recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). II-16 81 During the year ended December 31, 1995, the Company recognized a gain amounting to $123 million in connection with the sale by TINTA to the public of 20 million shares of TINTA common stock (the "IPO") and the issuance by TINTA of shares of common stock for an investment in an Argentine programming entity (the "TYC Acquisition"). Minority interests in earnings of consolidated subsidiaries aggregated $56 million for the year ended December 31, 1996, as compared to minority interests in losses of consolidated subsidiaries in 1995 and 1994. Such change in 1996 is due primarily to the accrual of dividends on preferred securities issued by certain subsidiaries of the Company. On October 10, 1996, Time Warner, Inc. ("Time Warner") and Turner Broadcasting System, Inc. ("TBS") consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Prior to the TBS/Time Warner Merger, the Company owned shares of TBS common stock and shares of a class of TBS preferred stock that were convertible into TBS common stock. Time Warner, TBS, TCI and Liberty entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock") in exchange for its TBS common and preferred stock. Holders of the TW Exchange Stock are entitled to one one-hundredth of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holder of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, the Company received approximately 50.6 million shares of TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. Net Earnings The Company's net earnings (before preferred stock dividend requirements) of $278 million for the year ended December 31, 1996 represents an increase of $449 million as compared to the Company's net loss (before preferred stock dividend requirements) of $171 million for 1995. Such increase is due to the net effect of the gains recorded in connection with the TBS/Time Warner Merger and the HSN Merger partially offset by an increase in share of losses of affiliates, income tax expense and interest expense. Additionally, the Company recognized gains in 1995 related to the TeleWest Merger and TINTA IPO. II-17 82 The Company's net loss (before preferred stock dividend requirements) of $171 million for the year ended December 31, 1995 represents a decrease of $233 million as compared to the Company's net earnings (before preferred stock dividend requirements) of $62 million for the corresponding period of 1994. Such decrease is due primarily to a decrease in operating income, a decrease in share of earnings of affiliates (a significant portion of which results from the gain recognized in 1994 by Liberty upon the sale of its investment in AMC), and an increase in interest expense partially offset by the recognition of a gain resulting from the TINTA IPO. Inflation has not had a significant impact on the Company's results of operations during the three-year period ended December 31, 1996. Liquidity and Capital Resources On July 31, 1996, pursuant to certain agreements entered into among TCIC, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. The Viacom Acquisition has been accounted for by the purchase method and accordingly, the Company recorded Cable Sub's assets and liabilities at fair value. Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. II-18 83 In addition to the Viacom Acquisition, the Company consummated certain other acquisitions during 1996. See note 3 to the accompanying consolidated financial statements for additional information regarding assets acquired and liabilities assumed in connection with all acquisitions. During the year ended December 31, 1996, the Company, through certain subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable Preferred Stock for net cash proceeds of $223 million, (ii) $500 million in face value of 8.72% Trust Originated Preferred SecuritiesSM for net cash proceeds of $486 million (through a special purpose entity formed as a Delaware business trust) (iii) $500 million in face value of 10% Trust Preferred Securities for net cash proceeds of $485 million (through a special purpose entity formed as a Delaware business trust) and (iv) $2.06 billion of publicly-placed senior and medium term notes with interest rates ranging from 6.1% to 7.9% and maturity dates ranging through 2026. The Company used the proceeds from the aforementioned debt and equity issuances to retire commercial paper and to repay certain other indebtedness. During March 1997, the Company, through special purpose entities formed as Delaware business trusts, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. Additionally, in February 1996, TINTA issued $345 million (before deducting offering costs of $9 million) of 4.5% convertible subordinated debentures. TINTA anticipates that it will use the net proceeds to fund capital contributions to certain of its equity investees. In January 1997, the Company acquired the 50% ownership interest in TKR Cable Company ("TKR Cable") that the Company did not previously own and certain additional assets for aggregate consideration of approximately $970 million. The Company issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. The Company is a holding company and its assets consist almost entirely of investments in its subsidiaries. As a holding company, the Company's ability to pay dividends on any classes or series of preferred stock is dependent on the earnings of, or other funds available to, the Company's subsidiaries and the distribution or other payment of such earnings or other funds to the Company in the form of dividends, loans or other advances, payment or reimbursement of management fees and expenses and repayment of loans and advances from the Company. The Company's subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay the dividends on any class or series of preferred stock of TCI or to make any funds available therefor, whether by dividends, loans or other payments. The payment of dividends or the making of loans and advances to the Company by its subsidiaries may be subject to statutory or regulatory restrictions, are contingent upon the earnings of those subsidiaries and are subject to various business considerations. Further, certain of the Company's subsidiaries are subject to loan agreements that prohibit or limit the transfer of funds by such subsidiaries to the Company in the form of dividends, loans, or advances, and require that such subsidiaries' indebtedness to the Company be subordinate to the indebtedness under such loan agreements. The amount of net assets of subsidiaries subject to such restrictions exceeds the Company's consolidated net assets. The Company's subsidiaries currently have the ability to transfer funds to the Company in amounts exceeding the Company's dividend requirement on any class or series of preferred stock. Net cash provided by operating activities of subsidiaries which are not restricted from making transfers to the parent company have been and are expected to continue to be sufficient to enable the parent company to meet its cash obligations. II-19 84 Moreover, almost all of the consolidated liabilities of the Company have been incurred by its subsidiaries. Therefore, the Company's rights, and the extent to which the holders of the Company's preferred stocks will be able to participate in the distribution of assets of any subsidiary upon the latter's liquidation or reorganization, will be subject to prior claims of the subsidiary's creditors, including trade creditors, except to the extent that the Company may itself be a creditor with recognized claims against such subsidiary (in which case the claims of the Company would still be subject to the prior claims of any secured creditor of such subsidiary and of any holder of indebtedness of such subsidiary that is senior to that held by the Company). During the second quarter of 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. The Company does not believe that such terminations will adversely affect its future liquidity. At December 31, 1996, subsidiaries of the Company had approximately $1.8 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries were in compliance with the restrictive covenants contained in their credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with such restrictive covenants (which relate primarily to the maintenance of certain ratios of cash flow to total debt and cash flow to debt service, as defined in the credit facilities) after giving effect to such additional borrowings. See note 8 to the accompanying consolidated financial statements for additional information regarding the material terms of the subsidiaries' lines of credit. One measure of liquidity is commonly referred to as "interest coverage." Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization, compensation relating to stock appreciation rights, adjustment to compensation relating to stock appreciation rights and restructuring charges) ($2,276 million, $1,988 million and $1,798 million in 1996, 1995 and 1994, respectively) to interest expense ($1,096 million, $1,010 million and $785 million in 1996, 1995 and 1994, respectively), is determined by reference to the consolidated statements of operations. The Company's interest coverage ratio was 208%, 197% and 229% for 1996, 1995 and 1994, respectively. Management of the Company believes that the foregoing interest coverage ratio is adequate in light of the consistency and nonseasonal nature of its cable television operations and the relative predictability of the Company's interest expense, almost half of which results from fixed rate indebtedness. However, the Company's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that the Company will be able to achieve such objective. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. II-20 85 Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying consolidated statements of cash flows. Net cash provided by operating activities ($1,228 million, $957 million and $908 million in 1996, 1995 and 1994, respectively) reflects net cash from the operations of the Company available for the Company's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. Amounts expended by the Company for its investing activities exceed net cash provided by operating activities. However, management believes that net cash provided by operating activities, the ability of the Company and its subsidiaries to obtain additional financing (including the subsidiaries' available lines of credit and access to public debt markets), issuances and sales of the Company's equity or equity of its subsidiaries, and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. See the Company's consolidated statements of cash flows included in the accompanying consolidated financial statements. The Company's subsidiaries generally finance acquisitions and capital expenditures through net cash provided by operating and financing activities. Historically, amounts expended for acquisitions and capital expenditures have exceeded net cash provided by operating activities. In this regard, the amount of capital expended by the Company for property and equipment was $2,055 million, $1,782 million and $1,264 million in 1996, 1995 and 1994, respectively. The Company has reevaluated its capital expenditure strategy and currently anticipates that it will expend significantly less for property and equipment in 1997 than it did in 1996. To the extent that net cash provided by operating activities exceeds net cash used in investing activities in 1997, the Company currently anticipates that such excess cash will initially be used to reduce outstanding debt. In late April 1996, TCIC was notified by Moody's Investors Service, Inc. ("Moody's") and Duff & Phelps Credit Rating Co. ("Duff and Phelps") that those rating agencies had downgraded by one level their respective ratings of TCIC's senior debt to the first level below investment grade. Fitch Investors Service, L.P. ("Fitch") reaffirmed its rating for TCIC's senior debt at the last level of investment grade. On October 18, 1996, Standard and Poor's Securities, Inc. ("Standard & Poor's") issued a press release stating that TCIC's senior debt would be placed on CreditWatch with negative implications. On January 24, 1997, Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior debt is currently rated BBB- by Standard & Poor's (the last level of investment grade) with a negative outlook. These actions are expected to marginally increase TCIC's cost of borrowings under certain bank credit facilities, and may adversely affect TCIC's access to the public debt market and its overall cost of future borrowings. The Company is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide, using the "Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast, Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The Company has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo and accounts for its interests in the PCS Ventures by the equity method. II-21 86 The Sprint PCS Partnerships have licenses, and have affiliated with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or population equivalents), based on the Donnelley Marketing Service estimate of the December 31, 1995 population of the relevant geographic areas. The Sprint PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction conducted by the FCC that ended in March 1995, for an aggregate license cost of approximately $2.1 billion. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego, California. The Sprint PCS Partnerships may invest in other entities that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. From inception through 1996, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company contributed an aggregate of approximately $0.9 billion, including approximately $0.2 billion during the year ended December 31, 1996.) The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. The Company expects that the remaining approximately $1.2 billion of such amount (of which the Company's share is approximately $0.4 billion) will be contributed by the end of the second quarter of 1998 (although there can be no assurance that any additional capital will be contributed). The Company expects that the Sprint PCS Partnerships will require additional equity thereafter. The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $278 million at December 31, 1996. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such guarantees, that they will not be material to the Company. The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating approximately $571 million. The aggregate amount of the Film Licensing Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, the Company's aggregate payments under the Film Licensing Obligations could prove to be significant. The Company has made certain financial commitments related to the acquisition of foreign sports program rights through 2004. At December 31, 1996, such commitments aggregated $226 million. The Company's various partnerships and other affiliates accounted for under the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by the Company) and through net cash provided by their own operating activities. II-22 87 In order to achieve the desired balance between variable and fixed rate indebtedness and to diminish its exposure to extreme increases in variable interest rates, the Company has entered into various interest rate exchange agreements. Pursuant to the interest rate exchange agreements, the Company (i) pays fixed interest rates ranging from 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 (the "Fixed Rate Agreements") and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996 (the "Variable Rate Agreements"). During the year ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million) and $36 million, respectively. During the year ended December 31, 1996, the Company terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. The Company will amortize the termination settlement over the remainder of the original terms of the terminated Variable Rate Agreements. The Company is exposed to credit losses for the periodic settlements of amounts due under the interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. At December 31, 1996, after considering the net effect of the aforementioned interest rate exchange agreements, the Company had $7,349 million (or 49%) of fixed-rate debt with a weighted average interest rate of 8.5% and $7,577 million (or 51%) of variable-rate debt with a weighted average interest rate of 6.3%. In connection with its investments in certain foreign entities, the Company is exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar against the UK pound sterling ("L."), the Japanese yen ("Y."), and various other foreign currencies that are the functional currencies of the Company's foreign subsidiaries and affiliates. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of an operating subsidiary or affiliate of TINTA will cause the Company to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. The Company is also exposed to foreign currency risk to the extent that the Company or its foreign subsidiaries and affiliates enter into transactions denominated in currencies other than their respective functional currencies. Because the Company generally views its foreign operating subsidiaries and affiliates as long-term investments, the Company generally does not attempt to hedge existing investments in its foreign affiliates and subsidiaries. With respect to funding commitments that are denominated in currencies other than the U.S. dollar, the Company historically has sought to reduce its exposure to short-term (generally no more than 90 days) movements in the applicable exchange rates once the timing and amount of such funding commitments becomes fixed. Although the Company monitors foreign currency exchange rates with the objective of mitigating its exposure to unfavorable fluctuations in such rates, the Company believes that it is not possible or practical to completely eliminate the Company's exposure to unfavorable fluctuations in foreign currency exchange rates. II-23 88 Approximately twenty-seven percent of the franchises held by the Company, involving approximately 4.5 million basic customers, expire within five years. There can be no assurance that the franchises for the Company's systems will be renewed as they expire, although the Company believes that its cable television systems generally have been operated in a manner which satisfies the standards established by the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), as supplemented by the renewal provisions of the 1992 Cable Act, for franchise renewal. However, in the event they are renewed, the Company cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with the renewals. To date they have not varied significantly from the original terms. During 1996, the Company has experienced a competitive impact from medium power and high power direct broadcast satellites ("DBS") that use high frequencies to transmit signals that can be received by dish antennas ("HSDs") much smaller in size than traditional HSDs. The Primestar partners distribute a multi-channel programming service via a medium power communications satellite to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, the Company provided this satellite service. DirecTv, Inc. ("DirecTv"), United States Satellite Broadcasting Corporation ("USSB") and EchoStar Communications Corp. ("EchoStar"), transmit from high power satellites and generally use smaller dishes to receive their signals. Alphastar, Inc. ("Alphastar") began offering medium power service in the second quarter of 1996. On February 24, 1997, News Corp. and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar and that the companies will combine their DBS businesses into a new company, which will operate under the name Sky. The two companies contend that Sky, which is scheduled to launch in early 1998, will offer 500 channels of digital television on a nationwide basis (not all of which would be available to each subscriber), Internet services and local broadcast network television signals, capable of reaching more than 50% of all television householders upon the launch of Sky and 75% of all television households by the end of 1998. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. Estimated DBS customers nationwide increased from approximately 2.2 million at the end of 1995 to approximately 4.4 million at the end of 1996, and the Company expects that competition from DBS will continue to increase. However, the Company is unable to predict what effect such competition will have on the Company's financial position. II-24 89 LIBERTY MEDIA GROUP General On August 3, 1995, the stockholders of TCI authorized the Board to issue two new series of stock which reflect the separate performance of Liberty Media Group. The issuance of Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty Media Group. At December 31, 1996, the TCI Group Stock reflects the separate performance of TCI Group, which is generally comprised of the subsidiaries and assets not attributed to Liberty Media Group, including TCI's Domestic Cable and Communications unit, TCI's International Cable and Programming unit, TCI's Telephony unit, TCI's Internet unit and TCI's Technology/Venture Capital unit. The businesses of TCI not attributed to Liberty Media Group are referred to as "TCI Group". Intercompany balances resulting from transactions with such units are reflected as borrowings from or loans to TCI Group and, prior to the Distribution, are included in combined equity in the accompanying combined financial statements of Liberty Media Group. See note 9 to the accompanying Liberty Media Group combined financial statements. On April 1, 1996, UVSG, a subsidiary of TCI Group, and Netlink, a subsidiary of Liberty Media Group, formed Superstar/Netlink, a limited liability company comprised of UVSG's Superstar Satellite Entertainment and Netlink's retail C-band satellite business. Liberty Media Group and UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail C-band satellite business is no longer consolidated with the financial results of Liberty Media Group. As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed two sports programming ventures both of which are accounted for using the equity method. In the United States, Liberty Media Group and News Corp. formed Fox Sports into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. Internationally, News Corp. and Liberty/TINTA formed Fox Sports International to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multichannel, multipoint distribution systems or cable television. II-25 90 As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. On October 10, 1996, Time Warner and TBS consummated the TBS/Time Warner Merger whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Prior to the TBS/Time Warner Merger, Liberty Media Group owned shares of TBS common stock and shares of a class of TBS preferred stock that were convertible into TBS common stock. Time Warner, TBS, TCI and Liberty entered into an Agreement Containing Consent Order with the FTC dated August 14, 1996, as amended September 4, 1996. Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of TW Exchange Stock. Holders of the TW Exchange Stock are entitled to one one-hundredth of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner Common Stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, Liberty Media Group recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would own, directly or indirectly, the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. II-26 91 In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable at Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. Pursuant to the BDTV Agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996, Liberty Media Group contributed to BDTV-I, in August 1996, the option to purchase 2 million shares of Class B common stock of Silver King (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC. II-27 92 Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received: (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV-II, (ii) the contractual right to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity and voting power of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. Pursuant to an Exchange Agreement between Liberty Media Group and Silver King, the shares of HSN held by Liberty Media Group following the HSN Merger are mandatorily exchangeable from time to time for shares of common stock and Class B common stock of Silver King (in the same ratio as the merger ratio in the HSN Merger) either upon the occurrence of certain events or changes in laws, rules or regulations which would entitle Liberty Media Group to own directly a greater number of shares of Silver King or in connection with the sale of the shares of Silver King to be received in the exchange to a third party who would be entitled to own such shares under applicable law. If all shares of Silver King stock issuable pursuant to the Contingent Right and the Exchange Agreement were issued, Liberty Media Group's beneficial ownership of Silver King stock would increase from 21.37% to approximately 36% of the outstanding common equity (with such shares and the shares owned by BDTV-I and BDTV-II representing approximately 77% of the total voting power of the Silver King common equity). As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II, as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. II-28 93 Summary of Operations Liberty Media Group's programming services include production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products ("Entertainment and Information Programming Services"). Additionally, Liberty Media Group is engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing ("Electronic Retailing Services"). To enhance the reader's understanding, separate financial data have been provided below for Electronic Retailing Services, which include a retail function, and other Entertainment and Information Programming Services. The table below sets forth, for the periods indicated, certain financial information and the percentage relationship that certain items bear to revenue. This summary provides trend data related to the normal recurring operations of Liberty Media Group. Corporate expenses have been reflected separately in the following table. Liberty Media Group holds significant equity investments, the results of which are not a component of operating income, but are discussed below under "Other Income and Expense". Other items of significance are discussed separately under their own captions below.
Years ended December 31, -------------------------------------------------------- 1996 1995 1994 -------------- ------------------- ----------------- dollar amounts in thousands Entertainment and Information - ----------------------------- Programming Services - -------------------- Revenue 100% $355,242 100% $521,050 100% $ 357,031 Operating, selling, general and administrative 72 257,601 91 475,533 93 332,060 Compensation relating to stock appreciation rights 6 20,142 1 2,183 -- -- Depreciation and amortization 7 23,676 10 54,688 5 17,006 --- -------- -------- -------- --- ---------- Operating income (loss) 15% $ 53,823 (2)% $(11,354) 2% $ 7,965 === ======== ======== ======== === ========== Electronic Retailing Services - ----------------------------- Net sales 100% $984,117 100% $919,796 100% $1,014,384 Cost of sales 61 605,116 66 602,849 61 618,972 Operating, selling, general and administrative 31 305,681 39 359,130 34 341,015 Adjustments to compensation relating to stock appreciation rights -- -- -- (758) -- (1,547) Depreciation and amortization 4 36,891 4 43,249 3 32,244 --- --------- -------- -------- --- ---------- Operating income (loss) 4% $ 36,429 (9)% $(84,674) 2% $ 23,700 === ======== ======== ======== === ========== Corporate expenses - ------------------ Selling, general and administrative $ 6,484 $ 4,743 $ 7,132 Compensation (adjustments to compensation) relating to stock appreciation rights (2,789) 10,261 (7,027) Depreciation and amortization 125 74 86 -------- -------- ---------- Operating loss $ (3,820) $(15,078) $ (191) ======== ======== ==========
II-29 94 Entertainment and Information Programming Services Revenue from Entertainment and Information Programming Services decreased 32% or $166 million for the year ended December 31, 1996, compared to the year ended December 31, 1995. As a result of the formation of Fox Sports in April of 1996, the financial results of Liberty Media Group's regional sports programming businesses were no longer consolidated with the financial results of Liberty Media Group. Additionally, as of April 1, 1996, Netlink's retail C-band satellite business no longer consolidates with the financial results of Liberty Media Group. Excluding the effect of these two transactions, revenue increased $62 million. Revenue from Encore Media Corporation ("Encore") increased approximately $50 million from 1995 to 1996. Approximately $22 million of this increase was related to Encore's thematic multiplex services ("Multiplex"). Multiplex units increased 103% from 6 million at December 31, 1995 to approximately 12.2 million units at December 31, 1996. Encore subscribers increased 39% to approximately 11 million at December 31, 1996 resulting in an increase in revenue of approximately $23 million in 1996. Average rates per subscriber were essentially unchanged during these periods. The remaining increase in Encore's revenue in 1996 was due to increased management fees from affiliates. The remaining increase in revenue for Entertainment and Information Programming Services is related to increases in revenue from affiliate fees from Southern and TV Network Corporation ("Intro") and the increase in the "Content Fee" from STARZ! (see note 4 to the accompanying combined financial statements). Revenue from Intro accounted for 7% of total revenue from Entertainment and Information Programming Services for the year ended December 31, 1996. Effective January 1, 1997 the operations for Intro were discontinued. Consequently, revenue from such operations will not be realized in future periods. Operating, selling, general and administrative expenses decreased 46% or $218 million for the year ended December 31, 1996, compared to the year ended December 31, 1995. The operations of Liberty Media Group's regional sports programming businesses and the operations of Netlink's retail C-band satellite business have not been consolidated with the financial results of Liberty Media Group for most of the year ended December 31, 1996 which contributes substantially to this decrease in operating costs and expenses. Excluding the effect of the businesses which no longer consolidate with the financial results of Liberty Media Group, operating, selling, general and administrative expenses increased $19 million. Such increase primarily relates directly to the corresponding increases in revenue. Programming costs for Encore increased approximately $11 million primarily due to upgrading the quality of programming on all Encore and Multiplex channels. Marketing costs and other general and administrative costs for Encore increased approximately $4 million in 1996 in relation to the increase in revenue and additional personnel and related costs supporting the overall growth of the company. Intro's operating, selling, general and administrative expenses will not be incurred in future periods due to the discontinuation of Intro's operations. Operating income for Entertainment and Information Programming Services increased $65 million from an $11 million loss for the year ended December 31, 1995 to operating income of $54 million for the year ended December 31, 1996. Excluding the effect of Liberty Media Group's regional sports programming businesses and Netlink's retail C-band satellite business, operating income increased $20 million from 1995 to 1996. The increase in operating income is primarily a result of the previously discussed increases in revenue offset by the increases in operating expenses. The increase in compensation relating to stock appreciation rights is due primarily to an increase in compensation relating to Encore's phantom stock appreciation rights of approximately $14 million (see note 10 to the accompanying combined financial statements). II-30 95 Revenue from Entertainment and Information Programming Services increased 46% or $164 million from 1994 to 1995. Liberty Media Group's regional sports programming businesses accounted for $102 million of such increase. Prime Ticket Networks, L.P. ("Prime Sports-West") was acquired by Liberty Media Group in August 1994, and was responsible for $40 million of the increase in revenue from Liberty Media Group's regional sports programming businesses. Other new regional sports programming businesses accounted for $27 million of the increase in revenue for the year ended December 31, 1995. Excluding the effect of Prime Sports-West and other new regional sports programming businesses, advertising and infomercial revenue for the year ended December 31, 1995 increased $11 million over the year ended December 31, 1994. Increases in direct broadcast satellite revenue accounts for $20 million of the 1995 increase in revenue from Liberty Media Group's regional sports programming businesses. The remaining increase in revenue from Liberty Media Group's regional sports programming businesses is attributed to customer growth and rate increases in the established regional sports programming businesses. Multiplex (three services launched in July 1994 and three services launched in September 1994) and Intro (a 24-hour basic cable service launched in July 1994) accounted for a combined increase in revenue of $24 million for the year ended December 31, 1995. Excluding Multiplex, Encore experienced a 33% increase in customers (primarily direct broadcast customers) representing an $11 million increase in revenue over 1994. Revenue from Netlink increased $29 million for the year ended December 31, 1995 compared to the year ended December 31, 1994. Substantially, all of this increase is attributed to pricing increases and an increase in the average number of retail customers. Operating, selling, general and administrative expenses increased 43% or $143 million from 1994 to 1995. Prime Sports-West accounted for $33 million of the increase in operating expenses of Liberty Media Group's regional sports programming businesses. Other new businesses in the regional sports programming businesses increased expenses $63 million for the year ended December 31, 1995. Expenses at Liberty Media Group's regional sports programming businesses, excluding the impact of new businesses, increased $14 million for the year ended December 31, 1995. Such increase was caused by increased programming rights fees in certain markets, new rights agreements, and increased production costs and technical operations due to a larger number of events. Intro and Multiplex, which were launched during 1994, were responsible for $13 million of the increase in expenses from 1994 to 1995. Additionally, Encore's expenses increased $4 million due to additional marketing expenses related to Encore's increase in customers and due to additional personnel and related costs. Netlink's programming costs increased $23 million for the year ended December 31, 1995 which is directly related to the increases in customers and increases in the rates that Netlink pays to its program suppliers. Operating loss for Entertainment and Information Programming Services was $11 million in 1995. Operating income was $8 million in 1994. Encore and Intro accounted for a combined increase of $18 million in operating income in 1995 due to increased cable customers and Encore's increased direct broadcast satellite customers. Such increase was offset by a $48 million decrease in operating income in the regional sports programming businesses due to start-up costs of new businesses, international ventures, and increased amortization related to other intangibles acquired in the acquisition of Prime Sports-West. The remaining increase in operating income of Liberty Media Group's Entertainment and Information Programming Services is primarily a result of increased revenue combined with decreased expenses from Southern, and growth in rates and customers of Netlink. II-31 96 Electronic Retailing Services This information reflects the results of HSN, which became a consolidated subsidiary of Liberty Media Group in February 1993. As a result of the HSN Merger on December 20, 1996, HSN is no longer a consolidated subsidiary. HSN's primary business is electronic retailing conducted by HSC. For the year ended December 31, 1996, revenue from Electronic Retailing Services increased $64 million, or 7% as compared to 1995. Net sales reflects an increase of 11.5% in the number of packages shipped and a decrease of 8.5% in the average price per unit sold. The remaining increase in revenue is due to increases in sales by other HSN wholly-owned subsidiaries, Internet Shopping Network, Inc. ("ISN") and Vela Research, Inc. ("Vela"), which were offset by decreases related to the sale of assets of Ortho-Vent, Inc., a subsidiary of HSN Mail Order, Inc. ("Mail Order"), and decreases by HSN's infomercial joint venture, HSN Direct Joint Venture ("HSND"). During April 1996, HSN sold a majority of its interest in HSND for $5.9 million to TINTA. For the year ended December 31, 1996, gross profit for Electronic Retailing Services increased $62 million, or 20%, compared to 1995. As a percentage of net sales, gross profit increased to 39% from 34%. Such increase was partially offset by combined decreases related to HSND and Ortho-Vent, Inc. The dollar increases in HSN's and HSC's gross profit relate to the higher sales volume. The comparative increases in HSN's gross profit percentage relate to warehouse sales and other promotional events held during 1995 which reduced gross profit in these periods and a 1996 product sales mix which was composed of higher gross profit merchandise. Operating, selling, general and administrative expenses decreased $53 million, to 31% of sales in 1996, compared with 39% of sales in 1995. In late 1995 and the first quarter of 1996, management of HSN instituted measures aimed at streamlining operations primarily by reducing its work force and taking other actions to reduce operating expenses. These changes resulted in reductions in operating expenses in 1996 compared with the same periods in 1995. In November 1995, HSN appointed a new chairman of the board and a new president and chief executive officer, both with significant experience in the electronic retailing and programming areas. HSN believes that the improved sales in 1996 were primarily the result of immediate changes made by new management to HSN's merchandising and programming strategies. HSN's management is taking additional steps designed to attract both first-time and active customers which include reformatting the Spree! network to America's Jewelry Store, a twenty-four hour jewelry shopping network, changes in the merchandising area designed to broaden product assortment, changing the sales mix, optimizing product level, improving inventory management and better planning of programmed shows. HSN believes that its negative performance in 1995 was due, in part, to the adverse effects of certain merchandising and programming strategies which had been implemented in late 1994 and 1995. There can be no assurance that changes to HSN's merchandising and programming strategies will achieve HSN's management's intended results. HSN revenue decreased $95 million or 9% from 1994 to 1995. HSC's sales reflect the net effect of a 19% decrease in the number of packages shipped which was partially offset by a 9% increase in the average price per unit sold. The decrease in HSC sales was offset by sales increases by HSND, Mail Order and Vela totaling $31 million for the year ended December 31, 1995. II-32 97 Cost of sales decreased $16 million, or 3%, from 1994 to 1995; and cost of sales, as a percentage of net sales, increased to 66% from 61%. The 1995 dollar decreases in cost of sales, compared to 1994, relate to the lower sales volumes. The comparative increases in cost of sales percentages primarily relate to warehouse sales and other promotional events. In addition, cost of sales for the year ended December 31, 1995, reflect a $12 million adjustment to HSC's inventory carrying value related to product which is inconsistent with HSC's new sales and merchandising philosophy. Operating expenses, exclusive of depreciation and amortization, increased $18 million, to 35% of sales during 1995 compared with 30% of sales in the 1994. The majority of such increase was restructuring charges of $16 million during the year ended December 31, 1995. Such restructuring charges consist of severance costs of $4 million related to a reduction in work force, $5 million payments to certain executives as provided for under their employment agreements in connection with the termination of their employment and $2 million related to the write-off of certain equipment maintenance and contractual fees related to service contracts which HSN will no longer utilize. In addition, HSN recorded a write-down of inventory totaling $1.3 million to net realizable value based on the disposition of the assets of Ortho-Vent, Inc. Additionally, $4 million of the restructuring charges for the year ended December 31, 1995, represents HSN management's estimate of costs to be incurred in connection with the closing of HSN's Reno, Nevada, distribution center, which was accomplished in June 1995. The decision to close the Reno distribution center was based on an evaluation of HSN's overall distribution strategy. HSN believes that seasonality does impact the business but not to the same extent it impacts the retail industry in general. Corporate Expenses Corporate selling, general and administrative expenses were relatively comparable for each of the years presented. The amount of expense associated with stock appreciation rights is based on the market price of the underlying common stock as of the date of the financial statements. The expense is subject to future adjustment based on market price fluctuations and, ultimately, on the final determination of market value when the rights are exercised. Stock options and/or stock appreciation rights granted by Liberty prior to the TCI/Liberty Combination have been assumed by TCI. Subsequent to the Distribution, certain corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of each year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that would approximate the costs Liberty Media Group would incur for comparable services on a stand alone basis. During the years ended December 31, 1996 and 1995, Liberty Media Group was allocated approximately $3 million each year in corporate general and administrative costs by TCI Group. Other Income and Expense Interest expense was $17 million, $19 million and $13 million in 1996, 1995 and 1994, respectively. The increased debt at HSN and Prime Sports-West is primarily responsible for the increase in interest expense in 1995. II-33 98 Dividend and interest income was $22 million, $12 million and $20 million for the years ended December 31, 1996, 1995 and 1994, respectively. Dividend income in 1996 increased due to dividends received on the TW Exchange Stock in December of 1996. Interest income earned on invested cash balances increased during 1996 due to an increase in such cash balances. The decrease in 1995 is primarily the result of the repayment of an HSN note receivable in August 1994. Liberty Media Group's share of earnings of affiliates was $8 million in 1996 compared to losses of $15 million in 1995 and earnings of $31 million in 1994. The increase in earnings in 1996 was partially due to the investment in Superstar/Netlink in April 1996 which contributed $11 million to the share of earnings for 1996. The decrease in losses of Court was responsible for approximately $19 million of the increase in earnings from 1995 to 1996. In August 1995, Liberty Media Group made an additional $29 million investment in Court which represented Liberty Media Group's pro rata share of capital calls made in prior years by the other partners of Court that Liberty Media Group had no obligation to fund. Due to the additional investment in Court, Liberty Media Group's share of losses of Court for the year ended December 31, 1995 includes $18 million of previously unrecognized losses of Court. Such losses were not recognized in prior periods due to the fact that Liberty Media Group's investment in Court had been reduced to zero. Earnings before interest, taxes and depreciation and amortization for QVC increased 18% in 1996 compared to 1995. Interest expense for QVC was decreased approximately $10 million for the year ended December 31, 1996 compared to the year ended December 31, 1995. Additionally, QVC recorded a one time charge in 1995 for compensation resulting from stock option redemptions in the QVC Merger. Consequently, Liberty Media Group's share of earnings in affiliates attributable to its interest in QVC increased $20 million in 1996 compared to 1995. These increases in share of earnings attributable to Liberty Media Group's investments in affiliates were offset by increased share of losses in other affiliates attributable to Liberty Media Group. Such losses include share of losses of DMX which contributed $14 million in losses to Liberty Media Group in 1996. Additionally, due to the formation of Fox Sports, share of earnings in affiliates attributable to Liberty Media Group's interest in certain regional sports programming businesses reflect twelve months of earnings in 1995 but only four months of earnings in 1996. This represents a $6 million decrease in earnings in 1996. Liberty Media Group's share of earnings in affiliates attributable to its interest in Discovery Communications, Inc. ("Discovery") decreased by approximately $4 million in 1996 compared to 1995. Discovery's earnings before interest, taxes and depreciation and amortization increased 34% in 1996 compared to 1995 for its established businesses. This increase was almost entirely offset by increased losses before interest, taxes and depreciation and amortization of its developing businesses. Discovery also recorded increased depreciation and amortization on increased fixed assets resulting from a 1996 acquisition by Discovery as well as increased expense relating to an executive compensation plan. The increase in losses in 1995 is primarily due to share of losses of Court. As previously discussed, Liberty Media Group's share of losses of Court for the year ended December 31, 1995 of $21 million includes $18 million of previously unrecognized losses of Court. The 1995 increase in losses also was partially due to the sale of substantially all of Liberty Media Group's interest in AMC in July 1994, which investment contributed $9 million to the 1994 earnings. Liberty Media Group's share of earnings in affiliates attributable to its interest in QVC decreased $9 million for 1995, as compared to 1994. Such change is primarily the result of increased interest expense on additional debt arising from the QVC Merger as well as compensation resulting from stock option redemptions in the QVC Merger. Liberty Media Group's share of losses increased by $8 million in 1995 due to share of losses in Premier Sports. II-34 99 Liquidity and Capital Resources Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to Liberty Media Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI approved by the shareholders of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries will each continue to be responsible for their respective liabilities. Holders of Liberty Group Stock are holders of common stock of TCI and will continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock does not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of Liberty Media Group and the market price of shares of Liberty Group Stock. In addition, net losses of any portion of TCI, dividends and distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce funds of TCI legally available for dividends on all series of common stock. Accordingly, Liberty Media Group financial information should be read in conjunction with the TCI consolidated financial information. Dividends on Liberty Group Stock will be payable at the sole discretion of the Board out of the lesser of all assets of TCI legally available for dividends and the available dividend amount with respect to Liberty Media Group, as defined. Determinations to pay dividends on Liberty Group Stock will be based primarily upon the financial condition, results of operations and business requirements of Liberty Media Group and TCI as a whole. TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Previously, cash receipts of certain businesses attributed to Liberty Media Group were remitted to TCI Group and certain cash disbursements of Liberty Media Group were funded by TCI Group on a daily basis. Prior to the Distribution, the net amounts of such cash activities are included in combined equity in the accompanying combined financial statements. Subsequent to the Distribution, such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to the Liberty Media Group. The Board could determine from time to time that debt of TCI not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. For all periods prior to the Distribution, all financial impacts of equity offerings were attributed entirely to TCI. Following the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, and all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, will to such extent be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions of Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group, and financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group will be attributed entirely to TCI Group. II-35 100 Borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. Liberty Media Group's sources of funds include its available cash balances, cash generated from operating activities, cash distributions from affiliates, dividend and interest payments, asset sales, availability under certain credit facilities, and loans and/or equity contributions from TCI Group. To the extent cash needs of Liberty Media Group exceed cash provided by Liberty Media Group, TCI Group may transfer funds to Liberty Media Group. Conversely, to the extent cash provided by Liberty Media Group exceeds cash needs of Liberty Media Group, Liberty Media Group may transfer funds to TCI Group. Encore's loan agreement contains restrictions regarding transfers of funds to other members of Liberty Media Group in the form of loans, advances or cash dividends. However, other subsidiaries, principally Southern and Netlink's wholesale C-band satellite business are not restricted from making transfers of funds to other members of the group. The cash provided by operating activities of Southern is a significant source of cash available for distribution to Liberty Media Group. Upon consummation of the Spin-Off, cash provided by operating activities of Southern will no longer be available as a source of cash for Liberty Media Group. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of TW Exchange Stock in exchange for its holdings in TBS common and preferred stock. It is anticipated that Time Warner will continue to pay dividends on its common stock and consequently Liberty Media Group will receive dividends on the common stock received in connection with the TBS/Time Warner Merger. However, there can be no assurance that such dividends will continue to be paid. If the Spin-Off occurs, such cash dividends would not be available as a source of cash for Liberty Media Group. Cash provided by operating activities of Netlink's wholesale C-band satellite business is another significant source of cash available for distribution to Liberty Media Group. In addition, Netlink's wholesale C-band satellite business, faces significant competition from other C-band distributors as well as DBS services, which were launched in 1994. Liberty Media Group believes that the entry of DBS will serve to decrease the size of the C-Band market in the short and long term. During 1996, the C-Band industry decreased 4% to 2.3 million subscribers. A significant deterioration of the C-Band market could have a material effect on Netlink's wholesale C-band satellite business and consequently, Liberty Media Group's cash provided by operating activities. While the consummation of the Spin-Off and the decrease in the C-Band industry could have significant effects on Liberty Media Group's cash provided by operating activities, cash generated by Liberty Media Group's remaining operating activities, distributions from affiliates, dividend and interest payments and available cash balances should provide adequate cash to meet its obligations. Liberty Media Group has a revolving line of credit which provides for borrowings of up to $325 million. No borrowings were outstanding at December 31, 1996. Encore has a line of credit which provides for borrowings up to $50 million, $1.6 million of which was outstanding at December 31, 1996. Such facility contains certain provisions which limit Encore as to additional indebtedness, sale of assets, liens, guarantees and distributions and includes various financial covenants, including maintenance of certain financial ratios. II-36 101 Various partnerships and other affiliates of Liberty Media Group accounted for under the equity method finance a substantial portion of their acquisitions and capital expenditures through borrowings under their own credit facilities and net cash provided by their operating activities. Liberty Media Group intends to continue to develop its entertainment and information programming services and has made certain financial commitments related to the acquisition of programming. As of December 31, 1996, Liberty Media Group's future minimum obligation related to certain film licensing agreements was $194 million. The amount of the total obligation is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Continued development may require additional financing and it cannot be predicted whether Liberty Media Group will obtain such financing. If additional financing cannot be obtained, Liberty Media Group could attempt to sell assets but there can be no assurance that asset sales, if any, can be consummated at a price and on terms acceptable to Liberty Media Group. Further, Liberty Media Group and/or TCI could attempt to sell equity securities but, again, there can be no certainty that such a sale could be accomplished on acceptable terms. The FCC has initiated a number of rulemakings to implement various provisions of the Telecommunications Act of 1996 (the "1996 Telecom Act"). Recent regulatory developments which may affect Liberty Media Group's programming interests include two additional proceedings. Section 612 of the Communications Act of 1934, as amended, requires a cable operator, depending upon the number of activated channels in its cable system, to set aside up to 15 percent of activated channels for leased access. On March 21, 1996, the FCC adopted a Further Notice of Proposed Rulemaking in which it proposed an alternative maximum rate formula that it believes may better promote the goals of leased access. On February 4, 1997 the FCC released revised rules for calculating the maximum rate for leased commercial access to tiered channels. The newly-adopted formula yields a lower maximum rate than the current rate such that the use of leased access may be expected to increase, thereby further restricting the channel capacity available for carriage of Liberty Media Group's programming services. Additionally, the 1996 Telecom Act also requires the FCC to establish rules and implementation schedules to ensure that video programming is fully accessible to the hearing impaired through closed captioning. On January 17, 1997, the FCC released proposed new rules which would require substantial closed captioning. Depending upon the rules and implementation schedule ultimately adopted by the FCC, Liberty Media Group's programming interests may incur significant additional costs for closed captioning. Netlink's wholesale C-band satellite business uplinks the signals of broadcast televisions stations to C-Band packagers and marketers in the United States and Canada. In uplinking and selling the signals of broadcast television stations in the United States, Netlink's wholesale C-band satellite business is subject to certain FCC regulations and Copyright Act provisions. Pursuant to such regulations, Netlink's wholesale C-band satellite business may only distribute the signals of network broadcast stations to "unserved households" which are outside the Grade B contours of a primary station affiliated with such network. Netlink has entered into an agreement in principle with representatives of the National Association of Broadcasters and of its television network affiliate members to identify by zip code those geographic areas which are "unserved" by network affiliated stations. Depending upon finalization of the agreement and such identification, Netlink's wholesale C-band satellite business may be required to disconnect a substantial number of existing subscribers which would have a material adverse effect upon the operations of the Netlink wholesale C-band business. II-37 102 TCI GROUP General The TCI/Liberty Combination was consummated on August 4, 1994. Due to the significant economic interest held by TCIC through its ownership of Liberty preferred stock and Liberty common stock and other related party considerations, TCIC accounted for its investment in Liberty under the equity method prior to the consummation of the TCI/Liberty Combination. Accordingly, TCIC had recognized 100% of Liberty's earnings or losses before deducting preferred stock dividends. The TCI/Liberty Combination was accounted for using predecessor cost due to related party considerations. Accordingly, the accompanying combined financial statements of TCI Group reflect the combination of the historical financial information of the assets of TCI and Liberty which have not been attributed to Liberty Media Group. For periods prior to the TCI/Liberty Combination, the combined financial statements of TCI Group and Liberty Media Group comprise all the accounts included in the corresponding consolidated financial statements of TCI and subsidiaries and Liberty and subsidiaries. For periods subsequent to the TCI/Liberty Combination, the combined financial statements of TCI Group and Liberty Media Group comprise all the accounts included in the corresponding consolidated financial statements of TCI and subsidiaries. On August 3, 1995, the stockholders of TCI authorized the Board to issue two new series of stock which reflect the separate performance of Liberty Media Group. Additionally, stockholders of TCI approved the redesignation of the previously authorized Class A and Class B common stock of TCI into Series A and Series B TCI Group Stock. The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution represented one hundred percent of the equity value attributable to Liberty Media Group. At December 31, 1996, the TCI Group Stock reflects the separate performance of TCI Group, which is generally comprised of the subsidiaries and assets not attributed to Liberty Media Group, including TCI's Domestic Cable and Communications unit, TINTA and TCI's Technology/Venture Capital unit. On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of TCI's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock. The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of TCI's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. II-38 103 Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of TCI attributable to Telephony Group, in addition to the separate performance of TCI's domestic cable distribution business, telephony distribution and communications business (other than the investments attributed to Telephony Group), international cable, telephony and programming businesses, technology/venture capital business, and any other business of TCI not attributed to either Liberty Media Group or Telephony Group. As shares of Telephony Group Stock are issued and distributed or sold, the percentage of the common stockholders' equity value of TCI attributable to the Telephony Group that is or is intended to be reflected in the TCI Group Stock will be reduced accordingly. The composition of Liberty Media Group was not affected by the authorization, and will not be affected by the issuance, of Telephony Group Stock. Summary of Operations TCI Group operates principally in the cable and communications industry. The Telephony, Internet, Technology/Venture Capital and International Cable and Programming portions of TCI Group's business have been included with cable and communications services due to their relative insignificance. The table below sets forth for the periods presented, the percentage relationship that certain items bear to revenue. This summary provides trend data relating to the normal recurring operations of TCI Group. Other items of significance are discussed separately under separate captions below.
Years ended December 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ dollar amounts in millions Revenue 100% $6,790 100% $5,145 100% $4,068 Operating, selling, general and administrative expenses 69 4,678 61 3,173 56 2,284 Compensation (adjustment to compensation) relating to stock appreciation rights -- (30) 1 45 (5) Restructuring charges -- 41 -- -- -- -- Depreciation and amortization 23 1,555 25 1,274 25 1,001 ---- ------ --- ------ --- ------ Operating income 8% $ 546 13% $ 653 19% $ 788 ==== ====== === ====== === ======
The operation of TCI Group's cable television systems is regulated at the federal, state and local levels. The Cable Acts established rules under which TCI Group's basic and tier service rates and its equipment and installation charges are regulated if a complaint is filed or if the appropriate franchise authority is certified. At December 31, 1996, approximately 78% of TCI Group's basic customers were served by cable television systems that were subject to such rate regulation. During the year ended December 31, 1996, 61% of TCI Group's revenue was derived from Regulated Services. As noted above, any increases in rates charged for Regulated Services are regulated by the Cable Acts. Moreover, competitive factors may limit TCI Group's ability to increase its service rates. II-39 104 Through December 4, 1996, TCI Group had an investment in Primestar. Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, TCI distributed to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. At the time of the Satellite Spin-off, Satellite's assets and operations included TCI Group's interest in Primestar, TCI Group's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with TCI Group's. See note 8 to the accompanying combined financial statements for the effect of the Satellite Spin-off on TCI Group's results of operations and financial position. Revenue increased 32% and 26% for the years ended December 31, 1996 and 1995, respectively, as compared to the prior years. In TCI Group's regulated cable systems, TCI Group implemented rate increases for its Regulated Services in June 1996. As allowed by FCC regulations, such rate increases include amounts intended to recover increased programming costs incurred during the first five months of 1996 and not previously recovered, as well as interest on said amounts. The 1996 increase in revenue is the result of the effect of certain acquisitions (including the Viacom Acquisition) (18%), increases in the rates charged for TCI Group's cable television service due to inflation, programming cost increases as previously discussed and channel additions (7%), an increase in TCI Group's satellite customers through the date of the Satellite Spin-off (3%), net growth in basic customers levels within TCI Group's cable television systems (1%), and increases in advertising sales, international programming and other revenue (3%). The 1995 increase in revenue is the result of the effect of certain acquisitions (13%), growth in TCI Group's Primestar subscribers (4%), increases in the rates charged for TCI Group's cable television service due to inflation, programming cost increases and channel additions (4%), net growth in basic customer levels within TCI Group's cable television systems (4%) and an increase in TCI Group's long distance voice and data service revenue (1%). Operating, selling, general and administrative expenses increased 47% and 39% for the years ended December 31, 1996 and 1995, respectively. Exclusive of the effects of acquisitions (21% and 13%) and Primestar (5% and 8%) such expenses increased 21% and 18%. Programming expenses accounted for the majority of such increase. TCI Group cannot determine whether and to what extent increases in the cost of programming will affect its future operating costs. However, such programming costs have increased at a greater percentage than increases in revenue from Regulated Services. During the fourth quarter of 1995, TCI Group incurred $25 million in expenses related to payment of bonuses to the majority of its employees. During the fourth quarter of 1996, TCI Group restructured certain of its operating and accounting functions. In connection with the Restructuring, TCI Group recognized a charge of $41 million related primarily to work force reductions. As of December 31, 1996, $8 million of such restructuring charges had been paid. TCI Group anticipates that the majority of the remaining charges will be paid during the six months ended June 30, 1997. The increase in TCI Group's depreciation expense in 1996 and 1995 is due to acquisitions as well as increased capital expenditures due to a program to upgrade and install optical fiber technology in TCI Group's cable systems. The increase in TCI Group's amortization expense in 1996 and 1995 is due to acquisitions. II-40 105 Certain corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that would approximate the costs Liberty Media Group would incur for comparable services on a stand alone basis. During each of 1996 and 1995, Liberty Media Group was allocated $3 million in corporate general and administrative costs by TCI Group. TCI Group records compensation relating to stock appreciation rights and restricted stock awards granted to certain employees by TCI or TINTA. Such compensation is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Other Income and Expenses TCI Group's interest expense increased $87 million or 9% from 1995 to 1996 and $207 million or 26% from 1994 to 1995. The increase in 1996 is the net result of an increase due to higher debt balances partially offset by a decrease due to a lower weighted average interest rate. The 1995 increase is the result of higher interest rates and debt balances. TCI Group's weighted average interest rate on borrowings was 7.7%, 8.1% and 7.6% during 1996, 1995 and 1994, respectively. During the year ended December 31, 1996, in order to reduce future interest costs, TCI Group redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44%. In connection with the Redemption, TCI Group recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. Also, during the year ended December 31, 1996, certain subsidiaries of TCI Group terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, TCI Group recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. TCI Group's share of losses of affiliates were $469 million, $178 million and $117 million in 1996, 1995 and 1994, respectively. The increases in 1996 and 1995 are due in part to the share of losses of Telewest and TCI Group's other international investments described below. Additionally, included in share of losses of affiliates for the year ended December 31, 1996, is $168 million attributable to Sprint Spectrum. Such amount includes $34 million associated with prior periods. At December 31, 1996, TCI Group had an effective ownership interest of approximately 27% in Telewest, a company that is currently operating and constructing cable television and telephone systems in the UK. Telewest, which is accounted for under the equity method, had a carrying value at December 31, 1996 of $488 million and comprised $109 million, $70 million and $43 million of TCI Group's share of its affiliates' losses in 1996, 1995, and 1994, respectively. The increase in TCI Group's share of losses of Telewest in 1996 and 1995 is due, in part, to an increase in Telewest's interest expense and foreign currency translation losses related to the 1995 issuance of U.S. dollar denominated debentures by Telewest. In addition, TCI Group has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other equity method investments had a carrying value of $422 million at December 31, 1996 and accounted for $79 million, $62 million and $50 million of TCI Group's share of its affiliates' losses in 1996, 1995 and 1994, respectively. II-41 106 Telewest was formed during the fourth quarter of 1995 upon the merger of TeleWest Communications with SBC (CableComms)(UK). Prior to the TeleWest Merger, TCI Group had an effective ownership interest of approximately 36% in TeleWest Communications, and subsequent to the TeleWest Merger, TCI Group has an effective ownership interest of approximately 27% in TeleWest. As a result of the TeleWest Merger, TCI Group recognized a gain of $165 million (before deducting the related tax expense of $58 million). Such gain represents the difference between TCI Group's recorded cost for TeleWest Communications and TCI Group's effective proportionate share of Telewest's net assets. There is no assurance that TCI Group will realize similar gains in future periods. As a result of the TeleWest Communications November 1994 initial public offering and the associated dilution of TCI Group's ownership interest of TeleWest Communications, TCI Group recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million) in 1994. As a result of the TCG IPO in 1996, TCI Group's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, TCI Group recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). As a result of the TINTA IPO and the TYC Acquisition, TCI Group recognized a gain amounting to $123 million during 1995. There is no assurance that TCI Group will realize similar gains in future periods. Minority interests in earnings of consolidated subsidiaries aggregated $54 million for the year ended December 31, 1996, as compared to $18 million in 1995 and minority interests in losses of consolidated subsidiaries in 1994. The change in 1996 is due primarily to the accrual of dividends on preferred securities issued by certain subsidiaries of TCI Group. Net Loss TCI Group's net loss (before preferred stock dividends requirements) of $778 million for the year ended December 31, 1996 represents a decrease of $663 million, as compared to TCI Group's net loss (before earnings of Liberty Media Group and preferred stock dividends) of $115 million for the year ended December 31, 1995. Such decrease is primarily the net result of an increase in share of losses of affiliates, interest expense and an decrease in operating income offset by an increase in income tax benefit. Additionally, TCI Group recorded gains in 1995 related to the TeleWest Merger and the TINTA IPO. TCI Group's net loss (before earnings of Liberty Media Group and preferred stock dividend requirements) of $115 million for the year ended December 31, 1995 represents a decrease of $93 million, as compared to TCI Group's net loss of $22 million for 1994. Such decrease is the result of increases in interest expense and share of losses of affiliates combined with a decrease in operating income which were partially offset by the aforementioned gain recognized as a result of the TINTA IPO and the TYC Acquisition and a decrease in tax expense. Inflation has not had a significant impact on TCI Group's results of operations during the three-year period ended December 31, 1996. II-42 107 Liquidity and Capital Resources Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI approved by the shareholders of TCI did not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of TCI Group and the market price of shares of the TCI Group Stock. In addition, net losses of any portion of TCI, dividends or distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce the funds of TCI legally available for dividends on all series of common stock. Accordingly, TCI Group financial information should be read in conjunction with the TCI and Liberty Media Group financial information. Dividends on TCI Group Stock are payable at the sole discretion of the Board out of the lesser of assets of TCI legally available for dividends and the available dividend amount with respect to TCI Group, as defined. Determinations to pay dividends on TCI Group Stock would be based primarily upon the financial condition, results of operations and business requirements of TCI Group and TCI as a whole. TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Previously, cash receipts of certain businesses attributed to Liberty Media Group were remitted to TCI Group and certain cash disbursements of Liberty Media Group were funded by TCI Group on a daily basis. Prior to the Distribution, the net amounts of such cash activities are included in investment in Liberty Media Group in the accompanying combined financial statements. Subsequent to the Distribution, such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to be reflected as an Inter-Group Interest to Liberty Media Group. The Board could determine from time to time that debt of TCI Group not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. For all periods prior to the Distribution, all financial impacts of equity offerings were attributed entirely to TCI Group. After the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, will be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions on Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group, and the financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group will be attributed entirely to TCI Group. II-43 108 Borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. On July 31, 1996, pursuant to certain agreements entered into between TCI Group, Viacom International, Inc. and Viacom, TCI Group acquired all of the common stock of Cable Sub which owned Viacom's cable systems and related assets. The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to New Viacom Sub. Cable Sub also transferred to New Viacom Sub the Loan Proceeds. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. The Viacom Acquisition has been accounted for by the purchase method and accordingly, TCI Group recorded Cable Sub's assets and liabilities at fair value. Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Common Stock the opportunity to exchange a portion of their shares of Viacom Common Stock for shares of Cable Sub Class A Stock. Immediately following the completion of the Exchange Offer, TCI Group acquired from Cable Sub shares of Cable Sub Class B Common Stock for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into Exchangeable Preferred Stock of Cable Sub with a stated value of $100 per share. The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. In addition to the Viacom Acquisition, TCI Group consummated certain other acquisitions during 1996. See note 5 to the accompanying consolidated financial statements for additional information regarding assets acquired and liabilities assumed in connection with all acquisitions. During the year ended December 31, 1996, TCIC issued (i) 4.6 million shares of Cumulative Exchangeable Preferred Stock for net cash proceeds of $223 million, (ii) $500 million in face value of 8.72% Trust Originated Preferred SecuritiesSM for net cash proceeds of $486 million (through a special purpose entity formed as a Delaware business trust), (iii) $500 million in face value of 10% Trust Preferred Securities for net cash proceeds of $485 million (through a special purpose entity formed as a Delaware business trust) and (iv) $2.06 billion of publicly-placed senior and medium term notes with interest rates ranging from 6.1% to 7.9% and maturity dates ranging through 2026. TCIC used the proceeds from the aforementioned debt and equity issuances to retire commercial paper and to repay certain other indebtedness. II-44 109 During March 1997, TCI Group, through special purpose entities formed as Delaware business trusts, issued $300 million in face value of 9.65% Capital Securities and $200 million in face value of 9.72% Trust Preferred Securities. The Company used the net proceeds from such issuances to retire commercial paper and repay certain other indebtedness. Additionally, in February 1996, TINTA issued $345 million (before deducting offering costs of $9 million) of 4.5% convertible subordinated debentures. TINTA anticipates that it will use the net proceeds to fund capital contributions to certain of its equity investees. In January 1997, TCI Group acquired the 50% ownership interest in TKR Cable that TCI Group did not previously own for aggregate consideration of approximately $970 million. TCI Group issued approximately 16 million shares of TCI Group Stock, assumed $584 million of TKR Cable's debt and paid cash of $88 million and shares of Time Warner common stock valued at $41 million upon consummation of such acquisition. During the second quarter of 1996, certain subsidiaries of TCI Group terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion. TCI Group does not believe that such terminations will adversely affect its future liquidity. At December 31, 1996, subsidiaries of TCI Group had approximately $1.4 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. Although such subsidiaries were in compliance with the restrictive covenants contained in their credit facilities at said date, additional borrowings under the credit facilities are subject to the subsidiaries' continuing compliance with the restrictive covenants (which relate primarily to the maintenance of certain ratios of cash flow to total debt and cash flow to debt service, as defined in the credit facilities) after giving effect to such additional borrowings. See note 9 to the accompanying TCI Group combined financial statements for additional information regarding the material terms of the lines of credit. One measure of liquidity is commonly referred to as "interest coverage." Interest coverage, which is measured by the ratio of Operating Cash Flow (operating income before depreciation, amortization, compensation relating to stock appreciation rights, adjustment to compensation relating to stock appreciation rights and restructuring charges) $2,112 million, $1,972 million and $1,784 million for the years ended December 31, 1996, 1995 and 1994, respectively) to interest expense ($1,080 million, $993 million and $786 million in 1996, 1995 and 1994, respectively), is determined by reference to the combined statements of operations. TCI Group's interest coverage ratio was 196%, 199% and 227% for 1996, 1995 and 1994, respectively. The decrease in TCI Group's interest coverage in 1996 and 1995 is caused by an increase in interest expense due to higher debt balances. Management of TCI Group believes that the foregoing interest coverage ratio is adequate in light of the consistency and nonseasonal nature of its cable television operations and the relative predictability of TCI Group's interest expense, almost half of which results from fixed rate indebtedness. However, TCI Group's current intent is to reduce its outstanding indebtedness such that its interest coverage ratio could be increased. There is no assurance that TCI Group will be able to achieve such objective. Operating Cash Flow is a measure of value and borrowing capacity within the cable television industry and is not intended to be a substitute for cash flows provided by operating activities, a measure of performance prepared in accordance with generally accepted accounting principles, and should not be relied upon as such. Operating Cash Flow, as defined, does not take into consideration substantial costs of doing business, such as interest expense, and should not be considered in isolation to other measures of performance. II-45 110 Another measure of liquidity is net cash provided by operating activities, as reflected in the accompanying combined statements of cash flows. Net cash provided by operating activities ($1,084 million, $955 million and $1,001 million in 1996, 1995 and 1994, respectively) reflects net cash from the operations of TCI Group available for TCI Group's liquidity needs after taking into consideration the aforementioned additional substantial costs of doing business not reflected in Operating Cash Flow. Amounts expended by TCI Group for its investing activities exceed net cash provided by operating activities. However, management believes that net cash provided by operating activities, the ability of TCI Group to obtain additional financing (including the available lines of credit and access to public debt markets), issuances and sales of TCI's equity or equity of its subsidiaries, and proceeds from disposition of assets will provide adequate sources of short-term and long-term liquidity in the future. See TCI Group's combined statements of cash flows included in the accompanying combined financial statements. TCI Group's subsidiaries generally finance acquisitions and capital expenditures through net cash provided by operating and financing activities. Historically, amounts expended for acquisitions and capital expenditures have exceeded net cash provided by operating activities. In this regard, the amount of capital expended by TCI Group for property and equipment was $2,043 million, $1,733 million and $1,249 million in 1996, 1995 and 1994, respectively. TCI Group has reevaluated its capital expenditure strategy and currently anticipates that it will expend significantly less for property and equipment in 1997 than it did in 1996. To the extent that net cash provided by operating activities exceeds net cash used in investing activities in 1997, TCI Group currently anticipates that such excess cash will initially be used to reduce outstanding debt. In late April, 1996, TCIC was notified by Moody's and Duff & Phelps that those rating agencies had downgraded by one level their respective ratings of TCIC's senior debt to the first level below investment grade. Fitch reaffirmed its rating for TCIC's senior debt at the last level of investment grade. On October 18, 1996, Standard and Poor's issued a press release stating that TCIC's senior debt would be placed on CreditWatch with negative implications. On January 24, 1997, Standard & Poor's removed TCIC's senior debt from CreditWatch. TCIC's senior debt is currently rated BBB- by Standard & Poor's (the last level of investment grade) with a negative outlook. These actions are expected to marginally increase TCIC's cost of borrowings under certain bank credit facilities, and may adversely affect TCIC's access to the public debt market and its overall cost of future borrowings. TCI Group is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services, to residential and business customers nationwide, using the "Sprint" brand. The PCS Ventures include the Sprint PCS Partnerships and PhillieCo. The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint, Comcast, Cox and TCI Group. The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI Group. TCI Group has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo and accounts for its interest in the PCS Ventures by the equity method. II-46 111 The Sprint PCS Partnerships have licenses, and have affiliated with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or population equivalents), based on the Donnelley Marketing Service estimate of the December 31, 1995 population of the relevant geographic areas. The Sprint PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction conducted by the FCC that ended in March 1995, for an aggregate license cost of approximately $2.1 billion. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with APC, which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox-California, which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego, California. The Sprint PCS Partnerships may invest in other entities that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. From inception through 1996, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which TCI Group contributed an aggregate of approximately $0.9 billion, including approximately $0.2 billion during the year ended December 31, 1996.) The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. TCI Group expects that the remaining approximately $1.2 billion of such amount (of which TCI Group's share is approximately $0.4 billion) will be contributed by the end of the second quarter of 1998 (although there can be no assurance that any additional capital will be contributed). TCI Group expects that the Sprint PCS Partnerships will require additional equity thereafter. TCI Group has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $278 million at December 31, 1996. Although there can be no assurance, management of TCI Group believes that it will not be required to meet its obligations under such guarantees or if it is required to meet any of such guarantees, that they will not be material to TCI Group. TCI Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through December 31, 2005. Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating approximately $377 million. The aggregate amount of the Film Licensing Obligations is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, TCI Group's required aggregate payments under the Film Licensing Obligations could prove to be significant. TCI Group has made certain financial commitments related to the acquisition of foreign sports program rights through 2004. At December 31, 1996, such commitments aggregated $226 million. TCI Group's various partnerships and other affiliates accounted for under the equity method generally fund their acquisitions, required debt repayments and capital expenditures through borrowings under and refinancing of their own credit facilities (which are generally not guaranteed by TCI Group) and through net cash provided by their own operating activities. II-47 112 In order to achieve the desired balance between variable and fixed rate indebtedness and to diminish its exposure to extreme increases in variable interest rates, TCI Group has entered into various interest rate exchange agreements. Pursuant to the interest rate exchange agreements, TCI Group (i) pays fixed interest rates ranging from 7.2% to 9.3% and receives variable rates on notional amounts of $310 million at December 31, 1996 and (ii) pays variable interest rates and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, TCI Group's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively. During the years ended December 31, 1996, 1995 and 1994, TCI Group's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million), and $36 million, respectively. During the year ended December 31, 1996, TCI Group terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. TCI Group received $16 million upon such terminations. TCI Group will amortize the termination settlement over the remainder of the original terms of the terminated Variable Rate Agreements. TCI Group is exposed to credit losses for the periodic settlements of amounts due under the interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, TCI Group does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. At December 31, 1996, after considering the net effect of the aforementioned interest rate exchange agreements, TCI Group had $7,347 million (or 49%) of fixed-rate debt with a weighted average interest rate of 8.5% and $7,577 million (or 51%) of variable-rate debt with a weighted average interest rate of 6.3%. In connection with its investments in the above-described foreign entities, TCI Group is exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar against the UK pound sterling ("L."), the Japanese yen ("Y."), and various other foreign currencies that are the functional currencies of TCI Group's foreign subsidiaries and affiliates. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of an operating subsidiary or affiliate of TINTA will cause TCI Group to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. TCI Group is also exposed to foreign currency risk to the extent that TCI Group or its foreign subsidiaries and affiliates enter into transactions denominated in currencies other than their respective functional currencies. Because TCI Group generally views its foreign operating subsidiaries and affiliates as long-term investments, TCI Group generally does not attempt to hedge existing investments in its foreign affiliates and subsidiaries. With respect to funding commitments that are denominated in currencies other than the U.S. dollar, TCI Group historically has sought to reduce its exposure to short-term (generally no more than 90 days) movements in the applicable exchange rates once the timing and amount of such funding commitments becomes fixed. Although TCI Group monitors foreign currency exchange rates with the objective of mitigating its exposure to unfavorable fluctuations in such rates, TCI Group believes that it is not possible or practical to completely eliminate TCI Group's exposure to unfavorable fluctuations in foreign currency exchange rates. II-48 113 Approximately twenty-seven percent of the franchises held by TCI Group, involving approximately 4.5 million basic customers, expire within five years. There can be no assurance that the franchises for TCI Group's systems will be renewed as they expire, although TCI Group believes that its cable television systems generally have been operated in a manner which satisfies the standards established by the 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, for franchise renewal. However, in the event they are renewed, TCI Group cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with the renewals. To date they have not varied significantly from the original terms. During 1996, TCI Group has experienced a competitive impact from medium power and high power direct broadcast satellites that use high frequencies to transmit signals that can be received by HSDs much smaller in size than traditional HSDs. The Primestar partners distribute a multi-channel programming service via a medium power communications satellite to HSDs of approximately 3 feet in diameter. Prior to the Satellite Spin-off, TCI Group provided this satellite service. DirecTv, USSB and EchoStar transmit from high power satellites and generally use smaller dishes to receive their signals. Alphastar began offering medium power service in the second quarter of 1996. On February 24, 1997, News Corp. and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar and that the companies will combine their DBS businesses into a new company, which will operate under the name Sky. The two companies contend that Sky, which is scheduled to launch in early 1998, will offer 500 channels of digital television on a nationwide basis (not all of which would be available to each subscriber), Internet services and local broadcast network television signals, capable of reaching more than 50% of all television householders upon the launch of Sky and 75% of all television households by the end of 1998. DBS operators have the right to distribute substantially all of the significant cable television programming services currently carried by cable television systems. Estimated DBS customers nationwide increased from approximately 2.2 million at the end of 1995 to approximately 4.4 million at the end of 1996, and TCI Group expects that competition from DBS will continue to increase. However, TCI Group is unable to predict what effect such competition will have on TCI Group's financial position. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of Tele-Communications, Inc. are filed under this Item, beginning on Page II-50. The combined financial statements of Liberty Media Group are filed under this Item, beginning on Page II-102. The combined financial statements of TCI Group are filed under this Item, beginning at Page II-129. The financial statement schedules required by Regulation S-X are filed under Item 14 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. II-49 114 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited the accompanying consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-50 115 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995
1996 1995 -------- -------- Assets amounts in millions Cash and cash equivalents $ 394 118 Trade and other receivables, net 448 407 Inventories, net -- 104 Prepaid expenses 81 65 Prepaid program rights 49 47 Committed film inventory 136 122 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 3,012 2,372 Investment in Time Warner, Inc. ("Time Warner") (note 5) 2,027 -- Investment in Turner Broadcasting System, Inc. ("TBS") (note 5) -- 955 Property and equipment, at cost: Land 77 88 Distribution systems 10,078 9,545 Support equipment and buildings 1,541 1,429 -------- -------- 11,696 11,062 Less accumulated depreciation 4,168 3,653 -------- -------- 7,528 7,409 -------- -------- Franchise costs 17,875 14,322 Less accumulated amortization 2,439 2,092 -------- -------- 15,436 12,230 -------- -------- Other assets, at cost, net of amortization 1,133 1,748 -------- -------- $ 30,244 25,577 ======== ========
(continued) II-51 116 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued December 31, 1996 and 1995
1996 1995 -------- -------- Liabilities and Stockholders' Equity amounts in millions Accounts payable $ 216 243 Accrued interest 274 233 Accrued programming expense 347 318 Other accrued expenses 812 1,114 Debt (note 8) 14,926 13,211 Deferred income taxes (note 14) 6,012 4,584 Other liabilities 253 195 -------- -------- Total liabilities 22,840 19,898 -------- -------- Minority interests in equity of consolidated subsidiaries 1,493 651 Redeemable preferred stocks (note 9) 658 478 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC") (note 10) 1,000 -- Stockholders' equity (note 11): Series Preferred Stock, $.01 par value -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value -- -- Tele-Communications, Inc. Series A TCI Group common stock, $1 par value. Authorized 1,750,000,000 shares; issued 696,325,478 shares in 1996 and 672,211,009 shares in 1995 696 672 Tele-Communications, Inc. Series B TCI Group common stock, $1 par value. Authorized 150,000,000 shares; issued 84,647,065 shares in 1996 and 84,691,554 shares in 1995 85 85 Tele-Communications, Inc. Series A Liberty Media Group common stock, $1 par value. Authorized 750,000,000 shares; issued 227,844,437 shares in 1996 and 224,942,830 shares in 1995 228 225 Tele-Communications, Inc. Series B Liberty Media Group common stock, $1 par value. Authorized 75,000,000 shares; issued 21,189,369 shares in 1996 and 21,196,868 shares in 1995 21 21 Additional paid-in capital 3,672 3,986 Cumulative foreign currency translation adjustment, net of taxes 26 (9) Unrealized holding gains for available-for-sale securities, net of taxes 15 338 Accumulated deficit (176) (454) -------- -------- 4,567 4,864 Series A TCI Group common stock, at cost, held by subsidiaries (116,853,196 shares and 100,524,364 shares in 1996 and 1995, respectively) (314) (314) -------- -------- Total stockholders' equity 4,253 4,550 -------- -------- Commitments and contingencies (note 15) $ 30,244 25,577 ======== ========
See accompanying notes to consolidated financial statements. II-52 117 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------ ------ amounts in millions, except per share amounts Revenue (note 16): Communications and programming services (note 6) $ 7,038 5,586 4,250 Net sales from electronic retailing services 984 920 432 ------- ------ ------ 8,022 6,506 4,682 ------- ------ ------ Operating costs and expenses: Operating 2,917 2,161 1,507 Cost of sales from electronic retailing services 605 603 263 Selling, general and administrative 2,224 1,754 1,114 Compensation (adjustment to compensation) relating to options and stock appreciation rights (13) 57 (8) Restructuring charges 41 17 -- Depreciation 1,093 899 700 Amortization 523 473 318 ------- ------ ------ 7,390 5,964 3,894 ------- ------ ------ Operating income (note 16) 632 542 788 Other income (expense): Interest expense (1,096) (1,010) (785) Interest and dividend income 64 52 36 Share of losses of affiliates, net (note 4) (473) (193) (112) Share of earnings of Liberty Media Corporation -- -- 128 Loss on early extinguishment of debt (note 8) (71) (6) (9) Minority interests in losses (earnings) of consolidated subsidiaries, net (56) 17 2 Gain on sale of subsidiary stock (note 13) -- 123 -- Gain on sale of stock by equity investee (note 4) 12 165 161 Gain (loss) on disposition of assets 1,593 49 (10) Other, net (65) (30) (17) ------- ------ ------ (92) (833) (606) ------- ------ ------ Earnings (loss) before income taxes 540 (291) 182 Income tax benefit (expense) (note 14) (262) 120 (120) ------- ------ ------ Net earnings (loss) (note 16) 278 (171) 62 Dividend requirements on preferred stocks (35) (34) (8) ------- ------ ------ Net earnings (loss) attributable to common stockholders (note 6) $ 243 (205) 54 ======= ====== ======
(continued) II-53 118 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations, continued Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 --------- --------- --------- amounts in millions, except per share amounts Net earnings (loss) attributable to common stockholders (note 2): TCI Class A and Class B common stock $ -- (71) 54 TCI Group Series A and Series B common stock (813) (107) -- Liberty Media Group Series A and Series B common stock 1,056 (27) -- --------- --------- --------- $ 243 (205) 54 ========= ========= ========= Primary net earnings (loss) attributable to common stockholders per common and common equivalent share (notes 2 and 6): TCI Class A and Class B common stock $ -- (.11) .10 TCI Group Series A and Series B common stock $ (1.22) (.16) -- Liberty Media Group Series A and Series B common stock $ 3.97 (.11) -- Fully diluted net earnings (loss) attributable to common stockholders per common and common equivalent share (notes 2 and 6): TCI Class A and Class B common stock $ -- (.11) .10 TCI Group Series A and Series B common stock $ (1.22) (.16) -- Liberty Media Group Series A and Series B common stock $ 3.88 (.11) --
See accompanying notes to consolidated financial statements. II-54 119 Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994
Common Stock --------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ------------------ -------------------- -------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital ----- ------- ------- -------- -------- -------- -------- ------- amounts in millions Balance at December 31, 1993* $-- 482 47 -- -- -- -- 2,293 Unrealized holding gains for available- for-sale securities as of January 1, 1994 -- -- -- -- -- -- -- -- Net earnings -- -- -- -- -- -- -- -- Conversion of redeemable preferred stock (note 9) -- 1 -- -- -- -- -- 17 Issuance of common stock upon conversion of notes (note 8) -- 3 -- -- -- -- -- -- Issuance of common stock upon exercise of stock option -- -- -- -- -- -- -- 3 Acquisition and retirement of common stock -- -- -- -- -- -- -- (2) Issuance of common stock for acquisition -- 85 42 -- -- -- -- 383 Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (8) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 4 Foreign currency translation adjustment -- -- -- -- -- -- -- -- Issuance of TCI Class A common stock to subsidiaries of TCI in Reorganization -- -- -- -- -- -- -- (23) Issuance of Class A common stock for investment -- 6 -- -- -- -- -- 124 Repayment of note receivable from related party -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- ---- ---- ---- ---- ---- ---- ---- ----- Balance at December 31, 1994 $-- 577 89 -- -- -- -- 2,791 ---- ---- ---- ---- ---- ---- ---- -----
Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ---------- ------------ ----- ------- ----- ------ amounts in millions Balance at December 31, 1993* (29) -- -- (344) (333) 2,116 Unrealized holding gains for available- for-sale securities as of January 1, 1994 -- 297 -- -- -- 297 Net earnings -- -- -- 62 -- 62 Conversion of redeemable preferred stock (note 9) -- -- -- -- -- 18 Issuance of common stock upon conversion of notes (note 8) -- -- -- -- -- 3 Issuance of common stock upon exercise of stock option -- -- -- -- -- 3 Acquisition and retirement of common stock -- -- -- -- -- (2) Issuance of common stock for acquisition -- 4 (15) -- (285) 214 Accreted dividends on all classes of preferred stock -- -- -- -- -- (8) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 4 Foreign currency translation adjustment 25 -- -- -- -- 25 Issuance of TCI Class A common stock to subsidiaries of TCI in Reorganization -- -- -- -- 23 -- Issuance of Class A common stock for investment -- -- -- -- -- 130 Repayment of note receivable from related party -- -- 15 -- (15) -- Change in unrealized holding gains for available-for-sale securities -- (207) -- -- -- (207) ---- ---- ---- ------ ----- ------ Balance at December 31, 1994 (4) 94 -- (282) (610) 2,655 ---- ---- ---- ------ ----- ------
(continued) II-55 120 Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1996, 1995 and 1994
Common Stock --------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ------------------ -------------------- -------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital ----- ------- ------- -------- -------- -------- -------- ------- amounts in millions Balance at December 31, 1994 $-- 577 89 -- -- -- -- 2,791 Net loss -- -- -- -- -- -- -- -- Issuance of common stock in public offering -- 20 -- -- -- -- -- 381 Issuance of common stock in private offering -- 1 -- -- -- -- -- 29 Issuance of common stock for acquisitions and investments (note 6) -- 59 -- -- -- -- -- 1,329 Issuance of Class A common stock to subsidiary of TCI in Reorganization -- -- -- -- -- -- -- (6) Issuance of Class A common stock to subsidiary in exchange for investment -- -- -- -- -- -- -- (1) Retirement of Class A common stock previously held by subsidiary -- -- -- -- -- -- -- 29 Exchange of common stock held by subsidiaries of TCI for Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") (note 9) -- (86) (4) -- -- -- -- (542) Conversion of Series F Preferred Stock held by subsidiary for Series A TCI Group common stock -- -- -- 101 -- -- -- 213 Distribution of Series A and Series B Liberty Media Group common stock to TCI common stockholders (note 1) -- -- -- -- -- 225 21 (246) Costs associated with Distribution to stockholders -- -- -- -- -- -- -- (8) Redesignation of TCI common stock into Series A and Series B TCI Group common stock (note 1) -- (571) (85) 571 85 -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (34) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 10 Payment of preferred stock dividends -- -- -- -- -- -- -- (10) Issuance of common stock by subsidiary (note 13) -- -- -- -- -- -- -- 51 Foreign currency translation adjustment -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries -- -- -- -- -- -- -- -- --- ---- ---- ----- ----- ----- ---- ------ Balance at December 31, 1995 $-- -- -- 672 85 225 21 3,986 --- ---- ---- ----- ----- ----- ---- ------
Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ---------- ------------ ----- ------- ----- ------ amounts in millions Balance at December 31, 1994 (4) 94 -- (282) (610) 2,655 Net loss -- -- -- (171) -- (171) Issuance of common stock in public offering -- -- -- -- -- 401 Issuance of common stock in private offering -- -- -- -- -- 30 Issuance of common stock for acquisitions and investments (note 6) -- -- -- -- -- 1,388 Issuance of Class A common stock to subsidiary of TCI in Reorganization -- -- -- -- 6 -- Issuance of Class A common stock to subsidiary in exchange for investment -- -- -- -- 1 -- Retirement of Class A common stock previously held by subsidiary -- -- -- -- (29) -- Exchange of common stock held by subsidiaries of TCI for Convertible Redeemable Participating Preferred Stock, Series F ("Series F Preferred Stock") (note 9) -- -- -- -- 632 -- Conversion of Series F Preferred Stock held by subsidiary for Series A TCI Group common stock -- -- -- -- (314) -- Distribution of Series A and Series B Liberty Media Group common stock to TCI common stockholders (note 1) -- -- -- -- -- -- Costs associated with Distribution to stockholders -- -- -- -- -- (8) Redesignation of TCI common stock into Series A and Series B TCI Group common stock (note 1) -- -- -- -- -- -- Accreted dividends on all classes of preferred stock -- -- -- -- -- (34) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 10 Payment of preferred stock dividends -- -- -- -- -- (10) Issuance of common stock by subsidiary (note 13) -- -- -- -- -- 51 Foreign currency translation adjustment (5) -- -- -- -- (5) Change in unrealized holding gains for available-for-sale securities -- 244 -- -- -- 244 Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries -- -- -- (1) -- (1) ---- ---- ---- ----- ---- ---- Balance at December 31, 1995 (9) 338 -- (454) (314) 4,550 ---- ---- ---- ----- ---- ----
(continued) II-56 121 Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1996, 1995 and 1994
Common Stock --------------------------------------------------------------- Class B TCI TCI Group Liberty Media Group Additional Preferred ------------------ -------------------- -------------------- paid-in Stock Class A Class B Series A Series B Series A Series B capital ----- ------- ------- -------- -------- -------- -------- ------- amounts in millions Balance at December 31, 1995 $-- -- -- 672 85 225 21 3,986 Net earnings -- -- -- -- -- -- -- -- Issuance of common stock for acquisition (note 6) -- -- -- 11 -- 4 -- 250 Issuance of common stock upon conversion of notes -- -- -- 2 -- 1 -- (1) Issuance of common stock upon conversion of preferred stock -- -- -- 1 -- -- -- 15 Exchange of cost investment for TCI Group and Liberty Media Group common stock -- -- -- (6) -- (2) -- (122) Contribution of common stock to subsidiary -- -- -- 16 -- -- -- (16) Spin-off of TCI Satellite Entertainment, Inc. (note 7) -- -- -- -- -- -- -- (405) Accreted dividends on all classes of preferred stock -- -- -- -- -- -- -- (35) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- -- -- 10 Payment of preferred stock -- -- -- -- -- -- -- (10) dividends Foreign currency translation adjustment -- -- -- -- -- -- -- -- Recognition of unrealized holding gains on available-for-sale securities (note 5) -- -- -- -- -- -- -- -- Recognition of unrealized holding losses on available-for-sale securities -- -- -- -- -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- -- -- -- -- -- ---- ---- ---- ----- ----- ----- ---- ------ Balance at December 31, 1996 $-- -- -- 696 85 228 21 3,672 ==== ==== ==== ===== ====== ===== ==== ======
Consolidated Statement of Stockholders' Equity, continued Years ended December 31, 1996, 1995 and 1994
Unrealized holding gains Cumulative (losses) for Note foreign available- receivable currency for-sale from Total translation securities, related Accumulated Treasury stockholders' adjustment net of taxes party deficit stock equity ---------- ------------ ----- ------- ----- ------ amounts in millions Balance at December 31, 1995 (9) 338 -- (454) (314) 4,550 Net earnings -- -- -- 278 -- 278 Issuance of common stock for acquisition (note 6) -- -- -- -- -- 265 Issuance of common stock upon conversion of notes -- -- -- -- -- 2 Issuance of common stock upon conversion of preferred stock -- -- -- -- -- 16 Exchange of cost investment for TCI Group and Liberty Media Group common stock -- -- -- -- -- (130) Contribution of common stock to subsidiary -- -- -- -- -- -- Spin-off of TCI Satellite Entertainment, Inc. (note 7) -- -- -- -- -- (405) Accreted dividends on all classes of preferred stock -- -- -- -- -- (35) Accreted dividends on all classes of preferred stock not subject to mandatory redemption requirements -- -- -- -- -- 10 Payment of preferred stock -- -- -- -- -- (10) dividends Foreign currency translation adjustment 35 -- -- -- -- 35 Recognition of unrealized holding gains on available-for-sale securities (note 5) -- (428) -- -- -- (428) Recognition of unrealized holding losses on available-for-sale securities -- 64 -- -- -- 64 Change in unrealized holding gains for available-for-sale securities -- 41 -- -- -- 41 ---- ---- ---- ---- ---- ----- Balance at December 31, 1996 26 15 -- (176) (314) 4,253 ==== ==== ==== ==== ==== =====
See accompanying notes to consolidated financial statements. II-57 122 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------ ------ amounts in millions (see note 3) Cash flows from operating activities: Net earnings (loss) $ 278 (171) 62 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 1,616 1,372 1,018 Compensation (adjustment to compensation) relating to options and stock appreciation rights (13) 57 (8) Payments of stock appreciation rights (3) (9) -- Restructuring charges 41 17 -- Payments of restructuring charges (8) (17) -- Share of losses of affiliates 473 193 112 Share of earnings of Liberty Media Corporation -- -- (128) Loss on early extinguishment of debt 71 6 9 Minority interests in earnings (losses) 56 (17) (2) Gain on sale of subsidiary stock -- (123) -- Gain on sale of stock by equity investee (12) (165) (161) Loss (gain) on disposition of assets (1,593) (49) 10 Deferred income tax expense (benefit) 224 (153) 37 Other noncash charges (credits) 11 (28) (2) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (115) (70) 15 Change in inventories (8) 16 (26) Change in prepaids (23) (86) (97) Change in accrued interest 40 45 13 Change in other accruals and payables 193 139 56 ------- ------ ------ Net cash provided by operating activities 1,228 957 908 ------- ------ ------ Cash flows from investing activities: Cash paid for acquisitions (598) (477) (358) Capital expended for property and equipment (2,055) (1,782) (1,264) Cash proceeds from disposition of assets 341 166 39 Additional investments in and loans to affiliates and others (798) (1,134) (445) Repayments of loans to affiliates and others 679 18 148 Other investing activities (38) (135) (15) ------- ------ ------ Net cash used in investing activities (2,469) (3,344) (1,895) ------- ------ ------ Cash flows from financing activities: Borrowings of debt 8,163 8,152 4,676 Repayments of debt (7,969) (6,567) (3,607) Prepayment penalties (60) -- -- Proceeds from sale of subsidiary stock 223 445 -- Proceeds from issuances of common stock -- 431 1 Proceeds from issuance of Trust Securities 971 -- -- Contributions by minority shareholders of subsidiaries 319 -- -- Payment of dividends on subsidiary preferred stock and Trust Securities (95) (6) (6) Payment of preferred stock dividends (35) (24) (4) Costs associated with Distribution to stockholders -- (8) -- Other financing activities -- 8 -- ------- ------ ------ Net cash provided by financing activities 1,517 2,431 1,060 ------- ------ ------ Net increase in cash and cash equivalents 276 44 73 Cash and cash equivalents at beginning of year 118 74 1 ------- ------ ------ Cash and cash equivalents at end of year $ 394 118 74 ======= ====== ======
See accompanying notes to consolidated financial statements. II-58 123 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (1) Organization Principles of Consolidation The accompanying consolidated financial statements include the accounts of Tele-Communications, Inc. and those of all majority-owned subsidiaries ("TCI" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Preferred stock of TCI which is owned by subsidiaries of TCI eliminates in consolidation. Common stock of the Company held by subsidiaries is treated as treasury stock in consolidation. Industry Segments The Company currently has significant operations principally in two industry segments: cable and communications services ("Communications") and programming services ("Programming"). Programming includes the production, acquisition and distribution of globally branded entertainment, education and information programming services and software for distribution through all available formats and media; and home shopping via television and other interactive media, direct marketing, advertising sales, infomercials and transaction processing. Home Shopping is a programming service which includes a retail function. The Company's cable and communications segment is comprised of five lines of business: Domestic Cable and Communications (the "Cable Unit"); International Cable and Programming ("TINTA"); Telephony; Internet; and Technology/Venture Capital. TINTA, Telephony, Internet and Technology/Venture Capital are not separately reportable segments due to their relative insignificance. The Company has investments accounted for under the equity method and the cost method, which also operate in the Communications and Programming industries. See note 16 for additional segment information. Targeted Stock On August 3, 1995, the TCI stockholders authorized the TCI Board of Directors (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes programming services ("Liberty Media Group"). Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). The issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to the Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including TCI's Cable Unit, TINTA, Telephony unit, Internet unit and Technology/Venture Capital unit. Such subsidiaries and assets are referred to as "TCI Group". (continued) II-59 124 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group or to Liberty Media Group for purposes of preparing their combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock or Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Dividends on TCI Group Stock are payable at the sole discretion of the Board out of the lesser of assets of TCI legally available for dividends and the available dividend amount with respect to TCI Group, as defined. Determinations to pay dividends on TCI Group Stock will be based primarily upon the financial condition, results of operations and business requirements of TCI Group and TCI as a whole. Dividends on Liberty Group Stock are payable at the sole discretion of the Board out of the lesser of all assets of TCI legally available for dividends and the available dividend amount with respect to Liberty Media Group, as defined. Determinations to pay dividends on Liberty Group Stock will be based primarily upon the financial condition, results of operations and business requirements of Liberty Media Group and TCI as a whole. After the Distribution, existing preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of TCI Class A common stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange (in addition to the same number of shares of redesignated Series A TCI Group Stock as were theretofore issuable thereunder) the number of shares of Series A Liberty Group Stock that would have been issuable in the Distribution with respect to the TCI Class A common stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Distribution. Options to purchase TCI Class A common stock outstanding at the time of the Distribution were adjusted by issuing to the holders of such options separate options to purchase that number of shares of Series A Liberty Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Class A common stock prior to the record date for the Distribution and reallocating a portion of the aggregate exercise price of the previously outstanding options to the newly issued options to purchase Series A Liberty Group Stock. (continued) II-60 125 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A number of wholly-owned subsidiaries of the Company which are part of TCI Group owned shares of TCI Class A common stock and TCI preferred stock ("Subsidiary Shares"). Because the Distribution was made as a dividend to all holders of TCI's Class A common stock and Class B common stock and, pursuant to the anti-dilution provisions set forth therein, to the holders of securities convertible into TCI Class A common stock and Class B common stock upon the conversion thereof, shares of Liberty Group Stock would otherwise have been issued and become issuable in respect of the Subsidiary Shares held by these subsidiaries and would have been attributed to TCI Group. The Liberty Group Stock issued in connection with the Distribution was intended to constitute 100% of the equity value thereof to the holders of the TCI Class A common stock and TCI Class B common stock, and TCI Group did not initially have any interest in Liberty Media Group represented by any outstanding shares of Liberty Group Stock (an "Inter-Group Interest"). Therefore, TCI determined to exchange all of the outstanding Subsidiary Shares for shares of Series F Preferred Stock. See note 9. The rights, privileges and preferences of the Series F Preferred Stock did not entitle its holders to receive Liberty Group Stock in the Distribution or upon conversion of the Series F Preferred Stock. Stock Dividend Effective January 13, 1997, the Company issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been retroactively restated to reflect the Liberty Group Stock Dividend. Telephony Group Stock Proposal On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of the Company's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). The Telephony Group Stock, if issued, would be intended to reflect the separate performance of Telephony Group, which initially consists of the Company's investments in certain entities engaged in the domestic wireline and wireless telephony businesses. A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of March 24, 1997, no shares of Telephony Group Stock have been issued. (continued) II-61 126 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of the Company attributable to Telephony Group, in addition to the separate performance of the Company's domestic cable distribution business; telephony distribution and communications business (other than the investments attributed to Telephony Group); international cable, telephony and programming businesses; technology/venture capital business; and any other business of the Company not attributed to either Liberty Media Group or Telephony Group. As shares of Telephony Group Stock are issued and distributed or sold, the percentage of the common stockholders' equity value of the Company attributable to Telephony Group that is or is intended to be reflected in the TCI Group Stock will be reduced accordingly. The composition of Liberty Media Group was not affected by the authorization, and will not be affected by the issuance, of Telephony Group Stock. (2) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed film inventory and program rights payable are recorded at the estimated costs of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the specific number of exhibitions. Investments All marketable equity securities held by the Company are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of stockholders' equity. Realized gains and losses are determined on a specific-identification basis. (continued) II-62 127 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other investments in which the ownership interest is less than 20% and are not considered marketable securities are generally carried at cost. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to the Company's ownership interest in such affiliates. Changes in the Company's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in the Company's consolidated statements of operations. Long-Lived Assets (a) Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1996, 1995 and 1994, interest capitalized was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems, 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (b) Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the Company in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. (continued) II-63 128 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated 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. Pursuant to Statement No. 121, the Company periodically reviews the carrying amounts of its long-lived assets, franchise costs and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. The Company considers historical and expected future net operating losses to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). The Company deems Assets to be impaired if the Company is unable to recover the carrying value of such Assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair value. The Company generally measures fair value by considering sales prices for similar assets or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Interest Rate Derivatives Amounts receivable or payable under derivative financial instruments used to manage interest rate risks arising from the Company's financial liabilities are recognized as interest expense. Gains and losses on early terminations of derivatives are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining term of the derivative financial instruments. The Company does not use such instruments for trading purposes. Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause the Company to repurchase such holders' common equity. (continued) II-64 129 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Included in minority interests in equity of consolidated subsidiaries is $902 million and $49 million in 1996 and 1995, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. The current dividend requirements on these preferred stocks aggregate $47 million per annum and such dividend requirements are reflected as minority interests in the accompanying consolidated statements of operations. Foreign Currency Translation All balance sheet accounts of foreign investments are translated at the current exchange rate as of the end of the accounting period. Statement of operations items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Net Sales from Electronic Retailing Services Revenue includes merchandise sales reduced by incentive discounts and sales returns to arrive at net sales from electronic retailing services. Revenue is recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. The Company's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, the Company continues to account for stock-based employee compensation pursuant to APB Opinion No. 25. The Company has included the disclosures required by Statement No. 123 in note 11. Earnings (Loss) Per Common and Common Equivalent Share (a) TCI Class A and B Common Stock Loss per common share attributable to common stockholders for the period from January 1, 1995 through the Distribution was computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding (648.2 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) II-65 130 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Primary earnings per common and common equivalent share attributable to common stockholders for the year ended December 31, 1994 was computed by dividing net earnings attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding (540.8 million). Fully diluted earnings per common and common equivalent share attributable to common stockholders for the year ended December 31, 1994 was computed by dividing earnings attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding (540.8 million). Shares issuable upon conversion of the Convertible Preferred Stock, Series C ("Series C Preferred Stock") (see note 9) have not been included in the computation of weighted average shares because their effect would be anti-dilutive. (b) TCI Group Stock The loss attributable to TCI Group stockholders per common share for the year ended December 31, 1996 and for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to TCI Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of TCI Group Stock during the period (664.8 million and 656.4 million, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (c) Liberty Group Stock Primary earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing net earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (266.3 million). Fully diluted earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (272.4 million). Shares issuable upon conversion of the Series C Preferred Stock, the Convertible Preferred Stock, Series D (the "Series D Preferred Stock"), and the Redeemable Convertible Liberty Media Group Preferred Stock, Series H have been included in the computation of weighted average shares. (continued) II-66 131 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The loss attributable to Liberty Media Group stockholders per common share for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of Liberty Group Stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (246.1 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts have been reclassified for comparability with the 1996 presentation. (3) Supplemental Disclosures to Consolidated Statements of Cash Flows Cash paid for interest was $1,056 million, $965 million and $758 million for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes was $25 million in 1996, $63 million in 1995 and was not material in 1994. Significant noncash investing and financing activities are reflected in the following table. See also note 7 for the impact of the spin-off of TCI Satellite Entertainment, Inc.
Years ended December 31, ------------------------------- 1996 1995 1994 ------- ------ ------ amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 4,998 3,571 1,921 Liabilities assumed, net of current assets (1,811) (445) (648) Deferred tax liability recorded in acquisitions (1,379) (1,083) (190) Minority interests in equity of acquired entities (113) 49 (35) Note receivable from related party assumed -- -- 15 Common stock and preferred stock issued in acquisitions (457) (1,615) (808) Preferred stock of subsidiaries issued in acquisitions (640) -- -- Common stock issued to subsidiaries -- -- 285 Unrealized gains on available-for-sale securities of acquired entities -- -- (182) ------- ------ ------ Cash paid for acquisitions $ 598 477 358 ======= ====== ======
(continued) II-67 132 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Years ended December 31, ------------------------------------ 1996 1995 1994 --------- ---------- ---------- amounts in millions Exchange of consolidated subsidiaries for note receivable and equity investments $ 894 -- -- ========= ========== ========== Conversion of debt into additional minority interest in consolidated subsidiary $ -- 14 -- ========= ========== ========== Assets contributed for interest in limited liability company $ -- 3 -- ========= ========== ========== Issuance of subsidiary stock for equity investment $ -- 11 -- ========= ========== ==========
(4) Investments in Affiliates The Company has various investments accounted for under the equity method. The following table includes the Company's carrying value and percentage ownership of the more significant investments at December 31, 1996.
December 31, 1996 ------------------------------------ Percentage Carrying Ownership Value ---------- --------- amounts in millions Sprint Spectrum Holding Company, L.P., MinorCo, L.P. and PhillieCo, L.P. 30% - 35.3% $ 830 Teleport Communications Group, Inc. ("TCG") 31.1% 276 Home Shopping Network, Inc. ("HSN") 19.9% 142 BDTV INC. and BDTV II, INC. 99% 200 Telewest Communications plc ("Telewest") 27% 488 Various foreign equity investments (other than Telewest) var. 422 Discovery Communications, Inc. 49% 118 QVC, Inc. 43% 104
(continued) II-68 133 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Summarized unaudited financial information for affiliates is as follows:
December 31, ------------------ 1996 1995 ------- ------ Combined Financial Position amounts in millions Property and equipment, net $ 4,770 3,464 Franchise costs, net 3,392 1,302 Other assets, net 13,287 8,127 ------- ------ Total assets $21,449 12,893 ======= ====== Debt $ 8,657 5,438 Due to TCI 42 47 Other liabilities 5,539 1,803 Owners' equity 7,211 5,605 ------- ------ Total liabilities and equity $21,449 12,893 ======= ======
Years ended December 31, ------------------------------- 1996 1995 1994 ------- ------ ------ Combined Operations amounts in millions Revenue $ 5,996 4,540 3,033 Operating expenses (5,488) (3,956) (2,678) Depreciation and amortization (1,037) (542) (261) ------- ------ ------ Operating income (loss) (529) 42 94 Interest expense (631) (349) (112) Other, net (369) (151) 13 ------- ------ ------ Net loss $(1,529) (458) (5) ======= ====== ======
The Company is a partner in a series of partnerships formed to engage in the business of providing wireless communications services, using the radio spectrum for broadband personal communications services ("PCS"), to residential and business customers nationwide, using the "Sprint" brand (the "PCS Ventures"). The PCS Ventures include Sprint Spectrum and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships") and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation, Cox Communications, Inc. ("Cox") and the Company. The partners of PhillieCo are subsidiaries of Sprint, Cox and the Company. The Company has a 30% partnership interest in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. II-69 134 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Sprint PCS Partnerships have licenses, and have affiliated with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or population equivalents), based on the Donnelley Marketing Service estimate of the December 31, 1995 population of the relevant geographic areas. The Sprint PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction conducted by the Federal Communications Commission ("FCC") that ended in March 1995, for an aggregate license cost of approximately $2.1 billion. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego, California. The Sprint PCS Partnerships may invest in other entities that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. From inception through 1996, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company contributed an aggregate of approximately $0.9 billion, including approximately $0.2 billion during the year ended December 31, 1996.) The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. The Company expects that the remaining approximately $1.2 billion of such amount (of which the Company's share is approximately $0.4 billion) will be contributed by the end of the second quarter of 1998 (although there can be no assurance that any additional capital will be contributed). The Company expects that the Sprint PCS Partnerships will require additional equity thereafter. TCG, a competitive local exchange carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410,000,000. As a result of the TCG IPO, the Company's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, the Company recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and TINTA formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed Liberty/Fox U.S. Sports LLC ("Fox Sports") into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. (continued) II-70 135 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Internationally, News Corp. and a limited liability company ("Liberty/TINTA") formed by Liberty Sports, Inc., a wholly-owned subsidiary of Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to operate previously existing sports services in Latin America and Australia and a variety of new sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multichannel, multipoint distribution systems or cable television. Fox Sports International is accounted for using the equity method. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the FCC in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). (continued) II-71 136 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired Home Shopping Network, Inc. ("HSN") by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. Telewest is a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest was formed on October 3, 1995 upon the merger (the "TeleWest Merger") of TeleWest Communications plc ("TeleWest Communications") with SBC (CableComms) (UK). Prior to the TeleWest Merger, the Company had an effective ownership interest of approximately 36% in TeleWest Communications. As a result of the TeleWest Merger, the Company recognized a gain of approximately $165 million (before deducting deferred income taxes of $58 million), which gain represents the difference between the Company's recorded cost for TeleWest Communications and the Company's 27% effective proportionate share of Telewest's net assets. Telewest contributed $109 million, $70 million and $43 million of the Company's share of its affiliates' losses during the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other equity method investments accounted for $79 million, $62 million and $50 million of the Company's share of its affiliates' losses in 1996, 1995 and 1994, respectively. (continued) II-72 137 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of TeleWest Communications' November 1994 initial public offering and the associated dilution of the Company's ownership interest of TeleWest Communications, the Company recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million). Certain of the Company's affiliates are general partnerships and any subsidiary of the Company that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (5) Investment in Time Warner At December 31, 1995, TCI owned shares of TBS common stock and shares of TBS preferred stock that were convertible into TBS common stock. The Company's total holdings represented an approximate 7.5% voting interest for those matters which preferred and common voted as a single class. On October 10, 1996, Time Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, the Company received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, the Company recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. At December 31, 1996, the Company's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2 billion based upon the market value of the marketable common stock into which it is convertible. (continued) II-73 138 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would hold the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. (6) Acquisitions On July 31, 1996, pursuant to certain agreements entered into among TCIC, a subsidiary of TCI, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. (continued) II-74 139 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Exchange Offer, TCIC acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. The Viacom Acquisition has been accounted for by the purchase method. Accordingly, the results of operations of Cable Sub have been consolidated with those of the Company since the date of acquisition, and the Company recorded Cable Sub's assets and liabilities at fair value. On a pro forma basis, the Company's revenue, net loss, and net loss per share of TCI Group Stock would have been increased by $280 million, $55 million and $.08, respectively, for the year ended December 31, 1996; and revenue, net loss, net loss per share of TCI Group Stock and net loss per share of TCI Class A Common Stock would have been increased by $446 million, $115 million, $.07 and $.10, respectively, for the year ended December 31, 1995 had Cable Sub been consolidated with the Company on January 1, 1995. The foregoing unaudited pro forma financial information is based upon historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of the results had the Company operated Cable Sub since January 1, 1995. As of January 26, 1995, TCI, TCIC and TeleCable Corporation ("TeleCable") consummated a transaction, whereby TeleCable was merged into TCIC. The aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of approximately $300 million of TeleCable's net liabilities and the issuance to TeleCable's shareholders of approximately 42 million shares of TCI Class A common stock and 1 million shares of Series D Preferred Stock with an aggregate initial liquidation value of $300 million (see note 9). (continued) II-75 140 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision for a purchase price of $282 million, before liabilities assumed. The purchase price was paid with cash consideration of $195 million and TINTA's issuance of $87 million principal amount of secured negotiable promissory notes payable to the selling shareholders. TINTA has an option during the two-year period ended April 25, 1997 to increase its ownership interest in Cablevision up to 80% at a cost per subscriber similar to the initial purchase price, adjusted however for certain fluctuations in applicable foreign currency exchange rates. (7) Spin-Off of TCI Satellite Entertainment, Inc. Through December 4, 1996, the Company had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which the Company accounted for under the equity method. Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, the Company distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included the Company's interest in Primestar, the Company's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with the Company's. In addition, the Satellite Spin-off effected a change in the conversion rate for each of the Company's equity and debt securities that are convertible into Series A TCI Group Stock. See notes 8, 9 and 11. Summarized financial information of Satellite as of and through the date of the Satellite Spin-off is as follows (amounts in millions): Financial Position Cash, receivables and other assets $ 104 Investment in PRIMESTAR Partners L.P. 32 Property and equipment, net 1,111 ------- $ 1,247 ======= Accounts payable and accrued liabilities $ 60 Due to PRIMESTAR Partners L.P. 458 Due to TCI 324 Equity 405 ------- $ 1,247 ======= Operations Revenue $ 377 Operating expenses (373) Depreciation (166) ------- Loss before income tax benefit (162) Income tax benefit 53 Net loss $ (109) =======
(continued) II-76 141 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) Debt Debt is summarized as follows:
Weighted average December 31, interest rate at ------------------------------ December 31, 1996 1996 1995 ----------------- ------------ -------------- amounts in millions Debt of subsidiaries: Notes payable 8.3% $ 9,308 7,713 Bank credit facilities 6.6% 4,813 3,854 Commercial paper 6.1% 638 1,469 Convertible notes (a) 9.5% 43 45 Other debt 124 130 ------------ -------------- $ 14,926 13,211 ============ ==============
(a) These convertible notes, which are stated net of unamortized discount of $178 million and $186 million at December 31, 1996 and 1995, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. During 1996, certain of these notes were converted into 1,623,800 shares of Series A TCI Group Stock and 608,925 shares of Series A Liberty Group Stock. During 1995 and 1994, certain of these notes were converted into 3,416 shares and 2,350,000 shares of TCI Class A common stock, respectively. At December 31, 1996, the notes were convertible, at the option of the holders, into an aggregate of 37,083,773 shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty Group Stock (as adjusted to give effect to the Liberty Group Stock Dividend). During the year ended December 31, 1996, in order to reduce future interest costs, the Company redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, the Company recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. Also, during the year ended December 31, 1996, certain subsidiaries of the Company terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, the Company recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. At December 31, 1996, subsidiaries of the Company had approximately $1.8 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. The bank credit facilities and various other debt instruments of the Company's subsidiaries generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. (continued) II-77 142 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As security for borrowings under one of its bank credit facilities, the Company has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of the Company. As security for borrowings under another of its credit facilities, TCI has pledged a portion of its Time Warner common stock. The fair value of the debt of the Company's subsidiaries is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $14,926 million, was $15,523 million at December 31, 1996. In order to achieve the desired balance between variable and fixed rate indebtedness, the Company has entered into various interest rate exchange agreements pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, the Company's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and the Company's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million), and $36 million, respectively. During the year ended December 31, 1996, the Company terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. The Company received $16 million upon such terminations. After giving effect to the Company's interest rate exchange agreements, approximately 49% of the Company's indebtedness bears interest at fixed rates. The Company's Fixed Rate Agreements and Variable Rate Agreements expire as follows (amounts in millions, except percentages):
Fixed Rate Agreements Variable Rate Agreements ------------------------------------------- --------------------------------------------- Expiration Interest Rate Notional Expiration Interest Rate Notional Date To Be Paid Amount Date To Be Received Amount ---------- ------------- ------- ---------- -------------- --------- October 1997 7.2%-9.3% $ 80 April 1997 7.0% $ 200 December 1997 8.7% 230 September 1998 4.8%-5.4% 450 ------ April 1999 7.4% 50 $ 310 February 2000 5.8%-6.6% 300 ====== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 --------- $ 1,750 =========
The Company is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, the Company does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. (continued) II-78 143 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The fair value of the interest rate exchange agreements is the estimated amount that the Company would pay or receive to terminate the agreements at December 31, 1996, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. At December 31, 1996, the Company would be required to pay an estimated $15 million to terminate the Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate Agreements. Certain of TCI's subsidiaries are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI's subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. Annual maturities of debt for each of the next five years are as follows (amounts in millions): 1997 $ 1,418* 1998 490 1999 721 2000 766 2001 1,079
* Includes $638 million of commercial paper. (9) Redeemable Preferred Stocks The conversion rates identified below for the redeemable preferred stocks that are convertible into Series A TCI Group Stock were adjusted, as applicable, on December 4, 1996 as a result of the Satellite Spin-off. See note 7. The conversion rates for the redeemable preferred stocks that are convertible into Series A Liberty Group Stock have been adjusted to give effect to the Liberty Group Stock Dividend. See note 1. Convertible Preferred Stock, Series C. TCI issued 70,575 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series C," par value $.01 per share, as partial consideration for an acquisition by TCI. There were 80,000 shares of Series C Preferred Stock authorized and 70,575 shares outstanding at December 31, 1996. Each share of Series C Preferred Stock is convertible, at the option of the holders, into 116.24 shares of Series A TCI Group Stock and 37 shares of Series A Liberty Group Stock, subject to anti-dilution adjustments. The dividend, liquidation and redemption features of the Series C Preferred Stock will be determined by reference to the liquidation value of the Series C Preferred Stock, which as of any date of determination is equal, on a per share basis, to the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the dividend payment date on or immediately preceding such date of determination to the extent not paid on or before such date, plus (iii), for purposes of determining liquidation and redemption payments, all unpaid dividends accrued on the sum of clauses (i) and (ii) above, to such date of determination. (continued) II-79 144 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Subject to the prior preferences and other rights of any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock, the holders of Series C Preferred Stock are entitled to receive and, subject to any prohibition or restriction contained in any instrument evidencing indebtedness of TCI, TCI is obligated to pay preferential cumulative cash dividends out of funds legally available therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of the liquidation value per share, whether or not such dividends are declared or funds are legally or contractually available for payment of dividends, except that if TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, dividends will thereafter accrue cumulatively at an annual rate of 15% of the liquidation value per share. Accrued dividends are payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing on the first dividend payment date after the issuance of the Series C Preferred Stock. Dividends not paid on any dividend payment date will be added to the liquidation value on such date and remain a part thereof until such dividends and all dividends accrued thereon are paid in full. Dividends accrue on unpaid dividends at the rate of 5-1/2% per annum, unless such dividends remain unpaid for two consecutive quarters in which event such rate will increase to 15% per annum. The Series C Preferred Stock ranks prior to the Series A TCI Group Stock, Series A Liberty Group Stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock with respect to the declaration and payment of dividends. Upon the dissolution, liquidation or winding up of TCI, holders of the Series C Preferred Stock will be entitled to receive from the assets of TCI available for distribution to stockholders an amount in cash, per share, equal to the liquidation value. The Series C Preferred Stock will rank prior to the TCI common stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock as to any such distributions. The Series C Preferred Stock is subject to optional redemption at any time after the seventh anniversary of its issuance, in whole or in part, by TCI at a redemption price, per share, equal to the then liquidation value of the Series C Preferred Stock. Subject to the rights of any other class or series of the Company's preferred stock ranking pari passu with the Series C Preferred Stock, the Series C Preferred Stock is required to be redeemed by the Company at any time after such seventh anniversary at the option of the holder, in whole or in part (provided that the aggregate liquidation value of the shares to be redeemed is in excess of $1 million), in each case at a redemption price, per share, equal to the liquidation value. (continued) II-80 145 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For so long as any dividends are in arrears on the Series C Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock and until all dividends accrued up to the immediately preceding dividend payment date on the Series C Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, TCI may not redeem or otherwise acquire any shares of Series C Preferred Stock, any such parity stock or any class or series of its preferred stock ranking junior (including the TCI common stock and the Series C Preferred Stock) unless all then outstanding shares of Series C Preferred Stock and such parity stock are redeemed. If TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, and until all such shares are redeemed in full, TCI may not redeem any such parity stock or junior stock, or otherwise acquire any shares of such stock or Series C Preferred Stock. Nothing contained in the two immediately preceding sentences shall prevent TCI from acquiring (i) shares of Series C Preferred Stock and any such parity stock pursuant to a purchase or exchange offer made to holders of all outstanding shares of Series C Preferred Stock and such parity stock, if (a) as to holders of all outstanding shares of Series C Preferred Stock, the terms of the purchase or exchange offer for all such shares are identical, (b) as to holders for all outstanding shares of a particular series or class of parity stock, the terms of the purchase or exchange offer for all such shares are identical and (c) as among holders of all outstanding shares of Series C Preferred Stock and parity stock, the terms of each purchase or exchange offer are substantially identical relative to the respective liquidation prices of the shares of Series C Preferred Stock and each series or class of such parity stock, or (ii) shares of Series C Preferred Stock, parity stock or junior stock in exchange for, or through the application of the proceeds of the sale of, shares of junior stock. The Series C Preferred Stock is subject to restrictions on transfer although it has certain customary registration rights with respect to the underlying shares of TCI Group and Liberty Group Stock. The Series C Preferred Stock may vote on all matters submitted to a vote of the holders of the TCI common stock, has one vote for each share of TCI Group and Liberty Group Stock into which the shares of Series C Preferred Stock are converted for such purpose, and may vote as a single class with the TCI common stock. The Series C Preferred Stock has no other voting rights except as required by the Delaware General Corporation Law ("DGCL") and except that the consent of the holders of record of shares representing at least two-thirds of the liquidation value of the outstanding shares of the Series C Preferred Stock is necessary to (i) amend the designation, rights, preferences and limitations of the Series C Preferred Stock as set forth in the TCI Charter and (ii) to create or designate any class or series of TCI preferred stock that would rank prior to the Series C Preferred Stock. Convertible Preferred Stock, Series D. The Company issued 1,000,000 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series D", par value $.01 per share, as partial consideration for the merger between TCIC and TeleCable (see note 6). At December 31, 1996, there were 997,222 shares of Series D Preferred Stock outstanding. (continued) II-81 146 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The holders of the Series D Preferred Stock shall be entitled to receive, when and as declared by the Board out of unrestricted funds legally available therefor, cumulative dividends, in preference to dividends on any stock that ranks junior to the Series D Preferred Stock (currently the TCI Group Stock, the Liberty Group Stock and the Class B Preferred Stock), that shall accrue on each share of Series D Preferred stock at the rate of 5-1/2% per annum of the liquidation value ($300 per share). Dividends are cumulative, and in the event that dividends are not paid in full on two consecutive dividend payment dates or in the event that TCI fails to effect any required redemption of Series D Preferred Stock, accrue at the rate of 10% per annum of the liquidation value. The Series D Preferred Stock ranks on parity with the Series C Preferred Stock and the Series F Preferred Stock. Each share of Series D Preferred Stock is convertible into 10 shares of Series A TCI Group Stock and 3.5 shares of Series A Liberty Group Stock, subject to adjustment upon certain events specified in the certificate of designation establishing Series D Preferred Stock. In addition to the aforementioned shares of TCI common stock, holders of Series D Preferred Stock are entitled to one share of Satellite common stock for each share of Series D Preferred Stock converted. Such shares of Satellite common stock represent the number of shares of Satellite common stock that they would have received had they converted their Series D Preferred Stock into TCI Group Stock prior to the Satellite Spin-off. To the extent any cash dividends are not paid on any dividend payment date, the amount of such dividends will be deemed converted into shares of TCI common stock at a conversion rate equal to 95% of the then current market price of common stock, and upon issuance of common stock to holders of Series D Preferred Stock in respect of such deemed conversion, such dividend will be deemed paid for all purposes. Shares of Series D Preferred Stock are redeemable for cash at the option of the holder at any time after the tenth anniversary of the issue date at a price equal to the liquidation value in effect as of the date of the redemption. Shares of Series D Preferred Stock may also be redeemed for cash at the option of TCI after the fifth anniversary of the issue date at such redemption price or after the third anniversary of the issue date if the market value per share exceeds certain defined levels for periods specified in the certificate of designation. If TCI fails to effect any required redemption of Series D Preferred Stock, the holders thereof will have the option to convert their shares of Series D Preferred Stock into common stock at a conversion rate of 95% of the then current market value of common stock, provided that such option may not be exercised unless the failure to redeem continues for more than a year. Except as required by law, holders of Series D Preferred Stock are not entitled to vote on any matters submitted to a vote of the stockholders of TCI. (continued) II-82 147 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Convertible Redeemable Participating Preferred Stock, Series F. The Company is authorized to issue 500,000 shares of Series F Preferred Stock, par value $.01 per share. Subsidiaries of TCI hold all the issued and outstanding shares (278,307 shares). Immediately prior to the record date for the Distribution, the Company caused each of its subsidiaries holding Subsidiary Shares to exchange such shares for shares of Series F Preferred Stock having an aggregate value of not less than that of the Subsidiary Shares so exchanged. Subsidiaries of TCI exchanged all of the Subsidiary Shares for 355,141 shares of Series F Preferred Stock. Subsequent to such exchange, a holder of 78,077 shares of Series F Preferred Stock converted its holdings into 100,524,364 shares of Series A TCI Group Stock. Each holder of Series F Preferred Stock has the right to receive upon conversion 1,496.65 shares of Series A TCI Group Stock. The anti-dilution provisions of the Series F Preferred Stock provide that the conversion rate of the Series F Preferred Stock will be adjusted by increasing the number of shares of Series A TCI Group Stock issuable upon conversion in the event of any non-cash dividend or distribution of the Series A TCI Group Stock to give effect to the value of the securities, assets or other property so distributed; however, no such adjustment shall entitle the holder to receive the actual security, asset or other property so distributed upon the conversion of shares of Series F Preferred Stock. The holders of the Series F Preferred Stock are entitled to participate, on an as-converted basis, with the holders of the Series A TCI Group Stock, with respect to any cash dividends or distribution declared and paid on the Series A TCI Group Stock. Dividends or distribution on the Series A TCI Group Stock which are not paid in cash would result in the adjustment of the applicable conversion rate as described above. Upon the dissolution, liquidation or winding up of the Company, holders of the Series F Preferred Stock will be entitled to receive from the assets of the Company available for distribution to stockholders an amount, in cash or property or a combination thereof, per share of Series F Preferred Stock, equal to the sum of (x) $.01 and (y) the amount to be distributed per share of Series A TCI Group Stock in such liquidation, dissolution or winding up multiplied by the applicable conversion rate of a share of Series F Preferred Stock. The Series F Preferred Stock is subject to optional redemption by the Company at any time after its issuance, in whole or in party, at a redemption price, per share, equal to the issue price of a share of Series F Preferred Stock (as adjusted in respect of stock splits, reverse splits and other events affecting the shares of Series F Preferred Stock), plus any dividends which have been declared but are unpaid as of the date fixed for such redemption. The Company may elect to pay the redemption price (or designated portion thereof) of the shares of Series F Preferred Stock called for redemption by issuing to the holder thereof, in respect of its shares to be redeemed, a number of shares of Series A TCI Group Stock equal to the aggregate redemption price (or designated portion thereof) of such shares divided by the average of the last sales prices of the Series A TCI Group Stock for a period specified, and subject to the adjustments described, in the certificate of designation establishing the Series F Preferred Stock. (continued) II-83 148 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock"). In January, 1996, TCI issued 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible Liberty Media Group Preferred Stock, Series H" as consideration for an acquisition. At December 31, 1996, there were 6,695,427 shares of each of Series G Preferred Stock and Series H Preferred Stock outstanding. The initial liquidation value for the Series G Preferred Stock and Series H Preferred Stock is $21.60 per share and $5.40 per share, respectively, subject in both cases, to increase in an amount equal to aggregate accrued but unpaid dividends, if any. Dividends will begin to accrue on the Series G and Series H Preferred Stock on the first anniversary of issuance of the Series G and Series H Preferred Stock, and will thereafter be payable semi-annually commencing August 1, 1997, at the rate of 4% per annum on the liquidation value. Any dividends paid on the Series G and Series H Preferred Stock may be paid, at TCI's election, in cash or shares of TCI Group Stock. Additional dividends will accrue on unpaid dividends initially at a rate of 4% per annum. The dividend rate on dividends that remain unpaid for six months will increase to 8.625% per annum. Each share of Series G Preferred Stock is convertible at the option of the holder at any time prior to the close of business on the last business day prior to redemption into 1.19 shares of Series A TCI Group Stock and each share of Series H Preferred Stock is convertible at any time prior to the close of business on the last business day prior to redemption into .2625 shares of Series A Liberty Group Stock. However, the shares of Series A Liberty Group Stock issuable upon conversion of the Series H Preferred Stock shall be adjusted to provide for the Liberty Group Stock Dividend. The conversion rights of Series G and Series H Preferred Stock are subject to adjustment in certain circumstances. Among other such adjustments, if the Liberty Group Stock, or any other redeemable capital stock of TCI into which either series of Preferred Stock may be convertible ("Redeemable Capital Stock"), is redeemed in full by TCI (the "Redemption Event"), then, except as otherwise described below, the shares of such Series G and Series H Preferred Stock will thereafter be convertible into the kind and amount of consideration that would have been received in such Redemption Event by a holder of the number of shares of Redeemable Capital Stock that would have been issuable upon conversion of such shares of Series G and Series H Preferred Stock, if they had been converted in full immediately prior to such Redemption Event. (continued) II-84 149 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements However, if any series of Redeemable Capital Stock into which a series of Series G or Series H Preferred Stock is then convertible is redeemed in full by TCI in exchange for securities of another issuer ("Redemption Securities"), TCI may elect to provide the holders of such Series G or Series H Preferred Stock with the right to exchange such Series G or Series H Preferred Stock, concurrently with the Redemption Event, for preferred stock of such other issuer ("Mirror Preferred Stock"). Such Mirror Preferred Stock shall be convertible into Redemption Securities and shall otherwise have terms and conditions comparable to the Series G or Series H Preferred Stock exchanged. If TCI provides such an exchange right, any holder that does not then choose to participate in such exchange will continue to hold such Series G or Series H Preferred Stock but such holder will lose the conversion right with respect to the Redeemable Capital Stock redeemed in the Redemption Event and will not have any right to receive Redemption Securities in lieu thereof. A holder that participates in such exchange will receive Mirror Preferred Stock convertible into Redemption Securities, but will no longer hold the Series G or Series H Preferred Stock so exchanged. An alternative provision will apply if, at the time of exercise of any such exchange right provided by TCI, the holder of the applicable series of Series G or Series H Preferred Stock would be entitled to receive on conversion any property in addition to the Redeemable Capital Stock being redeemed. In that case, holders that choose to participate in the exchange will receive both Mirror Preferred Stock issued by the issuer of the Redemption Securities of the other issuer and a new preferred stock of TCI convertible into such additional property. In such event, the Mirror Preferred Stock and such new TCI preferred stock will have a combined liquidation value equal to the liquidation value of the Series G or Series H Preferred Stock exchanged and will otherwise have terms and conditions comparable to such Series G or Series H Preferred Stock. The Series G and Series H Preferred Stock are redeemable at TCI's option, in whole or in part, any time on or after February 1, 2001. The Series G and Series H Preferred Stock will be redeemable in full on February 1, 2016, to the extent then outstanding. In all cases, the redemption price per share will be the liquidation value thereof, including the amount of any accrued but unpaid dividends thereon, to and including the redemption date. The Series G and Series H Preferred Stock will rank prior to TCI common stock and the TCI Class B Preferred Stock and pari passu with all other currently outstanding classes and series of TCI preferred stock with respect to the declaration and payment of dividends and in liquidation. The Series G and Series H Preferred Stock will vote in any general election of directors of TCI and will have one vote per share for such purposes and will vote as a single class with the TCI common stock, the TCI Class B Preferred Stock and any other class or series of TCI Preferred Stock entitled to vote in any general election of directors. The Series G and Series H Preferred Stock will have no other voting rights except as required by the DGCL. II-85 150 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC In January 1996, TCI Communications Financing I ("Trust I"), an indirect wholly-owned subsidiary of the Company, issued $16 million in common securities to TCIC, and issued $500 million of 8.72% Trust Originated Preferred SecuritiesSM (the "Trust I Preferred Securities" and together with the common securities, the "Trust I Securities") to the public. Trust I exists for the exclusive purposes of issuing Trust I Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 8.72% Subordinated Deferrable Interest Notes due January 31, 2045 (the "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust I's obligations under the Trust I Preferred Securities. In May 1996, TCI Communications Financing II ("Trust II"), an indirect wholly-owned subsidiary of the Company, issued $16 million in common securities to TCIC, and issued $500 million of 10% Trust Preferred Securities (the "Trust II Preferred Securities" and together with the common securities, the "Trust II Securities") to the public. Trust II exists for the exclusive purposes of issuing Trust II Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 10% Subordinated Deferrable Interest Notes due May 31, 2045 (the "10% Subordinated Debt Securities") of TCIC. The 10% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of the Company. Upon redemption of the 10% Subordinated Debt Securities, the Trust II Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust II's obligations under the Trust II Preferred Securities. The Trust I and Trust II Preferred Securities are presented together in a separate line item in the accompanying consolidated balance sheet captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of TCI Communications, Inc." Dividends accrued on the Trust I and Trust II Preferred Securities are included in minority interests in losses (earnings) of consolidated subsidiaries in the accompanying consolidated statements of operations. (11) Stockholders' Equity Common Stock The Series A TCI Group Stock and Series A Liberty Group Stock each have one vote per share, and the Series B TCI Group Stock and Series B Liberty Group Stock each have ten votes per share. Each share of Series B TCI Group Stock is convertible, at the option of the holder, into one share of Series A TCI Group Stock, and each share of Series B Liberty Group Stock is convertible, at the option of the holder, into one share of Series A Liberty Group Stock. See note 1. (continued) II-86 151 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The rights of holders of the TCI Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the TCI Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. Similarly, the rights of holders of the Liberty Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the Liberty Group Stock to the aggregate market capitalization, as defined, of the Liberty Group Stock and the TCI Group Stock. Employee Benefit Plans The Company has several employee stock purchase plans (the "Plans") to provide employees an opportunity for ownership in the Company and to create a retirement fund. Terms of the Plans generally provide for employees to contribute up to 10% of their compensation to a trust for investment in TCI Group Stock and Liberty Media Group Stock. The Company, by annual resolution of the Board, generally contributes up to 100% of the amount contributed by employees. Certain of the Company's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $35 million, $28 million and $21 million for 1996, 1995 and 1994, respectively. Preferred Stock Class A Preferred Stock. The Company is authorized to issue 700,000 shares of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 592,797 shares. The holders of the Class A Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. See note 1. Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. The Company is authorized to issue 1,675,096 shares of Class B Preferred Stock and 1,620,026 of such shares are issued and outstanding. Dividends accrue cumulatively (but without compounding) at an annual rate of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation Value"), whether or not such dividends are declared or funds are legally available for payment of dividends. Accrued dividends will be payable annually on March 1 of each year (or the next succeeding business day if March 1 does not fall on a business day), and, in the sole discretion of the Board, may be declared and paid in cash, in shares of Series A TCI Group Stock or in any combination of the foregoing. Accrued dividends not paid as provided above on any dividend payment date will accumulate and such accumulated unpaid dividends may be declared and paid in cash, shares of Series A TCI Group Stock or any combination thereof at any time (subject to the rights of any senior stock and, if applicable, to the concurrent satisfaction of any dividend arrearages on any class or series of TCI preferred stock ranking on a parity with the Class B Preferred Stock with respect to dividend rights) with reference to any regular dividend payment date, to holders of record of Class B Preferred Stock as of a special record date fixed by the Board (which date may not be more than 45 days nor less than 10 days prior to the date fixed for the payment of such accumulated unpaid dividends). The Class B Preferred Stock ranks junior to the Series F Preferred Stock with respect to the declaration and payment of dividends. (continued) II-87 152 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements If all or any portion of a dividend payment is to be paid through the issuance and delivery of shares of Series A TCI Group Stock, the number of such shares to be issued and delivered will be determined by dividing the amount of the dividend to be paid in shares of Series A TCI Group Stock by the Average Market Price of the Series A TCI Group Stock. For this purpose, "Average Market Price" means the average of the daily last reported sale prices (or, if no sale price is reported on any day, the average of the high and low bid prices on such day) of a share of Series A TCI Group Stock for the period of 20 consecutive trading days ending on the tenth trading day prior to the regular record date or special record date, as the case may be, for the applicable dividend payment. In the event of any liquidation, dissolution or winding up of TCI, the holders of Class B Preferred Stock will be entitled, after payment of preferential amounts on any class or series of stock ranking prior to the Class B Preferred Stock with respect to liquidating distributions, to receive from the assets of TCI available for distribution to stockholders an amount in cash or property or a combination thereof, per share, equal to the Stated Liquidation Value thereof, plus all accumulated and accrued but unpaid dividends thereon to and including the redemption date. TCI does not have any mandatory obligation to redeem the Class B Preferred Stock as of any fixed date, at the option of the holders or otherwise. Subject to the prior preferences and other rights of any class or series of TCI preferred stock, the Class B Preferred Stock will be exchangeable at the option of TCI in whole but not in part at any time for junior subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a qualified trustee to be chosen by TCI. If TCI exercises its optional exchange right, each holder of outstanding shares of Class B Preferred Stock will be entitled to receive in exchange therefor newly issued Junior Exchange Notes of a series authorized and established for the purpose of such exchange, the aggregate principal amount of which will be equal to the aggregate Stated Liquidation Value of the shares of Class B Preferred Stock so exchanged by such holder, plus all accumulated and accrued but unpaid dividends thereon to and including the exchange date. The Junior Exchange Notes will be issuable only in principal amounts of $100 or any integral multiple thereof and a cash adjustment will be paid to the holder for any excess principal that would otherwise be issuable. The Junior Exchange Notes will mature on the fifteenth anniversary of the date of issuance and will be subject to earlier redemption at the option of TCI, in whole or in part, for a redemption price equal to the principal amount thereof plus accrued but unpaid interest. Interest will accrue, and be payable annually, on the principal amount of the Junior Exchange Notes at a rate per annum to be determined prior to issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will accrue on overdue principal at the same rate, but will not accrue on overdue interest. The Junior Exchange Notes will represent unsecured general obligations of TCI and will be subordinated in right of payment to all Senior Debt (as defined in the Indenture). Accordingly, holders of Class B Preferred Stock who receive Junior Exchange Notes in exchange therefor may have difficulty selling such Notes. (continued) II-88 153 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For so long as any dividends are in arrears on the Class B Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Class B Preferred Stock which is entitled to payment of cumulative dividends prior to the redemption, exchange, purchase or other acquisition of the Class B Preferred Stock, and until all dividends accrued up to the immediately preceding dividend payment date on the Class B Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, neither TCI nor any subsidiary thereof may redeem, exchange, purchase or otherwise acquire any shares of Class B Preferred Stock, any such parity stock or any class or series of its capital stock ranking junior to the Class B Preferred Stock (including the TCI common stock), or set aside any money or assets for such purpose, unless all of the outstanding shares of Class B Preferred Stock and such parity stock are redeemed. If TCI fails to redeem or exchange shares of Class B Preferred Stock on a date fixed for redemption or exchange, and until such shares are redeemed or exchanged in full, TCI may not redeem or exchange any parity stock or junior stock, declare or pay any dividend on or make any distribution with respect to any junior stock or set aside money or assets for such purpose and neither TCI nor any subsidiary thereof may purchase or otherwise acquire any Class B Preferred Stock, parity stock or junior stock or set aside money or assets for any such purpose. The failure of TCI to pay any dividends on any class or series of parity stock or to redeem or exchange on any date fixed for redemption or exchange any shares of Class B Preferred Stock shall not prevent TCI from (i) paying any dividends on junior stock solely in shares of junior stock or the redemption purchase or other acquisition of junior stock solely in exchange for (together with cash adjustment for fractional shares, if any) or (but only in the case of a failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, shares of junior stock; or (ii) the payment of dividends on any parity stock solely in shares of parity stock and/or junior stock or the redemption, exchange, purchase or other acquisition of Class B Preferred Stock or parity stock solely in exchange for (together with a cash adjustment for fractional shares, if any), or (but only in the case of failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, parity stock and/or junior stock. The Class B Preferred Stock will vote in any general election of directors, will have one vote per share for such purpose and will vote as a single class with the TCI common stock and any class or series of TCI preferred stock entitled to vote in any general election of directors. The Class B Preferred Stock will have no other voting rights except as required by the DGCL. Series Preferred Stock. The TCI Series Preferred Stock is issuable, from time to time, in one or more series, with such designations, preferences and relative participating, option or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board. The Company is authorized to issue 50,000,000 shares of Series Preferred Stock. All shares of any one series of the TCI Series Preferred Stock are required to be alike for every particular and all shares are required to rank equally and be identical in all respects, except insofar as they may vary with respect to matters which the Board is expressly authorized by the TCI Charter to determine in the resolution or resolutions proving for the issue of any series of the TCI Series Preferred Stock. (continued) II-89 154 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Redeemable Convertible Preferred Stock, Series E. The Company is authorized to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par value $.01. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 246,402 shares. The holders of the Series E Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. Stock Options In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock Incentive Plan (the "1994 Plan"). The Plan provided for awards to be made in respect of a maximum of 16 million shares of TCI Class A common stock. Awards may be made as grants of stock options, stock appreciation rights, restricted shares, stock units or any combination thereof. The 1994 Plan was adjusted to provide that the number and type of shares subject to future awards consists of a number of shares of Series A TCI Group Stock equal to the number of shares of Class A common stock subject to future awards immediately prior to the Distribution and a number of shares of Series A Liberty Group Stock equal to one-fourth of the number of shares of Class A common stock subject to future awards immediately prior to Distribution. Following the Distribution, the Compensation Committee of TCI may in its discretion grant awards, including awards of options on, or stock appreciation rights respecting, shares of Series A TCI Group Stock, Series A Liberty Group Stock, or combinations thereof, in such amounts and types as it determines in accordance with the terms of the 1994 Plan, as adjusted. In 1995, the Company adopted the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (the "1995 Plan"). In addition, the Company has established the Tele-Communications, Inc. 1996 Stock Incentive Plan (the "1996 Plan" and together with the 1994 Plan and the 1995 Plan, the "Incentive Plans") which was approved by stockholders at the TCI 1996 annual meeting. The 1996 Plan provides (i) for stock-based awards to be made in respect of a maximum of 16 million shares of Series A TCI Group Stock and a maximum of 6 million shares of Series A Liberty Group Stock (subject to certain adjustments described below) and (ii) for cash awards in amounts determined by the TCI compensation committee. Series A TCI Group Stock and Series A Liberty Group Stock shall be hereinafter collectively referred to as the "Common Stock". Awards may be made as grants of stock options ("Options"), stock appreciation rights ("SARs"), restricted shares ("Restricted Shares"), stock units ("Stock Units"), performance awards ("Performance Awards"), or any combination thereof (collectively, "Awards"). Shares in respect of which Awards are made may be either authorized but unissued shares of Common Stock or issued shares reacquired by the Company, including shares purchased in the open market. Shares of Common Stock that are subject to Awards that expire, terminate or are annulled for any reason without having been exercised (or, with respect to Tandem SARs deemed exercised, by virtue of the exercise of a related Option), or are Restricted Shares or Stock Units that are forfeited prior to becoming vested, or are subject to Awards of SAR's that are exercised for cash, will return to the pool of such shares available for grant under the 1996 Plan. (continued) II-90 155 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In connection with the Distribution, each holder of an outstanding option or stock appreciation right received an additional option or stock appreciation right, as applicable, covering a number of shares of Series A Liberty Group Stock equal to one-fourth of the number of shares of Class A common stock theretofore subject to the outstanding option or stock appreciation right, and the outstanding option or stock appreciation right would continue in effect as an option or stock appreciation right covering the same number of shares of Series A TCI Group Stock (as redesignated) that were theretofore subject to the option or stock appreciation right. The aggregate pre-adjustment strike price of the outstanding options or stock appreciation rights was allocated between the outstanding options or stock appreciation rights and the newly issued options or stock appreciation rights in a ratio determined by the Compensation Committee. The following descriptions of stock options and/or stock appreciation rights have been adjusted to reflect such change. Awards of Series A TCI Group Stock made under the Incentive Plans were adjusted in connection with the Satellite Spin-off such that immediately prior to the Satellite Spin-off, each option was divided into two separately exercisable options: (i) an option to purchase Satellite Series A common stock (an "Add-on Satellite Option"), exercisable for the number of shares of Satellite Series A common stock that would have been issued in the Satellite Spin-off in respect of the shares of Series A TCI Group Stock subject to the applicable TCI option, if such TCI option had been exercised in full immediately prior to the record date of the Satellite Spin-off, and containing substantially equivalent terms as the existing TCI option, and (ii) an option to purchase Series A TCI Group Stock (an "Adjusted TCI Option"), exercisable for the same number of shares of Series A TCI Group Stock as the corresponding TCI option had been. The aggregate exercise price of each TCI option was allocated between the Add-on Satellite Option and the Adjusted TCI Option into which it is divided, and all other terms of the Add-on Satellite Option and Adjusted TCI Option will in all material respects be the same as such TCI option. Similar adjustments were made to the outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI SARs and Add-on Satellite SARs instead of TCI SARs, effective immediately prior to the Satellite Spin-off. As a result of the foregoing, certain persons who remain TCI employees or non-employee directors after the Satellite Spin-off and certain persons who were TCI employees prior to the Satellite Spin-off but became Satellite employees after the Satellite Spin-off hold both Adjusted TCI Options and separate Add-on Satellite Options and/or hold both Adjusted TCI SARs and separate Add-on Satellite SARs. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by TCI employees and non-employee directors following the Satellite Spin-off are obligations solely of TCI. The obligations with respect to the Adjusted TCI Options, Add-on Satellite Options, Adjusted TCI SARs and Add-on Satellite SARs held by persons who are Satellite employees at the time of the Satellite Spin-off and following the Satellite Spin-off are no longer TCI employees are obligations solely of Satellite. Prior to the Satellite Spin-off, TCI and Satellite entered into an agreement to sell to each other from time to time at the then current market price shares of Series A TCI Group Stock and Satellite Series A common stock, respectively, as necessary to satisfy their respective obligations under such securities. (continued) II-91 156 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of the Liberty Stock Dividend, options to purchase shares of Liberty Group Stock were increased by one option for each two options previously granted, and the exercise price was also adjusted accordingly. The folowing Liberty Group Stock option disclosures have been adjusted to reflect such changes. The following table presents the number and weighted average exercise price ("WAEP") of certain options in tandem with SARs to purchase Class A common stock, Series A TCI Group Stock and Series A Liberty Group Stock pursuant to the Incentive Plans:
Series A Class A Series A Liberty common TCI Group Group stock WAEP Stock WAEP Stock WAEP ----------- ---- ---------- ---- --------- ---- Outstanding at 8,309,336 $16.61 -- -- January 1, 1994 Granted 3,220,000 22.00 -- -- Assumed 54,600 19.56 -- -- Exercised (217,483) 17.26 -- -- Canceled (45,625) 20.13 -- -- ----------- ---------- --------- Outstanding at December 31, 1994 11,320,828 18.13 -- -- Converted from (11,218,866) 18.15 11,218,866 $13.58 -- Class A options Adjustment for -- -- 4,207,056 $12.10 Distribution Granted -- 7,507,500 16.99 3,879,000 15.95 Exercised (91,962) 16.07 (933,516) 12.45 (340,504) 11.11 Canceled (10,000) 17.25 (90,500) 13.07 (33,936) 11.66 ----------- ---------- --------- Outstanding at December 31, 1995 -- 17,702,350 15.08 7,711,616 14.08 Exercised -- (196,300) 12.70 (87,730) 11.89 Canceled -- (132,200) 15.35 (27,900) 12.68 ----------- ---------- --------- Outstanding at December 31, 1996 -- 17,373,850 12.97 7,595,986 14.11 =========== ========== ========= Exercisable at December 31, 1994 3,053,348 16.35 -- -- =========== ========== ========= Exercisable at December 31, 1995 -- 4,717,230 12.87 1,774,222 11.48 =========== ========== ========= Exercisable at December 31, 1996 -- 8,189,828 11.89 3,290,718 12.71 =========== ========== ========= Vesting Period 4-5 yrs 4-5 yrs ========== =========
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded 330,000 restricted shares of Series A TCI Group common stock and 45,000 restricted shares of Series A Liberty Group Stock to certain officers and other key employees of the Company. Such restricted shares vest as to 50% on December 13, 2000 and as to the remaining 50% on December 13, 2001. SARs with respect to 1,357,875 shares of Series A TCI Group Stock and 533,811 shares of Series A Liberty Group Stock were outstanding at December 31, 1996. These rights have an adjusted strike price of $0.52 and $0.54 per share, respectively, and become exercisable and vest evenly over seven years, beginning March 28, 1991. The SARs expire on March 28, 2001. The Company has the option of paying the holder in stock or cash. During the year ended December 31, 1996, SARs with respect to 65,625 shares of Series A TCI Group Stock were exercised. (continued) II-92 157 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On August 3, 1995, stockholders of the Company approved the Director Stock Option Plan (the "DSOP") including the grant, effective as of November 16, 1994, to each person that as of that date was a member of the Board and was not an employee of the Company or any of its subsidiaries, of options to purchase 50,000 shares of TCI Class A common stock. Pursuant to the DSOP, options to purchase 300,000 shares of TCI Class A common stock were granted at an exercise price of $22.00 per share. Such options had a weighted average fair value of $16.49 on the date of grant. Options issued pursuant to the DSOP vest and become exercisable over a five-year period from the date of grant and expire 10 years from the date of grant. During the year ended December 31, 1995, options to purchase 50,000 shares of Series A TCI Group Stock and options to purchase 18,750 shares of Series A Liberty Group Stock with a WAEP of $16.50 and $14.67, respectively, were canceled. During the year ended December 31, 1996, options to purchase 150,000 shares of Series A TCI Group Stock and options to purchase 56,250 shares of Series A Liberty Group stock were issued pursuant to the DSOP. Such option had a weighted average fair value of $9.83 and $11.51, respectively, on the date of grant. At December 31, 1996, 400,000 options with respect to TCI Group Stock granted pursuant to the DSOP were outstanding, 100,000 of which were exercisable. Such options had a range of exercise prices of $12.25 to $16.99, with a WAEP of $14.06, and a weighted average remaining contractual life of 8.63 years. At December 31, 1996, 150,000 options with respect to Liberty Group Stock granted pursuant to the DSOP were outstanding, 37,500 of which were exercisable. Such options had a range of exercise prices of $14.67 to $17.50, with a WAEP of $15.65, and a weighted average remaining contractual life of 8.63 years. The estimated fair values noted above are based on the Black-Scholes model and are stated in current annualized dollars on a present value basis. The key assumptions used in the model for purposes of these calculations include the following: (a) a discount rate equal to the 10-year Treasury rate on the date of grant; (b) a 35% volatility factor, (c) the 10-year option term; (d) the closing price of the respective common stock on the date of grant; and (e) an expected dividend rate of zero. The actual value that the subject directors may realize will depend upon the extent to which the stock price exceeds the exercise price on the date the options are exercised. Accordingly, the value realized by such directors will not necessarily be the value determined by the model. Estimated compensation relating to restricted stock awards, options with tandem SARs and SARs has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. Other In connection with the exercise of a stock option by an officer/director of Liberty, a note was given to Liberty as partial payment of the exercise price. This note bore interest at 7.54% per annum. The Company recorded the net assumed note receivable, amounting to $15 million, from such officer as a reduction of stockholders' equity. On October 27, 1994, such officer tendered to the Company 634,917 shares of TCI Class B common stock in full payment of principal and interest amounting to $15 million. The excess of consideration received on debentures converted or options exercised over the par value of the stock issued is credited to additional paid-in capital. At December 31, 1996, there were 127,607,438 shares of Series A TCI Group Stock and 30,090,303 shares of Series A Liberty Group Stock (as adjusted to give effect to the Liberty Group Stock Dividend) reserved for issuance under exercise privileges related to options, convertible debt securities and convertible preferred stock and upon vesting of the restricted stock awards described in this note 11 and in notes 8 and 9. In addition, one share of Series A TCI Group Stock is reserved for each outstanding share of Series B TCI Group Stock and one share of Series A Liberty Group Stock is reserved for each outstanding share of Series B Liberty Group Stock. See note 1 for the effect of the Distribution on the conversion rights of holders of convertible securities. (continued) II-93 158 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Transactions with Officers and Directors Effective January 31, 1996, a director of the Company purchased one-third of the Company's interest in two limited partnerships and obtained two ten-year options to purchase the Company's remaining partnership interests. The purchase price for the one-third partnership interests was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a wholly-owned subsidiary of the Company) Series C Cumulative Compounding Preferred Stock owned by such director, and the purchase price for the ten-year options was $100 for each option. All options are exercisable for cash in the aggregate amount of $3,000,000. On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an executive officer of TCI was transferred all of TCI's right title and interest in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock of WestMarc owned by TCI. Such preferred stock has a liquidation value of $1,999,500 and is subject to forfeiture by such officer in the event of certain circumstances from the date of grant through December 13, 2005. Effective December 1, 1996, an executive officer of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI Telephony Services, Inc., a consolidated subsidiary of the Company, ("Telephony Services"). The aggregate exercise price for each such option is equal to 1.0% of (i) the Company's cumulative investment in Telephony Services as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax benefits generated by Telephony Services (up to $500 million) as and when used by TCI. Each such executive officer was also granted a similar option representing 1.0% of the Company's common equity in TCI Wireline, Inc., another consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise price for each such Wireline option is equal to 1.0% of the Company's cumulative investment in Wireline as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise. Any exercise by one of such executive officers of all or part of one of such options (as to either the Telephony Services option or the Wireline option) would need to be accompanied by the exercise by such executive officer of a pro rata portion of the other such option. All of such options vest 20% per annum beginning February 1, 1997, and will expire on February 1, 2006. Effective December 1, 1996, two executive officers of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI.NET, Inc., a consolidated subsidiary of the Company. The aggregate exercise price for each such TCI.NET, Inc. option is equal to 1.0% of the Company's cumulative investment in TCI.NET, Inc. as of December 31, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise price. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. (continued) II-94 159 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements On the date of the Satellite Spin-off, the Company granted options to two of its executive officers to purchase 1.0% and an option to an employee of TCIC to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise price for each such option is equal to 1.0% or 0.5%, as applicable, of the Company's net investment in Satellite on the date of the Satellite Spin-off. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Estimated compensation relating to the aforementioned restricted stock award and options has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. (13) Sale of Subsidiary Stock On July 18, 1995, TINTA completed an initial public offering (the "IPO") in which it sold 20 million shares of TINTA Series A common stock to the public for consideration of $16.00 per share aggregating $320 million, before deducting related expenses (approximately $19 million). The shares sold to the public represented 17% of TINTA's total issued and outstanding common stock. Also in July 1995, TINTA issued 687,500 shares of TINTA Series A common stock as partial consideration for a 35% ownership interest in Torneos Y Competencias S.A., an Argentine sports programming company (the "TYC Acquisition"). As a result of the IPO and the TYC Acquisition, the Company recognized a gain amounting to $123 million. In June 1995, Flextech issued share capital for cash and preferred shares of Thomson Directories Limited. In connection with such issuance, the Company recorded a $51 million increase to stockholders' equity and a $93 million increase to minority interests in equity of consolidated subsidiaries. No gain was recognized in the Company's consolidated statement of operations due primarily to the existence of the Company's contingent obligations to repurchase certain of the Flextech share capital. (14) Income Taxes TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which the Company owns less than 80% each file a separate income tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. (continued) II-95 160 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Income tax benefit (expense) for the years ended December 31, 1996, 1995 and 1994 consists of:
Current Deferred Total ------- -------- ----- amounts in millions Year ended December 31, 1996: Federal $ (25) (175) (200) State and local (13) (49) (62) ----- ---- ---- $ (38) (224) (262) ===== ==== ==== Year ended December 31, 1995: Federal $ (23) 130 107 State and local (10) 23 13 ----- ---- ---- $ (33) 153 120 ===== ==== ==== Year ended December 31, 1994: Federal $ (69) (29) (98) State and local (14) (8) (22) ----- ---- ---- $ (83) (37) (120) ===== ==== ====
Income tax benefit (expense) differs from the amounts computed by applying the Federal income tax rate of 35% as a result of the following:
Years ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- amounts in millions Computed "expected" tax benefit (expense) $(189) 102 (64) Amortization not deductible for tax purposes (22) (25) (13) Minority interest in losses (earnings) of consolidated subsidiaries (3) 9 (3) Gain on sale of subsidiary stock -- 43 -- Recognition of losses of consolidated partnership -- -- (10) State and local income taxes, net of federal income tax benefit (49) (4) (20) Valuation allowance on foreign corporation -- -- (10) Other 1 (5) -- ----- ---- ---- $(262) 120 (120) ===== ==== ====
(continued) II-96 161 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, -------------------- 1996 1995 ------- ------- amounts in millions Deferred tax assets: Net operating loss carryforwards $ 679 583 Less - valuation allowance (121) (121) Investment tax credit carryforwards 118 118 Less - valuation allowance (41) (41) Alternative minimum tax credit carryforwards 95 95 Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 232 176 Future deductible amounts principally due to non-deductible accruals 79 90 Other 11 10 ------- ------- Net deferred tax assets 1,052 910 ------- ------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,193 1,111 Franchise costs, principally due to differences in amortization 4,676 3,569 Investment in affiliates, due principally to undistributed earnings of affiliates 917 499 Intangible assets, principally due to differences in amortization 36 42 Leases capitalized for tax purposes 90 53 Other 152 220 ------- ------- Total gross deferred tax liabilities 7,064 5,494 ------- ------- Net deferred tax liability $ 6,012 $ 4,584 ======= =======
The valuation allowance for deferred tax assets as of December 31, 1996 was $162 million. Such balance did not change from December 31, 1995. At December 31, 1996, the Company had net operating loss carryforwards for income tax purposes aggregating approximately $1,499 million of which, if not utilized to reduce taxable income in future periods, $136 million expires in 2003, $117 million in 2004, $355 million in 2005, $288 million in 2006, $138 million in 2009, $167 million in 2010 and $298 million in 2011. Certain subsidiaries of the Company had additional net operating loss carryforwards for income tax purposes aggregating approximately $236 million and these net operating losses are subject to certain rules limiting their usage. At December 31, 1996, the Company had remaining available investment tax credits of approximately $63 million which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of the Company had additional investment tax credit carryforwards aggregating approximately $55 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. (continued) II-97 162 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Certain of the Federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the IRS for the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues related to the years 1981-1991 have been resolved in the Company's favor. The IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the opinion of management, any additional tax liability, not previously provided for, resulting from the IRS Examinations or the IRS Appeals, ultimately determined to be payable, should not have a material adverse effect on the consolidated financial position of the Company. (15) Commitments and Contingencies On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, the Company's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, the Company's rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. The Company is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating approximately $571 million. The aggregate amount of the Film Licensing Obligations under other license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, the Company's aggregate payments under the Film Licensing Obligations could prove to be significant. The Company has made certain financial commitments related to the acquisition of sports program rights through 2004. At December 31, 1996, such commitments aggregated $226 million. (continued) II-98 163 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $278 million at December 31, 1996. Although there can be no assurance, management of the Company believes that it will not be required to meet its obligations under such guarantees, or if it is required to fulfill any of such guarantees, that they will not be material to the Company. The Company leases business offices, has entered into converter lease agreements, pole rental agreements and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $187 million, $142 million and $82 million in 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions): 1997 $ 173 1998 163 1999 149 2000 126 2001 116 Thereafter 354
It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1997. Certain key employees of the Company hold restricted stock awards, options and options with tandem SARs to acquire shares of certain subsidiaries' common stock. Estimates of the compensation related to the restricted stock awards and options and/or SARs have been recorded in the accompanying consolidated financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of the respective common stock and, ultimately, on the final market value when the rights are exercised or the restricted stock awards are vested. Had the Company accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying consolidated financial statements. Estimates of compensation relating to phantom stock appreciation rights ("PSARs") granted to employees of a subsidiary of TCI have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. Effective January 1, 1994, these employees have a put right that requires such subsidiary to purchase their respective PSARs. The subsidiary may call the PSARs on or after January 1, 1996. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (continued) II-99 164 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Information about the Company's Operations The following is selected information about the Company's operations for the years ended December 31, 1996, 1995 and 1994. Separate amounts of the Company's home shopping service have been provided to enhance the readers understanding of the Company.
Programming ---------------------- Communi- Electronic Other Intersegment cations Retailing Programming Eliminations Total -------- --------- ----------- ------------ ----- 1996 amounts in millions Revenue $ 6,790 984 355 (107) 8,022 ======= ==== ===== ==== ====== Operating income (loss) $ 546 36 50 -- 632 ======= ==== ===== ==== ====== Depreciation and amortization $ 1,555 37 24 -- 1,616 ======= ==== ===== ==== ====== Capital expenditures $ 2,043 5 7 -- 2,055 ======= ==== ===== ==== ====== Identifiable assets $27,154 442 2,617 31 30,244 ======= ==== ===== ==== ====== 1995 Revenue $ 5,153 920 521 (88) 6,506 ======= ==== ===== ==== ====== Operating income (loss) $ 653 (85) (26) -- 542 ======= ==== ===== ==== ====== Depreciation and amortization $ 1,274 43 55 -- 1,372 ======= ==== ===== ==== ====== Capital expenditures $ 1,733 13 36 -- 1,782 ======= ==== ===== ==== ====== Identifiable assets $23,059 725 1,793 -- 25,577 ======= ==== ===== ==== ====== 1994 Revenue $ 4,043 432 240 (33) 4,682 ======= ==== ===== ==== ====== Operating income (loss) $ 781 9 (2) -- 788 ======= ==== ===== ==== ====== Depreciation and amortization $ 992 15 11 -- 1,018 ======= ==== ===== ==== ====== Capital expenditures $ 1,239 19 6 -- 1,264 ======= ==== ===== ==== ====== Identifiable assets $17,121 739 1,448 (32) 19,276 ======= ==== ===== ==== ======
(continued) II-100 165 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Quarterly Financial Information (Unaudited)
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter --------- --------- --------- --------- amounts in millions, 1996: except per share amounts Revenue: As previously reported $ 1,959 2,022 2,135 Adjustment to reclassify franchise fee revenue (67) (70) (74) Adjustment to reclassify shipping and handling revenue (27) -- -- Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) --------- --------- --------- As adjusted $ 1,861 1,948 2,058 2,155 ======== ========= ========= ========= Operating income: As previously reported $ 176 173 223 Adjustment to reflect optical fiber leases as capital leases (4) (4) (3) --------- --------- --------- As adjusted $ 172 169 220 71 ======== ========= ========= ========= Net earnings (loss): As previously reported $ (118) (184) (136) Adjustment to reflect optical fiber leases as capital leases (3) (3) (2) --------- --------- --------- As adjusted $ (121) (187) (138) 724 ======== ========= ========= ========= Primary earnings (loss) attributable to common stockholders per common and common equivalent share: Series A and Series B TCI Group Stock: As previously reported $ (.22) (.29) (.24) Adjustment to reflect optical fiber leases as capital leases -- (.01) (.01) --------- --------- --------- As adjusted $ (.22) (.30) (.25) (.46) ======= ========= ========= ========= Series A and Series B Liberty Group Stock (a) $ .06 .02 .07 3.83 Fully diluted earnings (loss) attributable to common stockholders per common and common equivalent share: Series A and Series B TCI Group Stock: As previously reported $ (.22) (.29) (.24) Adjustment to reflect optical fiber leases as capital leases -- (.01) (.01) --------- --------- ---------- As adjusted $ (.22) (.30) (.25) (.46) ======= ========= ========= ========= Series A and Series B Liberty Group Stock (a) $ .06 .02 .07 3.74 1995: Revenue: As previously reported $ 1,524 1,674 1,761 1,892 Adjustment to reclassify franchise fee revenue (56) (62) (63) (65) Adjustment to reclassify shipping and handling revenue (22) (26) (23) (28) --------- --------- --------- --------- As adjusted $ 1,446 1,586 1,675 1,799 ======== ========= ========= ========= Operating income $ 180 135 176 51 Net earnings (loss) $ (44) (95) 32 (64) Primary and fully diluted earnings (loss) attributable to common stockholders per common and common equivalent share: TCI Class A and Class B common stock $ (.08) (.16) .12 N/A Series A and Series B TCI Group Stock N/A N/A $ (.09) (.07) Series A and Series B Liberty Group Stock (a) N/A N/A $ (.02) (.09)
------------------ (a) Adjusted to give effect to the Liberty Group Stock Dividend. II-101 166 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited and reported separately herein on the consolidated financial statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996. We have also audited the accompanying combined balance sheets of Liberty Media Group (a combination of certain assets of Tele-Communications, Inc., as defined in note 1) as of December 31, 1996 and 1995, and the related combined statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. As more fully described in note 1, the combined financial statements of Liberty Media Group are intended to reflect the performance of the businesses of Tele-Communications, Inc., which produce and distribute cable television programming services. The combined financial statements of Liberty Media Group should be read in conjunction with the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Liberty Media Group as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-102 167 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets December 31, 1996 and 1995
1996 1995 ------------- ------------- Assets amounts in thousands - ------ Cash and cash equivalents $ 317,359 41,225 Trade and other receivables, net 24,796 107,180 Inventories, net -- 103,968 Prepaid expenses 1,150 14,176 Prepaid program rights 32,063 32,170 Committed film inventory 20,092 29,931 Investments in affiliates, accounted for under the equity method, and related receivables (note 4) 545,121 299,331 Investment in Time Warner, Inc. ("Time Warner") (note 5) 2,016,799 -- Investment in Turner Broadcasting System, Inc. ("TBS") (note 5) -- 945,282 Other investments and related receivables (note 6) 81,537 110,791 Property and equipment, at cost: Land 39 21,254 Support equipment and buildings 17,756 180,051 Computer and broadcast equipment -- 44,962 ---------- --------- 17,795 246,267 Less accumulated depreciation 7,846 42,233 ---------- --------- 9,949 204,034 ---------- --------- Intangibles: Excess cost over acquired net assets 8,755 364,995 Other intangibles -- 279,467 Cable distribution fees -- 115,746 ---------- --------- 8,755 760,208 Less accumulated amortization 2,126 142,741 ---------- --------- 6,629 617,467 ---------- --------- Other assets, at cost, net of amortization 3,457 12,081 ---------- --------- $3,058,952 2,517,636 ========== =========
(continued) II-103 168 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets, continued December 31, 1996 and 1995
1996 1995 -------------- ----------------- Liabilities and Combined Equity amounts in thousands - ------------------------------- Accounts payable and accrued liabilities $ 19,397 261,237 Accrued compensation relating to phantom stock appreciation rights (note 10) 17,758 2,183 Program rights payable 33,700 34,864 Deferred revenue 6,166 50,803 Debt (note 7) 1,620 250,990 Deferred income taxes (note 8) 582,089 201,909 Other liabilities -- 14,261 -------------- ----------------- Total liabilities 660,730 816,247 -------------- ----------------- Minority interests in equity of consolidated subsidiaries 1,052 87,960 Combined equity (note 9): Combined equity 2,355,021 1,336,125 Due to TCI Group 42,149 7,496 Unrealized holding gains for available-for-sale securities, net of taxes -- 269,808 -------------- ----------------- 2,397,170 1,613,429 -------------- ----------------- Commitments and contingencies (note 10) $ 3,058,952 2,517,636 ============== =================
See accompanying notes to combined financial statements. II-104 169 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---------- --------- --------- amounts in thousands, except per share amounts Revenue: Net sales from electronic retailing services $ 984,117 919,796 1,014,384 Programming services: From TCI Group (note 9) 106,734 79,738 64,660 From others 248,508 441,312 292,371 ---------- --------- --------- 1,339,359 1,440,846 1,371,415 ---------- --------- --------- Cost of sales, operating costs and expenses: Cost of sales 605,116 602,849 618,972 Operating 265,586 426,445 325,565 Selling, general and administrative 282,265 372,216 340,462 Charges by TCI Group (note 9) 21,915 23,899 14,180 Compensation relating to phantom rights and stock appreciation rights (notes 9 and 10) 17,353 11,686 -- Adjustment to compensation relating to stock appreciation rights (note 9) -- -- (8,574) Restructuring charges -- 16,846 -- Depreciation 15,543 24,769 22,574 Amortization 45,149 73,242 26,762 ---------- --------- --------- $1,252,927 1,551,952 1,339,941 ---------- --------- --------- Operating income (loss) 86,432 (111,106) 31,474 Other income (expense): Interest expense (16,671) (17,395) (10,333) Interest expense to TCI Group -- (1,920) (2,348) Dividend and interest income, primarily from affiliates 22,040 11,552 20,249 Share of earnings (losses) of affiliates (note 4) 7,524 (15,092) 30,833 Minority interests in lossess (earnings) of consolidated subsidiaries (13,257) 34,518 (10,083) Gain (loss) on disposition of assets (note 5) 1,537,408 (2,195) 181,088 Litigation settlements -- (9,003) -- Other, net 575 17 (2,375) ---------- --------- --------- 1,537,619 482 207,031 ---------- --------- --------- Earnings (loss) before income taxes 1,624,051 (110,624) 238,505 Income tax benefit (expense) (note 8) (567,655) 54,292 (103,941) ---------- --------- --------- Net earnings (loss) $1,056,396 (56,332) 134,564 ========== ========= ========= Primary earnings (loss) per common and common equivalent share (note 2) $ 3.97 (.11) ========== ========= Fully diluted earnings (loss) per common and common equivalent share (note 2) $ 3.88 (.11) ========== =========
See accompanying notes to combined financial statements. II-105 170 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity Years ended December 31, 1996, 1995 and 1994
Unrealized holding gains for available-for- Total Combined Due to sale securities, combined equity TCI Group net of taxes equity ---------- --------- ------------ --------- amounts in thousands Balance at December 31, 1993 $1,185,381 2,738 -- 1,188,119 Unrealized holding gains for available-for-sale securities as of -- -- 292,918 292,918 January 1, 1994 Net earnings 134,564 -- -- 134,564 Sale of programming to TCI Group (64,660) -- -- (64,660) Cost allocations from TCI Group 14,180 -- -- 14,180 Accrued cable distribution fees to TCI Group from Home Shopping Network, Inc. ("HSN") -- 28,170 -- 28,170 Allocation of compensation relating to stock appreciation rights (8,574) -- -- (8,574) Interest expense allocation from TCI Group 2,348 -- -- 2,348 Intergroup tax allocation 78,238 -- -- 78,238 Acquisition of Prime Ticket Networks, 210,796 -- -- 210,796 L.P. Net cash transfers to TCI Group (160,833) (2,184) -- (163,017) Change in unrealized holding gains for available-for-sale securities -- -- (194,729) (194,729) ---------- --------- ---------- --------- Balance at December 31, 1994 1,391,440 28,724 98,189 1,518,353 Net loss (56,332) -- -- (56,332) Sale of programming to TCI Group (43,079) (36,659) -- (79,738) Cost allocations from TCI Group 14,480 9,419 -- 23,899 Cable distribution fees paid to TCI Group from HSN -- (26,540) -- (26,540) Allocation of compensation relating to stock appreciation rights 6,765 2,738 -- 9,503 Interest expense allocation from TCI Group 1,786 134 -- 1,920 Intergroup tax allocation 435 (407) -- 28 Deferred tax assets transferred to TCI Group (13,717) -- -- (13,717) Deferred tax assets transferred to TCI Group upon implementation of tax sharing agreement (note 8) (2,410) -- -- (2,410) Net cash transferred from TCI Group 17,637 30,087 -- 47,724 Contribution to combined equity for acquisitions 19,120 -- -- 19,120 Change in unrealized holding gains for available-for-sale securities -- -- 171,619 171,619 ---------- --------- ---------- --------- Balance at December 31, 1995 1,336,125 7,496 269,808 1,613,429 Net earnings 1,056,396 -- -- 1,056,396 Repurchase of Liberty Group Stock (37,500) -- -- (37,500) Sale of programming to TCI Group -- (106,734) -- (106,734) Cost allocations from TCI Group -- 21,915 -- 21,915 Cable distribution fees paid to TCI Group from HSN -- 2,620 -- 2,620 Adjustment to allocation of compensation relating to stock appreciation rights -- (2,789) -- (2,789) Allocation of payment of compensation relating to stock appreciation rights -- (192) -- (192) Intergroup tax allocation -- 32,042 -- 32,042 Net cash transfers from TCI Group -- 87,791 -- 87,791 Recognition of previously unrealized gains on available-for-sale securities -- -- (355,922) (355,922) Change in unrealized holding gains on available-for-sale securities -- -- 86,114 86,114 ---------- --------- ---------- --------- Balance at December 31, 1996 $2,355,021 42,149 -- 2,397,170 ========== ========= ========== =========
See accompanying notes to combined financial statements. II-106 171 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows Years ended December 31, 1996, 1995 and 994
1996 1995 1994 ---------- --------- --------- amounts in thousands (see note 3) Cash flows from operating activities: Net earnings (loss) $1,056,396 (56,332) 134,564 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 60,692 98,011 49,336 Compensation relating to phantom rights and stock appreciation rights 17,353 11,686 -- Adjustment to compensation relating to stock appreciation rights -- -- (8,574) Payment of compensation relating to phantom rights and stock appreciation rights (1,218) -- -- Share of losses (earnings) of affiliates, net (7,524) 15,092 (30,833) Deferred income tax expense (benefit) 542,613 (53,900) 25,703 Intergroup tax allocation 32,042 28 -- Noncash interest expense 4,097 1,920 -- Minority interests in earnings (losses) 13,257 (34,518) 10,083 Litigation settlements -- 9,003 -- Payments of litigation settlements (3,725) (30,313) -- Loss (gain) on disposition of assets (1,537,408) 2,195 (181,088) Other noncash charges (1,003) 4,501 1,491 Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (40,180) (11,851) (13,437) Change in inventories 1,180 7,895 (18,455) Change in prepaid expenses (6,182) (16,658) (10,418) Change in payables, accruals and deferred revenue 19,461 54,937 48,810 ---------- --------- --------- Net cash provided by operating activities 149,851 1,696 7,182 ---------- --------- --------- Cash flows from investing activities: Cash paid for acquisitions (55,000) (36,596) -- Capital expended for property and equipment (11,734) (48,700) (32,455) Additional investments in and loans to affiliates and others (36,044) (69,479) (23,856) Return of capital from affiliates 6,144 20,009 9,880 Collections on loans to affiliates and others 1,918 2,501 149,162 Cash paid for cable distribution fees (31,529) (43,875) (71,871) Proceeds from disposition of assets 27,623 373 180,429 Other investing activities (7,572) 14,168 (2,245) ---------- --------- --------- Net cash provided (used) by investing activities (106,194) (161,599) 209,044 ---------- --------- --------- Cash flows from financing activities: Borrowings of debt 278,899 222,549 46,859 Repayments of debt (333,906) (50,284) (139,096) Change in cash transfers from TCI Group 5,592 (34,655) (149,442) Repurchase of Liberty Group Stock (37,500) -- -- Contributions by minority shareholders of subsidiaries 319,457 2,084 6,272 Distributions to minority shareholders of subsidiaries (65) (1,529) (400) ---------- --------- --------- Net cash provided (used) by financing activities 232,477 138,165 (235,807) ---------- --------- --------- Net increase (decrease) in cash and cash equivalents 276,134 (21,738) (19,581) Cash and cash equivalents at beginning of year 41,225 62,963 82,544 ---------- --------- --------- Cash and cash equivalents at end of year $ 317,359 41,225 62,963 ========== ========= =========
See accompanying notes to combined financial statements. II-107 172 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements December 31, 1996,1995 and 1994 (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of Tele- Communications, Inc. ("TCI") that are attributed to Liberty Media Group, as defined below. All significant intercompany accounts and transactions have been eliminated. On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes cable television programming services ("Liberty Media Group"). Additionally, the stockholders of TCI approved the redesignation of the previously authorized TCI Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). Liberty Media Group's programming services include production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products. Additionally, Liberty Media Group is engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing. The issuance of Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including (i) TCI's Domestic Cable and Communications unit, (ii) TCI's International Cable and Programming unit and (iii) TCI's Technology/Venture Capital unit. Such subsidiaries and assets are collectively referred to as "TCI Group". Intercompany balances resulting from transactions with such units are reflected as borrowings from or loans to TCI Group and, prior to the Distribution, are included in combined equity in the accompanying combined financial statements. See note 9. Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to Liberty Media Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries will each continue to be responsible for their respective liabilities. Holders of Liberty Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. (continued) II-108 173 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of Liberty Media Group and the market price of shares of Liberty Group Stock. In addition, net losses of any portion of TCI, dividends and distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce funds of TCI legally available for dividends on all series of common stock. Accordingly, Liberty Media Group financial information should be read in conjunction with the TCI consolidated financial information. Dividends on Liberty Group Stock are payable at the sole discretion of the Board out of the lesser of all assets of TCI legally available for dividends and the available dividend amount with respect to Liberty Media Group, as defined. Determinations to pay dividends on Liberty Group Stock will be based primarily upon the financial condition, results of operations and business requirements of Liberty Media Group and TCI as a whole. After the Distribution, existing preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of TCI Class A common stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange (in addition to the same number of shares of redesignated Series A TCI Group Stock as were theretofore issuable thereunder) the number of shares of Series A Liberty Group Stock that would have been issuable in the Distribution with respect to the TCI Class A common stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Distribution. Options to purchase TCI Class A common stock outstanding at the time of the Distribution were adjusted by issuing to the holders of such options separate options to purchase that number of shares of Series A Liberty Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Class A common stock prior to the record date for the Distribution and reallocating a portion of the aggregate exercise price of the previously outstanding options to the newly issued options to purchase Series A Liberty Group Stock. The issuance of shares of Series A Liberty Group Stock upon such conversion, exchange or exercise of such convertible securities will not result in any transfer of funds or other assets from TCI Group to Liberty Media Group in consideration of such issuance. In the case of the exercise of such options to purchase Series A Liberty Group Stock, the proceeds received upon the exercise of such options will be attributed to Liberty Media Group. Effective January 13, 1997, TCI issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). The Liberty Group Stock Dividend has been treated as a stock split, and accordingly, all share and per share amounts have been retroactively restated to reflect the Liberty Group Stock Dividend. (continued) II-109 174 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (2) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the specific number of exhibitions. Committed film inventory and program rights payable are recorded at the estimated costs of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the specific number of exhibitions. Investments All marketable equity securities held by Liberty Media Group are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of combined equity. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are generally carried at cost. For those investments in affiliates in which Liberty Media Group's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize Liberty Media Group's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of Liberty Media Group's investment in, advances to and commitments for the investee. Liberty Media Group's share of net earnings or losses of affiliates includes the amortization of the difference between Liberty Media Group's investment and its share of the net assets of the investee. However, recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to Liberty Media Group's ownership interest in such affiliates. Changes in Liberty Media Group's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in Liberty Media Group's consolidated statements of operations. II-110 175 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Long-Lived Assets (a) Property and Equipment Property and equipment, including significant improvements, is stated at cost which includes acquisition costs allocated to tangible assets acquired. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 40 years for support equipment and buildings (furniture and other equipment are depreciated from 3 to 8 years and buildings and improvements are depreciated from 20 to 40 years). Repairs and maintenance and any gains or losses on disposition of assets are included in operations. (b) Excess Cost Over Acquired Net Assets Excess cost over acquired net assets consists of the difference between the cost of acquiring programming entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over 30 years. In March of 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal years beginning after December 15, 1995. Statement No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The accounting for long-lived assets that are expected to be disposed are also addressed in Statement No. 121. Liberty Media Group adopted Statement No. 121 effective January 1, 1996. Such adoption did not have a significant effect on the financial position or results of operations of Liberty Media Group. Pursuant to Statement No. 121, Liberty Media Group periodically reviews the carrying amount of its long-lived assets and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. Liberty Media Group considers historical and expected future net operating losses to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). Liberty Media Group deems Assets to be impaired if Liberty Media Group is unable to recover the carrying value of such Assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair value. Liberty Media Group generally measures fair value by considering sales prices for similar assets or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. (continued) II-111 176 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause Liberty Media Group to repurchase such holders' common equity. Deferred Revenue Deferred revenue represents advance billings primarily to home satellite dish owners and providers. Such revenue is recognized in the month service is provided. Net Sales From Electronic Retailing Services Revenue includes merchandise sales reduced by incentive discounts and sales returns to arrive at net sales from electronic retailing services. Revenue is recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. Liberty Media Group's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, Liberty Media Group continues to account for stock-based employee compensation pursuant to APB Opinion No. 25. See note 9. Earnings (Loss) Per Common and Common Equivalent Share Primary earnings attributable to Liberty Media Group stockholders per common share for the year ended December 31, 1996 was computed by dividing net earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares of Liberty Media Group Series A and Series B common stock outstanding during the period, as adjusted for the effect of the Liberty Group Stock Dividend (266.3 million). Common stock equivalents were not included in the computation because their inclusion would be anti-dilutive to TCI. (continued) II-112 177 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Fully diluted earnings attributable to Liberty Media Group stockholders per common and common equivalent share for the year ended December 31, 1996 was computed by dividing earnings attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common and common equivalent shares outstanding of Liberty Media Group Series A and Series B common stock during the period, as adjusted for the effect of the Liberty Group Stock Dividend (272.4 million). Shares issuable upon conversion of TCI's Convertible Preferred Stock, Series C; Convertible Preferred Stock, Series D; and Redeemable Convertible Liberty Media Group Preferred Stock, Series H have been included in the computation of weighted average shares. The loss per common share for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to Liberty Media Group Series A and Series B common stockholders by the weighted average number of common shares of Liberty Media Group Series A and Series B common stock outstanding during the period, as adjusted for the effect of the Liberty Group Stock Dividend (246.1 million). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. Earnings per common share are omitted from the statements of operations for the periods from January 1, 1995 through the Distribution and for the year ended December 31, 1994 as Liberty Group Stock was not part of the capital structure of TCI until August 10, 1995, the date of the Distribution. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts have been reclassified for comparability with the 1996 presentation. (3) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $16,032,000, $14,968,000 and $8,853,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes during the years ended December 31, 1996, 1995 and 1994 was $1,553,000, $1,707,000 and $83,267,000, respectively. In addition, Liberty Media Group received income tax refunds amounting to $14,648,000 and $11,258,000 during the years ended December 31, 1996 and 1995, respectively. (continued) II-113 178 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Significant noncash investing and financing activities are as follows:
Years ended December 31, ------------------------------------- 1996 1995 1994 ------- ------- -------- amounts in thousands Cash paid for acquisitions: Fair value of assets acquired $55,000 35,329 302,043 Net liabilities assumed -- (934) (21,350) Contribution to combined equity from TCI for acquisition -- (19,120) (210,796) Deferred tax asset (liability) recorded in acquisition -- 1,084 (69,897) Minority interests in equity of acquired entities -- 20,237 -- ------- ------- -------- Cash paid for acquisitions $55,000 36,596 -- ======= ======= ======== Exchange of consolidated subsidiaries for note receivable and equity investments $574,104 -- -- ======= ======= ======== Conversion of debt into additional minority $ -- 14,215 -- ======= ======= ======== Assets contributed for interest in limited liability company $ -- 2,633 -- ======= ======= ========
(4) Investments in Affiliates Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
December 31, -------------------------------------- 1996 1995 ---------------- ---------------- amounts in thousands Combined Financial Position - --------------------------- Property and equipment, net $ 524,949 340,072 Program rights 360,129 256,255 Cable distribution rights 276,342 184,160 Due from Liberty Media Group -- 11,313 Other intangibles 2,892,021 1,174,738 Other assets 1,619,096 989,993 ---------------- ------------------ Total assets $ 5,672,537 2,956,531 ================ ============== Debt $ 1,811,509 1,359,471 Due to Liberty Media Group 9,239 1,654 Program rights payable 162,212 92,287 Other liabilities 1,939,108 924,812 Owners' equity 1,750,469 578,307 ---------------- -------------- Total liabilities and equity $ 5,672,537 2,956,531 ================ ==================
(continued) II-114 179 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements
Years ended December 31, --------------------------------------------------- 1996 1995 1994 ----------------- ----------------- --------------- amounts in thousands Combined Operations - ------------------- Revenue $ 3,392,548 2,632,908 2,152,341 Operating expenses (3,167,329) (2,338,703) (1,880,754) Depreciation and amortization (153,325) (137,663) (90,780) ----------------- ----------------- --------------- Operating income 71,894 156,542 180,807 Interest expense (103,321) (107,506) (31,900) Other, net (187,787) (95,446) (117,014) ----------------- ----------------- --------------- Net earnings (loss) $ (219,214) (46,410) 31,893 ================= ================= ===============
The following table reflects the carrying value of Liberty Media Group's investments, accounted for under the equity method, including related receivables:
December 31, ---------------------------- 1996 1995 -------- ------- amounts in thousands Discovery Communications, Inc. ("Discovery") $117,724 117,373 QVC, Inc. ("QVC") 103,855 81,160 Sunshine Network ("Sunshine") (a) -- 8,221 SportsChannel Chicago ("Chicago") (a) -- 29,722 Home Team Sports Limited Partnership ("HTS") (a) -- 3,514 International Cable Channels Partnership, Ltd. ("ICCP") 9,411 11,563 Premier Sports (a) -- 4,212 Bet Holdings, Inc. ("BET") 20,225 15,353 Courtroom Television Network ("Court") 2,160 7,711 Liberty/Fox U.S. Sports LLC ("Fox Sports") (a) (21,964) -- Superstar/Netlink Group LLC ("Superstar/Netlink") (b) (37,236) -- DMX Inc. ("DMX") 2,331 -- HSN (c) 141,921 -- BDTV INC. and BDTV II INC. (c) 199,701 -- Other 6,993 20,502 -------- ------- $545,121 299,331 ======== =======
(continued) II-115 180 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (a) As of April 29, 1996, Liberty Media Group, The News Corporation Limited ("News Corp.") and Tele- Communications International, Inc. ("TINTA"), a consolidated subsidiary of TCI, formed two sports programming ventures. In the United States, Liberty Media Group and News Corp. formed Fox Sports into which Liberty Media Group contributed interests in its national and regional sports networks and into which News Corp. contributed its fx cable network and certain other assets. Liberty Media Group received a 50% interest in Fox Sports and $350 million in cash. Internationally, News Corp. and Liberty/TINTA LLC ("Liberty/TINTA"), a limited liability corporation owned 50% by Liberty Media Group and 50% by TINTA, formed a venture ("Fox Sports International") to operate previously existing sports services in Latin American and Australia and a variety of new sports services throughout the world except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with News Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed Prime Deportiva, a Spanish language sports service distributed in Latin American and in Hispanic markets in the United States; an interest in Torneos y Competencias S.A., an Argentinean sports programming and production business; various international sports and satellite transponder rights and cash. Liberty/TINTA also contributed its 50% interest in Premier Sports and All-Star Sports. Both are Australian 24-hour sports services available via multi-channel, multi-point distribution systems or cable television. Liberty/TINTA is accounted for using the equity method. As part of the formation of Fox Sports International, Liberty/TINTA is entitled to receive from News Corp. 7.5% of the outstanding stock of Star Television Limited. Upon delivery of such stock to Liberty/TINTA, News Corp. is entitled to receive from Liberty/TINTA $20 million and rights under various Asian sports programming agreements. Star Television Limited operates a satellite-delivered television platform in Asia. (b) On April 1, 1996, United Video Satellite Group, Inc. ("UVSG") and Liberty Media Group formed Superstar/Netlink, a limited liability company of UVSG's Superstar Satellite Entertainment combined with Netlink USA's ("Netlink") retail business. Liberty Media Group and UVSG each own 50% of Superstar/Netlink. As of April 1, 1996, Netlink's retail business no longer consolidates with the financial results of Liberty Media Group. (continued) II-116 181 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (c) Pursuant to an agreement among Liberty Media Group, Barry Diller and certain of their respective affiliates entered into in August 1995 and amended in August 1996 (the "BDTV Agreement"), Liberty Media Group contributed to BDTV INC. ("BDTV-I"), in August 1996, an option (the "Option") to purchase 2 million shares of Class B common stock of Silver King Communications, Inc. ("Silver King") (which shares represented voting control of Silver King at such time) and $3,500,000 in cash, representing the exercise price of the Option. BDTV-I is a corporation formed by Liberty Media Group and Mr. Diller pursuant to the BDTV Agreement, in which Liberty Media Group owns over 99% of the equity and none of the voting power (except for protective rights with respect to certain fundamental corporate actions) and Mr. Diller owns less than 1% of the equity and all of the voting power. BDTV-I exercised the option shortly after its contribution, thereby becoming the controlling stockholder of Silver King. Such change in control of Silver King had been approved by the Federal Communications Commission ("FCC") in June 1996, subject, however, to the condition that the equity interest of Liberty Media Group in Silver King not exceed 21.37% without the prior approval of the FCC (the "FCC Order"). Pursuant to an Agreement and Plan of Exchange and Merger entered into in August 1996, Silver King acquired HSN by merger of HSN with a subsidiary of Silver King in December 1996 (the "HSN Merger") where HSN is the surviving corporation and a subsidiary of Silver King following the HSN Merger. Liberty Media Group accounted for the HSN Merger as a sale of a portion of its investment in HSN and accordingly, recorded a pre-tax gain of approximately $47 million. In order to effect the HSN Merger in compliance with the FCC Order, Liberty Media Group agreed to defer receiving certain shares of Silver King that would otherwise have become issuable to it in the HSN Merger until such time as it was permitted to own such shares. As a result, the HSN Merger was structured so that Liberty Media Group received (i) 7,809,111 shares of Class B common stock of Silver King, all of which shares Liberty Media Group contributed to BDTV II INC. ("BDTV-II"), (ii) the contractual right (the "Contingent Right") to be issued up to an additional 2,591,752 shares of Class B common stock of Silver King from time to time upon the occurrence of certain events which would allow Liberty Media Group to own additional shares in compliance with the FCC Order (including events resulting in the dilution of Liberty Media Group's percentage equity interest), and (iii) 739,141 shares of Class B common stock and 17,566,702 shares of common stock of HSN (representing approximately 19.9% of the equity of HSN). BDTV-II is a corporation formed by Liberty Media Group and Barry Diller pursuant to the BDTV Agreement, in which the relative equity ownership and voting power of Liberty Media Group and Mr. Diller are substantially the same as their respective equity ownership and voting power in BDTV-I. (continued) II-117 182 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements As a result of the HSN Merger, HSN is no longer a subsidiary of Liberty Media Group and therefore, the financial results of HSN will no longer be consolidated with the financial results of Liberty Media Group. Although Liberty Media Group no longer possesses voting control over HSN, it continues to have an indirect equity interest in HSN through its ownership of the equity securities of BDTV-I and BDTV-II as well as a direct interest in HSN which would be exchangeable into shares of Silver King. Accordingly, HSN, BDTV-I and BDTV-II are accounted for using the equity method. The following table reflects Liberty Media Group's share of earnings (losses) of each of the aforementioned affiliates:
Years ended December 31, --------------------------------------- 1996 1995 1994 ------ -------- ------ amounts in thousands Discovery $351 4,191 7,093 QVC 22,720 2,261 10,830 Sunshine 634 2,524 1,376 Chicago 3,065 6,560 6,465 HTS 397 744 531 ICCP (2,755) (1,973) (1,469) Premier Sports (3,199) (8,478) -- BET 4,872 4,158 3,071 Court (2,543) (21,064) -- Liberty/TINTA (6,603) -- -- Superstar/Netlink 10,754 -- -- DMX (13,617) -- -- BDTV-I and BDTV-II (954) -- -- Other (a) (5,598) (4,015) 2,936 ------ -------- ------ $ 7,524 (15,092) 30,833 ======= ======= ======
(a) Included in other investments is Liberty Media Group's 49.9% partnership interest in QE+ Ltd. ("QE+"), a limited partnership which distributes STARZ!, a first-run movie premium programming service launched in 1994. Entities attributed to TCI Group hold the remaining 50.1% partnership interest. (continued) II-118 183 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The QE+ limited partnership agreement provides that TCI Group will be required to make special capital contributions to QE+ through July 1, 2005, up to a maximum amount of $350 million, approximately $203 million of which was paid through December 31, 1996. QE+ is obligated to pay TCI Group a preferred return of 10% per annum on the first $200 million of its special capital contributions beginning five years from the date of the contribution or five years from January 1, 1996, whichever is later. Any TCI Group special capital contributions in excess of $200 million will be entitled to a preferred return of 10% per annum from the date of the contribution. QE+ is required to apply 75% of its available cash flow, as defined, to repay the TCI Group special capital contributions and any preferred return payable thereon. To the extent such special capital contributions are insufficient to fund the cash requirements of QE+, TCI Group and Liberty Media Group will each have the option to fund such cash requirements in proportion to their respective ownership percentages. Liberty Media Group also has the right to acquire an additional 10.1% general partnership interest in QE+ based on a formula designed to approximate the fair value of such interest. Such right is exercisable for a period of ten years beginning January 1, 1999 after QE+ has had positive cash flow for two consecutive calendar quarters. The right is exercisable only after all special capital contributions from TCI Group have been repaid, including any preferred return as discussed above. Encore Media Corporation ("Encore") (90% owned by Liberty Media Group) earns management fees from QE+ equal to 20% of managed costs, as defined. In addition, effective July 1, 1995, Liberty Media Group started earning a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. Such Content Fees aggregated $3,735,000 and $972,000 for the year ended December 31, 1996 and the six months ended December 31, 1995, respectively, and are included in revenue from TCI Group in the combined statements of operations. The Content Fee agreement expires on June 30, 2001, subject to renewal on an annual basis thereafter. Payment of the Content Fee will be subordinated to the repayment of the contributions made by TCI Group and the preferred return thereon. Certain of Liberty Media Group's affiliates are general partnerships and any subsidiary of Liberty Media Group that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. (continued) II-119 184 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (5) Investment in Time Warner At December 31, 1995, Liberty Media Group owned shares of TBS common stock and shares of TBS preferred stock that were convertible into TBS common stock. Liberty Media Group's total holdings represented an approximate 7.5% voting interest for those matters which preferred and common stock voted as a single class. On October 10, 1996, Time Warner and TBS consummated a merger (the "TBS/Time Warner Merger") whereby TBS shareholders received 0.75 of a Time Warner common share for each TBS Class A and Class B common share held, and each holder of TBS Class C preferred stock received 0.80 of a Time Warner common share for each of the 6 shares of TBS Class B common stock into which each share of Class C preferred stock could have been converted. Time Warner, TBS, TCI and Liberty Media Corporation ("Liberty") entered into an Agreement Containing Consent Order with the Federal Trade Commission ("FTC") dated August 14, 1996, as amended on September 4, 1996 (the "FTC Consent Decree"). Pursuant to the FTC Consent Decree, among other things, Liberty agreed to exchange the shares of Time Warner common stock to be received in the TBS/Time Warner Merger for shares of a separate series of Time Warner common stock with limited voting rights (the "TW Exchange Stock"). Holders of the TW Exchange Stock are entitled to one one-hundredth (l/100th) of a vote for each share with respect to the election of directors. Holders of the TW Exchange Stock will not have any other voting rights, except as required by law or with respect to limited matters, including amendments of the terms of the TW Exchange Stock adverse to such holders. Subject to the federal communications laws, each share of the TW Exchange Stock will be convertible at any time at the option of the holder on a one-for-one basis for a share of Time Warner common stock. Holders of TW Exchange Stock are entitled to receive dividends ratably with the Time Warner common stock and to share ratably with the holders of Time Warner common stock in assets remaining for common stockholders upon dissolution, liquidation or winding up of Time Warner. In connection with the TBS/Time Warner Merger, Liberty Media Group received approximately 50.6 million shares of the TW Exchange Stock in exchange for its TBS holdings. As a result of the TBS/Time Warner Merger, Liberty Media Group recognized a pre-tax gain of approximately $1.5 billion in the fourth quarter of 1996. At December 31, 1996, Liberty Media Group's investment in Time Warner, carried at cost, had an aggregate fair value of approximately $2 billion based upon the market value of the marketable common stock into which it is convertible. As security for borrowings under one of its credit facilities, Liberty Media Group pledged a portion of its TBS common stock. Upon consummation of the TBS/Time Warner Merger, the revolving credit agreement was amended and provides as security for this indebtedness the TW Exchange Stock received for the previously pledged TBS Class B Common Stock. See note 7. II-120 185 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Subject to a number of conditions, including receipt of a ruling from the Internal Revenue Service ("IRS") that such dividend would be tax free to the Liberty Media Group stockholders, TCI agreed that it would distribute in the form of a stock dividend (the "Spin-Off") to the Liberty Media Group stockholders the stock of a new company ("Spinco") which would own, directly or indirectly, the TW Exchange Stock and the business of Southern Satellite Systems, Inc. ("Southern"), a wholly owned subsidiary of Liberty Media Group which distributes the TBS SuperStation ("WTBS") signal in the United States and Canada. The level of Liberty Media Group's ownership interest in Time Warner will be restricted until the Spin-Off occurs, at which time, such restriction would be eased for Spinco. If the Spin-Off occurs, certain control stockholders of TCI would exchange the Spinco common stock they receive for a Spinco convertible preferred security which would only be entitled to vote on major corporate transactions involving Spinco. In connection with the TBS/Time Warner Merger, Liberty and Time Warner entered into, among other agreements, an agreement providing for the grant to Time Warner of an option (the "Contract Option") to enter into a contract with Southern (the "Distribution Contract") pursuant to which Southern would provide Time Warner with certain uplinking and distribution services relating to WTBS and would assist Time Warner in converting WTBS from a superstation into a copyright paid cable programming service. The Contract Option will be granted no later than the fifth business day following the earlier of May 31, 1997, the receipt of a favorable IRS ruling and the determination that the IRS ruling will not be obtained. On the date of grant, Time Warner will issue to Southern, in consideration for the Contract Option and certain noncompetition covenants, an aggregate of 5.0 million shares of TW Exchange Stock and $66,666,700, payable to Time Warner's option in cash or TW Exchange Stock. If Time Warner exercises the Contract Option and enters into the Distribution Contract, Time Warner will be obligated to make quarterly payments to Southern in an amount which, when added to Southern's net cash flow, would aggregate approximately $213.3 million on a present value basis discounted to the effective date of the Distribution Contract. (6) Other Investments Other investments and related receivables are summarized as follows:
December 31, --------------------------------- 1996 1995 ------------- ------------ amounts in thousands Marketable equity securities, at fair value $ 790 16,681 Convertible debt, at cost, which approximates fair value 23,000 23,000 Other investments, at cost, and related receivables 57,747 71,110 ------------- --------------- $ 81,537 110,791 ============= ===============
(continued) II-121 186 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Management of Liberty Media Group estimates that the market value, calculated utilizing a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices, of all of Liberty Media Group's other investments aggregated $162 million and $192 million at December 31, 1996 and December 31, 1995, respectively. No independent external appraisals were conducted for those assets. (7) Debt Debt is summarized as follows:
December 31, ----------------------------------- 1996 1995 ------------- ------------ amounts in thousands Note payable to bank (a) $ 1,620 -- Bank credit facility (b) -- 30,000 Note payable to partnership -- 5,654 Notes payable to bank -- 206,600 Other debt, with varying rates and maturities -- 8,736 ------------- ------------ $ 1,620 250,990 ============= ===========
(a) Payable by Encore Media Corporation This note payable provides for borrowings up to $50 million through September 30, 1999, at which time the commitment is required to be reduced in eight equal, quarterly amounts through June 30, 2001. Interest on borrowings under the note is tied to, at Encore's option, the bank's prime rate plus an applicable margin or the London Interbank Offered Rate plus an applicable margin (8.25% at December 31, 1996). Encore is required to pay a commitment fee which varies based on Encore's leverage ratio. The note is secured by substantially all of Encore's assets. (b) Payable by Communications Capital Corp. ("CCC") This revolving credit agreement, as amended, provides for borrowings up to $325 million through August of 1997. Borrowings under such agreement bear interest at optional measures which approximate the prime rate. As security for this indebtedness, Liberty Media Group pledged substantially all of its TBS Class B common stock. Upon consummation of the TBS/Time Warner Merger, the revolving credit agreement was amended and provides as security for this indebtedness the TW Exchange Stock received for the previously pledged TBS Class B Common Stock. CCC must pay an annual commitment fee of .3125% of the unfunded portion of the commitment. (continued) II-122 187 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The fair value of Liberty Media Group's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Liberty Media Group for debt of the same remaining maturities. The fair market value of such debt approximated its carrying value at December 31, 1996. (8) Income Taxes TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than 80% each file a separate tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis. Income tax expense for Liberty Media Group is based upon those items in the consolidated tax calculations of TCI applicable to Liberty Media Group. Intergroup tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) and alternative minimum taxes to Liberty Media Group in relation to its amount of taxable earnings or losses. Prior to the Distribution, the payable or receivable arising from the intergroup tax allocation has been reflected as an increase or decrease in combined equity. Subsequent to the Distribution, such amounts are reflected as borrowings from or loans to TCI Group. A tax sharing agreement (the "Tax Sharing Agreement") among entities attributed to Liberty Media Group, TCI and certain subsidiaries of TCI 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, Liberty Media Group is responsible to TCI for its share of current consolidated income tax liabilities. TCI is responsible to Liberty Media Group to the extent that Liberty Media 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 Liberty Media Group's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising Liberty Media Group. In connection with the implementation of the Tax Sharing Agreement, Liberty Media Group recorded a decrease to its deferred income tax liability and an increase to its combined equity of $2,410,000. (continued) II-123 188 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Income tax benefit (expense) consists of:
Current Deferred Total ------- -------- ----- amounts in thousands Year ended December 31, 1996: State and local intergroup tax expense allocation $ (1,251) (95,417) (96,668) Federal intergroup tax expense allocation (23,791) (447,196) (470,987) ----------- -------- -------- $ (25,042) (542,613) (567,655) =========== ======== ======== Year ended December 31, 1995: State and local intergroup tax benefit (expense) allocation $ (2,192) 8,920 6,728 Federal intergroup tax benefit allocation 2,584 44,980 47,564 ----------- -------- -------- $ 392 53,900 54,292 =========== ======== ======== Year ended December 31, 1994: State and local intergroup tax expense allocation $ (16,699) (4,742) (21,441) Federal intergroup tax expense allocation (61,539) (20,961) (82,500) ----------- -------- -------- $ (78,238) (25,703) (103,941) =========== ======== ========
Income tax benefit (expense) differs from the amounts computed by the federal tax rate of 35% as a result of the following:
Year ended December 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ----------- amounts in thousands Computed expected tax benefit (expense) $(568,418) 38,726 (83,477) Dividends excluded for income tax purposes 2,114 1,116 1,134 Minority interest of consolidated subsidiaries (4,735) 13,333 (3,548) Amortization not deductible for income tax purposes (3,765) (5,723) (4,774) Excess executive compensation -- 688 -- State and local income taxes, net of federal income tax benefit (61,250) 2,043 (13,937) Change in allocated state tax rate -- 2,353 -- Recognition of difference in income tax basis of investments in consolidated subsidiaries 66,735 -- 920 Other, net 1,664 1,756 (259) --------- ---------- ----------- $(567,655) 54,292 (103,941) ========= ========== ===========
(continued) II-124 189 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, ------------------------ 1996 1995 -------- ------- amounts in thousands Deferred tax assets: Net operating and capital loss carryforwards $9,264 36,254 Charitable contribution carryforward 166 733 Inventory costs -- 10,339 Provision for returns and allowance -- 9,460 Future deductible amount attributable to accrued stock appreciation rights and deferred compensation 6,927 3,094 Property and equipment, due principally to differences in depreciation 5,475 6,087 Intangible assets, due principally to differences in amortization 1,428 -- Other future deductible amounts due principally to non-deductible accruals 395 996 -------- ------- Deferred tax assets 23,655 66,963 -------- ------- Deferred tax liabilities: Lease obligations, capitalized for income tax purposes 17,075 18,249 Intangible assets, due principally to differences in amortization -- 3,392 Investments in affiliates, due principally to undistributed earnings of affiliates 588,669 247,231 -------- ------- Deferred tax liabilities 605,744 268,872 -------- ------- Net deferred tax liabilities $582,089 201,909 ======== =======
There was no valuation allowance for deferred tax assets as of December 31, 1996 and 1995. At December 31, 1996, Liberty Media Group had net operating and capital loss carryforwards for income tax purposes aggregating approximately $50,049,000 which, if not utilized to reduce taxable income in future periods, expire as follows: $2,352,000 in 2003, $478,000 in 2004, $11,345,000 in 2005, $22,528,000 in 2006 and $13,346,000 in 2007. Pursuant to the Tax Sharing Agreement, Liberty Media Group has already received benefit for approximately $26,625,000 of the net operating loss carryforward disclosed above. Liberty Media Group is responsible to TCI to the extent this amount of net operating loss carryforward is utilized by TCI in future periods. (continued) II-125 190 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (9) Combined Equity General The rights of holders of the Liberty Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the Liberty Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. Stock Options and Stock Appreciation Rights Estimates of the compensation relating to options and/or stock appreciation rights granted to employees of Liberty Media Group are allocated to Liberty Media Group and have been recorded in the accompanying combined financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of Series A TCI Group Stock and the Series A Liberty Group Stock and, ultimately, on the final determination of market value when the rights are exercised. Had Liberty Media Group accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying combined financial statements. Prior to the Distribution, the payable or receivable arising from the compensation related to the options and/or stock appreciation rights has been reflected as an increase or decrease in combined equity. Subsequent to the Distribution, such amounts are reflected as borrowings from or loans to TCI Group. Transactions with TCI and Other Related Parties Certain TCI corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand-alone basis. During the years ended December 31, 1996 and 1995, Liberty Media Group was allocated $2,723,000 and $3,066,000, respectively, in corporate general and administrative costs by TCI Group. Entities included in Liberty Media Group lease satellite transponder facilities from TCI Group. Charges by TCI Group for such arrangements and other related operating expenses for the years ended December 31, 1996, 1995 and 1994 aggregated $11,946,000, $14,709,000 and $7,542,000, respectively. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute sports and other programming to cable television operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. HSN pays a commission to TCI Group for merchandise sales to customers who are subscribers of TCI Group's cable systems. Aggregate commissions and charges by TCI Group were $7,187,000, $6,124,000 and $6,638,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (continued) II-126 191 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Previously, cash receipts of certain businesses attributed to Liberty Media Group were remitted to TCI Group and certain cash disbursements of Liberty Media Group were funded by TCI Group on a daily basis. Prior to the Distribution, the net amounts of such cash activities are included in combined equity. Subsequent to the Distribution, such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to Liberty Media Group. The Board could determine from time to time that debt of TCI not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. For all periods prior to the Distribution, all financial impacts of equity offerings are attributed entirely to TCI Group. After the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, and all financial impacts of issuances of additional shares of Liberty Group Stock, the proceeds of which are attributed to Liberty Media Group, will to such extent be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions of Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group, and financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group will be attributed entirely to TCI Group. Subsequent to the Distribution, borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. (10) Commitments and Contingencies Liberty Media Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2009 (the "Film Licensing Obligations"). Based on subscriber levels at December 31, 1996, these agreements require minimum payments aggregating approximately $194 million. The aggregate amount of the Film Licensing Obligations under these license agreements is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, required aggregate payments under the Film Licensing Obligations could prove to be significant. (continued) II-127 192 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Liberty Media Group leases business offices, has entered into transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $40,039,000, $47,569,000 and $34,274,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands): 1997 $ 20,227 1998 20,256 1999 14,881 2000 12,825 2001 10,507 Thereafter 23,751
It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1997. Estimates of compensation relating to phantom stock appreciation rights ("PSARs") granted to employees of a subsidiary of Liberty Media Group have been recorded in the accompanying combined financial statements, but is subject to future adjustment based upon a valuation model derived from such subsidiary's cash flow, working capital and debt. Effective January 1, 1994, these employees have a put right that requires such subsidiary to purchase their respective PSARs. The subsidiary may call the PSARs on or after January 1, 1996. II-128 193 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: We have audited and reported separately herein on the consolidated financial statements of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996. We have also audited the accompanying combined balance sheets of TCI Group (a combination of certain assets of Tele-Communications, Inc., as defined in note 1) as of December 31, 1996 and 1995, and the related combined statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of TCI Group are presented for purposes of additional analysis of the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. As more fully described in note 1, the combined financial statements of TCI Group are intended to reflect the performance of the remaining businesses of Tele-Communications, Inc., which have not been attributed to Liberty Media Group. Liberty Media Group includes the businesses of Tele-Communications, Inc., which produce and distribute cable television programming services. The combined financial statements of TCI Group should be read in conjunction with the consolidated financial statements of Tele-Communications, Inc. and subsidiaries. As more fully described in note 1 to the combined financial statements, TCI Group has accounted for its interest in Liberty Media Group in a manner similar to the equity method of accounting for all periods that TCI Group had an interest in Liberty Media Group that, in our opinion, should be consolidated with TCI Group to conform to generally accepted accounting principles. If TCI Group's interest in Liberty Media Group were consolidated with TCI Group, the combined financial position, combined results of operations, and combined cash flows of TCI Group would equal the consolidated financial position, consolidated results of operations, and consolidated cash flows of Tele-Communications, Inc. and subsidiaries, which financial statements are included separately herein. In our opinion, except for the effects of not consolidating TCI Group's interest in Liberty Media Group as discussed in the preceding paragraph, the combined financial statements referred to in the second paragraph above present fairly, in all material respects, the financial position of TCI Group as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 II-129 194 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets December 31, 1996 and 1995 1996 1995 ------- ------- Assets amounts in millions Cash $ 56 77 Trade and other receivables, net 423 300 Prepaid expenses 80 51 Prepaid program rights 17 19 Committed film inventory 116 92 Investments in affiliates, accounted for under the equity method, and related receivables (note 6) 2,457 2,073 Property and equipment, at cost: Land 77 67 Distribution systems 10,072 9,536 Support equipment and buildings 1,529 1,213 ------- ------- 11,678 10,816 Less accumulated depreciation 4,160 3,611 ------- ------- 7,518 7,205 ------- ------- Franchise costs 17,875 14,322 Less accumulated amortization 2,439 2,092 ------- ------- 15,436 12,230 ------- ------- Other assets, net of amortization 1,051 1,012 ------- ------- $27,154 23,059 ======= =======
(continued) II-130 195 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets, continued December 31, 1996 and 1995
1996 1995 -------- -------- Liabilities and Combined Equity amounts in millions Accounts payable $ 216 148 Accrued interest 274 228 Accrued programming expense 313 272 Other accrued expenses 787 911 Debt (note 9) 14,924 12,960 Deferred income taxes (note 15) 5,430 4,382 Other liabilities 235 181 -------- -------- Total liabilities 22,179 19,082 -------- -------- Minority interests in equity of consolidated subsidiaries 1,454 563 Redeemable preferred stock (note 10) 658 478 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ("Trust Securities") holding solely subordinated debt securities of TCI Communications, Inc. ("TCIC") (note 11) 1,000 -- Combined equity (note 12): Combined equity, including preferred stocks of Tele-Communications, Inc. ("TCI") 1,864 2,884 Cumulative foreign currency translation adjustment 26 (9) Unrealized holding gains for available-for-sale securities, net of taxes 15 68 Due from Liberty Media Group (42) (7) -------- -------- Combined equity 1,863 2,936 -------- -------- Commitments and contingencies (note 17) $ 27,154 23,059 ======== ========
See accompanying notes to combined financial statements. II-131 196 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------- ------- amounts in millions, except per share amounts Revenue (note 7) $ 6,790 5,145 4,068 Operating costs and expenses: Operating 2,651 1,735 1,289 Programming charges from Liberty Media Group (note 16) 107 80 65 Selling, general and administrative 1,942 1,382 944 Charges to Liberty Media Group (note 16) (22) (24) (14) Compensation (adjustment to compensation) relating to options and stock appreciation rights (30) 45 (5) Restructuring charges 41 -- -- Depreciation 1,077 874 694 Amortization 478 400 307 ------- ------- ------- 6,244 4,492 3,280 ------- ------- ------- Operating income 546 653 788 Other income (expense): Interest expense (1,080) (993) (786) Interest income 42 41 21 Interest income from Liberty Media Group -- 2 2 Gain on sale of subsidiary stock (note 14) -- 123 -- Gain on sale of stock by equity investee (note 6) 12 165 161 Share of losses of affiliates, net (note 6) (469) (178) (117) Gain (loss) on disposition of assets 56 51 (13) Loss on early extinguishment of debt (note 9) (71) (6) (9) Minority interests in losses (earnings) of consolidated subsidiaries, net (54) (18) 6 Other, net (66) (21) (15) ------- ------- ------- (1,630) (834) (750) ------- ------- ------- Earnings (loss) before income taxes (1,084) (181) 38 Income tax benefit (expense) (note 15) 306 66 (60) ------- ------- ------- Loss before earnings (loss) of Liberty Media Group through the date of Distribution (note 1) (778) (115) (22) Earnings (loss) of Liberty Media Group through the date of Distribution (note 1) -- (29) 135 ------- ------- ------- Net earnings (loss) (note 7) (778) (144) 113 Dividend requirements on preferred stocks (35) (34) (14) ------- ------- ------- Net earnings (loss) attributable to common stockholders $ (813) (178) 99 ======= ======= ======= Loss attributable to common stockholders per common share (notes 4 and 7) $ (1.22) (.16) ======= =======
See accompanying notes to combined financial statements. II-132 197 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity Years ended December 31, 1996, 1995 and 1994
TCI Group unrealized holding gains Combined Cumulative Note (losses) for equity, foreign receivable available- including currency from for-sale preferred translation related securities, stocks adjustment party net of taxes --------- ----------- ---------- ------------ amounts in millions Balance at December 31, 1993 $ 2,174 (29) (15) -- Unrealized holding gains for available-for-sale securities as of January 1, 1994 -- -- -- 22 Net earnings (loss) 113 -- -- -- Purchase of programming from Liberty Media Group -- -- -- -- Cost allocations to Liberty Media Group -- -- -- -- Accrued cable distribution fees to TCI from Home Shopping Network, Inc. ("HSN") -- -- -- -- Allocation to Liberty Media Group of compensation related to stock appreciation rights -- -- -- -- Interest income from Liberty Media Group -- -- -- -- Intergroup tax allocation -- -- -- -- Net cash transfers from Liberty Media Group -- -- -- -- Change in unrealized holding gains for available-for-sale securities -- -- -- (26) Foreign currency translation adjustment -- 25 -- -- Payment of preferred stock dividends (14) -- -- -- Issuance of TCI common stock for investments 130 -- -- -- Fees incurred in acquisition (13) -- -- -- Issuance of TCI preferred stock for acquisition by Liberty Media Group 168 -- -- -- Acquisition by Liberty Media Group -- -- -- -- Conversion of redeemable preferred stock 18 -- -- -- Issuance of TCI Class A common stock upon conversion of notes 3 -- -- -- Issuance of TCI Class A common stock upon exercise of stock options 3 -- -- -- Acquisition and retirement of TCI common stock (2) -- -- -- Repayment of note receivable from related party with TCI common stock (15) -- 15 -- ------- ------- ------- ------- Balance at December 31, 1994 $ 2,565 (4) -- (4) ------- ------- ------- ------- Liberty Media Group unrealized Due holding Interest from gains for in Liberty available- Liberty Media for-sale Media Combined Group securities Group equity ------- ---------- -------- -------- amounts in millions Balance at December 31, 1993 (3) -- (1,185) 942 Unrealized holding gains for available-for-sale securities as of January 1, 1994 -- 293 (293) 22 Net earnings (loss) -- -- (135) (22) Purchase of programming from Liberty Media Group -- -- 65 65 Cost allocations to Liberty Media Group -- -- (14) (14) Accrued cable distribution fees to TCI from Home Shopping Network, Inc. ("HSN") (28) -- -- (28) Allocation to Liberty Media Group of compensation related to stock appreciation rights -- -- 8 8 Interest income from Liberty Media Group -- -- (2) (2) Intergroup tax allocation -- -- (78) (78) Net cash transfers from Liberty Media Group 2 -- 161 163 Change in unrealized holding gains for available-for-sale securities -- (195) 195 (26) Foreign currency translation adjustment -- -- -- 25 Payment of preferred stock dividends -- -- -- (14) Issuance of TCI common stock for investments -- -- -- 130 Fees incurred in acquisition -- -- -- (13) Issuance of TCI preferred stock for acquisition by Liberty Media Group -- -- (168) -- Acquisition by Liberty Media Group -- -- (43) (43) Conversion of redeemable preferred stock -- -- -- 18 Issuance of TCI Class A common stock upon conversion of notes -- -- -- 3 Issuance of TCI Class A common stock upon exercise of stock options -- -- -- 3 Acquisition and retirement of TCI common stock -- -- -- (2) Repayment of note receivable from related party with TCI common stock -- -- -- -- ------- ------- ------- ------- Balance at December 31, 1994 (29) 98 (1,489) 1,137 ------- ------- ------- -------
(continued) II-133 198 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity (continued) Years ended December 31, 1996, 1995 and 1994
TCI Group unrealized holding gains Combined Cumulative Note (losses) for equity, foreign receivable available- including currency from for-sale preferred translation related securities, stocks adjustment party net of taxes --------- ----------- ---------- ------------ amounts in millions Balance at December 31, 1994 $ 2,565 (4) -- (4) Net loss (144) -- -- -- Purchase of programming from Liberty Media Group -- -- -- -- Cost allocations to Liberty Media Group -- -- -- -- Cable distribution fees received from HSN -- -- -- -- Allocation of compensation relating to stock appreciation rights -- -- -- -- Interest income from Liberty Media Group -- -- -- -- Deferred tax assets transferred from Liberty Media Group -- -- -- -- Turner Broadcasting System, Inc. ("TBS") stock received in acquisition transferred to Liberty Media Group -- -- -- -- Net cash transfers to Liberty Media Group -- -- -- -- Change in unrealized gains for available-for-sale securities -- -- -- 72 Foreign currency translation adjustment -- (5) -- -- Accreted dividends on TCI preferred stock subject to mandatory redemption requirements (24) -- -- -- Payment of TCI preferred stock dividends (10) -- -- -- Issuance of TCI Class A common stock for acquisitions and investments 1,378 -- -- -- Issuance of TCI Class A common stock for acquisition by Liberty Media Group 10 -- -- -- Cash paid by TCI Group for investment by Liberty Media Group contributed to Liberty Media Group combined equity -- -- -- -- Proceeds from issuances of TCI Class A common stock in public and private offerings 431 -- -- -- Distribution of TCI Series A and Series B Liberty Media Group common stock to TCI common stockholders (1,364) -- -- -- Costs associated with Distribution to stockholders (8) -- -- -- Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries (1) -- -- -- Deferred tax assets transferred from Liberty Media Group upon implement- ation of tax sharing agreement -- -- -- -- Issuance of common stock by subsidiary (note 14) 51 -- -- -- ------- ------- ----- ------- Balance at December 31, 1995 $ 2,884 (9) -- 68 ------- ------- ----- ------- Liberty Media Group unrealized Due holding Interest from gains for in Liberty available- Liberty Media for-sale Media Combined Group securities Group equity ------- ---------- -------- -------- amounts in millions Balance at December 31, 1994 (29) 98 (1,489) 1,137 Net loss -- -- 29 (115) Purchase of programming from Liberty Media Group 37 -- 43 80 Cost allocations to Liberty Media Group (9) -- (15) (24) Cable distribution fees received from HSN 27 -- -- 27 Allocation of compensation relating to stock appreciation rights (3) -- (7) (10) Interest income from Liberty Media Group -- -- (2) (2) Deferred tax assets transferred from Liberty Media Group -- -- 14 14 Turner Broadcasting System, Inc. ("TBS") stock received in acquisition transferred to Liberty Media Group -- -- (7) (7) Net cash transfers to Liberty Media Group (30) -- (18) (48) Change in unrealized gains for available-for-sale securities -- 108 (108) 72 Foreign currency translation adjustment -- -- -- (5) Accreted dividends on TCI preferred stock subject to mandatory redemption requirements -- -- -- (24) Payment of TCI preferred stock dividends -- -- -- (10) Issuance of TCI Class A common stock for acquisitions and investments -- -- -- 1,378 Issuance of TCI Class A common stock for acquisition by Liberty Media Group -- -- (10) -- Cash paid by TCI Group for investment by Liberty Media Group contributed to Liberty Media Group combined equity -- -- (2) (2) Proceeds from issuances of TCI Class A common stock in public and private offerings -- -- -- 431 Distribution of TCI Series A and Series B Liberty Media Group common stock to TCI common stockholders -- (206) 1,570 -- Costs associated with Distribution to stockholders -- -- -- (8) Adjustment to reflect elimination of reporting delay with respect to certain foreign subsidiaries -- -- -- (1) Deferred tax assets transferred from Liberty Media Group upon implement- ation of tax sharing agreement -- -- 2 2 Issuance of common stock by subsidiary (note 14) -- -- -- 51 ------- ------- ------- ------- Balance at December 31, 1995 (7) -- -- 2,936 ------- ------- ------- -------
(continued) See accompanying notes to combined financial statements. II-134 199 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Equity (continued) Years ended December 31, 1996, 1995 and 1994
TCI Group unrealized holding gains Combined Cumulative Note (losses) for equity, foreign receivable available- including currency from for-sale preferred translation related securities, stocks adjustment party net of taxes --------- ----------- ---------- ------------ amounts in millions Balance at December 31, 1995 $ 2,884 (9) -- 68 Net loss (778) -- -- -- Purchase of programming from Liberty Media Group -- -- -- -- Cost allocations to Liberty Media Group -- -- -- -- Cable distribution fees received from HSN -- -- -- -- Allocation of compensation relating to stock appreciation rights -- -- -- -- Allocation of payment of compensation relating to stock appreciation rights -- -- -- -- Intergroup tax allocation -- -- -- -- Net cash transfers to Liberty Media Group -- -- -- -- Recognition of unrealized holding gains on available-for-sale securities -- -- -- (72) Recognition of unrealized holding losses on available-for-sale securities -- -- -- 64 Change in unrealized gains for available-for-sale securities -- -- -- (45) Foreign currency translation adjustment -- 35 -- -- Accreted dividends on TCI preferred stock subject to mandatory redemption requirements (25) -- -- -- Payment of TCI preferred stock dividends (10) -- -- -- Issuance of TCI common stock for acquisition 265 -- -- -- Issuance of common stock upon conversion of notes 2 -- -- -- Issuance of common stock upon conversion of preferred stock 16 -- -- -- Exchange of cost investment for TCI Group common stock (85) -- -- -- Spin-off of TCI Satellite Entertainment, Inc. (note 8) (405) -- -- -- ------- ------- ----- ------- Balance at December 31, 1996 $ 1,864 26 -- 15 ======= ======= ===== ======= Liberty Media Group unrealized Due holding Interest from gains for in Liberty available- Liberty Media for-sale Media Combined Group securities Group equity ------- ---------- -------- -------- amounts in millions Balance at December 31, 1995 (7) -- -- 2,936 Net loss -- -- -- (778) Purchase of programming from Liberty Media Group 107 -- -- 107 Cost allocations to Liberty Media Group (22) -- -- (22) Cable distribution fees received from HSN (3) -- -- (3) Allocation of compensation relating to stock appreciation rights 3 -- -- 3 Allocation of payment of compensation relating to stock appreciation rights 1 -- -- 1 Intergroup tax allocation (32) -- -- (32) Net cash transfers to Liberty Media Group (89) -- -- (89) Recognition of unrealized holding gains on available-for-sale securities -- -- -- (72) Recognition of unrealized holding losses on available-for-sale securities -- -- -- 64 Change in unrealized gains for available-for-sale securities -- -- -- (45) Foreign currency translation adjustment -- -- -- 35 Accreted dividends on TCI preferred stock subject to mandatory redemption requirements -- -- -- (25) Payment of TCI preferred stock dividends -- -- -- (10) Issuance of TCI common stock for acquisition -- -- -- 265 Issuance of common stock upon conversion of notes -- -- -- 2 Issuance of common stock upon conversion of preferred stock -- -- -- 16 Exchange of cost investment for TCI Group common stock -- -- -- (85) Spin-off of TCI Satellite Entertainment, Inc. (note 8) -- -- -- (405) ------- ----- ------- ------- Balance at December 31, 1996 (42) -- -- 1,863 ======= ===== ======= =======
See accompanying notes to combined financial statements. II-135 200 "TCI GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------- ------- ------- amounts in millions (see note 5) Cash flows from operating activities: Loss before earnings or loss of Liberty Media Group* $ (778) (115) (22) Adjustments to reconcile loss before earnings or loss of Liberty Media Group to net cash provided by operating activities: Depreciation and amortization 1,555 1,274 1,001 Compensation (adjustment to compensation) relating to options and stock appreciation rights (30) 45 (5) Payments of compensation relating to options and stock appreciation rights (2) (9) -- Restructuring charges 41 -- -- Payments of restructuring charges (8) -- -- Intergroup tax allocation (32) -- -- Share of losses of affiliates 469 178 117 Gain on sale of subsidiary stock -- (123) -- Gain on sale of stock by equity investee (12) (165) (161) Loss (gain) on disposition of assets (56) (51) 13 Loss on early extinguishment of debt 71 6 9 Minority interests in earnings (losses) 54 18 (6) Deferred income tax expense (benefit) (319) (99) -- Other noncash charges (credits) 7 (15) (2) Changes in operating assets and liabilities, net of the effect of acquisitions: Change in receivables (75) (58) 4 Change in prepaids (22) (56) (50) Change in accruals and payables 176 85 77 Change in accrued interest 45 40 26 ------- ------- ------- Net cash provided by operating activities 1,084 955 1,001 ------- ------- ------- Cash flows from investing activities: Cash paid for acquisitions (543) (440) (541) Capital expended for property and equipment (2,043) (1,733) (1,249) Proceeds from disposition of assets 313 148 41 Additional investments in and loans to affiliates and others (804) (1,064) (434) Repayment of loans to affiliates and others 677 18 33 Change in due from Liberty Media Group (6) 22 2 Sale of Liberty Media Group common stock to Liberty Media Group 38 -- -- Change in interest in Liberty Media Group -- 13 148 Other investing activities 10 (111) (26) ------- ------- ------- Net cash used in investing activities (2,358) (3,147) (2,026) ------- ------- ------- Cash flows from financing activities: Borrowings of debt 7,884 7,929 4,648 Repayments of debt (7,635) (6,517) (3,612) Prepayment penalties (60) -- -- Proceeds from sale of subsidiary stock 223 445 -- Payment of dividends on subsidiary preferred stock and Trust Securities (95) (6) (6) Payment of preferred stock dividends (35) (24) (4) Issuances of common stock -- 431 1 Issuance of Trust Securities 971 Costs associated with Distribution to stockholders -- (8) -- Other financing activities -- 8 -- ------- ------- ------- Net cash provided by financing activities 1,253 2,258 1,027 ------- ------- ------- Net increase (decrease) in cash (21) 66 2 Cash at beginning of year 77 11 9 ------- ------- ------- Cash at end of year $ 56 77 11 ======= ======= =======
* Net earnings or loss of Liberty Media Group does not provide or use funds. See accompanying notes to combined financial statements. II-136 201 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements December 31, 1996, 1995 and 1994 (1) Basis of Presentation The accompanying combined financial statements include the accounts of the subsidiaries and assets of TCI that are attributed to TCI Group, as defined below. All significant intercompany accounts and transactions have been eliminated. Preferred stock of TCI, which is owned by subsidiaries of TCI, eliminates in combination. Common stock of TCI held be subsidiaries is included in combined equity. On August 3, 1995, the stockholders of TCI authorized the Board of Directors of TCI (the "Board") to issue two new series of stock ("Liberty Group Stock") which reflect the separate performance of TCI's business which produces and distributes cable television programming services ("Liberty Media Group"). Additionally, the stockholders, of TCI approved the redesignation of the previously authorized Class A and Class B common stock into Series A TCI Group and Series B TCI Group common stock ("TCI Group Stock"). Issuance of the Liberty Group Stock did not result in any transfer of assets or liabilities of TCI or any of its subsidiaries or affect the rights of holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI distributed, in the form of a dividend, one share of Liberty Group Stock for each four shares of TCI Group Stock owned. Such distribution (the "Distribution") represented one hundred percent of the equity value attributable to Liberty Media Group. As of December 31, 1996, the TCI Group Stock reflects the separate performance of TCI's subsidiaries and assets not attributed to Liberty Media Group, including TCI's Domestic Cable and Communications unit, International Cable and Programming unit ("TINTA") and Technology/Venture Capital unit. Such subsidiaries and assets are collectively referred to as "TCI Group". Notwithstanding the attribution of assets and liabilities, equity and items of income and expense to TCI Group for purposes of preparing its combined financial statements, the change in the capital structure of TCI does not affect the ownership or the respective legal title to assets or responsibility for liabilities of TCI or any of its subsidiaries. TCI and its subsidiaries each continue to be responsible for their respective liabilities. Holders of TCI Group Stock are holders of common stock of TCI and continue to be subject to risks associated with an investment in TCI and all of its businesses, assets and liabilities. The issuance of Liberty Group Stock did not affect the rights of creditors of TCI. Financial effects arising from any portion of TCI that affect the consolidated results of operations or financial condition of TCI could affect the combined results of operations or financial condition of TCI Group and the market price of shares of the TCI Group Stock. In addition, net losses of any portion of TCI, dividends or distributions on, or repurchases of, any series of common stock, and dividends on, or certain repurchases of preferred stock would reduce the funds of TCI legally available for dividends on all series of common stock. Accordingly, TCI Group financial information should be read in conjunction with the TCI consolidated financial information. (continued) II-137 202 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Dividends on the TCI Group Stock are payable at the sole discretion of the Board out of the lesser of assets of TCI legally available for dividends and the available dividend amount with respect to TCI Group, as defined. Determinations to pay dividends on TCI Group Stock are based primarily upon the financial condition, results of operations and business requirements of TCI Group and TCI as a whole. After the Distribution, existing preferred stock and debt securities of TCI that were convertible into or exchangeable for shares of TCI Class A common stock were, as a result of the operation of antidilution provisions, adjusted so that there will be delivered upon their conversion or exchange (in addition to the same number of shares of redesignated Series A TCI Group Stock as were theretofore issuable thereunder) the number of shares of Series A Liberty Group Stock that would have been issuable in the Distribution with respect to the TCI Class A common stock issuable upon conversion or exchange had such conversion or exchange occurred prior to the record date for the Distribution. Options to purchase TCI Class A common stock outstanding at the time of the Distribution were adjusted by issuing to the holders of such options separate options to purchase that number of shares of Series A Liberty Group Stock which the holder would have been entitled to receive had the holder exercised such option to purchase TCI Class A common stock prior to the record date for the Distribution and reallocating a portion of the aggregate exercise price of the previously outstanding options to the newly issued options to purchase Series A Liberty Group Stock. The issuance of shares of Series A Liberty Group Stock upon such conversion, exchange or exercise of such convertible securities will not result in any transfer of funds or other assets from TCI Group to Liberty Media Group or a reduction in any Inter-Group Interest, as defined below, that then may exist, in consideration of such issuance. In the case of the exercise of such options to purchase Series A Liberty Group Stock, the proceeds received upon the exercise of such options will be attributed to Liberty Media Group. A number of wholly-owned subsidiaries which are part of TCI Group owned shares of TCI Class A common stock and TCI preferred stock ("Subsidiary Shares"). Because the distribution of the Liberty Group Stock was made as a dividend to all holders of TCI's Class A common stock and Class B common stock and, pursuant to the anti-dilution provisions set forth therein, to the holders of securities convertible into TCI Class A common stock and TCI Class B common stock upon the conversion thereof, shares of Liberty Group Stock would otherwise have been issued and become issuable in respect of the Subsidiary Shares held by these subsidiaries and would have been attributed to TCI Group. The Liberty Group Stock issued in connection with the Distribution constituted 100% of the equity value thereof to the holders of TCI Class A common stock and TCI Class B common stock, and TCI Group did not initially have any interest in Liberty Media Group represented by any outstanding shares of Liberty Group Stock (an "Inter-Group Interest"). Therefore, TCI determined to exchange all of the outstanding Subsidiary Shares for shares of a new series of Series Preferred Stock designated Convertible Redeemable Participating Preferred Stock, Series F (the "Series F Preferred Stock"). See note 10. The rights, privileges and preferences of the Series F Preferred Stock did not entitle its holders to receive Liberty Group Stock in the Distribution or upon conversion of the Series F Preferred Stock. (continued) II-138 203 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Prior to the Distribution, TCI Group had a 100% Inter-Group Interest in Liberty Media Group. Following the Distribution, TCI Group no longer has an Inter-Group Interest in Liberty Media Group. For periods in which an Inter-Group Interest exists, TCI Group would account for its Inter-Group Interest in a manner similar to the equity method of accounting. For periods after the Distribution and before the creation of an Inter-Group Interest, TCI Group would not reflect any interest in Liberty Media Group. An Inter-Group Interest would be created only if a subsequent transfer of cash or other property from TCI Group to Liberty Media Group is specifically designated by the Board as being made to create an Inter-Group Interest or if outstanding shares of Liberty Group Stock are purchased with funds attributable to TCI Group. Management of TCI believes that generally accepted accounting principles require that Liberty Media Group be consolidated with TCI Group for all periods that an Inter-Group Interest exists. If Liberty Media Group were consolidated with TCI Group, the combined financial position, combined results of operations, and combined cash flows of TCI Group would equal the consolidated financial position, consolidated results of operations and consolidated cash flows of TCI and subsidiaries, which financial statements are included separately herein. Management of TCI has elected to present the accompanying combined financial statements in a manner that does not comply with generally accepted accounting principles for the periods in which TCI Group had an Inter-Group Interest in Liberty Media Group. Effective January 13, 1997, the Company issued a stock dividend to holders of Liberty Group Stock consisting of one share of Series A Liberty Group Stock for every two shares of Series A Liberty Group Stock owned and one share of Series A Liberty Group Stock for every two shares of Series B Liberty Group Stock owned (the "Liberty Group Stock Dividend"). (2) Telephony Group Stock Proposal On March 12, 1997, the TCI stockholders authorized the Board to issue two new series of TCI's common stock, par value $1.00 per share, (and a corresponding increase in the total number of authorized shares of common stock) to be designated Tele-Communications, Inc. Series A Telephony Group common stock and Tele-Communications, Inc. Series B Telephony Group common stock (collectively, the "Telephony Group Stock"). A total of 750 million shares of Series A Telephony Group Stock and 75 million shares of Series B Telephony Group Stock were authorized. As of March 24, 1997, no shares of Telephony Group Stock have been issued. (continued) II-139 204 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The Telephony Group Common Stock, if issued, will be intended to reflect the separate performance of Telephony Group, which initially consist of TCI's principal investments in the domestic wireless and wireline telephony businesses (the "Telephony Business"). These investments consist primarily of TCI's investment in a series of partnerships formed to engage in the business of providing wireless communications services using the radio spectrum for broadband personal communications services ("PCS") to residential and business customers nationwide using the "Sprint" brand (the "PCS Ventures"), and TCI's investment in Teleport Communications Group Inc., a Delaware corporation ("TCG"). The PCS Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), and PhillieCo, L.P. ("PhillieCo"). The partners of each of the Sprint PCS Partnerships are subsidiaries of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI. The partners of PhillieCo are subsidiaries of Sprint, Cox and TCI. TCI has a 30% interest as a partner in each of the Sprint PCS Partnerships and a 35.3% interest as a partner in PhillieCo. TCG is a competitive local exchange carrier that offers a wide range of local telecommunications services in major metropolitan markets nationwide, primarily to businesses, long distance carriers and resellers, and wireless communications companies. TCI has a 31.1% equity interest (which represents a 36.4% voting interest) in the outstanding common stock of TCG. The Telephony Group also includes a 50% partnership interest in Kansas City Fiber Network, L.P. and a 40% partnership interest in NHT Partnership, which are competitive access providers serving the Kansas City and Buffalo metropolitan areas, respectively. Each of the foregoing investments is owned directly or indirectly by TCI Telephony Services, Inc., a Delaware corporation and an indirectly wholly owned subsidiary of TCI ("TTS-Delaware"). All assets and liabilities of TTS-Delaware and its subsidiaries (collectively, "TCI Telephony") will be attributed to Telephony Group. Beyond its current investments, TCI Telephony has the right, but not the obligation, to acquire TCI's developmental stage cable telephony business, which provides wireline residential telephony services (i.e., conventional telephony service or "POTS" and related services) via TCI's cable plant to residential and small business customers in certain of the geographic areas served by TCI's cable television systems (the "ResTel Business"). The right to acquire the ResTel Business may be exercised by TCI Telephony in whole or in part (by geographic area) and at any time or from time to time, as applicable, provided that TCI Telephony is at the time of exercise a subsidiary of TCI and TCI is then conducting such business. The method of determining the purchase price for the ResTel Business, and the arrangements between Telephony Group and TCI Group for the use by TCI Telephony of TCI Group's underlying cable plant to conduct the ResTel Business, have not yet been determined by the Board and, when determined, may not be the price or arrangements that either TCI Telephony or TCI Group could have obtained in an arms-length transaction. TCI Telephony is currently in the process of studying the customer acceptance and economic attractiveness of the ResTel Business. (continued) II-140 205 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Telephony also has the right to acquire TCI's interests in the business, currently being conducted by TCI's subsidiary, Western Tele-Communications, Inc., of providing long-distance transport of video, voice and data traffic and other telecommunications services primarily to inter-exchange carriers on a wholesale basis using a digital broadband microwave network located throughout a 14-state region in the western United States (the "WTCI Business"). Such right may be exercised at any time, provided that TCI Telephony is then a subsidiary of TCI and TCI is then conducting such business, at a price based on the fair market value of such business (as determined by the Board). If TCI Telephony exercises its right to acquire the ResTel Business (in whole or in part) or its right to acquire the WTCI Business, payment of the applicable purchase price may be in funds generated by Telephony Group (whether through external financings, future operations or sales of assets), in funds borrowed from TCI or otherwise through the issuance of debt or preferred equity securities by TCI Telephony to TCI or other potential financing opportunities; provided, however that the Board has determined that, in the case of Telephony Group's acquisition of the ResTel Business, the payment of such purchase price will not be made through an increase in the Inter-Group Interest (as defined below) of TCI Group in Telephony Group. Whether or not TCI Telephony will exercise its right to acquire the ResTel Business (in whole or in part) will depend upon a number of factors, including the penetration rates for the service in the geographic area or areas in which the service has been commercially launched (with the penetration rate being the percentage that the number of subscribers to the service in such geographic area represents of the homes technically capable of subscribing to the service), the cost of providing the service at the penetration rate achieved in that area, and the ability of TCI Telephony to fund the continued development and ongoing operation of the ResTel Business in that area. With regard to the WTCI Business, the factors that may affect whether TCI Telephony will exercise its acquisition right include the costs to acquire and operate the business and TCI Telephony's ability to fund such costs. Telephony Group would also include such other assets and liabilities of TCI Group as the Board may in the future determine to attribute to Telephony Group and such other businesses, assets and liabilities as the Company or any of its subsidiaries may in the future acquire for the Telephony Group, as determined by the Board. It is currently the intention of the Company that any businesses, assets and liabilities so attributed to Telephony Group in the future would be businesses, assets and liabilities of, or related to, the interests of TCI and its subsidiaries in the Telephony Business. (continued) II-141 206 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Authorized shares of Telephony Group Stock may be issued at the discretion of the Board in one or more public offerings, as consideration for acquisitions or investments, to employees of TCI pursuant to employee benefit plans or otherwise as compensation, as a distribution to holders of TCI Group Stock, or for any other proper corporate purpose. Such authorized shares of Telephony Group Stock may be issued in the form of shares of Series A Telephony Group Stock and/or Series B Telephony Group Stock (subject to there being a sufficient number of authorized and unissued shares of the applicable series of Telephony Group Stock). The proceeds of any future issuance of shares of Telephony Group Stock may be allocated either to TCI Group (in which case the percentage of the common stockholders' equity value of the Company attributable to Telephony Group that is, or is intended to be, reflected in TCI Group Stock will be reduced accordingly) or to Telephony Group (in which case the percentage of the common stockholders equity value of TCI attributable to Telephony Group that is represented by the outstanding shares of Telephony Group Stock will increase accordingly). TCI does not currently intend to distribute shares of Telephony Group Stock to holders of TCI Group Stock. Upon authorization of the Telephony Group Stock and until shares of Telephony Group Stock are issued, the investments attributed to Telephony Group will be included in TCI Group. The TCI Group Stock will continue to reflect all of the assets, liabilities and common stockholders' equity value of TCI attributable to Telephony Group, in addition to the separate performance of TCI's domestic cable and telephony distribution and communications businesses (other than the investments attributed to the Telephony Group); international cable, telephony and programming businesses; technology/venture capital business and any other businesses and assets of TCI not attributed to either Liberty Media Group or Telephony Group. The common stockholders' equity value of TCI attributable to Telephony Group that, at any relevant time, is attributed to TCI Group and, accordingly, not represented by outstanding Telephony Group Stock is referred to as the "Inter-Group Interest" of TCI Group in Telephony Group. Prior to the issuance of any shares of Telephony Group Stock, the Inter-Group Interest of TCI Group in Telephony Group will be 100%. As shares of Telephony Group Stock are issued and distributed or sold, TCI Group's Inter-Group Interest in Telephony Group will be reduced accordingly. (3) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1996 and 1995 was not material. Investments All marketable equity securities held by TCI Group are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a separate component of combined equity. Realized gains and losses are determined on a specific-identification basis. (continued) II-142 207 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Other investments in which the ownership interest is less than 20% but are not considered marketable securities are generally carried at cost. For those investments in affiliates in which TCI Group's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize TCI Group's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of TCI Group's investment in, advances to and commitments for the investee. TCI Group's share of net earnings or losses of affiliates includes the amortization of the difference between TCI Group's investment and its share of the net assets of the investee. Recognition of gains on sales of properties to affiliates accounted for under the equity method is deferred in proportion to TCI Group's ownership interest in such affiliates. Changes in TCI Group's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such subsidiary or equity investee, generally are recognized as gains or losses in TCI Group's combined statements of operations. Long-Lived Assets (a) Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1996, 1995 and 1994, interest capitalized was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (b) Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by TCI Group in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. (continued) II-143 208 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined 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. TCI Group adopted Statement No. 121 effective January 1, 1996. Such adoption did not have a significant effect on the financial position or results of operations of TCI Group. Pursuant to Statement No. 121, TCI Group periodically reviews the carrying amounts of its long-lived assets, franchise costs and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. TCI Group considers historical and expected future net operating losses to be its primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). TCI Group deems Assets to be impaired if TCI Group is unable to recover the carrying value of such Assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair value. TCI Group generally measures fair value by considering sales prices for similar assets or by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Interest Rate Derivatives Amounts receivable or payable under derivative financial instruments used to manage interest rate risks arising from TCI Group's financial liabilities are recognized as interest expense. Gains and losses on early terminations of derivatives are included in the carrying amount of the related debt and amortized as yield adjustments over the remaining terms of the derivative financial instruments. TCI Group does not use such instruments for trading purposes. Minority Interests Recognition of minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the common equity of those consolidated subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of consolidated subsidiaries have the right to cause TCI Group to repurchase such holders' common equity. (continued) II-144 209 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Included in minority interests in equity of consolidated subsidiaries is $902 million and $49 million in 1996 and 1995, respectively, of preferred stocks (and accumulated dividends thereon) of certain subsidiaries. The current dividend requirements on these preferred stocks aggregate $47 million per annum and such dividend requirements are reflected as minority interests in the accompanying combined statements of operations. Foreign Currency Translation All balance sheet accounts of foreign investments are translated at the current exchange rate as of the end of the accounting period. Statement of operations items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of combined equity. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement No. 123") was issued by the FASB in October 1995. Statement No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement No. 123, TCI Group continues to account for stock-based compensation pursuant to APB Opinion No. 25. See note 12. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts have been reclassified for comparability with the 1996 presentation. (4) Loss Per Common Share The loss attributable to common stockholders per common share for the year ended December 31, 1996 and for the period from the Distribution to December 31, 1995 was computed by dividing net loss attributable to TCI Group Series A and Series B common stockholders by the weighted average number of common shares outstanding of TCI Group Series A and Series B Stock during the period (664.8 million and 656.4 million, respectively). Common stock equivalents were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive. (continued) II-145 210 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Earnings or loss per common and common equivalent share are omitted from the combined statements of operations for the period from January 1, 1995 through the Distribution and for the year ended December 31, 1994 as TCI Group Stock was not part of the capital structure of TCI until August 10, 1995, the date of the Distribution. (5) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $1,035 million, $953 million and $758 million for the years ended December 31, 1996, 1995 and 1994, respectively. Cash paid for income taxes was $23 million in 1996, $61 million in 1995 and was not material in 1994. Significant noncash investing and financing activities are reflected in the following table. See also note 8 for the impact of the spin-off of TCI Satellite Entertainment, Inc.
Years ended December 31, 1996 1995 1994 ------- ------- ------- amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 4,943 3,540 694 Liabilities assumed, net of current assets (1,811) (457) (10) Deferred tax liability recorded in acquisitions (1,379) (1,083) (34) Minority interests in equity of acquired entities (113) 43 (35) Common stock and preferred stock issued in acquisitions (457) (1,605) (298) Preferred stock of subsidiaries issued in acquisitions (640) -- -- Contribution to combined equity of Liberty Media Group from TCI Group for acquisition -- 2 211 Fees incurred in acquisition -- -- 13 ------- ------- ------- Cash paid for acquisitions $ 543 440 541 ======= ======= ======= Exchange of consolidated subsidiaries for equity investment $ 274 -- -- ======= ======= ======= Issuance of subsidiary stock for equity investment $ -- 11 -- ======= ======= =======
(continued) II-146 211 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (6) Investments in Affiliates TCI Group has various investments accounted for under the equity method. The following table includes TCI Group's carrying value and percentage ownership of the more significant investments at December 31, 1996.
December 31, 1996 -------------------------- Percentage Carrying Ownership Value ----------- --------- amounts in millions PCS Ventures 30% - 35.3% $ 830 TCG 31.1% 276 Telewest Communications plc ("Telewest") 27% 488 Various foreign equity investments (other than Telewest) var. 422
Summarized unaudited results of operations for affiliates accounted for under the equity method are as follows:
December 31, ----------------- Combined Financial Position 1996 1995 ------- ------- amounts in millions Property and equipment, net $ 4,262 3,126 Franchise costs, net 3,392 1,302 Other assets, net 8,327 5,587 ------- ------- Total assets $15,981 10,015 ======= ======= Debt $ 6,849 4,079 Due to TCI Group 37 44 Other liabilities 3,866 930 Owners' equity 5,229 4,962 ------- ------- Total liabilities and equity $15,981 10,015 ======= =======
Years ended December 31, ----------------------------- Combined Operations 1996 1995 1994 ------- ------- ------- amounts in millions Revenue $ 2,941 1,948 896 Operating expenses (2,825) (1,736) (849) Depreciation and amortization (886) (405) (170) ------- ------- ------- Operating loss (770) (193) (123) Interest expense (527) (242) (81) Other, net (194) (56) 130 ------- ------- ------- Net loss $(1,491) (491) (74) ======= ======= =======
(continued) II-147 212 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The Sprint PCS Partnerships have licenses, and have affiliated with other entities (including PhillieCo) that have licenses, to provide PCS service to MTAs (or metropolitan trading areas) covering over 190 million "Pops" (or population equivalents), based on the Donnelley Marketing Service estimate of the December 31, 1995 population of the relevant geographic areas. The Sprint PCS Partnerships' licenses, which cover 29 markets, were acquired in an auction conducted by the FCC that ended in March 1995, for an aggregate license cost of approximately $2.1 billion. The Sprint PCS Partnerships have invested in (acquiring a 49% interest) and affiliated with American PCS, L.P. ("APC"), which owns a PCS license for and operates a PCS system in the Baltimore/Washington, D.C. MTA, and Cox California PCS, L.P. ("Cox-California"), which holds a PCS license for the Los Angeles/San Diego MTA and currently operates a PCS system in San Diego, California. The Sprint PCS Partnerships may invest in other entities that hold PCS Licenses. PhillieCo holds the license for the Philadelphia MTA, which was acquired at a license cost of $85 million. During December 1996, the Sprint PCS Partnerships initiated the commercial launch of PCS service in seven markets. From inception through 1996, the four partners have contributed approximately $3.0 billion to the Sprint PCS Partnerships (of which the Company contributed an aggregate of approximately $0.9 billion, including approximately $0.2 billion during the year ended December 31, 1996.) The remaining capital that the Sprint PCS Partnerships will require to fund the construction of the PCS systems and the commitments made to APC and Cox-California will be substantial. The partners had agreed in forming the Sprint PCS Partnerships to contribute up to an aggregate of approximately $4.2 billion of equity thereto, from inception through fiscal 1999, subject to certain requirements. The Company expects that the remaining approximately $1.2 billion of such amount (of which the Company's share is approximately $0.4 billion) will be contributed by the end of the second quarter of 1998 (although there can be no assurance that any additional capital will be contributed). The Company expects that the Sprint PCS Partnerships will require additional equity thereafter. TCG, a competitive local exchange carrier, conducted an initial public offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000 shares of Class A common stock at $16.00 per share to the public for aggregate net proceeds of approximately $410,000,000. As a result of the TCG IPO, TCI Group's ownership interest in TCG was reduced from approximately 35% to approximately 31%. Accordingly, TCI Group recognized a gain amounting to $12 million (before deducting deferred income tax expense of approximately $5 million). As of April 29, 1996, the News Corporation ("News Corp.) and a limited liability company ("Liberty/TINTA") formed by Liberty Media Group, and TINTA formed a venture ("Fox Sports International") to operate a variety of sports services throughout the world, except in Asia and in the United Kingdom, Japan and New Zealand where prior arrangements preclude an immediate collaboration. Liberty/TINTA owns 50% of Fox Sports International with New Corp. owning the other 50%. News Corp. contributed various international sports rights and certain trademark rights. Liberty/TINTA contributed certain Latin American and Argentinean sports programming services, various international sports and satellite transponder rights and cash. Liberty/TINTSA also contributed its 50% interest in Premier Sports and All-Star Sports. (continued) II-148 213 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Telewest is a company that is currently operating and constructing cable television and telephone systems in the United Kingdom ("UK"). Telewest was formed on October 3, 1995 upon the merger (the "TeleWest Merger") of TeleWest Communications plc ("TeleWest Communications") with SBC (CableComms) (UK). Prior to the TeleWest Merger, TCI Group had an effective ownership interest of approximately 36% in TeleWest Communications. As a result of the TeleWest Merger, TCI Group recognized a gain of $165 million (before deducting the related tax expense of $58 million), which gain represents the difference between TCI Group's recorded cost for TeleWest Communications and TCI Group's 27% effective proportionate share of Telewest's net assets. Telewest contributed $109 million, $70 million and $43 million of TCI Group's share of its affiliates' losses during the years ended December 31, 1996, 1995 and 1994, respectively. In addition, TCI Group has other less significant equity method investments in video distribution and programming businesses located in the UK, other parts of Europe, Asia, Latin America and certain other foreign countries. In the aggregate, such other equity method investments accounted for $79 million, $62 million and $50 million of TCI Group's share of its affiliates' losses in 1996, 1995 and 1994, respectively. As a result of the TeleWest Communications' November 23, 1994 initial public offering and the associated dilution of TCI Group's ownership interest of TeleWest Communications, TCI Group recognized a gain amounting to $161 million (before deducting the related tax expense of $57 million). Certain of TCI Group's affiliates are general partnerships and any subsidiary of TCI Group that is a general partner in a general partnership is, as such, liable as a matter of partnership law for all debts of that partnership in the event liabilities of that partnership were to exceed its assets. (7) Acquisitions On July 31, 1996, pursuant to certain agreements entered into between TCI Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI Group acquired all of the common stock of a subsidiary of Viacom ("Cable Sub") which owned Viacom's cable systems and related assets (the "Viacom Acquisition"). The transaction was structured as a tax-free reorganization in which Cable Sub transferred all of its non-cable assets, as well as all of its liabilities other than current liabilities, to a new subsidiary of Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan Facility") arranged by TCI Group and Cable Sub. Following these transfers, Cable Sub retained cable assets with a value at closing of approximately $2.326 billion and the obligation to repay the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub has any obligation with respect to repayment of the Loan Proceeds. (continued) II-149 214 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Prior to the consummation of the Viacom Acquisition, Viacom offered to the holders of shares of Viacom Class A Common Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the opportunity to exchange (the "Exchange Offer") a portion of their shares of Viacom Common Stock for shares of Class A Common Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following the completion of the Exchange Offer, TCI Group acquired from Cable Sub shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350 million (which was used to reduce Cable Sub's obligations under the Loan Facility). At the time of the Share Issuance, the Cable Sub Class A Stock received by Viacom stockholders pursuant to the Exchange Offer automatically converted into 5% Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of $100 per share (the "Stated Value"). The Exchangeable Preferred Stock is exchangeable, at the option of the holder commencing after the fifth anniversary of the date of issuance, for shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The Exchangeable Preferred Stock is subject to redemption, at the option of Cable Sub, after the fifth anniversary of the date of issuance, initially at a redemption price of $102.50 per share and thereafter at prices declining ratably annually to $100 per share on and after the eighth anniversary of the date of issuance, plus accrued and unpaid dividends to the date of redemption. The Exchangeable Preferred Stock is also subject to mandatory redemption on the tenth anniversary of the date of issuance at a price equal to the Stated Value per share plus accrued and unpaid dividends. Amounts payable by Cable Sub in satisfaction of its optional or mandatory redemption obligations with respect to the Exchangeable Preferred Stock may be made in cash or, at the election of Cable Sub, in shares of Series A TCI Group Stock, or in any combination of the foregoing. The Viacom Acquisition has been accounted for by the purchase method. Accordingly, the results of operations of Cable Sub have been consolidated with those of TCI Group since the date of acquisition, and TCI Group recorded Cable Sub's assets and liabilities at fair value. On a pro forma basis, TCI Group's revenue, net loss, and net loss per share of TCI Group Stock would have been increased by $280 million, $55 million, and $.08, respectively, for the year ended December 31, 1996; and revenue, net loss, and net loss per share of TCI Group Stock would have been increased by $440 million, $115 million, and $.07, respectively, for the year ended December 31, 1995 had Cable Sub been consolidated with TCI Group on January 1, 1995. The foregoing unaudited pro forma financial information is based upon historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of the results had TCI Group operated Cable Sub since January 1, 1995. As of January 26, 1995, TCI Group and TeleCable Corporation ("TeleCable") consummated a transaction, whereby TeleCable was merged into TCI Group. The aggregate $1.6 billion purchase price was satisfied by TCIC's assumption of approximately $300 million of TeleCable's net liabilities and the issuance to TeleCable's shareholders of approximately 42 million shares of TCI Class A common stock and 1 million shares of TCI Convertible Preferred Stock, Series D (the "Series D Preferred Stock") with an aggregate initial liquidation value of $300 million (see note 10). (continued) II-150 215 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision for a purchase price of $282 million, before liabilities assumed. The purchase price was paid with cash consideration of $195 million and TINTA's issuance of $87 million principal amount of secured negotiable promissory notes payable to the selling shareholders. TINTA has an option during the two-year period ended April 25, 1997 to increase its ownership interest in Cablevision up to 80% at a cost per subscriber similar to the initial purchase price, adjusted however for certain fluctuations in applicable foreign currency exchange rates. (8) Spin-Off of TCI Satellite Entertainment, Inc. Through December 4, 1996, TCI Group had an investment in a direct broadcast satellite partnership, PRIMESTAR Partners L.P. ("Primestar"), which TCI Group accounted for under the equity method. Primestar provides programming and marketing support to each of its cable partners who provide satellite television service to their customers. On December 4, 1996, TCI Group distributed (the "Satellite Spin-off") to the holders of shares of TCI Group Stock all of the issued and outstanding common stock of TCI Satellite Entertainment, Inc. ("Satellite"). At the time of the Satellite Spin-off, Satellite's assets and operations included TCI Group's interest in Primestar, TCI Group's business of distributing Primestar programming and two communications satellites. As a result of the Satellite Spin-off, Satellite's operations are no longer consolidated with TCI Group's. In addition, the Satellite Spin-off effected a change in the conversion rate for each of TCI Group's equity and debt securities that are convertible into Series A TCI Group Stock. See notes 9, 10 and 12. Summarized financial information of Satellite as of and through the date of the Satellite Spin-off is as follows (amounts in millions): Financial Position Cash, receivables and other assets $ 104 Investment in PRIMESTAR Partners L.P. 32 Property and equipment, net 1,111 ------- $ 1,247 ======= Accounts payable and accrued liabilities $ 60 Due to PRIMESTAR Partners L.P. 458 Due to TCI 324 Equity 405 ------- $ 1,247 ======= Operations Revenue $ 377 Operating expenses (373) Depreciation (166) ------- Loss before income tax benefit (162) Income tax benefit 53 Net loss $ (109) =======
(continued) II-151 216 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (9) Debt Debt is summarized as follows:
Weighted average December 31, interest rate at ------------------ December 31, 1996 1996 1995 ----------------- ------- ------ amounts in millions Notes payable 8.3% $ 9,308 7,713 Bank credit facilities 6.6% 4,811 3,617 Commercial paper 6.1% 638 1,469 Convertible notes (a) 9.5% 43 45 Other debt 124 116 ------- ------ $14,924 12,960 ======= ======
(a) These convertible notes, which are stated net of unamortized discount of $178 million and $186 million at December 31, 1996 and 1995, respectively, mature on December 18, 2021. The notes require (so long as conversion of the notes has not occurred) an annual interest payment through 2003 equal to 1.85% of the face amount of the notes. At December 31, 1996, the notes were convertible, at the option of the holders, into an aggregate of 37,083,773 shares of Series A TCI Group Stock and 13,906,404 shares of Series A Liberty Group Stock. See note 1. During the year ended December 31, 1996, in order to reduce future interest costs, TCI Group redeemed certain notes payable which had an aggregate principle balance of $904 million and fixed interest rates ranging from 7.88% to 10.44% (the "Redemption"). In connection with the Redemption, TCI Group recognized a loss on early extinguishment of debt of $62 million. Such loss related to prepayment penalties amounting to $60 million and the retirement of deferred loan costs. During the year ended December 31, 1996, certain subsidiaries of TCI Group terminated, at such subsidiaries' option, certain revolving bank credit facilities with aggregate commitments of approximately $2 billion and refinanced certain other bank credit facilities. In connection with such termination and refinancings, TCI Group recognized a loss on early extinguishment of debt of $9 million related to the retirement of deferred loan costs. At December 31, 1996, subsidiaries of TCI Group had approximately $1.4 billion in unused lines of credit, excluding amounts related to lines of credit which provide availability to support commercial paper. The bank credit facilities and various other debt instruments attributable to the TCI Group generally contain restrictive covenants which require, among other things, the maintenance of certain earnings, specified cash flow and financial ratios (primarily the ratios of cash flow to total debt and cash flow to debt service, as defined), and include certain limitations on indebtedness, investments, guarantees, dispositions, stock repurchases and/or dividend payments. (continued) II-152 217 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements As security for borrowings under one of TCI Group's bank credit facilities, TCI Group has pledged 116,853,195 shares of Series A TCI Group Stock held by a subsidiary of TCI Group. The fair value of the debt attributable to the TCI Group is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the TCI Group for debt of the same remaining maturities. The fair value of debt, which has a carrying value of $14,924 million, was $15,521 million at December 31, 1996. In order to achieve the desired balance between variable and fixed rate indebtedness, TCI Group has entered into various interest rate exchange agreements pursuant to which it (i) pays fixed interest rates (the "Fixed Rate Agreements") ranging from 7.2% to 9.3% and receives variable interest rates on notional amounts of $310 million at December 31, 1996 and (ii) pays variable interest rates (the "Variable Rate Agreements") and receives fixed interest rates ranging from 4.8% to 7.4% on notional amounts of $1,750 million at December 31, 1996. During the years ended December 31, 1996, 1995 and 1994, TCI Group's net payments pursuant to the Fixed Rate Agreements were $14 million, $13 million and $26 million, respectively; and TCI Group's net receipts (payments) pursuant to the Variable Rate Agreements were $15 million, (less than $1 million), and $36 million, respectively. During the year ended December 31, 1996, TCI Group terminated certain Variable Rate Agreements with an aggregate notional amount of $700 million. TCI Group received $16 million upon such terminations. After giving effect to TCI Group's interest rate exchange agreements, approximately 49% of TCI Group's indebtedness bears interest at fixed rates. TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as follows (amounts in millions, except percentages):
Fixed Rate Agreements Variable Rate Agreements ----------------------------------------- ------------------------------------------ Expiration Interest Rate Notional Expiration Interest Rate Notional Date To Be Paid Amount Date To Be Received Amount ---------- ------------- -------- ========== -------------- -------- October 1997 7.2%-9.3% $ 80 April 1997 7.0% $ 200 December 1997 8.7% 230 September 1998 4.8%-5.4% 450 ------ April 1999 7.4% 50 $ 310 February 2000 5.8%-6.6% 300 ====== March 2000 5.8%-6.0% 675 September 2000 5.1% 75 ------ $1,750 ======
TCI Group is exposed to credit losses for the periodic settlements of amounts due under these interest rate exchange agreements in the event of nonperformance by the other parties to the agreements. However, TCI Group does not anticipate that it will incur any material credit losses because it does not anticipate nonperformance by the counterparties. (continued) II-153 218 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The fair value of the interest rate exchange agreements is the estimated amount that TCI Group would pay or receive to terminate the agreements at December 31, 1996, taking into consideration current interest rates and assuming the current creditworthiness of the counterparties. At December 31, 1996, TCI Group would be required to pay an estimated $15 million to terminate the Variable Rate Agreements and an estimated $7 million to terminate the Fixed Rate Agreements. Certain subsidiaries attributed to the TCI Group are required to maintain unused availability under bank credit facilities to the extent of outstanding commercial paper. Also, certain of TCI Group's subsidiaries pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed portion of the total amount available for borrowings under bank credit facilities. Annual maturities of debt for each of the next five years are as follows (amounts in millions): 1997 $ 1,418* 1998 490 1999 721 2000 766 2001 1,077
*Includes $638 million of commercial paper. (10) Redeemable Preferred Stock The conversion rates identified below for the redeemable preferred stocks that are convertible into Series A TCI Group Stock were adjusted, as applicable, on December 4, 1996 as a result of the Satellite Spin-off. See note 7. The conversion rates for the redeemable preferred stocks that are convertible into Series A Liberty Group Stock have been adjusted to give effect to the Liberty Group Stock Dividend. See note 1. Convertible Preferred Stock, Series C ("Series C Preferred Stock"). TCI issued 70,575 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series C," par value $.01 per share, as partial consideration for an acquisition by TCI. There were 80,000 shares of Series C Preferred Stock authorized and 70,575 shares outstanding at December 31, 1996. Each share of Series C Preferred Stock is convertible, at the option of the holders, into 116.24 shares of Series A TCI Group Stock and 37 shares of Series A Liberty Group Stock, subject to anti-dilution adjustments. The dividend, liquidation and redemption features of the Series C Preferred Stock will be determined by reference to the liquidation value of the Series C Preferred Stock, which as of any date of determination is equal, on a per share basis, to the sum of (i) $2,375, plus (ii) all dividends accrued on such share through the dividend payment date on or immediately preceding such date of determination to the extent not paid on or before such date, plus (iii), for purposes of determining liquidation and redemption payments, all unpaid dividends accrued on the sum of clauses (i) and (ii) above, to such date of determination. (continued) II-154 219 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Subject to the prior preferences and other rights of any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock, the holders of Series C Preferred Stock are entitled to receive and, subject to any prohibition or restriction contained in any instrument evidencing indebtedness of TCI, TCI is obligated to pay preferential cumulative cash dividends out of funds legally available therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of the liquidation value per share, whether or not such dividends are declared or funds are legally or contractually available for payment of dividends, except that if TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, dividends will thereafter accrue cumulatively at an annual rate of 15% of the liquidation value per share. Accrued dividends are payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing on the first dividend payment date after the issuance of the Series C Preferred Stock. Dividends not paid on any dividend payment date will be added to the liquidation value on such date and remain a part thereof until such dividends and all dividends accrued thereon are paid in full. Dividends accrue on unpaid dividends at the rate of 5-1/2% per annum, unless such dividends remain unpaid for two consecutive quarters in which event such rate will increase to 15% per annum. The Series C Preferred Stock ranks prior to the TCI common stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock with respect to the declaration and payment of dividends. Upon the dissolution, liquidation or winding up of TCI, holders of the Series C Preferred Stock will be entitled to receive from the assets of TCI available for distribution to stockholders an amount in cash, per share, equal to the liquidation value. The Series C Preferred Stock will rank prior to the TCI common stock and Class B Preferred Stock and pari passu with the Series F Preferred Stock as to any such distributions. The Series C Preferred Stock is subject to optional redemption at any time after the seventh anniversary of its issuance, in whole or in part, by TCI at a redemption price, per share, equal to the then liquidation value of the Series C Preferred Stock. Subject to the rights of any other class or series of TCI's preferred stock ranking pari passu with the Series C Preferred Stock, the Series C Preferred Stock is required to be redeemed by TCI at any time after such seventh anniversary at the option of the holder, in whole or in part (provided that the aggregate liquidation value of the shares to be redeemed is in excess of $1 million), in each case at a redemption price, per share, equal to the liquidation value. (continued) II-155 220 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements For so long as any dividends are in arrears on the Series C Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Series C Preferred Stock and until all dividends accrued up to the immediately preceding dividend payment date on the Series C Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, TCI may not redeem or otherwise acquire any shares of Series C Preferred Stock, any such parity stock or any class or series of its preferred stock ranking junior (including the TCI common stock and Series C Preferred Stock) unless all then outstanding shares of Series C Preferred Stock and such parity stock are redeemed. If TCI fails to redeem shares of Series C Preferred Stock required to be redeemed on a redemption date, and until all such shares are redeemed in full, TCI may not redeem any such parity stock or junior stock, or otherwise acquire any shares of such stock or Series C Preferred Stock. Nothing contained in the two immediately preceding sentences shall prevent TCI from acquiring (i) shares of Series C Preferred Stock and any such parity stock pursuant to a purchase or exchange offer made to holders of all outstanding shares of Series C Preferred Stock and such parity stock, if (a) as to holders of all outstanding shares of Series C Preferred Stock, the terms of the purchase or exchange offer for all such shares are identical, (b) as to holders for all outstanding shares of a particular series or class of parity stock, the terms of the purchase or exchange offer for all such shares are identical and (c) as among holders of all outstanding shares of Series C Preferred Stock and parity stock, the terms of each purchase or exchange offer are substantially identical relative to the respective liquidation prices of the shares of Series C Preferred Stock and each series or class of such parity stock, or (ii) shares of Series C Preferred Stock, parity stock or junior stock in exchange for, or through the application of the proceeds of the sale of, shares of junior stock. The Series C Preferred Stock is subject to restrictions on transfer although it has certain customary registration rights with respect to the underlying shares of TCI Group and Liberty Media Group common stock. The Series C Preferred Stock may vote on all matters submitted to a vote of the holders of the TCI common stock, has one vote for each share of TCI Group and Liberty Media Group Stock into which the shares of Series C Preferred Stock are converted for such purpose, and may vote as a single class with the TCI common stock. The Series C Preferred Stock has no other voting rights except as required by the Delaware General Corporation Law ("DGCL") and except that the consent of the holders of record of shares representing at least two-thirds of the liquidation value of the outstanding shares of the Series C Preferred Stock is necessary to (i) amend the designation, rights, preferences and limitations of the Series C Preferred Stock as set forth in the TCI Charter and (ii) to create or designate any class or series of TCI preferred stock that would rank prior to the Series C Preferred Stock. Convertible Preferred Stock, Series D. TCI issued 1,000,000 shares of a series of TCI Series Preferred Stock designated "Convertible Preferred Stock, Series D", par value $.01 per share, as partial consideration for the merger between TCIC and TeleCable (see note 7). At December 31, 1996, there were 997,222 shares of Series D Preferred Stock outstanding. (continued) II-156 221 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The holders of the Series D Preferred Stock shall be entitled to receive, when and as declared by the Board out of unrestricted funds legally available therefor, cumulative dividends, in preference to dividends on any stock that ranks junior to the Series D Preferred Stock (currently the TCI Group Stock, the Liberty Group Stock, and the Class B Preferred Stock), that shall accrue on each share of Series D Preferred stock at the rate of 5-1/2% per annum of the liquidation value ($300 per share). Dividends are cumulative, and in the event that dividends are not paid in full on two consecutive dividend payment dates or in the event that TCI fails to effect any required redemption of Series D Preferred Stock, accrue at the rate of 10% per annum of the liquidation value. The Series D Preferred Stock ranks on parity with the Series F Preferred Stock and the Series C Preferred Stock. Each share of Series D Preferred Stock is convertible into 10 shares of Series A TCI Group Stock and 3.5 shares of Series A Liberty Group Stock, subject to adjustment upon certain events specified in the certificate of designation establishing Series D Preferred Stock. In addition to the aforementioned shares of TCI common stock, holders of Series D Preferred Stock are entitled to one share of Satellite common stock for each share of Series D Preferred Stock converted. Such shares of Satellite common stock represent the number of shares of Satellite common stock that they would have received had they converted their Series D Preferred Stock into TCI Group Stock prior to the Satellite Spin-off. To the extent any cash dividends are not paid on any dividend payment date, the amount of such dividends will be deemed converted into shares of common stock at a conversion rate equal to 95% of the then current market price of common stock, and upon issuance of common stock to holders of Series D Preferred Stock in respect of such deemed conversion, such dividend will be deemed paid for all purposes. See note 1. Shares of Series D Preferred Stock are redeemable for cash at the option of the holder at any time after the tenth anniversary of the issue date at a price equal to the liquidation value in effect as of the date of the redemption. Shares of Series D Preferred Stock may also be redeemed for cash at the option of TCI after the fifth anniversary of the issue date at such redemption price or after the third anniversary of the issue date if the market value per share exceeds certain defined levels for periods specified in the certificate of designation. If TCI fails to effect any required redemption of Series D Preferred Stock, the holders thereof will have the option to convert their shares of Series D Preferred Stock into common stock at a conversion rate of 95% of the then current market value of common stock, provided that such option may not be exercised unless the failure to redeem continues for more than a year. Except as required by law, holders of Series D Preferred Stock are not entitled to vote on any matters submitted to a vote of the stockholders of TCI. (continued) II-157 222 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Convertible Redeemable Participating Preferred Stock, Series F. TCI Group is authorized to issue 500,000 shares of Series F Preferred Stock, par value $.01 per share. Subsidiaries of TCI hold all the issued and outstanding shares (278,307 shares). Immediately prior to the record date for the Distribution, TCI Group caused each of its subsidiaries holding Subsidiary Shares to exchange such shares for shares of Series F Preferred Stock having an aggregate value of not less than that of the Subsidiary Shares so exchanged. Subsidiaries of TCI exchanged all of the Subsidiary Shares for 355,141 shares of Series F Preferred Stock. Subsequent to such exchange, a holder of 78,077 shares of Series F Preferred Stock converted its holdings into 100,524,364 shares of Series A TCI Group Stock. Such shares of Series A TCI Group Stock are reflected as a reduction in combined equity in the accompanying combined financial statements. Each holder of Series F Preferred Stock has the right to receive upon conversion 1,496.65 shares of Series A TCI Group Stock. The anti-dilution provisions of the Series F Preferred Stock provide that the conversion rate of the Series F Preferred Stock will be adjusted by increasing the number of shares of Series A TCI Group Stock issuable upon conversion in the event of any non-cash dividend or distribution of the Series A TCI Group Stock to give effect to the value of the securities, assets or other property so distributed; however, no such adjustment shall entitle the holder to receive the actual security, asset or other property so distributed upon the conversion of shares of Series F Preferred Stock. The holders of the Series F Preferred Stock are entitled to participate, on an as-converted basis, with the holders of the Series A TCI Group Stock, with respect to any cash dividends or distribution declared and paid on the Series A TCI Group Stock. Dividends or distribution on the Series A TCI Group Stock which are not paid in cash would result in the adjustment of the applicable conversion rate as described above. Upon the dissolution, liquidation or winding up of TCI, holders of the Series F Preferred Stock will be entitled to receive from the assets of TCI available for distribution to stockholders an amount, in cash or property or a combination thereof, per share of Series F Preferred Stock, equal to the sum of (x) $.01 and (y) the amount to be distributed per share of Series A TCI Group Stock in such liquidation, dissolution or winding up multiplied by the applicable conversion rate of a share of Series F Preferred Stock. The Series F Preferred Stock is subject to optional redemption by TCI at any time after its issuance, in whole or in part, at a redemption price, per share, equal to the issue price of a share of Series F Preferred Stock (as adjusted in respect of stock splits, reverse splits and other events affecting the shares of Series F Preferred Stock), plus any dividends which have been declared but are unpaid as of the date fixed for such redemption. TCI may elect to pay the redemption price (or designated portion thereof) of the shares of Series F Preferred Stock called for redemption by issuing to the holder thereof, in respect of its shares to be redeemed, a number of shares of Series A TCI Group Stock equal to the aggregate redemption price (or designated portion thereof) of such shares divided by the average of the last sales prices of the Series A TCI Group Stock for a period specified, and subject to the adjustments described, in the certificate of designation establishing the Series F Preferred Stock. (continued) II-158 223 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred Stock"). In January, 1996, TCI issued 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible TCI Group Preferred Stock, Series G" and 7,259,380 shares of a series of TCI Series Preferred Stock designated "Redeemable Convertible Liberty Media Group Preferred Stock, Series H" as consideration for an acquisition. At December 31, 1996, there were 6,695,427 shares of each of Series G Preferred Stock and Series H Preferred Stock outstanding. The initial liquidation value for the Series G Preferred Stock and Series H Preferred Stock is $21.60 per share and $5.40 per share, respectively, subject in both cases, to increase in an amount equal to aggregate accrued but unpaid dividends, if any. Dividends will begin to accrue on the Series G and Series H Preferred Stock on the first anniversary of issuance of the Series G and Series H Preferred Stock, and will thereafter be payable semi-annually commencing August 1, 1997, at the rate of 4% per annum on the liquidation value. Any dividends paid on the Series G and Series H Preferred Stock may be paid, at TCI's election, in cash or shares of TCI Group Stock. Additional dividends will accrue on unpaid dividends initially at a rate of 4% per annum. The dividend rate on dividends that remain unpaid for six months will increase to 8.625% per annum. Each share of Series G Preferred Stock is convertible at the option of the holder at any time prior to the close of business on the last business day prior to redemption into 1.19 shares of Series A TCI Group Stock and each share of Series H Preferred Stock is convertible at any time prior to the close of business on the last business day prior to redemption into .2625 shares of Series A Liberty Group Stock. However, the shares of Series A Liberty Group Stock issuable upon conversion of the Series H Preferred Stock shall be adjusted to provide for the Liberty Group Stock Dividend. The conversion rights of Series G and Series H Preferred Stock are subject to adjustment in certain circumstances. Among other such adjustments, if the Liberty Group Stock, or any other redeemable capital stock of TCI into which either series of Preferred Stock may be convertible ("Redeemable Capital Stock"), is redeemed in full by TCI (the "Redemption Event"), then, except as otherwise described below, the shares of such Series G and Series H Preferred Stock will thereafter be convertible into the kind and amount of consideration that would have been received in such Redemption Event by a holder of the number of shares of Redeemable Capital Stock that would have been issuable upon conversion of such shares of Series G and Series H Preferred Stock, if they had been converted in full immediately prior to such Redemption Event. (continued) II-159 224 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements However, if any series of Redeemable Capital Stock into which a series of Series G or Series H Preferred Stock is then convertible is redeemed in full by TCI in exchange for securities of another issuer ("Redemption Securities"), TCI may elect to provide the holders of such Series G or Series H Preferred Stock with the right to exchange such Series G or Series H Preferred Stock, concurrently with the Redemption Event, for preferred stock of such other issuer ("Mirror Preferred Stock"). Such Mirror Preferred Stock shall be convertible into Redemption Securities and shall otherwise have terms and conditions comparable to the Series G or Series H Preferred Stock exchanged. If TCI provides such an exchange right, any holder that does not then choose to participate in such exchange will continue to hold such Series G or Series H Preferred Stock but such holder will loose the conversion right with respect to the Redeemable Capital Stock redeemed in the Redemption Event and will not have any right to receive Redemption Securities in lieu thereof. A holder that participates in such exchange will receive Mirror Preferred Stock convertible into Redemption Securities, but will no longer hold the Series G or Series H Preferred Stock so exchanged. An alternative provision will apply if, at the time of exercise of any such exchange right provided by TCI, the holder of the applicable series of Series G or Series H Preferred Stock would be entitled to receive on conversion any property in addition to the Redeemable Capital Stock being redeemed. In that case, holders that choose to participate in the exchange will receive both Mirror Preferred Stock issued by the issuer of the Redemption Securities of the other issuer and a new preferred stock of TCI convertible into such additional property. In such event, the Mirror Preferred Stock and such new TCI preferred stock will have a combined liquidation value equal to the liquidation value of the Series G or Series H Preferred Stock exchanged and will otherwise have terms and conditions comparable to such Series G or Series H Preferred Stock. The Series G and Series H Preferred Stock are redeemable at TCI's option, in whole or in part, any time on or after February 1, 2001. The Series G and Series H Preferred Stock will be redeemable in full on February 1, 2016, to the extent then outstanding. In all cases, the redemption price per share will be the liquidation value thereof, including the amount of any accrued but unpaid dividends thereon, to and including the redemption date. The Series G and Series H Preferred Stock will rank prior to TCI common stock and the TCI Class B Preferred Stock and pari passu with all other currently outstanding classes and series of TCI preferred stock with respect to the declaration and payment of dividends and in liquidation. The Series G and Series H Preferred Stock will vote in any general election of directors of TCI and will have one vote per share for such purposes and will vote as a single class with the TCI common stock, the TCI Class B Preferred Stock and any other class or series of TCI Preferred Stock entitled to vote in any general election of directors. The Series G and Series H Preferred Stock will have no other voting rights except as required by the DGCL. (continued) II-160 225 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (11) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC In January 1996, TCI Communications Financing I ("Trust I"), an indirect wholly-owned subsidiary of TCI Group, issued $16 million in common securities to TCIC, a subsidiary of TCI Group, and issued $500 million of 8.72% Trust Originated Preferred SecuritiesSM (the "Trust I Preferred Securities" and together with the common securities, the "Trust I Securities") to the public. Trust I exists for the exclusive purposes of issuing Trust I Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 8.72% Subordinated Deferrable Interest Notes due January 31, 2045 (the "8.72% Subordinated Debt Securities") of TCIC. The 8.72% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of TCI Group. Upon redemption of the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust I's obligations under the Trust I Preferred Securities. In May 1996, TCI Communications Financing II ("Trust II"), an indirect wholly-owned subsidiary of TCI Group, issued $16 million in common securities to TCIC, and issued $500 million of 10% Trust Preferred Securities (the "Trust II Preferred Securities" and together with the common securities, the "Trust II Securities") to the public. Trust II exists for the exclusive purposes of issuing Trust II Securities and investing the proceeds thereof into an aggregate principal amount of $516 million of 10% Subordinated Deferrable Interest Notes due May 31, 2045 (the "10% Subordinated Debt Securities") of TCIC. The 10% Subordinated Debt Securities are unsecured obligations of TCIC and are subordinate and junior in right of payment to certain other indebtedness of TCI Group. Upon redemption of the 10% Subordinated Debt Securities, the Trust II Preferred Securities will be mandatorily redeemable. TCIC effectively provides a full and unconditional guarantee of Trust II's obligations under the Trust II Preferred Securities. The Trust I and Trust II Preferred Securities are presented together in a separate line item in the accompanying combined balance sheet captioned "Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities of TCI Communications, Inc." Dividends accrued on the Trust I and Trust II Preferred Securities are included in minority interests in losses (earnings) of consolidated subsidiaries in the accompanying combined statements of operations. (12) Combined Equity General The rights of holders of the TCI Group Stock upon liquidation of TCI are based upon the ratio of the aggregate market capitalization, as defined, of the TCI Group Stock to the aggregate market capitalization, as defined, of the TCI Group Stock and the Liberty Group Stock. (continued) II-161 226 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Employee Benefit Plans TCI has several employee stock purchase plans (the "Plans") to provide employees an opportunity for ownership in TCI and to create a retirement fund. Terms of the Plans generally provide for employees to contribute up to 10% of their compensation to a trust for investment in TCI common stock. TCI, by annual resolution of the Board, generally contributes up to 100% of the amount contributed by employees. Certain of TCI's subsidiaries have their own employee benefit plans. Contributions to all plans aggregated $35 million, $28 million and $21 million for 1996, 1995 and 1994, respectively. Preferred Stock Class A Preferred Stock. TCI is authorized to issue 700,000 shares of Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 592,797 shares. The holders of the Class A Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock. TCI is authorized to issue 1,675,096 shares of Class B Preferred Stock and 1,620,026 of such shares are issued and outstanding. Dividends accrue cumulatively (but without compounding) at an annual rate of 6% of the stated liquidation value of $100 per share (the "Stated Liquidation Value"), whether or not such dividends are declared or funds are legally available for payment of dividends. Accrued dividends will be payable annually on March 1 of each year (or the next succeeding business day if March 1 does not fall on a business day), and, in the sole discretion of the Board, may be declared and paid in cash, in shares of Series A TCI Group Stock or in any combination of the foregoing. Accrued dividends not paid as provided above on any dividend payment date will accumulate and such accumulated unpaid dividends may be declared and paid in cash, shares of Series A TCI Group Stock or any combination thereof at any time (subject to the rights of any senior stock and, if applicable, to the concurrent satisfaction of any dividend arrearages on any class or series of TCI preferred stock ranking on a parity with the Class B Preferred Stock with respect to dividend rights) with reference to any regular dividend payment date, to holders of record of Class B Preferred Stock as of a special record date fixed by the Board (which date may not be more than 45 days nor less than 10 days prior to the date fixed for the payment of such accumulated unpaid dividends). The Class B Preferred Stock ranks junior to the Series F Preferred Stock with respect to the declaration and payment of dividends. (continued) II-162 227 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements If all or any portion of a dividend payment is to be paid through the issuance and delivery of shares of Series A TCI Group Stock, the number of such shares to be issued and delivered will be determined by dividing the amount of the dividend to be paid in shares of Series A TCI Group Stock by the Average Market Price of the Series A TCI Group Stock. For this purpose, "Average Market Price" means the average of the daily last reported sale prices (or, if no sale price is reported on any day, the average of the high and low bid prices on such day) of a share of Series A TCI Group Stock for the period of 20 consecutive trading days ending on the tenth trading day prior to the regular record date or special record date, as the case may be, for the applicable dividend payment. In the event of any liquidation, dissolution or winding up of TCI, the holders of Class B Preferred Stock will be entitled, after payment of preferential amounts on any class or series of stock ranking prior to the Class B Preferred Stock with respect to liquidating distributions, to receive from the assets of TCI available for distribution to stockholders an amount in cash or property or a combination thereof, per share, equal to the stated liquidation value thereof, plus all accumulated and accrued but unpaid dividends thereon to and including the redemption date. TCI does not have any mandatory obligation to redeem the Class B Preferred Stock as of any fixed date, at the option of the holders or otherwise. Subject to the prior preferences and other rights of any class or series of TCI preferred stock, the Class B Preferred Stock will be exchangeable at the option of TCI in whole but not in part at any time for junior subordinated debt securities of TCI ("Junior Exchange Notes"). The Junior Exchange Notes will be issued pursuant to an indenture (the "Indenture"), to be executed by TCI and a qualified trustee to be chosen by TCI. If TCI exercises its optional exchange right, each holder of outstanding shares of Class B Preferred Stock will be entitled to receive in exchange therefor newly issued Junior Exchange Notes of a series authorized and established for the purpose of such exchange, the aggregate principal amount of which will be equal to the aggregate Stated Liquidation Value of the shares of Class B Preferred Stock so exchanged by such holder, plus all accumulated and accrued but unpaid dividends thereon to and including the exchange date. The Junior Exchange Notes will be issuable only in principal amounts of $100 or any integral multiple thereof and a cash adjustment will be paid to the holder for any excess principal that would otherwise be issuable. The Junior Exchange Notes will mature on the fifteenth anniversary of the date of issuance and will be subject to earlier redemption at the option of TCI, in whole or in part, for a redemption price equal to the principal amount thereof plus accrued but unpaid interest. Interest will accrue, and be payable annually, on the principal amount of the Junior Exchange Notes at a rate per annum to be determined prior to issuance by adding a spread of 215 basis points to the "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest will accrue on overdue principal at the same rate, but will not accrue on overdue interest. The Junior Exchange Notes will represent unsecured general obligations of TCI and will be subordinated in right of payment to all Senior Debt (as defined in the Indenture). Accordingly, holders of Class B Preferred Stock who receive Junior Exchange Notes in exchange therefor may have difficulty selling such Notes. (continued) II-163 228 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements For so long as any dividends are in arrears on the Class B Preferred Stock or any class or series of TCI preferred stock ranking pari passu with the Class B Preferred Stock which is entitled to payment of cumulative dividends prior to the redemption, exchange, purchase or other acquisition of the Class B Preferred Stock, and until all dividends accrued up to the immediately preceding dividend payment date on the Class B Preferred Stock and such parity stock shall have been paid or declared and set apart so as to be available for payment in full thereof and for no other purpose, neither TCI nor any subsidiary thereof may redeem, exchange, purchase or otherwise acquire any shares of Class B Preferred Stock, any such parity stock or any class or series of its capital stock ranking junior to the Class B Preferred Stock (including the TCI common stock), or set aside any money or assets for such purpose, unless all of the outstanding shares of Class B Preferred Stock and such parity stock are redeemed. If TCI fails to redeem or exchange shares of Class B Preferred Stock on a date fixed for redemption or exchange, and until such shares are redeemed or exchanged in full, TCI may not redeem or exchange any parity stock or junior stock, declare or pay any dividend on or make any distribution with respect to any junior stock or set aside money or assets for such purpose and neither TCI nor any subsidiary thereof may purchase or otherwise acquire any Class B Preferred Stock, parity stock or junior stock or set aside money or assets for any such purpose. The failure of TCI to pay any dividends on any class or series of parity stock or to redeem or exchange on any date fixed for redemption or exchange any shares of Class B Preferred Stock shall not prevent TCI from (i) paying any dividends on junior stock solely in shares of junior stock or the redemption purchase or other acquisition of junior stock solely in exchange for (together with cash adjustment for fractional shares, if any) or (but only in the case of a failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, shares of junior stock; or (ii) the payment of dividends on any parity stock solely in shares of parity stock and/or junior stock or the redemption, exchange, purchase or other acquisition of Class B Preferred Stock or parity stock solely in exchange for (together with a cash adjustment for fractional shares, if any), or (but only in the case of failure to pay dividends on any parity stock) through the application of the proceeds from the sale of, parity stock and/or junior stock. The Class B Preferred Stock will vote in any general election of directors, will have one vote per share for such purpose and will vote as a single class with the TCI common stock and any other class or series of TCI preferred stock entitled to vote in any general election of directors. The Class B Preferred Stock will have no other voting rights except as required by the DGCL. Series Preferred Stock. The TCI Series Preferred Stock is issuable, from time to time, in one or more series, with such designations, preferences and relative participating, option or other special rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board. The Company is authorized to issue 50,000,000 shares of Series Preferred Stock. (continued) II-164 229 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements All shares of any one series of the TCI Series Preferred Stock are required to be alike for every particular and all shares are required to rank equally and be identical in all respects, except insofar as they may vary with respect to matters which the Board is expressly authorized by the TCI Charter to determine in the resolution or resolutions providing for the issue of any series of the TCI Series Preferred Stock. Redeemable Convertible Preferred Stock, Series E. per share. TCI is authorized to issue 400,000 shares of Redeemable Convertible Preferred Stock, Series E, par value $.01. Subsidiaries of TCI held all of the issued and outstanding shares of such stock, amounting to 246,402 shares. The holders of the Series E Preferred Stock exchanged such Subsidiary Shares for shares of Series F Preferred Stock immediately prior to the record date of the Distribution. Stock Options and Stock Appreciation Rights Certain key employees of TCI Group hold options with tandem stock appreciation rights to acquire Series A TCI Group Stock and Series A Liberty Group Stock as well as restricted stock awards of Series A TCI Group Stock and Series A Liberty Group Stock. Estimates of the compensation relating to the options and/or stock appreciation rights as well as restricted stock awards granted to such employees are allocated to TCI Group and have been recorded in the accompanying combined financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of Series A TCI Group Stock and Series A Liberty Group Stock (see note 1) and, ultimately, on the final determination of market value when the rights are exercised or the restricted shares are vested. Had TCI Group accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying combined financial statements. (13) Transaction with Officers and Directors Effective January 31, 1996, a director of TCI purchased one-third of TCI Group's interest in two limited partnerships and obtained two ten-year options to purchase TCI Group's remaining partnership interests. The purchase price for the one-third partnership interest was 37.209 shares of WestMarc Communications, Inc. ("WestMarc", a wholly-owned subsidiary of TCI Group) Series C Cumulative Compounding Preferred Stock owned by such director, and the purchase price for the ten-year option was $100 for each option. All options are exercisable for cash in the aggregate amount of $3,000,000. On July 1, 1996, pursuant to a Restricted Stock Award Agreement, an executive officer of TCI was transferred all of TCI's right title and interest in and to 62 shares of the 12% Series C Cumulative Compounding Preferred Stock of WestMarc owned by TCI. Such preferred stock has a liquidation value of $1,999,500 and is subject to forfeiture by such officer in the event of certain circumstances from the date of grant through December 13, 2005. (continued) II-165 230 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Effective December 1, 1996, an executive officer of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI Telephony Services, Inc., a consolidated subsidiary of the Company, ("Telephony Services"). The aggregate exercise price for each such option is equal to 1.0% of (i) the Company's cumulative investment in Telephony Services as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise, less (ii) the sum of (x) $500 million and (y) the amount of the tax benefits generated by Telephony Services (up to $500 million) as and when used by TCI. Each such executive officer was also granted a similar option representing 1.0% of the Company's common equity in TCI Wireline, Inc., another consolidated subsidiary of the Company, ("Wireline"). The aggregate exercise price for each such Wireline option is equal to 1.0% of the Company's cumulative investment in Wireline as of December 1, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise. Any exercise by one of such executive officers of all or part of one of such options (as to either the Telephony Services option or the Wireline option) would need to be accompanied by the exercise by such executive officer of a pro rata portion of the other such option. All of such options will vest and become exercisable in five equal annual installments, with the first annual installment vesting on February 1, 1997, and will expire on February 1, 2006. Effective December 1, 1996, two executive officers of the Company and an executive officer of TCIC were each granted options representing 1.0% of the Company's common equity in TCI.NET, Inc., a consolidated subsidiary of the Company. The aggregate exercise price for each such TCI.NET, Inc. option is equal to 1.0% of the Company's cumulative investment in TCI.NET, Inc. as of December 31, 1996, adjusted for a 6% per annum interest factor from the date each such investment was made to the date of such exercise price. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. On the date of the Satellite Spin-off, the Company granted options to two of its executive officers to purchase 1.0% and an option to an employee of TCIC to acquire 0.5% of Satellite's issued and outstanding common stock. The exercise price for each such option is equal to 1.0% or 0.5%, as applicable, of the Company's net investment in Satellite on the date of the Satellite Spin-off. Such options vest 20% per annum beginning February 1, 1997 and expire on February 1, 2006. Estimated compensation relating to the aforementioned restricted stock award and options has been recorded through December 31, 1996 pursuant to APB Opinion No. 25. Such estimate is subject to future adjustment based upon market value, and ultimately, on the final determination of market value when the rights are exercised or the restricted stock awards are vested. Had TCI Group accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying combined financial statements. (continued) II-166 231 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements (14) Sale of Subsidiary Stock On July 18, 1995, TINTA completed an initial public offering (the "IPO") in which it sold 20 million shares of TINTA Series A common stock to the public for consideration of $16.00 per share aggregating $320 million, before deducting related expenses (approximately $19 million). The shares sold to the public represented 17% of TINTA's total issued and outstanding common stock. Also in July 1995, TINTA issued 687,500 Shares of TINTA Series A common stock as partial consideration for a 35% ownership interest in Torneos Y Competencias S.A., an Argentine sports programming company (the "TYC Acquisition"). As a result of the IPO and the TYC Acquisition, TCI Group recognized a nonrecurring gain amounting to $123 million. In June 1995, Flextech issued share capital for cash and preferred shares of Thomson Directories Limited. In connection with such issuance, TCI Group recorded a $51 million increase to stockholders' equity and a $93 million increase to minority interest in equity of consolidated subsidiaries. No gain was recognized in TCI Group's combined statement of operations due primarily to the existence of TCI Group's contingent obligations to repurchase certain of the Flextech share capital. (15) Income Taxes TCI files a consolidated Federal income tax return with all of its 80% or more owned subsidiaries. Consolidated subsidiaries in which TCI owns less than 80% each file a separate income tax return. TCI and such subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying combined financial statements. A tax sharing agreement (the "Tax Sharing Agreement") among entities attributed to TCI Group and certain other subsidiaries of TCI 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, TCI Group is responsible to TCI for its share of current consolidated income tax liabilities. TCI is responsible to TCI Group to the extent that TCI 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 TCI Group's operations after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising TCI Group. In connection with the implementation of the Tax Sharing Agreement, TCI Group recorded an increase to its deferred income tax liability and a decrease to its combined equity of $2 million. (continued) II-167 232 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Income tax benefit (expense) for the years ended December 31, 1996, 1995 and 1994 consists of:
Current Deferred Total ------- -------- ------- amounts in millions Year ended December 31, 1996: Federal $ (2) 273 271 State and local (11) 46 35 ------- ------- ------- $ (13) 319 306 ======= ======= ======= Year ended December 31, 1995: Federal $ (26) 85 59 State and local (8) 14 6 ------- ------- ------- $ (34) 99 65 ======= ======= ======= Year ended December 31, 1994: Federal $ (49) (4) (53) State and local (11) 4 (7) ------- ------- ------- $ (60) -- (60) ======= ======= =======
Income tax benefit (expense) differs from the amounts computed by applying the Federal income tax rate of 35% as a result of the following:
Years ended December 31, ----------------------------- 1996 1995 1994 ------- ------- ------- amounts in millions Computed "expected" tax benefit (expense) $ 379 63 (13) Amortization not deductible for tax purposes (18) (19) (12) Minority interest in earnings of consolidated subsidiaries 2 (3) (3) Gain on sale of subsidiary stock -- 43 -- Gain recognized for tax purposes on exchange of assets -- (12) -- Gain recognized for tax purposes on sale of investments (61) -- -- State and local income taxes, net of federal income tax benefit 12 (6) (9) Recognition of losses of consolidated partnership -- -- (10) Valuation allowance on foreign corporation -- -- (10) Other (8) (1) (3) ------- ------- ------- $ 306 65 (60) ======= ======= =======
(continued) II-168 233 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
December 31, ------------------ 1996 1995 ------- ------- amounts in millions Deferred tax assets: Net operating loss carryforwards $ 670 547 Less-valuation allowance (121) (121) Investment tax credit carryforwards 118 118 Less-valuation allowance (41) (41) Alternative minimum tax credit carryforwards 95 95 Investments in affiliates, due principally to losses of affiliates recognized for financial statement purposes in excess of losses recognized for income tax purposes 232 176 Future deductible amounts principally due to non-deductible accruals 72 86 Other 3 -- ------- ------- Net deferred tax assets 1,028 860 ------- ------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 1,199 1,099 Franchise costs, principally due to differences in amortization 4,676 3,566 Investment in affiliates, due principally to undistributed earnings of affiliates 329 263 Intangible assets, principally due to differences in amortization 36 42 Leases capitalized for tax purposes 72 53 Other 146 219 ------- ------- Total gross deferred tax liabilities 6,458 5,242 ------- ------- Net deferred tax liability $ 5,430 4,382 ======= =======
The valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was $162 million. The tax attributes disclosed above are those determined pursuant to the Tax Sharing Agreement. At December 31, 1996, TCI Group had net operating loss carryforwards for income tax purposes aggregating approximately $1,493 million of which, if not utilized to reduce taxable income in future periods, $134 million expires in 2003, $117 million in 2004, $344 million in 2005, $279 million in 2006, $138 million in 2009, $155 million in 2010 and $326 million in 2011. Certain subsidiaries of TCI Group had additional net operating loss carryforwards for income tax purposes aggregating approximately $236 million and these net operating losses are subject to certain rules limiting their usage. Pursuant to the Tax Sharing Agreement, TCI Group has received benefit for approximately $54 million of the net operating loss carryforward disclosed above. TCI Group is responsible to TCI to the extent such amounts are utilized by TCI Group in future periods. (continued) II-169 234 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements At December 31, 1996, TCI Group had remaining available investment tax credits of approximately $63 million which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2005. Certain subsidiaries of TCI Group had additional investment tax credit carryforwards aggregating approximately $55 million and these investment tax credit carryforwards are subject to certain rules limiting their usage. Certain of the Federal income tax returns of TCI and its subsidiaries which filed separate income tax returns are presently under examination by the Internal Revenue Service ("IRS") for the years 1992 through 1995 (the "IRS Examinations"). Certain income tax issues related to the years 1981-1991 have been resolved in TCI's favor. The IRS has until April 1997 to appeal such decisions (the "IRS Appeals"). In the opinion of management, any additional tax liability, not previously provided for, resulting from the IRS Examinations or the IRS Appeals, ultimately determined to be payable, should not have a material adverse effect on the combined financial position of TCI Group. (16) Transactions with Liberty Media Group and Other Related Parties Certain TCI corporate general and administrative costs are charged to Liberty Media Group at rates set at the beginning of the year based on projected utilization for that year. The utilization-based charges are set at levels that management believes to be reasonable and that approximate the costs Liberty Media Group would incur for comparable services on a stand alone basis. During the years ended December 31, 1996 and 1995, Liberty Media Group was allocated $3 million and $3 million, respectively, in corporate general and administrative costs by TCI Group. TCI Group has a 50.1% partnership interest in QE+Ltd Limited Partnership ("QE+"), which distributes STARZ!, a first-run movie premium programming service launched in 1994. Entities attributed to Liberty Media Group hold the remaining 49.9% partnership interest. TCI Group consolidates its interest in QE+. The QE+ limited partnership agreement provides that TCI Group will be required to make special capital contributions to QE+ through July 1, 2005, up to a maximum amount of $350 million, approximately $203 million of which was paid through December 31, 1996. QE+ is obligated to pay TCI Group a preferred return of 10% per annum on the first $200 million of its special capital contributions beginning five years from the date of the contribution or five years from January 1, 1996, whichever is later. Any TCI Group special capital contributions in excess of $200 million will be entitled to a preferred return of 10% per annum from the date of the contribution. QE+ is required to apply 75% of its available cash flow, as defined, to repay the TCI Group special capital contributions and any preferred return payable thereon. To the extent such special capital contributions are insufficient to fund the cash requirements of QE+, TCI Group and Liberty Media Group will each have the option to fund such cash requirements in proportion to their respective ownership percentages. (continued) II-170 235 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements Liberty Media Group also has the right to acquire an additional 10.1% general partnership interest in QE+ based on a formula designed to approximate the fair value of such interest. Such right is exercisable for a period of ten years beginning January 1, 1999 after QE+ has had positive cash flow for two consecutive calendar quarters. The right is exercisable only after all special capital contributions from TCI Group have been repaid, including any preferred return as discussed above. Encore Media Corporation (90% owned by Liberty Media Group) earns management fees from QE+ equal to 20% of managed costs, as defined. In addition, effective July 1, 1995, Liberty Media Group started earning a "Content Fee" for certain services provided to QE+ equal to 4% of the gross revenue of QE+. Such Content Fees aggregated $4 million for the year ended December 31, 1996 and $1 million for the six months ended December 31, 1995. The Content Fee agreement expires on June 30, 2001, subject to renewal on an annual basis thereafter. Payment of the Content Fee will be subordinated to the repayment of the contributions made by TCI Group and the preferred return thereon. Entities included in Liberty Media Group lease satellite transponder facilities from TCI Group. Charges by TCI Group for such arrangements and other related operating expenses for the years ended December 31, 1996, 1995 and 1994, aggregated $12 million, $15 million and $8 million, respectively. Certain subsidiaries attributed to Liberty Media Group produce and/or distribute sports and other programming to cable television operators (including TCI Group) and others. Charges to TCI Group are based upon customary rates charged to others. HSN pays a commission to TCI Group for merchandise sales to customers who are subscribers of TCI Group's cable systems. Aggregate commissions and charges to TCI Group were $7 million, $6 million and $7 million for the years ended December 31, 1996, 1995 and 1994, respectively. TCI Group manages certain treasury activities for Liberty Media Group on a centralized basis. Previously, cash receipts of certain businesses attributed to Liberty Media Group were remitted to TCI Group and certain cash disbursements of Liberty Media Group were funded by TCI Group on a daily basis. Prior to the Distribution, the net amounts of such cash activities are included in investment in Liberty Media Group in the accompanying combined financial statements. Subsequent to the Distribution, such cash activities are included in borrowings from or loans to TCI Group or, if determined by the Board, as an equity contribution to be reflected as an Inter-Group Interest to Liberty Media Group. The Board could determine from time to time that debt of TCI Group not incurred by entities attributed to Liberty Media Group or preferred stock and the proceeds thereof should be specifically attributed to and reflected on the combined financial statements of Liberty Media Group to the extent that the debt is incurred or the preferred stock is issued for the benefit of Liberty Media Group. (continued) II-171 236 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements For all periods prior to the Distribution, all financial impacts of equity offerings were attributed entirely to TCI Group. After the Distribution, all financial impacts of issuances of additional shares of TCI Group Stock will be attributed entirely to TCI Group, all financial impacts of issuances of additional shares of Liberty Group Stock the proceeds of which are attributed to the Liberty Media Group will be reflected entirely in the combined financial statements of Liberty Media Group. Financial impacts of dividends or other distributions on, and purchases of, TCI Group Stock will be attributed entirely to TCI Group, and financial impacts of dividends or other distributions on Liberty Group Stock will be attributed entirely to Liberty Media Group. Financial impacts of repurchases of Liberty Group Stock, the consideration for which is charged to Liberty Media Group, will be reflected entirely in the combined financial statements of Liberty Media Group, and the financial impacts of repurchases of Liberty Group Stock the consideration for which is charged to TCI Group, will be attributed entirely to TCI Group. Subsequent to the Distribution, borrowings from or loans to TCI Group bear interest at such rates and have repayment schedules and other terms as are established by the Board. The Board expects to make such determinations, either in specific instances or by setting generally applicable policies from time to time, after consideration of such factors as it deems relevant, including, without limitation, the use of proceeds by and creditworthiness of the recipient Group, the capital expenditure plans and investment opportunities available to each Group and the availability, cost and time associated with alternative financing sources. (17) Commitments and Contingencies On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the FCC adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, TCI Group's basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. TCI Group believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, TCI Group's rates for regulated services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. (continued) II-172 237 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through December 31, 2005 (the "Film Licensing Obligations"). Based on customer levels at December 31, 1996, these agreements require minimum payments aggregating $377 million. The aggregate amount of the Film Licensing Obligations is not currently estimable because such amount is dependent upon the number of qualifying films released theatrically by certain motion picture studios as well as the domestic theatrical exhibition receipts upon the release of such qualifying films. Nevertheless, TCI Group's required aggregate payments under the Film Licensing Obligations could prove to be significant. TCI Group has guaranteed notes payable and other obligations of affiliated and other companies with outstanding balances of approximately $278 million at December 31, 1996. Although there can be no assurance, management of TCI Group believes that it will not be required to meet its obligations under such guarantees, or if it is required to meet any of such obligations, that they will not be material to TCI Group. TCI Group has made certain financial commitments related to the acquisition of sports program rights through 2004. At December 31, 1996, such commitments aggregated $226 million. TCI Group leases business offices, has entered into converter lease agreements, pole rental agreements and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $163 million, $114 million and $75 million in 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in millions): 1997 $ 155 1998 145 1999 137 2000 114 2001 106 Thereafter 331
It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 1997. Certain key employees of TCI Group hold restricted stock awards, options and options with tandem SARs to acquire shares of certain subsidiaries' common stock. Estimates of the compensation related to the restricted stock awards and options and/or SARs have been recorded in the accompanying consolidated financial statements pursuant to APB Opinion No. 25. Such estimates are subject to future adjustment based upon the market value of the respective common stock and, ultimately, on the final market value when the rights are exercised. Had TCI Group accounted for its stock based compensation pursuant to the fair value based accounting method in Statement No. 123, the amount of compensation would not have been materially different from what has been reflected in the accompanying combined financial statements. (continued) II-173 238 "TCI GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements TCI Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible TCI Group may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. II-174 239 PART III. The information required by Part III (Items 10, 11, 12 and 13) has been incorporated herein by reference to the Company's definitive Proxy Statement (the "1997 Proxy Statement") to be used in connection with the 1997 Annual Meeting of Stockholders as set forth below, in accordance with General Instruction G(3) of Form 10-K. Item 10. Directors and Executive Officers of the Registrant. Information relating to directors and executive officers of the Company is set forth in the sections entitled "Election of Directors Proposal" and "Concerning Management" in the 1997 Proxy Statement and is incorporated herein by reference. Item 11. Executive Compensation. Information regarding compensation of officers and directors of the Company is set forth in the section entitled "Executive Compensation" in the 1997 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding ownership of certain of the Company's securities is set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions with the Company is set forth in the section entitled "Certain Relationships and Related Transactions" in the 1997 Proxy Statement and is incorporated herein by reference. III-1 240 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements
Included in Part II of this Report: Page No. -------- Tele-Communications, Inc.: Independent Auditors' Report II-50 Consolidated Balance Sheets, December 31, 1996 and 1995 II-51 to II-52 Consolidated Statements of Operations, Years ended December 31, 1996, 1995 and 1994 II-53 to II-54 Consolidated Statements of Stockholders' Equity, Years ended December 31, 1996, 1995 and 1994 II-55 to II-57 Consolidated Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994 II-58 Notes to Consolidated Financial Statements, December 31, 1996, 1995 and 1994 II-59 to II-101 "Liberty Media Group": Independent Auditors' Report II-102 Combined Balance Sheets, December 31, 1996 and 1995 II-103 to II-104 Combined Statements of Operations, Years ended December 31, 1996, 1995 and 1994 II-105 Combined Statements of Equity, Years ended December 31, 1996, 1995 and 1994 II-106 Combined Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994 II-107 Notes to Combined Financial Statements, December 31, 1996, 1995 and 1994 II-108 to II-128
IV-1 241 "TCI Group": Independent Auditors' Report II-129 Combined Balance Sheets, December 31, 1996 and 1995 II-130 to II-131 Combined Statements of Operations, Years ended December 31, 1996, 1995 and 1994 II-132 Combined Statements of Equity, Years ended December 31, 1996, 1995 and 1994 II-133 to II-135 Combined Statements of Cash Flows, Years ended December 31, 1996, 1995 and 1994 II-136 Notes to Combined Financial Statements, December 31, 1996, 1995 and 1994 II-137 to II-174
IV-2 242 (a) (2) Financial Statement Schedules Included in Part IV of this Report:
(i) Financial Statement Schedules required to be filed: Page No. -------- Independent Auditors' Report IV-15 Schedule I - Condensed Information as to the Financial Position of the Registrant, December 31, 1996 and 1995; Condensed Information as to the Operations and Cash Flows of the Registrant, Years ended December 31, 1996, 1995 and 1994 IV-16 to IV-18 Schedule II - Valuation and Qualifying Accounts, Years ended December 31, 1996, 1995 and 1994 IV-19 (ii) Separate financial statements for Telewest Communications plc: Consolidated Financial Statements --------------------------------- Independent Auditors' Report IV-20 Consolidated Statements of Operations IV-21 Consolidated Balance Sheets IV-22 Consolidated Statements of Cash Flows IV-23 Consolidated Statement of Shareholders' Equity IV-24 Notes to Consolidated Financial Statements IV-25 to IV-38 (iii) Separate financial statements for Sprint Spectrum Holding Company, L.P. and Subsidiaries Consolidated Financial Statements --------------------------------- Independent Auditors' Report IV-39 Report of Independent Accountants IV-40 Consolidated Balance Sheets IV-41 Consolidated Statements of Operations IV-42 Consolidated Statements of Changes in Partners' Capital IV-43 Consolidated Statements of Cash Flows IV-44 Notes to Consolidated Financial Statements IV-45 to IV-58
IV-3 243 (a) (3) Exhibits Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K): 3 - Articles of Incorporation and Bylaws: 3.1 The Restated Certificate of Incorporation, dated August 4, 1994, as amended on August 4, 1994, August 16, 1994, October 11, 1994, October 21, 1994, January 26, 1995, August 3, 1995, August 3, 1995, January 25, 1996 and January 25, 1996. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 3.2 The Bylaws as adopted June 16, 1994. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10 - Material Contracts: 10.1 Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Form S-4 Registration Statement (Commission File No. 33-54263). 10.2 Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.3 Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.4 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and Bob Magness.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.5 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and Bob Magness.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.6 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). (continued) IV-4 244 10 - Material contracts, continued: 10.7 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.8 Restricted Stock Award Agreement, made as of December 10, 1992, among Tele-Communications, Inc., Donne F. Fisher and WestMarc Communications, Inc.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.9 Consulting Agreement, dated as of January 1, 1996, between Tele-Communications, Inc. and Donne F. Fisher. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.10 Consulting Agreement, dated as March 11, 1995, between Tele-Communications, Inc. and J.C. Sparkman.* 10.11 Deferred Compensation Plan for Non-Employee Directors, effective on November 1, 1992.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.12 Amended and Restated Employment Agreement, dated as of July 18, 1995, among Tele-Communications, Inc., Tele-Communications International, Inc. and Fred A. Vierra.* Incorporated herein by reference to Tele-Communications International, Inc.'s Registration Statement on Form S-1 (Commission File No. 33-80491). 10.13 Employment Agreement, dated as of January 1, 1993, between Tele-Communications, Inc. and Larry E. Romrell.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.14 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and Larry E. Romrell.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.15 Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). (continued) IV-5 245 10 - Material contracts, continued: 10.16 Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.17 Non-Qualified Stock Option and Stock Appreciation Rights Agreement, dated as of November 12, 1993, by and between Tele-Communications, Inc. and Jerome H. Kern.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.18 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, Liberty Media Corporation and grantee relating to stock appreciation rights granted pursuant to letter dated September 17, 1991.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.19 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, Liberty Media Corporation and grantee relating to the assumption of options and related stock appreciation rights granted under the Liberty Media Corporation 1991 Stock Incentive Plan pursuant to letter dated July 26, 1993.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.20 Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and a director of Tele-Communications, Inc. relating to assumption of options and related stock appreciation rights granted outside of an employee benefit plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.21 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights granted under Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). (continued) IV-6 246 10 - Material contracts, continued: 10.22 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of grants pursuant to the Agreement and Plan of Merger dated June 6, 1991 between United Artists Entertainment Company and Tele-Communications, Inc.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.23 Form of letter dated September 17, 1991 from Liberty Media Corporation to grantee relating to grant of stock appreciation rights.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.24 Form of letter dated July 26, 1993 from Liberty Media Corporation to grantee relating to grant of options and stock appreciation rights.* Incorporated by reference to Tele-Communications, Inc.'s Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.25 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights under Tele- Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1992 Non- Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.26 Forms of Assumption and Amended and Restated Stock Option Agreements relating to options granted under the United Artists Entertainment Company 1988 Incentive and Non-Qualified Stock Option Plan and executed by employees who did not have employment agreements with United Artists Entertainment Company.* Incorporated herein by reference to Tele-Communications, Inc.'s Post-Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33- 43009). 10.27 Form of Indemnification Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.28 Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). (continued) IV-7 247 10 - Material contracts, continued: 10.29 Qualified Employee Stock Purchase Plan of Tele-Communications, Inc., as amended.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-57635). 10.30 Form of Restricted Stock Award Agreement for 1995 Award of Series A TCI Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.31 Form of Restricted Stock Award Agreement for 1995 Award of Series A Liberty Media Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.32 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.33 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.34 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.35 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) IV-8 248 10 - Material contracts, continued: 10.36 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele- Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.37 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.38 The Tele-Communications International, Inc. 1995 Stock Incentive Plan. Incorporated herein by reference to Tele-Communications International, Inc. Registration Statement on Form S-1 (Commission File No. 33-91876). 10.39 Form of Restricted Stock Award Agreement for 1995 Award of Series A Tele-Communications International, Inc. Restricted Stock pursuant to the Tele-Communications International 1995 Stock Incentive Plan. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.40 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock pursuant to the Tele-Communications International, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.41 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.42 Restricted Stock Award Agreement, made as of July 1, 1996, among Tele-Communications, Inc., Brendan Clouston and WestMarc Communictions, Inc. * 10.43 Option Agreement, dated as of December 4, 1996, by and between TCI Satellite Entertainment, Inc. and Brendan R. Clouston.* Incorporated herein by reference to the TCI Satellite Entertainment, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-21317). (continued) IV-9 249 10- Material contracts, continued: 10.44 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Telephony Services, Inc., Grantee and Tele-Communications, Inc.* 10.45 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Wireline, Inc., Grantee and Tele-Communications, Inc.* 10.46 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Internet Services, Inc., Grantee and Tele-Communications, Inc. * 10.47 Letter Agreement, dated December 26, 1996, by Tele-Communications, Inc. to purchase WestMarc Series C Cumulative Compounding Redeemable Preferred Stock from Larry E. Romrell. 10.48 Employee Stock Purchase Plan for Bargaining Unit Employees of United Cable Television of Baltimore Limited Partnership.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60839). 10.49 Employee Stock Purchase Plan for Bargaining Unit Employees of Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60843). 10.50 Employee Stock Purchase Plan for Bargaining Unit Employees of UACC Midwest, Inc. d/b/a TCI of Central Indiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64827). 10.51 The Settlement Plan and Rabbi Trust Agreement Entered into Pursuant to Thomas Adams, Mark Adamski, et. al. v. TCI of Northern New Jersey, Inc. and the Tele-Communications, Inc. Employee Stock Purchase Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64829). 10.52 Employee Stock Purchase Plan for Bargaining Unit Employees of TCI of Northern New Jersey, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64831). (continued) IV-10 250 10- Material contracts, continued: 10.53 Amended and Restated Agreement of Limited Partnership of MajorCo, L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership. Second Amended and Restated Joint Venture Formation Agreement, dated as of January 31, 1996, by and between Sprint Corporation, Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Parents Agreement, dated as of January 31, 1996, by Tele-Communications, Inc. and Sprint Corporation. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated February 9, 1996 (Commission File No. 0-20421). 10.54 Amended and Restated Stock Purchase Agreement, dated as of April 25, 1995, by and among Eduardo Eurnekian, stockholders of shares of the Common Stock of Cablevision S.A., Televisora Belgrano S.A., Construred S.A., Univent's S.A., and TCI International Holdings, Inc. Amended and Restated Stockholders Agreement, dated April 25, 1995, between Eduardo Eurnekian and TCI International Holdings, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated May 4, 1995, as amended by Form 8-K/A (Commission File No. 0-20421). 10.55 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Subscription Agreement, dated as of July 24, 1995, among Viacom International, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Implementation Agreement, dated as of July 24, 1995, between Viacom International, Inc. and Viacom International Services, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated July 26, 1995 (Commission File No. 0-20421). 10.56 Agreement of Purchase and Sale of Partnership Interest, dated as of January 31, 1996, among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.57 Consent and Amendment of Amended Agreement of Partnership for Halcyon Communications Partners, dated as of January 31, 1996, by and among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.58 Assignment and Assumption Agreement, made as of January 31, 1996, between ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) IV-11 251 10- Material contracts, continued: 10.59 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and ECP Holdings, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.60 Agreement of Purchase and Sale of Partnership Interests, dated as of January 31, 1996, among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.61 Consent and First Amendment of Amended and Restated Agreement of Limited Partnership for Halcyon Communications Limited Partnership, dated as of January 31, 1996, by and among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.62 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Utah, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.63 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Utah, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.64 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Nevada, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.65 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Nevada, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.66 Assignment and Assumption Agreement, made as of January 31, 1996, between American Televenture of Minersville, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) IV-12 252 10- Material contracts, continued: 10.67 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and American Televenture of Minersville, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.68 Assignment and Assumption Agreement, made as of January 31, 1996, between TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.69 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TEMPO Cable, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.70 Employment Agreement, effective as of October 1, 1995, by and between Tele-Communications, Inc. and Tony Coelho.* 10.71 Agreement Regarding Shares, as of April 3, 1996, among ETC w/tci, Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc. and Tony Coelho.(1) 10.72 1996 Incentive Plan of ETC w/tci, Inc.* 10.73 Coelho Option Agreement, as of April 3, 1996, betwen ETC w/tci, Inc. and Tony Chelho.* 21- Subsidiaries of Tele-Communications, Inc. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of KPMG Peat Marwick LLP. 23.3 Consent of KPMG Peat Marwick LLP. 23.4 Consent of KPMG Audit Plc. 23.5 Consent of Deloitte & Touche LLP. 23.6 Consent of Price Waterhouse LLP. 27- Financial data schedule *Constitutes management contract or compensatory arrangement. (1) Certain exhibits have been omitted. A copy of any exhibit or schedule will be furnished supplementally to the Commission upon request. IV-13 253 (b) Report on Form 8-K filed during the quarter ended December 31, 1996:
Item Date of Report Reported Financial Statements Filed ----------------- -------- -------------------------- December 17, 1996 Item 5 None
IV-14 254 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Tele-Communications, Inc.: Under date of March 24, 1997, we reported on the consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in the December 31, 1996 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Denver, Colorado March 24, 1997 IV-15 255 Schedule I Page 1 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to the Financial Position of the Registrant December 31, 1996 and 1995
Assets 1996 1995 ------- ------- amounts in millions Investments in and advances to consolidated subsidiaries - eliminated upon consolidation $ 6,305 6,364 Other assets, at cost, net of amortization 16 4 ------- ------- $ 6,321 6,368 ======= ======= Liabilities and Stockholders' Equity Accrued liabilities $ 149 109 Redeemable preferred stocks 658 478 Stockholders' equity: Series Preferred Stock, $.01 par value -- -- Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, $.01 par value -- -- Tele-Communications, Inc. Series A TCI Group common stock, $1 par value 696 672 Tele-Communications, Inc. Series B TCI Group common stock, $1 par value 85 85 Tele-Communications, Inc. Series A Liberty Media Group common stock, $1 par value 228 225 Tele-Communications, Inc. Series B Liberty Media Group common stock, $1 par value 21 21 Additional paid-in capital 4,933 5,217 Cumulative foreign currency translation adjustment, net of taxes 26 (9) Unrealized holding gains for available-for-sale securities, net of taxes 15 338 Accumulated deficit (176) (454) Treasury stock, at cost (314) (314) ------- ------- $ 6,321 6,368 ======= =======
IV-16 256 Schedule I Page 2 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to the Operations of the Registrant Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----- ----- ----- amounts in millions Operating income (expenses): Selling, general and administrative $ (82) (21) (10) Compensation (adjustment to compensation) relating to stock appreciation rights 13 (21) 1 Gain on sale of subsidiary stock -- 123 -- ----- ----- ----- Earnings (loss) before share of earnings (loss) of consolidated subsidiaries (69) 81 (9) Share of earnings (loss) of consolidated subsidiaries 347 (252) 71 ----- ----- ----- Net earnings (loss) 278 (171) 62 Preferred stock dividend requirements (35) (34) (8) ----- ----- ----- Net earnings (loss) attributable to common stockholders $ 243 (205) 54 ===== ===== =====
IV-17 257 Schedule I Page 3 of 3 TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Condensed Information as to Cash Flows of the Registrant Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----- ----- ----- amounts in millions Cash flows from operating activities: Earnings (loss) before share of earnings (loss) of consolidated subsidiaries $ (69) 81 (9) Adjustments to reconcile earnings (loss) to net cash provided (used) by operating activities: Compensation (adjustment to compensation) relating to stock appreciation rights (13) 21 (1) Payments of stock appreciation rights (3) -- -- Gain on sale of subsidiary stock -- (123) -- Change in accrued liabilities 56 53 24 ----- ----- ----- Net cash provided (used) by operating activities (29) 32 14 ----- ----- ----- Cash flows from investing activities: Reduction in or additional investments in and advances to consolidated subsidiaries, net 75 (430) (8) Other investing activities (11) (9) (3) ----- ----- ----- Net cash provided (used) by investing activities 64 (439) (11) ----- ----- ----- Cash flows from financing activities: Preferred stock dividends (35) (24) (4) Issuances of common stock -- 431 1 ----- ----- ----- Net cash provided (used) by financing activities (35) 407 (3) ----- ----- ----- Change in cash -- -- -- Cash at beginning of year -- -- -- ----- ----- ----- Cash at end of year $-- -- -- ===== ===== =====
See also note 3 to the consolidated financial statements. IV-18 258 Schedule II TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1996, 1995 and 1994
Additions Deductions --------- ---------- Balance at Charged to Write-offs Balance beginning profit net of at end Description of year and loss recoveries of year ----------- ------- -------- ---------- ------- amounts in millions Year ended December 31, 1996: Allowance for doubtful receivables - trade $ 34 121 (119) 36 ===== ===== ====== ===== Year ended December 31, 1995: Allowance for doubtful receivables - trade $ 23 86 (75) 34 ===== ===== ====== ===== Year ended December 31, 1994: Allowance for doubtful receivables - trade $ 19 58 (54) 23 ===== ===== ====== =====
IV-19 259 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TELEWEST COMMUNICATIONS PLC We have audited the accompanying consolidated balance sheet of Telewest Communications plc and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements on pages 69 to 86 present fairly, in all material respects, the financial position of Telewest Communications plc and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three year period ended December 31,1996 in conformity with generally accepted accounting principles in the United States of America. KPMG AUDIT PLC Chartered Accountants Registered Auditors London, England March 11, 1997 IV-20 260 CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31 1996 1996 1995 1994 $ '000 (pound) '000 (pound) '000 (pound) '000 (note 2) - --------------------------------------------------------------------------------------------------------------------------- REVENUE Cable television 207,572 121,224 64,740 35,875 Telephony - residential 214,060 125,013 57,597 23,471 Telephony - business 59,181 34,562 17,449 8,812 Other ((pound)1,600,(pound)1,451 and(pound)1,481 in 1996, 1995 and 1994, respectively, from related parties) 16,210 9,467 4,998 3,869 - ----------------------------------------------------------------------------------------------------------------------- 497,023 290,266 144,784 72,027 - ----------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Programming (119,700) (69,906) (32,194) (15,500) Telephony (90,019) (52,572) (29,526) (14,714) Selling, general and administrative (including (pound)2,560, (pound)3,257 and (pound)2,128 in 1996, 1995 and 1994, respectively, to related parties) (286,507) (167,323) (105,388) (60,414) Depreciation (222,113) (129,716) (60,019) (30,320) Amortization of goodwill (44,775) (26,149) (7,854) (1,827) - ----------------------------------------------------------------------------------------------------------------------- (763,114) (445,666) (234,981) (122,775) - ----------------------------------------------------------------------------------------------------------------------- OPERATING LOSS (266,091) (155,400) (90,197) (50,748) OTHER INCOME/(EXPENSE) Interest income (including (pound)1,723, (pound)1,583 and (pound)465 in 1996, 1995 and 1994, respectively, from related parties) 28,512 16,651 15,645 2,291 Interest expense ((pound)1,083 in 1994 to related parties) (180,086) (105,172) (26,649) (10,069) Loss on disposal of interest rate swaps - - (8,609) - Unrealized gain on interest rate swaps - - - 1,636 Foreign exchange losses, net (4,860) (2,838) (14,575) (21) Share of net losses of affiliates (27,351) (15,973) (12,777) (8,466) Gain/(loss) on disposal of assets 978 571 (419) 26 Minority interests in (profits)/losses of consolidated subsidiaries, net (308) (180) (16) 39 Other, net - - 82 (25) - ----------------------------------------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES (449,206) (262,341) (137,515) (65,337) Income tax expense (note 14) (86) (50) (16) - - ----------------------------------------------------------------------------------------------------------------------- LOSS BEFORE EXTRAORDINARY GAIN (449,292) (262,391) (137,531) (65,337) Extraordinary gain (note 15) - - - 7,287 - ----------------------------------------------------------------------------------------------------------------------- NET LOSS (449,292) (262,391) (137,531) (58,050) =======================================================================================================================
Year ended December 31 Pro forma 1996 1996 1995 1994 $* (pound)* (pound)* (pound)* - -------------------------------------------------------------------------------------------------------------------------- LOSS PER ORDINARY SHARE Weighted average number of ordinary shares outstanding 925,425,473 925,425,473 861,424,848 630,756,392 Loss per ordinary share before extraordinary gain (0.49) (0.28) (0.16) (0.10) Extraordinary gain - - - 0.01 - ------------------------------------------------------------------------------------------------------------------------- LOSS PER ORDINARY SHARE (0.49) (0.28) (0.16) (0.09) - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements. * Except number of shares IV-21 261 CONSOLIDATED BALANCE SHEETS
December 31 1996 1996 1995 $ '000 (pound) '000 (pound) '000 (note 2) - ----------------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents 135,470 79,116 464,818 Trade receivables (net of allowance for doubtful accounts of (pound)5,405 and(pound)4,695) 50,179 29,305 23,123 Other receivables (note 7) 55,468 32,394 25,657 Prepaid expenses 8,849 5,168 6,133 Investments in affiliates, accounted for under the equity method, and related receivables (note 8) 118,868 69,420 80,703 Other investments, at cost 43,948 25,666 20,666 Property and equipment (less accumulated depreciation of (pound)308,240 and(pound)182,142) (note 9) 2,478,030 1,447,194 1,063,808 Goodwill (less accumulated amortization of(pound)37,907 and(pound)11,758) 841,236 491,290 495,881 Other assets (less accumulated amortization of (pound)4,162 and (pound)742) (note 11) 106,825 62,387 108,931 - ---------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 3,838,873 2,241,940 2,289,720 ====================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable 80,230 46,855 40,402 Other liabilities (note 12) 325,679 190,200 103,824 Debt (note 13) 1,505,713 879,351 792,265 Capital lease obligations 93,132 54,390 30,314 - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,004,754 1,170,796 966,805 - ---------------------------------------------------------------------------------------------------------------------- MINORITY INTERESTS 594 347 167 - ---------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (note 16) Convertible preference shares, 10p par value; 661,000,000 shares authorized and 496,066,708 shares issued and outstanding 84,942 49,607 49,607 Ordinary shares, 10p par value; 2,010,000,000 shares authorized; 927,567,600 and 919,963,400 issued and outstanding in 1996 and 1995, respectively 158,828 92,757 91,996 Additional paid-in capital 2,282,302 1,332,887 1,322,971 Accumulated deficit (688,530) (402,108) (139,717) - ---------------------------------------------------------------------------------------------------------------------- 1,837,542 1,073,143 1,324,857 Ordinary shares held in trust for The Telewest Restricted Share Scheme (note 17) (4,017) (2,346) (2,109) - ---------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,833,525 1,070,797 1,322,748 - ---------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (note 18) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,838,873 2,241,940 2,289,720 ======================================================================================================================
See accompanying notes to the consolidated financial statements. IV-22 262 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 1996 1996 1995 1994 $ '000 (pound) '000 (pound) '000 (pound) '000 (note 2) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Loss before extraordinary gain (449,292) (262,391) (137,531) (65,337) Adjustments to reconcile loss before extraordinary gain to net cash provided by/(used in) operating activities: Depreciation 222,113 129,716 60,019 30,320 Amortization of goodwill 44,775 26,149 7,854 1,827 Amortization of deferred financing costs and issue discount on senior discount debentures 126,888 74,104 16,605 - Accrued interest on senior debentures - - 5,451 - Unrealized loss on foreign currency translation 4,860 2,838 14,575 - Loss on disposal of interest rate swaps - - 8,609 - Unrealized gain on interest rate swaps - - - (1,636) Share of losses of affiliates 27,351 15,973 12,777 8,466 (Gain)/loss on disposals of assets (978) (571) 419 (26) Minority interests in profit/(loss) 308 180 16 (39) Changes in operating assets and liabilities, net of effect of acquisition of subsidiaries: Change in receivables (27,239) (15,908) (5,282) (8,102) Change in prepaid expenses 1,632 953 (3,367) 1,004 Change in accounts payable (7,834) (4,575) (5,603) 15,293 Change in other liabilities 88,471 51,668 19,206 9,067 Other - - (356) - - ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 31,055 18,136 (6,608) (9,163) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for property and equipment (795,136) (464,367) (254,453) (202,683) Cash paid for acquisition of subsidiaries (24,258) (14,167) (3,232) (236) Additional investments in and loans to affiliates (4,671) (2,728) (9,143) (23,761) Additions to other investments (8,562) (5,000) - - Proceeds from disposals of assets 5,238 3,059 688 294 Other investing activities - - 335 (5,505) - ---------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (827,389) (483,203) (265,805) (231,891) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash paid for credit facility arrangement costs (31,506) (18,400) - - Proceeds from debenture issue - - 754,812 - Cash paid for foreign currency option - - (88,070) - Repayment of borrowings (1,604) (937) (157,930) (219,700) Cash paid for debenture issue costs (1,420) (829) (20,574) - Cash paid for share issue costs - - (6,141) (28,543) Proceeds from share issues - - - 511,800 Proceeds from borrowings 171,915 100,400 - 174,200 Capital element of finance lease repayments (2,108) (1,231) (1,291) (210) Net contributions from Joint Venturers and minorities - - - 44,995 - ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 135,277 79,003 480,806 482,542 - ---------------------------------------------------------------------------------------------------------------------- NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (661,057) (386,064) 208,393 241,488 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 620 362 8,423 - CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 795,907 464,818 248,002 6,514 - ---------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR 135,470 79,116 464,818 248,002 ======================================================================================================================
See accompanying notes to the consolidated financial statements. IV-23 263 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Net assets of the Joint Venture (pound) '000 (See note 1) - ---------------------------------------------------------------------------------------------------------------------- JOINT VENTURE: PERIOD FROM JANUARY 1 TO NOVEMBER 22, 1994 Balance at January 1, 1994 311,695 Capital contribution 121,873 Repayment of the Joint Venturers' capital accounts (75,700) Net loss (55,864) - ---------------------------------------------------------------------------------------------------------------------- BALANCE AT NOVEMBER 22, 1994 302,004 ======================================================================================================================
On November 22, 1994 the net assets of Joint Venture were contributed to the Company, as described in Note 1 to the consolidated financial statements. The contribution appears as an increase in additional paid-in capital in the following table.
Convertible Additional preference Ordinary Shares held paid-in Accumulated shares shares in trust capital deficit Total (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 - --------------------------------------------------------------------------------------------------------------------------- COMPANY: Shares issued during the year 15,300 84,824 - 384,272 - 484,396 Ordinary shares held in trust for the Telewest Restricted Share Scheme - - (7,280) - - (7,280) Contribution of the Joint Venture to the Company on November 22, 1994 - - - 302,004 - 302,004 Net loss - - - - (2,186) (2,186) - ---------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 15,300 84,824 (7,280) 686,276 (2,186) 776,934 Conversion of ordinary shares into convertible preference shares 11,227 (11,227) - - - - Shares issued in connection with the acquisition of TCMN (see note 5) 23,080 18,399 - 636,695 - 678,174 Accrued employee compensation relating to the Telewest Restricted Share Scheme - - 5,171 - - 5,171 Net loss - - - - (137,531) (137,531) - ---------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 49,607 91,996 (2,109) 1,322,971 (139,717) 1,322,748 Ordinary shares issued _ 761 - 9,916 - 10,677 Accrued employee compensation relating to the Telewest Restricted Share Scheme - - (237) - - (237) Net loss - - - - (262,391) (262,391) - ---------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 49,607 92,757 (2,346) 1,332,887 (402,108) 1,070,797 ======================================================================================================================
See accompanying notes to the consolidated financial statements. IV-24 264 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS years ended December 31, 1996 and 1995 1 ORGANIZATION AND HISTORY Telewest Communications plc ("the Company") is a cable television and telephony operator which offers these services to business and residential customers in the United Kingdom ("UK"). The Company derives its cable television revenues from installation fees, monthly basic and premium service fees and advertising charges. The Company derives its telephony revenues from connection charges, monthly line rentals, call charges, special residential service charges and interconnection fees payable by other operators. The cable television and telephony services account for approximately 42% and 55%, respectively, of the Company's revenue. This revenue is predominantly derived from residential, rather than business, customers. The Company was incorporated on October 20, 1994 under the laws of England and Wales in preparation for the October 2,1995 internal reorganization of Telewest Communications Cable Limited ("TCCL"), then called TeleWest Communications plc, and its subsidiaries whereby the entire issued share capital of TCCL was transferred to the Company in exchange for fully paid up shares of the Company. TCCL had traded since November 22, 1994 when affiliates of Tele-Communications, Inc. (the "TCI Affiliates") and affiliates of US WEST, Inc. (the "US WEST Affiliates") contributed their UK cable interests to TCCL (the "Contribution"). These interests were previously held by the TCI Affiliates and US WEST Affiliates through TCI/US West Cable Communications Group, a general partnership. TCI/US WEST Cable Communications Group and its subsidiaries collectively are referred to herein as the "Joint Venture" and the TCI Affiliates and US WEST Affiliates collectively are referred to herein as the "Joint Venturers". 2 BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's historical shareholders' equity for the periods prior to November 22, 1994, is the excess of the Joint Venture's assets over the Joint Venture's liabilities and represents the historical cost of the capital contributions made by the Joint Venturers less the accumulated deficit arising from the Joint Venture's operations. The economic environment and currency in which the Company operates is the UK and hence its reporting currency is Pounds Sterling ((pound)). Certain financial information for the year ended December 31, 1996 has been translated into US Dollars, with such US Dollar amounts being unaudited and presented solely for the convenience of the reader, at the rate of $1.7123 = (pound)1.00, the Noon Buying Rate of the Federal Reserve Bank of New York on December 31, 1996. The presentation of the US Dollar amounts should not be construed as a representation that the Pounds Sterling amounts could be so converted into US Dollars at the rate indicated or at any other rate. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and those of all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. All acquisitions have been accounted for under the purchase method of accounting. Under this method, the results of subsidiaries and affiliates acquired in the year are included in the consolidated statement of operations from the date of acquisition. Goodwill arising on consolidation (representing the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired) is amortized over the acquisition's useful life or over a maximum period of 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future operating cash flows of the acquired operations. The assessment of the recoverability of goodwill will be impacted if projected future operating cash flows are not achieved. The amount of goodwill impairment, if any, is measured based on the projected discounted future operating cash flows using a discount rate reflecting the Company's cost of funds. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly-liquid investments with original maturities of three months or less that are readily convertible into cash. FINANCIAL INSTRUMENTS The Company uses foreign currency option contracts which permit, but do not require, the Company to exchange foreign currencies at a future date with another party at a contracted exchange rate. The Company also enters into combined foreign currency and interest rate swap contracts ("Foreign Currency Swaps"). Such contracts are used to hedge against adverse changes in foreign currency exchange rates associated with obligations denominated in foreign currency. IV-25 265 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The foreign currency option and Foreign Currency Swaps are recorded on the balance sheet in other assets or other liabilities at their fair value at the reporting period with changes in their fair value during the reporting period being reported as part of the foreign exchange gain or loss in the statement of operations. Such gains and losses are offset against foreign exchange gains and losses on the obligations denominated in foreign currencies which have been hedged. Interest rate swap agreements which are used to manage interest rate risk on the Company's borrowings are accounted for using the accruals method. Net income or expense resulting from the differential between exchanging floating and fixed rate interest payments is recorded on an accruals basis. To the extent that the interest rate swap agreements are delayed starting, net income or expense is not recognized until the effective date of the agreement. Other interest rate swaps which are held as trading assets are recorded on the balance sheet at their fair value at the end of each reporting period with changes in their fair value being recorded as gains and losses in the statement of operations. INVESTMENTS Investments in partnerships, joint ventures and subsidiaries in which the Company's voting interest is 20% to 50%, and others where the Company has significant influence, are accounted for using the equity method. Investments which do not have a readily determinable fair value, in which the Company's voting interest is less than 20%, and in which the Company does not have significant influence, are carried at cost and written down to the extent that there has been an other-than-temporary diminution in value. ADVERTISING COSTS Advertising costs are expensed as incurred. The amount of advertising costs expensed was (pound)24,846,000, (pound)10,246,000, and (pound)4,313,000 for the years ended December 31, 1996, 1995, and 1994, respectively. PROPERTY AND EQUIPMENT Property and equipment is stated at cost, including the historical carryover basis cost from the Contribution. Except during the prematurity period as described below, depreciation is provided to write off the cost, less estimated residual value, of property and equipment by equal installments over their estimated useful economic lives as follows: Freehold and long leasehold buildings 50 years Cable and ducting 20 years Electronic equipment - - System electronics 8 years - - Switching equipment 8 years - - Subscriber electronics 5 years - - Headend, studio and playback facilities 5 years Other equipment - - Office furniture and fittings 5 years - - Motor vehicles 4 years
During the prematurity period, depreciation of cable and ducting and system electronics is charged monthly to write off the estimated cost at the end of the prematurity phase over a useful life of 20 and 8 years, respectively. In accordance with Statement of Financial Accounting Standard ("SFAS") No 51, "Financial Reporting by Cable Television Companies", the monthly charge is scaled down by a ratio of average customers in the current period to the estimated customer base at the end of the prematurity period. The prematurity period covers the period between connecting the first customer and substantial completion of the network. Preconstruction costs which are included within cable and ducting are amortized over the life of the franchise from the date of the first customer. The Company accounts for costs, expenses and revenues applicable to the construction and operation of its cable systems under SFAS No 51. The estimated useful lives of cable and ducting and systems electronics were reassessed with effect from January 1, 1996, and were changed from 25-30 years and 10 years to 20 years and 8 years, respectively. The net book value of these assets are being written-off over their revised estimated remaining lives. FRANCHISE COSTS Expenditure incurred on successful applications for franchise licenses is included in property and equipment and is amortized over the remaining life of the original franchise term. Costs relating to unsuccessful applications are charged to the statement of operations. DEFERRED FINANCING COSTS Costs incurred in raising debt are deferred and recorded on the balance sheet in other assets. The costs are amortized to the consolidated statement of operations at a constant rate to the carrying value of the debt over the life of the obligation. MINORITY INTERESTS Recognition of the minority interests' share of losses of consolidated subsidiaries is limited to the amount of such minority interests' allocable portion of the equity of those consolidated subsidiaries. FOREIGN CURRENCIES Transactions in foreign currencies are recorded using the rate of exchange in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the statement of operations. REVENUE RECOGNITION Revenue is recognized as services are delivered. Other revenues include connection fees which are recognized in the period of connection to the extent that the fee is offset by direct selling costs. The remainder is recognized over the estimated average period that customers are expected to remain connected to the system. IV-26 266 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PENSION COSTS The Company does not have a defined-benefit pension plan but operates a defined-contribution scheme or contributes up to specified limits to the third-party scheme of the employee's choice. The amount included in losses in 1996, 1995 and 1994 of (pound)2,580,000, (pound)1,538,000, and (pound)839,000, respectively, represents the contributions payable to the selected schemes in respect of the relevant accounting periods. INCOME TAXES Prior to November 22, 1994 no provision had been made for income tax expense or benefit in the accompanying financial statements as the earnings or losses of the Joint Venture were reported in the respective income tax returns of the individual Joint Venturers. Following the reorganization effective on November 22, 1994, the Company became subject to UK taxation and adopted SFAS No 109, "Accounting for Income Taxes". The adoption of SFAS No 109 does not give rise to any cumulative adjustment to be made in the 1994 consolidated statement of operations. Under the asset and liability method of SFAS No 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered. SHARE-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for share-based employee compensation plans at fair value. The Company has chosen to continue to account for share-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost for share options is measured as the excess, if any, of the quoted market price of the Company's shares at the date of the grant over the amount an employee must pay to acquire the shares. Shares purchased by trustees in connection with the Telewest Restricted Share Scheme, are valued at the market price on the date on which they are purchased and are reflected as a reduction of shareholders' equity in the balance sheet. This equity account is reduced when the shares are awarded to employees based on the original cost of the shares to the trustees. The value of awards of ordinary shares to be made to employees in future years is charged to the statement of operations to the extent that the awards have been awarded to and earned by employees in the current accounting period. The value of shares which have been awarded to, but have not been earned by employees, is included as deferred compensation expense within other assets. LOSS PER ORDINARY SHARE Loss per ordinary share is based on the weighted average number of ordinary shares outstanding during the year. Ordinary share equivalents are not included in the computation as their effect would be to decrease the loss per share. The pro forma loss per ordinary share calculated for the year ended December 31, 1994 assumes that ordinary shares issued to the Joint Venturers in return for the Contribution had been outstanding for the entire year. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The statement establishes, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS No. 125 also establishes new accounting requirements and servicing of financial assets and extinguishment of liabilities occurring after December 31,1996. In December 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", was issued. SFAS No. 127 defers for one year the effective date of certain requirements of SFAS No. 125. SFAS No. 125 is not expected to have a material impact on the financial position or results of operations of the Company. Statement of Position ("SOP") No. 96-1 "Environmental Remediation Liabilities", was issued in October 1996. This statement provides authoritative guidance on specific accounting issues that are present in the recognition, measurement, display, and disclosure of environment remediation liabilities. The provisions of this statement are effective for fiscal years beginning after December 15, 1996. SOP 96-1 is not expected to have a material impact on the financial position or results of operations of the Company. 4 FINANCIAL INSTRUMENTS FOREIGN CURRENCY OPTION CONTRACT At December 31, 1996, the Company held a Pounds Sterling put option to purchase US$1,537,000,000 to hedge its exposure to adverse fluctuations in exchange rates on the principal amount at maturity of its US Dollar-denominated Senior Discount Debentures due 2007 ("Senior Discount Debentures"). The expiration date of this option contract is September 28, 2000. The put option has a strike price at expiration of (pound)1.00 = US$1.4520. The foreign currency option has been included in other assets at its fair value on December 31, 1996. IV-27 267 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4 FINANCIAL INSTRUMENTS (continued) FOREIGN CURRENCY SWAP The Company has entered into a Foreign Currency Swap to hedge its exposure to adverse fluctuations in exchange rates on the principal amount of its US Dollar-denominated Senior Debentures due 2006 ("Senior Debentures"). The terms of the contract provided for the Company to make an initial exchange of principal of US$300,000,000 in exchange for (pound)196,078,000. On expiration on October 1, 2000, the initial principal amounts will be re-exchanged. The interest element of the Foreign Currency Swap requires the Company to make Pounds Sterling fixed-rate interest payments and to receive US Dollar fixed-rate interest payments on the initial exchange amounts on a semi-annual basis. The Foreign Currency Swap contract has been included in other liabilities at its fair value on December 31, 1996. INTEREST RATE SWAPS The Company has also entered into certain delayed-starting interest rate swap agreements in order to manage interest rate risk on its senior secured credit facility ("Senior Secured Facility"). The effective dates of the swap agreements are January 2, 1997 and March 31, 1997, and the agreements mature on December 31, 2001 and March 28, 2002. The aggregate notional principal amount of the swaps adjusts upwards on a semi-annual basis to a maximum of (pound)750 million. In accordance with the swap agreements, the Company receives interest at the six month LIBOR rate and pays a fixed interest rate in the range of 7.835 - 7.975%. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 119 "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments" requires disclosure of an estimate of the fair values of certain financial instruments. SFAS No. 119 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale. Fair value estimates are made at a specific point in time, based upon relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined precisely. Changes in assumptions could significantly affect the estimates. At December 31, 1996, the Company's significant financial instruments include cash and cash equivalents, trade receivables, a foreign currency option contract, a Foreign Currency Swap, interest rate swap agreements, trade payables and long-term borrowings. The following table summarizes the fair value of the foreign currency option contract, the Foreign Currency Swap, the interest rate swap agreements, the Senior Discount Debentures and the Senior Debentures. The fair value of the other financial instruments held by the Company approximates their recorded carrying amount due to the short maturity of these instruments and these instruments are not presented in the following table.
AT DECEMBER 31, 1996 At December 31, 1995 CARRYING Carrying AMOUNT FAIR VALUE amount Fair value (pound) '000 (pound) '000 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Assets: Foreign currency option contract 25,828 25,828 85,742 85,742 Liabilities: Interest rate swap agreements - 4,776 - - Foreign Currency Swap 26,481 26,481 3,983 3,983 Senior Discount Debentures 600,799 621,367 595,266 601,222 Senior Debentures 175,203 179,582 193,113 196,975 ===============================================================================
The estimated fair value of the foreign currency option contract, the interest rate swap agreements and the Foreign Currency Swap are based on quotations received from independent, third party financial institutions and represent the net amount receivable or payable to terminate the position, taking into consideration market rates and counterparty credit risk. The estimated fair value of the Senior Discount Debentures and the Senior Debentures are also based on quotations from independent third party financial institutions and are based on discounting the future cash flows to net present values using appropriate market interest rates prevailing at the year end. MARKET RISK AND CONCENTRATIONS OF CREDIT RISK Market risk is the sensitivity of the value of the financial instruments to changes in related currency and interest rates. Generally, the Company is not exposed to such market risk because gains and losses on the financial instruments are offset by gains and losses on the underlying assets and liabilities. The Company may be exposed to potential losses due to the credit risk of non-performance by the counterparties to its foreign currency option, interest rate swap agreements and Foreign Currency Swap contract, however such losses are not anticipated as these counterparties are major international financial institutions. Temporary cash investments also potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105 "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risks". The Company places its temporary cash investments with major international financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. At December 31, 1996, the Company had no significant concentration of credit risk. IV-28 268 5 BUSINESS COMBINATIONS On January 10, 1996, the Company acquired the entire issued share capital of Telewest Communications (Worcester) Limited, then called Bell Cablemedia (Worcester) Limited and the owner of the Worcester cable franchise, for cash consideration of (pound)9,849,000. Telewest Communications (Worcester) Limited was otherwise a dormant company with net assets of (pound)2 representing its called up share capital. This acquisition has been accounted for under the purchase method of accounting. The goodwill arising on acquisition was (pound)9,848,998 and is being amortized on a straight line basis over 20 years. During the year, the Company made various other minor acquisitions, largely for share consideration. The goodwill arising on these acquisitions was (pound)11,708,000 and is being amortized on a straight-line basis over 20 years. On October 3, 1995, the Company acquired the entire share capital of Telewest Communications (Midlands & North West) Limited ("TCMN"), then called SBC CableComms (UK), a company which holds cable television and telephony interests in the UK, from an affiliate of Cox Communications, Inc. and affiliates of SBC Communications, Inc., in exchange for an aggregate of 183,994,960 ordinary shares of 10 pence each and 230,790,208 convertible preference shares of 10 pence each. The value attributable to the shares issued was (pound)1.635 per share, being the market price of the shares on June 8, 1995, the day the terms of the acquisition were agreed to and announced. The fair value of the share consideration using this share price was (pound)678,174,000. The aggregate cost of acquisition was (pound)689,878,000 including payment of expenses relating to the acquisition. This acquisition has been accounted for under the purchase method of accounting. The goodwill arising on acquisition is (pound)464,872,000 and is being amortized on a straight-line basis over 20 years. The operating results of these acquisitions are included in the Company's consolidated statement of operations from their respective dates of acquisition. The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisitions had occurred at the beginning of 1995, after giving effect to the amortization of goodwill arising as a result of each of the acquisitions:
1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Revenue 290,266 191,195 Net loss (262,608) (189,225) ===============================================================================
The above unaudited pro forma financial information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the dates indicated above, nor is it indicative of future results. 6 SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest was (pound)25,795,000, (pound)6,041,000 and (pound)8,013,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Significant non-cash investing activities of the Company are described below. The amounts stated for 1996 represent the purchase of former minority shareholders' interests in certain UK cable interests held by the Company. The amounts stated for 1995 represent the purchase of TCMN for largely share consideration as described in Note 5 to the consolidated financial statements. The amounts stated for 1994 represent the contribution of UK cable interests to the Company by the Joint Venturers.
1996 1995 1994 (pound) '000 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Purchase/contribution of cable interests: Assets - 428,080 3,967 Liabilities assumed - (45,144) (2,744) Debt assumed - (157,930) - Minority interest in subsidiaries - - (44) - ------------------------------------------------------------------------------- Net assets acquired/ contributed - 225,006 1,179 Goodwill on acquisition 9,874 464,872 - - ------------------------------------------------------------------------------- 9,874 689,878 1,179 =============================================================================== Share consideration/ capital contribution 9,869 678,174 1,179 Costs of acquisition 5 11,704 - - ------------------------------------------------------------------------------- 9,874 689,878 1,179 ===============================================================================
The Company entered into finance lease arrangements for switching equipment and other equipment with a total capital value at the beginning of the lease of (pound)25,307,000, (pound)16,920,000 and (pound)6,820,000 during the years ended December 31, 1996, 1995 and 1994, respectively. 7 OTHER RECEIVABLES
At December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Value Added Tax refund 10,633 5,145 Interconnection receivables 3,865 3,019 Interest receivable 63 3,341 Accrued income 4,356 3,311 Recoverable expenses 5,714 2,808 Other 7,763 8,033 - ------------------------------------------------------------------------------- 32,394 25,657 ===============================================================================
IV-29 269 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8 INVESTMENTS The Company has investments in affiliates accounted for under the equity method at December 31, 1996 and 1995 as follows:
Percentage ownership at December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Cable London plc 50.00% 49.00% Birmingham Cable Corporation Limited 27.47% 27.47% London Interconnect Limited 16.67% 16.67% Central Cable Sales Limited 50.00% 50.00% ===============================================================================
The Company has accounted for its investment in London Interconnect Limited under the equity method because it is in a position to exercise a significant influence over London Interconnect Limited. Summarized financial information for such affiliates which operate principally in the cable television and telephony industries is as follows: COMBINED FINANCIAL POSITION
At December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Property and equipment, net 391,183 311,265 Intangible assets, net 3,845 4,644 Other assets, net 105,475 149,786 - ------------------------------------------------------------------------------- TOTAL ASSETS 500,503 465,695 =============================================================================== Debt 281,500 247,653 Other liabilities 91,947 50,268 Owners' equity 127,056 167,774 - ------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY 500,503 465,695 ===============================================================================
COMBINED OPERATIONS
Year ended December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Revenue 98,329 70,016 Operating expenses (124,358) (99,184) - ------------------------------------------------------------------------------- Operating loss (26,029) (29,168) Interest expense (15,945) (4,615) - ------------------------------------------------------------------------------- NET LOSS (41,974) (33,783) ===============================================================================
The Company's investments in affiliates are comprised as follows:
AT DECEMBER 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Loans 29,089 24,593 Share of net assets 40,331 56,110 - ------------------------------------------------------------------------------- 69,420 80,703 ===============================================================================
Any excess of the purchase cost over the value of the net assets acquired is included in goodwill and amortized over 20 years on a straight-line basis. IV-30 270 9 PROPERTY AND EQUIPMENT
Cable and Electronic Other Land Buildings ducting equipment equipment Total (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 - --------------------------------------------------------------------------------------------------------------------------- ACQUISITION COSTS Balance at January 1, 1996 4,223 36,005 766,866 359,617 79,239 1,245,950 Additions - 9,951 335,844 130,783 39,012 515,590 Disposals - - (749) (565) (4,792) (6,106) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31,1996 4,223 45,956 1,101,961 489,835 113,459 1,755,434 - --------------------------------------------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION Balance at January 1, 1996 - 4,920 74,532 70,810 31,880 182,142 Charge for year - 2,458 47,374 60,220 19,664 129,716 Disposals - - (725) (547) (2,346) (3,618) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 - 7,378 121,181 130,483 49,198 308,240 - --------------------------------------------------------------------------------------------------------------------------- 1996 NET BOOK VALUE 4,223 38,578 980,780 359,352 64,261 1,447,194 =========================================================================================================================== ACQUISITION COSTS Balance at January 1, 1995 4,055 16,643 321,208 149,652 30,575 522,133 On acquisition of TCMN 168 14,551 284,670 131,682 25,681 456,752 Additions - 4,811 161,439 78,729 24,097 269,076 Disposals - - (451) (446) (1,114) (2,011) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31,1995 4,223 36,005 766,866 359,617 79,239 1,245,950 - --------------------------------------------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION Balance at January 1,1995 - 2,106 25,926 28,040 11,218 67,290 On acquisition of TCMN - 833 26,201 17,080 11,660 55,774 Charge for year - 1,981 22,507 25,791 9,740 60,019 Disposals - - (102) (101) (738) (941) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 - 4,920 74,532 70,810 31,880 182,142 - --------------------------------------------------------------------------------------------------------------------------- 1995 NET BOOK VALUE 4,223 31,085 692,334 288,807 47,359 1,063,808 ===========================================================================================================================
Cable and ducting consists principally of civil engineering and fibre optic costs. In addition, cable and ducting includes net book value of preconstruction and franchise costs of (pound)13,220,000 and (pound)14,388,000 as of December 31, 1996 and 1995, respectively. Electronic equipment includes the Company's switching, headend and converter equipment. Other equipment consists principally of motor vehicles, office furniture and fixtures and leasehold improvements. 10 VALUATION AND QUALIFYING ACCOUNTS
Additions charged to Balance at Acquisition Costs and Other Balance at January 1 of TCMN expenses accounts Deductions December 31 (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 - -------------------------------------------------------------------------------------------------------------------------- 1996 Allowance for doubtful accounts 4,695 - 9,020 - (8,310) 5,405 ========================================================================================================================== 1995 Allowance for doubtful accounts 1,736 1,063 5,920 - (4,024) 4,695 ========================================================================================================================== 1994 Allowance for doubtful accounts 577 - 3,392 26 (2,259) 1,736 ==========================================================================================================================
IV-31 271 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11 OTHER ASSETS The components of other assets, net of amortization, are as follows:
At December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------ Deferred financing costs of debentures 17,510 20,716 Deferred financing costs of Senior Secured Facility 18,186 - Foreign currency option contract 25,828 85,742 Other 863 2,473 - ------------------------------------------------------------------------ 62,387 108,931 ========================================================================
12 OTHER LIABILITIES Other liabilities are summarized as follows:
At December 31 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------ Amounts due to affiliated or other related parties 1,901 2,052 Accrued interest 8,921 5,740 Accrued construction costs 36,397 14,859 Accrued expenses and deferred income 82,938 58,507 Foreign Currency Swap 26,481 3,983 Other liabilities 33,562 18,683 - ------------------------------------------------------------------ 190,200 103,824 ==================================================================
13 DEBT Debt is summarized as follows at December 31, 1996 and 1995:
Weighted average interest rate 1996 1995 1996 1995 (pound) '000 (pound) '000 - ------------------------------------------------------------------------------- Senior Debentures 9.625% 9.625% 175,203 193,113 Senior Discount Debentures 11.000% 11.000% 600,799 595,266 Senior Secured Facility 8.281% - 100,000 - Other debt 7.790% 8.450% 3,349 3,886 - ------------------------------------------------------------------------------- 879,351 792,265 ===============================================================================
SENIOR DEBENTURES In October 1995, the Company issued US$300,000,000 principal amount of Senior Debentures with a yield to maturity of 9.625%. The cash consideration received at the date of issue was (pound)188,703,000. The Senior Debentures mature on October 1, 2006. Interest on the Senior Debentures accrues semi-annually and is payable in arrears. The Senior Debentures are redeemable, in whole or in part, at the option of the Company at any time on or after October 1, 2000 at the redemption price of 104.813% of the principal amount during the year commencing October 1, 2000, 102.406% of the principal amount during the year commencing October 1, 2001, and thereafter at 100% of the principal amount plus accrued and unpaid interest. The Senior Debentures and the Senior Discount Debentures, which are described below, were issued to finance general working capital, capital expenditure, foreign currency swap and options to hedge against adverse fluctuations in exchange rates, and additional investments in affiliated companies. A portion of the net proceeds of the issue also was used to repay the (pound)157,930,000 indebtedness outstanding under the loan facility held by TCMN at the date that it was acquired by the Company. The indenture under which the Senior Debentures were issued contains various covenants which, among other things, restrict the ability of the Company to incur additional indebtedness, pay dividends, create certain liens, enter into certain transactions with shareholders or affiliates, or sell certain assets. The Company was in compliance with the convenants at December 31, 1996. The Company has entered into a Foreign Currency Swap to hedge its exposure to adverse fluctuations in exchange rates on the principal amount which will be outstanding on October 1, 2000, the earliest redemption date, and the associated interest payments of the Senior Debentures. The terms of the Foreign Currency Swap are described in Note 4 to the consolidated financial statements. The Senior Debentures are unsecured liabilities of the Company. SENIOR DISCOUNT DEBENTURES In October 1995, the Company issued US$1,536,413,000 principal amount at maturity of Senior Discount Debentures with a yield to maturity of 11%. The cash consideration received at the date of issue was (pound)566,109,000 (US$900,000,000). At December 31, 1996, the unamortized portion of the discount on issue was (pound)296,482,000 (US$507,665,000). The Senior Discount Debentures mature on October 1, 2007. Interest on the Senior Discount Debentures accrues semi-annually. Cash interest will not accrue on the Senior Discount Debentures prior to October 1, 2000 and is thereafter payable in arrears on April 1 and October 1 of each year at a rate of 11% per annum. The Senior Discount Debentures are redeemable, in whole or in part, at the option of the Company at any time on or after October 1, 2000 at the redemption price of 100% of the principal amount plus accrued and unpaid interest. The indenture under which the Senior Discount Debentures were issued contains various covenants as set out for the Senior Debentures above and the Company was in compliance with such covenants at December 31, 1996. IV-32 272 13 DEBT (continued) The Company has purchased a five year Pounds Sterling put option to purchase US$1,537,000,000 to hedge its exposure to adverse fluctuations in exchange rates on the principal amount which will be outstanding on October 1, 2000, the earliest redemption date, of the Senior Discount Debentures. The terms of the foreign currency option contract are described in Note 4 to the consolidated financial statements. The Senior Discount Debentures are unsecured liabilities of the Company. SENIOR SECURED FACILITY During the year, a subsidiary of the Company entered into a senior secured credit facility (the "Senior Secured Facility") with a syndicate of banks. The facility is available to finance the capital expenditure, working capital requirements and other permitted related activities involving the construction and operation of all the Company's owned and operated franchises, to pay cash interest on the Company's unsecured debentures, to fund the repayment of existing secured borrowings in respect of the London South and South West Regional Franchise Areas, to fund loans to or investments in affiliated companies, to bid for or purchase, and subsequently construct, licenses or franchises which may become available and to refinance advances and the payment of interest, fees, and expenses in respect of the Senior Secured Facility. The facility is divided into two tranches: the first portion (Tranche A) is available on a revolving basis for up to (pound)300 million, reducing to (pound)100 million by June 30, 1998 with full repayment by December 31, 1998; the second portion (Tranche B) is available on a revolving basis concurrently with Tranche A for an amount up to 6.5 times the trailing, rolling six month annualized consolidated net operating cash flow, gradually reducing throughout the period of the facility to 4 times by January 1, 2000. Thereafter, the amount outstanding under the Tranche B facility converts to a term loan amortizing over 5 years. The aggregate drawing at any time under both tranches cannot exceed (pound)1.2 billion. At December 31, 1996, (pound)100,000,000 was outstanding under Tranche A. During the year, the Company paid (pound)2,487,000 for commitment fees relating to the unused portion of the facility. Borrowings under the facility are secured by the assets of the Company, including the partnership interests and shares of subsidiaries, and bear interest at 2.25% above LIBOR for Tranche A and between 0.5% and 1.875% above LIBOR (depending on the ratio of borrowings to the trailing, rolling six month annualized consolidated net operating cash flow) for Tranche B. In September 1996, the Company entered into certain delayed-starting interest rate swap agreements in order to manage interest rate risk on the Senior Secured Facility. The terms of the swap agreements are described in Note 4 to the consolidated financial statements. The Company's ability to borrow under the facility is subject to, among other things, its compliance with the financial and other covenants and borrowing conditions contained therein. The Company was in compliance with the covenants at December 31, 1996. OTHER DEBT Other debt is represented by property loans which are secured on freehold land and buildings held by the Company which mature in 1997. The property loans bear interest at a rate of between 1.00% and 1.75% above LIBOR. 14 INCOME TAXES As discussed in Note 3 to the consolidated financial statements, the Company has adopted SFAS No 109 as of November 22, 1994. The adoption of this standard has no cumulative effect to be reported in the 1994 consolidated statement of operations. Loss before income taxes is solely attributable to the UK. The provisions for income taxes follow:
Year ended December 31 1996 1995 (pound) '000 (pound) '000 - -------------------------------------------------------------------------------- Currently payable 50 16 ================================================================================
A reconciliation of income taxes determined using the statutory UK rate of 33% to the effective rate of income tax is as follows:
Year ended December 31 1996 1995 % % - -------------------------------------------------------------------------------- Corporate tax at UK statutory rates (33) (33) Permanent differences 1 3 Valuation allowance and other temporary differences 30 26 Share of losses of affiliates 2 4 - -------------------------------------------------------------------------------- - - ================================================================================
Deferred income tax assets and liabilities at December 31, 1996 and 1995 are summarized as follows:
1996 1995 (pound) '000 (pound) '000 - -------------------------------------------------------------------------------- Deferred tax assets relating to: Fixed assets - 2,200 Net operating loss carryforwards 310,300 97,000 Other 3,400 9,200 - -------------------------------------------------------------------------------- Deferred tax asset 313,700 108,400 Valuation allowance (175,200) (96,300) - -------------------------------------------------------------------------------- 138,500 12,100 - -------------------------------------------------------------------------------- Deferred tax liabilities relating to: Fixed assets (110,600) - Other (27,900) (12,100) - -------------------------------------------------------------------------------- Deferred tax liabilities (138,500) (12,100) - -------------------------------------------------------------------------------- DEFERRED TAX ASSET PER BALANCE SHEET - - ================================================================================
IV-33 273 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14 INCOME TAXES (continued) At December 31, 1996 and 1995 the Company estimates that it has, subject to Inland Revenue agreement, net operating losses ("NOLs") of (pound)940,000,000 and (pound)294,000,000, available to relieve against future profits. NOLs at D ember 31, 1995 exclude capital allowances on assets which were available to the Company, but had not been claimed. At December 31, 1996, NOLs include a claim for all available capital allowances. The NOLs have an unlimited carry forward period under UK tax law, but are limited to their use to the type of business which has generated the loss. 15 EXTRAORDINARY GAIN The Company had entered into interest rate swap agreements in order to manage the interest rate risk on its previous revolving credit facilities by swapping the interest rate on part of its variable rate debt for a fixed interest rate. Following the initial public offering of the Company in November 1994, the Company used a portion of the proceeds from the offering to repay all amounts outstanding under these credit facilities and the interest rate swap agreements ceased to be a hedge of the interest rate liability. The interest rate swaps were retained pending their use as hedges of interest rates on future drawdowns of the credit facilities. They had been placed on the balance sheet at their fair value at the date upon which the debt was repaid and an extraordinary gain equal to the aggregate fair value of the interest rate swaps at this date was recognized in the consolidated statement of operations. Any change in the aggregate fair value of the swap agreements since this date had been recognized in the consolidated statement of operations. On October 12, 1995, the Company sold the interest rate swaps, recognizing a loss on disposal. 16 SHAREHOLDERS' EQUITY MOVEMENTS IN SHARE CAPITAL During the year the Company issued 7,604,200 ordinary shares of 10 pence each for the following consideration: an additional 1% of the ordinary shares of Cable London plc, the surrender by Trans-Global (UK) Limited of its option to acquire 9.9% of equity in the South East Regional Franchise Area, and the remaining 20% of the ordinary shares of Telewest Communications (Cotswolds) Limited held by a minority interest. On October 3, 1995, the Company acquired the entire share capital of TCMN from its former shareholders in exchange for an aggregate of 183,994,960 ordinary shares of 10 pence each and 230,790,208 convertible preference shares of 10 pence each. On October 2, 1995, pursuant to a court-approved scheme of arrangement (the "Scheme of Arrangement"), the Company exchanged 735,468,440 ordinary shares of 10 pence each and 265,276,500 convertible preference shares of 10 pence each in consideration for the transfer of shares of TCCL to the Company. Dealings in ordinary shares and ADSs representing ordinary shares of TCCL ceased on the London Stock Exchange and NASDAQ National Market immediately prior to the execution of the Scheme of Arrangement and upon completion of the Scheme of Arrangement, dealings in the ordinary shares and ADSs representing ordinary shares of the Company commenced. Immediately prior to the execution of the Scheme of Arrangement on October 2, 1995, TCCL restructured its share capital by converting 112,276,500 ordinary shares of 10 pence each into 112,276,500 convertible preference shares of 10 pence each. On November 22, 1994, immediately following the Contribution, TCCL issued 604,000,000 ordinary shares and 153,000,000 convertible preference shares to the Joint Venturers and completed an initial public offering in which 239,744,940 ordinary shares of 10 pence each were issued to the public market. CONVERTIBLE PREFERENCE SHARES The convertible preference shares are convertible into fully paid up ordinary shares at any time on the basis of one ordinary share for every convertible preference share provided that, immediately following the conversion, the percentage of the issued ordinary share capital of the Company held by members of the public, as defined by the listing rules of the London Stock Exchange, does not fall below 25%. The ordinary shares arising on conversion will rank pari passu in all respects with the ordinary shares then in issue. The holders of the convertible preference shares are entitled to receive a dividend of such amount as is declared and paid in relation to each ordinary share, subject to the dividend to be paid not exceeding 20 pence per share net of any associated tax credit. In the event of a winding-up of the Company or other return of capital, the assets of the Company available for distribution will be paid first to the holders of the convertible preference shares up to the sum of capital paid-up or credited as paid-up unless the right of election upon a winding-up of the Company has been exercised in respect of the convertible preference shares ("the Elected Shares"). If the election has been exercised, the holders of the ordinary shares and the Elected Shares will receive any surplus in accordance with the amount paid-up or credited as paid-up on the shares held. The holders of the convertible preference shares are not entitled to vote at any general meeting of the Company unless the meeting includes the consideration of a resolution for winding up the Company or a resolution modifying the rights or privileges attaching to the convertible preference shares. IV-34 274 17 SHARE-BASED COMPENSATION PLANS At December 31, 1996, the Company operated three types of share-based compensation plans: the Telewest Executive Share Option Schemes, the Telewest Sharesave Schemes, and the Telewest Restricted Share Scheme. The Company applies APB Opinion Bulletin No. 25 and related interpretations in accounting for its share-based compensation plans. Accordingly, no compensation cost has been charged to the statement of operations in respect of performance-based option grants since the options do not have exercise prices less than the market value of the Company's ordinary shares. Compensation cost has been recognized for fixed option grants since the options have exercise prices less than the market value of the Company's ordinary shares at the date of grant. Compensation cost has also been recognized for awards over ordinary shares made under the Telewest Restricted Share Scheme since the awards have no exercise price. Compensation cost recognized for fixed option grants and awards under the Telewest Restricted Share Scheme was (pound)1,380,000, (pound)1,334,000 and (pound)nil for 1996, 1995, and 1994, respectively. If compensation cost for share option grants and for awards under the Telewest Restricted Share Scheme had been determined based on their fair value at the date of grant for 1996 and 1995 consistent with the method prescribed by SFAS 123, the Company's net loss and loss per share would have been adjusted to the pro forma amounts set out below:
1996 1995 (pound) '000 (pound) '000 - ----------------------------------------------------------------- Net loss - As reported 262,391 137,531 - Pro forma 264,579 138,468 (pound) (pound) - ----------------------------------------------------------------- Loss per share - As reported 0.28 0.16 - Pro forma 0.29 0.16 - -----------------------------------------------------------------
PERFORMANCE-BASED SHARE OPTION COMPENSATION PLANS The Company has two performance-based share option plans: the Telewest 1995 (No. 1) Executive Share Option Scheme and the Telewest 1995 (No. 2) Executive Share Option Scheme. Under both plans, certain officers and key employees are granted options to purchase ordinary shares of the Company. The exercise price of each option generally equals the market price of the Company's ordinary shares on the date of grant. The options are exercisable between three and ten years after the date of the grant with exercise conditional on the Company's shares out-performing by price the FT-SE100 Index over any three year period preceding exercise. The Company may grant options for up to 92,000,000 ordinary shares. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using a weighted-average risk-free interest rate of 8.1 per cent and 8.3 per cent for grants in 1996 and 1995, respectively, and an expected volatility of 30 per cent used for grants in both 1996 and 1995. The Company does not expect to pay a dividend on its ordinary shares at any time during the expected life of the option. IV-35 275 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 17 SHARE-BASED COMPENSATION PLANS (continued) A summary of the status of the Company's performance-based share option plans as at December 31, 1996 and 1995, the first year in which the options were granted, and changes during the years ended on those dates is presented below:
1996 1995 WEIGHTED Weighted NUMBER AVERAGE Number average OF SHARES EXERCISE PRICE of shares exercise price - --------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 8,645,229 160.4p - - Granted 4,121,474 140.9p 8,871,398 160.3p Forfeited (1,527,851) 162.6p (226,169) 158.0p - --------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 11,238,852 153.0p 8,645,229 160.4p =========================================================================================================================== Options exercisable at year end 1,023,042 154.3p - - Weighted average fair value of options granted during the year 75.6p 86.0p
The following table summarizes information about the Company's performance-based share option plans outstanding at December 31, 1996.
Options outstanding Options exercisable ------------------------------------------------------ --------------------------------- Number Weighted Number outstanding at average Weighted exercisable at Weighted December 31, remaining average December 31, average Range of exercise prices 1996 contractual life exercise price 1996 exercise price - --------------------------------------------------------------------------------------------------------------------------------- 138.0 - 141.0p 3,945,812 7.0 years 140.1p 343,954 140.6p 154.5 - 155.5p 5,275,536 5.8 years 154.6p 414,019 154.6p 171.5 - 173.5p 2,017,504 6.9 years 172.4p 265,069 171.8p - --------------------------------------------------------------------------------------------------------------------------------- 138.0 - 173.5p 11,238,852 6.4 years 152.7p 1,023,042 154.3p =================================================================================================================================
FIXED SHARE OPTION COMPENSATION PLANS The Company also operates the Telewest Sharesave Scheme, a fixed share option compensation scheme. Under this plan, the Company grants options to employees to purchase ordinary shares at a 20% discount to market price. These options can be exercised only with funds saved by employees over time in a qualified savings account. The options are exercisable between 37 and 66 months after the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using a weighted-average risk-free interest rate of 7.4 per cent, 7.2 per cent, and 8.7 per cent for grants in 1996, 1995 and 1994, respectively, and an expected volatility of 30 per cent for all years. The Company does not expect to pay a dividend on its ordinary shares at any time during the expected life of the option. A summary of the status of the Company's fixed share option plans as of December 31, 1996, 1995, and 1994 and the changes during the years ended on those dates is presented below:
1996 1995 1994 WEIGHTED Weighted Weighted NUMBER AVERAGE Number average Number average OF SHARES EXERCISE PRICE of shares exercise price of shares exercise price - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,345,941 139.6p 1,666,534 150.0p - - Granted 2,165,009 102.5p 2,168,157 134.0p 1,666,534 150.0p Forfeited (1,434,315) 139.8p (488,750) 150.0p - - - --------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 4,076,635 119.8p 3,345,941 139.6p 1,666,534 150.0p ================================================================================================================================== Options exercisable at year end 75,977 32,200 - Weighted average fair value of options granted during the year 49.7p 79.3p 97.4p
IV-36 276 17 SHARE-BASED COMPENSATION PLANS (continued) The following table summarizes information about the Company's fixed share options outstanding at December 31, 1996.
Options outstanding - ------------------------------------------------------------------------------- Number Weighted average outstanding at remaining Exercise price December 31, 1996 contractual life - ------------------------------------------------------------------------------- 102.5p 2,165,009 3.6 years 134.0p 1,258,104 4.6 years 150.0p 653,522 3.6 years - ------------------------------------------------------------------------------- 102.5 - 150.0p 4,076,635 3.9 years ===============================================================================
TELEWEST RESTRICTED SHARE SCHEME The Company operates the Telewest Restricted Share Scheme in conjunction with an employment trust, the Telewest Employees Share Ownership Plan Trust (the "Telewest ESOP"), which has been designed to provide incentives to executives of the Company based on the performance of the Company. Under the Telewest Restricted Share Scheme, executives may be granted awards over ordinary shares of the Company based on a percentage of salary. The awards are made for no consideration. The awards generally vest three years after the date of the award and are exercisable for up to seven years after the date when they vest. Awards granted under the Telewest Restricted Share Scheme may be made over a maximum of 4,000,000 ordinary shares of the Company. The fair value of each award is the share price of the ordinary shares on the date the award was made. A summary of the status of the Company's Restricted Share Scheme at December 31, 1996 and 1995, the first year in which the awards were made, and changes during the years ended on those dates is presented below:
1996 1995 NUMBER OF Number of SHARES shares - ------------------------------------------------------------- Outstanding at beginning of year 2,616,857 - Granted 328,297 2,857,191 Exercised (62,920) _ Forfeited (233,801) (240,334) - ------------------------------------------------------------- Outstanding at end of year 2,648,433 2,616,857 ============================================================= Awards exercisable at year end 646,341 49,867 ============================================================= WEIGHTED AVERAGE FAIR VALUE OF AWARDS GRANTED DURING THE YEAR (pound)1.47 (pound)1.72
At December 31, 1996, the 2,648,433 awards outstanding and the 646,341 awards exercisable have weighted average remaining contractual lives of 8.2 years and 8.0 years, respectively. 18 COMMITMENTS AND CONTINGENCIES CAPITAL AND OPERATING LEASES The Company leases a number of assets under arrangements accounted for as capital leases, as follows:
Acquisition Accumulated Net book costs depreciation value (pound) '000 (pound) '000 (pound) '000 - --------------------------------------------------------------------- At December 31, 1996 Electronic equipment 46,634 (8,376) 38,258 Other equipment 8,780 (1,900) 6,880 At December 31, 1995 Electronic equipment 27,148 (3,352) 23,796 Other equipment 1,512 (432) 1,080 - ---------------------------------------------------------------------
Depreciation charged on these assets was (pound)7,106,000 and (pound)3,194,000 for the years ended December 31, 1996 and 1995, respectively. The Company leases business offices and uses certain equipment under lease arrangements accounted for as operating leases. Minimum rental expense under such arrangements amounted to (pound)3,065,000, (pound)2,276,000 and (pound)1,535,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under capital and operating leases are summarized as follows as at December 31,1996:
Capital Operating leases leases (pound) '000 (pound) '000 - -------------------------------------------------------------- 1997 6,033 2,796 1998 7,036 2,234 1999 8,025 1,717 2000 9,320 1,687 2001 8,517 1,630 2002 and thereafter 32,411 10,116 - ------------------------------------------------ 71,342 Imputed interest (16,952) - ------------------------------------------------ TOTAL 54,930 ================================================
It is expected that, in the normal course of business, expiring leases will be renewed or replaced. MINORITY INTERESTS In October 1993, the Company acquired all of the outstanding minority interests in the London South Regional Franchise Area from various shareholders other than the interest of one shareholder holding an approximately 0.03% interest in the London South Regional Franchise Area. IV-37 277 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 18 COMMITMENTS AND CONTINGENCIES (continued) In consideration for such minority interests, the Company made an initial payment to the sellers of approximately (pound)790,000 and may be required to make an additional payment to one of the sellers upon the occurrence of certain events (including the completion of certain share issuances by the Company). The amount of this payment is based upon the valuation of the London South Regional Franchise Area and the percentage of the franchise formerly owned by the minority shareholders. The Company does not expect any payments to the shareholders to have a material effect on the liquidity or capital resources of the Company. CONTINGENT LIABILITIES The Company is a party to various legal proceedings in the ordinary course of business which it does not believe will result, in aggregate, in a material adverse effect on its financial condition. 19 RELATED PARTY TRANSACTIONS The Company, in the normal course of providing cable television services, purchases certain of its programming from UK affiliates of TCI. Such programming is purchased on commercially-available terms. Total purchases in the year amounted to (pound)6,951,000. The Company has management agreements with TCI and US WEST under which amounts are paid by the Company relating to TCI and US WEST employees who have been seconded to the Company. For the years ended December 31, 1996, 1995 and 1994, fees charged to the Company under the agreements were (pound)2,185,000, (pound)3,042,000 and (pound)2,128,000, respectively. The Company has similar managment agreements with Cox Communications, Inc. and SBC Communications, Inc. For the years ended December 31,1996 and 1995, fees charged to the Company under these agreements were (pound)374,000 and (pound)233,000, respectively. The Company has entered into consulting agreements with its affiliates pursuant to which the Company provides consulting services related to telephony operations. Under the agreements, the Company receives an annual fee from each affiliate based upon the affiliate's revenues. Fees received for the years ended December 31,1996, 1995 and 1994 were (pound)642,000, (pound)566,000 and (pound)557,000, respectively. The Company also receives a fee for providing switching support services, comprising of a fixed element based on a number of switches and a variable element based on a number of lines. Fees received for the years ended December 31, 1996, 1995 and 1994, were (pound)741,000, (pound)827,000 and (pound)822,000, respectively. 20 QUARTERLY FINANCIAL INFORMATION (unaudited)
1996 Total Fourth quarter Third quarter Second quarter First quarter (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 - ----------------------------------------------------------------------------------------------------------------------------------- Revenue 290,266 83,663 73,123 68,320 65,160 Operating loss (155,400) (46,095) (34,512) (38,536) (36,257) Finance expenses, net (90,788) 28,222 (30,710) (54,503) (33,797) Net loss (262,391) (22,361) (69,303) (97,080) (73,647) Loss per ordinary share 28 pence 2 pence 7 pence 10 pence 8 pence ===================================================================================================================================
1995 Total Fourth quarter Third quarter Second quarter First quarter (pound) '000 (pound) '000 (pound) '000 (pound) '000 (pound) '000 - ----------------------------------------------------------------------------------------------------------------------------------- Revenue 144,784 57,144 32,240 28,969 26,431 Operating loss (90,197) (33,464) (20,135) (19,209) (17,389) Finance expenses, net (34,607) (29,344) (3,662) (1,064) (537) Net loss (137,531) (66,346) (27,325) (23,547) (20,313) Loss per ordinary share 16 pence 7 pence 3 pence 3 pence 2 pence ===================================================================================================================================
The Company regularly reviews the estimated useful lives of its property and equipment and the estimates used in calculating the capitalizable overheads which relate to the construction of the cable network. With effect from January 1, 1996, the Company has revised the estimated useful lives of certain assets as set out in Note 3 to the consolidated financial statements and certain of the estimates used in calculating capitalizable overheads. The impact of these revisions is to increase the depreciation charge for the year from (pound)110,233,000 to (pound)129,716,000 and to increase the loss per ordinary share for the year by 2 pence, and to increase the capitalization of overheads in the year from (pound)38,812,000 to (pound)54,019,000, and to reduce loss per ordinary share for the year by 2 pence. This impact principally has been accounted for in the fourth quarter of 1996. Finance expenses includes foreign exchange gains and losses on the re-translation or valuation of non-Sterling denominated financial instruments using period end exchange rates and market valuations. IV-38 278 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT Partners of Sprint Spectrum Holding Company, L.P. Kansas City, Missouri We have audited the accompanying consolidated balance sheets of Sprint Spectrum Holding Company, L.P. and subsidiaries (the "Partnership"), development stage enterprises, as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 1996, for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 1996 financial statements of American PCS, L.P. ("APC") an investment of the Partnership which is accounted for by use of the equity method. The Partnership's share of APC's net loss for the year ended December 31, 1996 was $96,850,000 and is included in the accompanying consolidated financial statements. The financial statements of APC were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for APC, is based solely on the reports of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Sprint Spectrum Holding Company, L.P. and subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for the years then ended and for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, Sprint Spectrum Holding Company, L.P. and its subsidiaries are in the development stage as of December 31, 1996. /s/ DELOITTE & TOUCHE LLP Kansas City, Missouri March 14, 1997 IV-39 279 REPORT OF INDEPENDENT ACCOUNTANTS In our opinion, the balance sheet and the related statements of loss, of changes in partners capital and cash flows (not presented separately herein) present fairly, in all material respects, the financial position of American PCS, L.P. at December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnerships management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Washington, DC March 7, 1997 IV-40 280 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents .......................... $ 69,988 $ 1,123 Accounts receivable, net ........................... 3,310 -- Receivable from affiliates ......................... 12,901 340 Inventory .......................................... 72,414 -- Prepaid expenses and other assets, net ............. 14,260 188 Note receivable--unconsolidated partnership ........ 226,670 655 ------------ ------------ Total current assets ............................. 399,543 2,306 INVESTMENT IN PCS LICENSES, net ....................... 2,122,908 2,124,594 INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS ............ 179,085 85,546 PROPERTY, PLANT AND EQUIPMENT, net .................... 1,408,680 31,897 MICROWAVE RELOCATION COSTS, net ....................... 135,802 -- OTHER ASSETS, net ..................................... 77,383 -- ------------ ------------ TOTAL ASSETS .......................................... $ 4,323,401 $ 2,244,343 ============ ============ LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Advances from partners ............................. $ 167,818 $ -- Accounts payable ................................... 196,146 41,950 Payable to affiliate ............................... 5,626 7,598 Accrued expenses ................................... 81,230 1,700 Current maturities of long-term debt ............... 49 -- ------------ ------------ Total current liabilities ........................ 450,869 51,248 LONG-TERM COMPENSATION OBLIGATION ..................... 11,356 1,856 CONSTRUCTION OBLIGATIONS .............................. 714,934 -- LONG-TERM DEBT ........................................ 686,192 -- COMMITMENTS AND CONTINGENCIES LIMITED PARTNER INTEREST IN CONSOLIDATED SUBSIDIARY ......................................... 13,397 13,170 PARTNERS' CAPITAL AND ACCUMULATED DEFICIT: Partners' capital .................................. 3,003,484 2,291,806 Deficit accumulated during the development stage ... (556,831) (113,737) ------------ ------------ Total partners' capital .......................... 2,446,653 2,178,069 ------------ ------------ TOTAL LIABILITIES AND PARTNERS' CAPITAL ............... $ 4,323,401 $ 2,244,343 ============ ============
See notes to consolidated financial statements IV-41 281 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
CUMULATIVE PERIOD FROM PERIOD FROM OCTOBER 24, 1994 OCTOBER 24, 1994 (DATE OF (DATE OF YEAR ENDED YEAR ENDED INCEPTION) TO INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 1996 ------------ ------------ ---------------- ---------------- OPERATING REVENUES: Service ................................ $ 33 $ -- $ -- $ 33 Equipment .............................. 4,142 -- -- 4,142 ------------ ------------ ---------------- ---------------- Total operating revenues ............. 4,175 -- -- 4,175 OPERATING EXPENSES: Cost of service ........................ 21,928 -- -- 21,928 Cost of equipment ...................... 14,148 -- -- 14,148 Selling ................................ 38,345 145 -- 38,490 General and administrative ............. 274,352 66,195 3,294 343,841 Depreciation and amortization .......... 11,275 211 38 11,524 ------------ ------------ ---------------- ---------------- Total operating expenses ............. 360,048 66,551 3,332 429,931 ------------ ------------ ---------------- ---------------- LOSS FROM OPERATIONS ...................... (355,873) (66,551) (3,332) (425,756) OTHER INCOME (EXPENSE): Interest income ........................ 8,593 460 24 9,077 Interest expense, net .................. (323) -- -- (323) Other income ........................... 1,586 38 -- 1,624 Equity in loss of unconsolidated ....... (96,850) (46,206) -- (143,056) partnership Limited partner interest in net loss of consolidated subsidiary ........... (227) 1,830 -- 1,603 ------------ ------------ ---------------- ---------------- Total other income (expense) ......... (87,221) (43,878) 24 (131,075) ------------ ------------ ---------------- ---------------- NET LOSS .................................. $ (443,094) $ (110,429) $ (3,308) $ (556,831) ============ ============ ================ ================
See notes to consolidated financial statements IV-42 282 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (IN THOUSANDS)
PARTNERS' ACCUMULATED CAPITAL DEFICIT TOTAL ----------- ----------- ----------- BALANCE, October 24, 1994 .......... $ -- $ -- $ -- Contributions of capital ........... 123,438 -- 123,438 Net loss ........................... -- (3,308) (3,308) ----------- ----------- ----------- BALANCE, December 31, 1994 ......... 123,438 (3,308) 120,130 Contributions of capital ........... 2,168,368 -- 2,168,368 Net loss ........................... -- (110,429) (110,429) ----------- ----------- ----------- BALANCE, December 31, 1995 ......... 2,291,806 (113,737) 2,178,069 Contributions of capital ........... 711,678 -- 711,678 Net loss ........................... -- (443,094) (443,094) ----------- ----------- ----------- BALANCE, December 31, 1996 ......... $ 3,003,484 $ (556,831) $ 2,446,653 =========== =========== ===========
See notes to consolidated financial statements IV-43 283 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
CUMULATIVE PERIOD FROM PERIOD FROM OCTOBER 24, 1994 OCTOBER 24, 1994 (DATE OF (DATE OF YEAR ENDED DECEMBER 31, INCEPTION) TO INCEPTION) TO ---------------------------- DECEMBER 31, DECEMBER 31, 1996 1995 1994 1996 ------------ ------------ ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .......................................... $ (443,094) $ (110,429) $ (3,308) $ (556,831) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in loss of unconsolidated partnership ... 96,850 46,206 -- 143,056 Limited partner interest in net loss of consolidated subsidiary ...................... 227 (1,830) -- (1,603) Depreciation and amortization .................. 11,275 211 38 11,524 Amortization of debt discount and issuance costs ............................... 14,008 -- -- 14,008 Loss on disposal of non-network equipment ...... -- 31 -- 31 Changes in assets and liabilities: Receivables ................................. (15,871) (340) -- (16,211) Inventory ................................... (72,414) -- -- (72,414) Prepaid expenses and other assets ........... (21,608) (178) (10) (21,796) Accounts payable and accrued expenses ....... 231,754 47,503 3,745 283,002 Long-term compensation obligation ........... 9,500 1,856 -- 11,356 ------------ ------------ ---------------- ---------------- Net cash provided by (used in) operating activities .................... (189,373) (16,970) 465 (205,878) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .............................. (683,886) (31,763) (451) (716,100) Proceeds on sale of equipment ..................... -- 37 -- 37 Microwave relocation costs ........................ (123,354) -- -- (123,354) Purchase of PCS licenses .......................... -- (2,006,156) (118,438) (2,124,594) Investment in unconsolidated partnerships ......... (190,390) (131,752) -- (322,142) Loan to unconsolidated partnership ................ (231,964) (655) -- (232,619) Payment received on loan to unconsolidated partnership ..................................... 5,950 -- -- 5,950 ------------ ------------ ---------------- ---------------- Net cash used in investing activities ..... (1,223,644) (2,170,289) (118,889) (3,512,822) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from partners ............................ 167,818 -- -- 167,818 Proceeds from issuance of long-term debt .......... 674,201 -- -- 674,201 Payments on long-term debt ........................ (24) -- -- (24) Debt issuance costs ............................... (71,791) -- -- (71,791) Partner capital contributions ..................... 711,678 2,183,368 123,438 3,018,484 ------------ ------------ ---------------- ---------------- Net cash provided by financing activities .............................. 1,481,882 2,183,368 123,438 3,788,688 ------------ ------------ ---------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. 68,865 (3,891) 5,014 69,988 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...... 1,123 5,014 -- -- ------------ ------------ ---------------- ---------------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............ $ 69,988 $ 1,123 $ 5,014 $ 69,988 ============ ============ ================ ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - Interest paid, net of amount capitalized ..... $ 323 $ -- $ -- $ 323 NON-CASH INVESTING ACTIVITIES: - Capital expenditures and microwave relocation costs of $807,241 for the year ended December 31, 1996 are net of construction obligations of $714,934.
See notes to consolidated financial statements IV-44 284 SPRINT SPECTRUM HOLDING COMPANY, L.P. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Sprint Spectrum Holding Company, L.P. (the "Company" and "Holdings") is a limited partnership formed in Delaware on March 28, 1995, by Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc. (formerly known as TCI Telephony Services, Inc. as successor to TCI Network Services), Cox Telephony Partnership and Comcast Telephony Services (together the "Partners"). Holdings was formed pursuant to a reorganization of the operations of an existing partnership, WirelessCo, L.P. ("WirelessCo") which transferred certain operating functions to Holdings. The Partners are subsidiaries of Sprint Corporation ("Sprint"), Tele-Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox", and together with Sprint, TCI and Comcast, the "Parents"), respectively. The Company and certain other affiliated partnerships offer services as Sprint PCS. The Partners of the Company have the following ownership interests as of December 31, 1996 and 1995: Sprint Enterprises, L.P. 40% TCI Spectrum Holdings, Inc. 30% Cox Telephony Partnership 15% Comcast Telephony Services 15%
Each Partner's ownership interest consists of a 99% general partner interest and a 1% limited partnership interest. The Company is consolidated with certain subsidiaries, including NewTelco, L.P. and Sprint Spectrum L.P. which, in turn, has several subsidiaries. Sprint Spectrum L.P.'s subsidiaries are Sprint Spectrum Equipment Company, L.P. ("EquipmentCo"), Sprint Spectrum Realty Company, L.P. ("RealtyCo"), Sprint Spectrum Finance Corporation ("FinCo"), and WirelessCo. MinorCo, L.P. ("MinorCo") held the remaining ownership interests in NewTelco, L.P., Sprint Spectrum L.P., EquipmentCo, RealtyCo and WirelessCo at December 31, 1996. RealtyCo and EquipmentCo were organized on May 15, 1996 for the purpose of holding PCS network-related real estate interests and assets. FinCo was formed on May 20, 1996 to be a co-obligor of the debt obligations discussed in Note 5. VENTURE FORMATION AND AFFILIATED PARTNERSHIPS - A Joint Venture Formation Agreement (the "Formation Agreement"), dated as of October 24, 1994, and subsequently amended as of March 28, 1995, and January 31, 1996, was entered into by the Parents, pursuant to which the Parents agreed to form certain entities to (i) provide national wireless telecommunications services, including acquisition and development of personal communications service ("PCS") licenses, (ii) develop a PCS wireless system in the Los Angeles-San Diego Major Trading Area ("MTA") and (iii) take certain other actions. On October 24, 1994, WirelessCo was formed and on March 28, 1995, additional partnerships were formed consisting of Holdings, MinorCo, NewTelco, L.P., and Sprint Spectrum L.P. The Partners' IV-45 285 ownership interests in WirelessCo were initially held directly by the Partners as of October 24, 1994, the formation date of WirelessCo, but were subsequently contributed to Holdings and then to Sprint Spectrum L.P. on March 28, 1995. Prior to July 1, 1996, substantially all wireless operations of Sprint Spectrum L.P. and subsidiaries were conducted at Holdings and substantially all operating assets and liabilities, with the exception of the interest in an unconsolidated subsidiary and the ownership interest in PCS licenses, were held at Holdings. As of July 1, 1996, Holdings transferred these net assets, and assigned agreements related to the wireless operations to which it was a party to Sprint Spectrum L.P., EquipmentCo and RealtyCo. SPRINT SPECTRUM HOLDING COMPANY, L.P. (FORMERLY KNOWN AS MAJORCO, L.P.) PARTNERSHIP AGREEMENT - The Amended and Restated Agreement of Limited Partnership of MajorCo, L.P. (the "MajorCo Agreement"), dated as of January 31, 1996, among Sprint Enterprises, L.P., TCI Spectrum Holdings, Inc., Comcast Telephony Services and Cox Telephony Partnership provides that the purpose of the Company is to engage in wireless communications services. The MajorCo Agreement provides for the governance and administration of partnership business, allocation of profits and losses (including provisions for special and curative allocations), tax allocations, transactions with partners, disposition of partnership interests and other matters. The MajorCo Agreement generally provides for the allocation of profits and losses according to each Partner's proportionate percentage interest, after giving effect to special allocations. After special allocations, profits are allocated to partners to the extent of and in proportion to cumulative net losses previously allocated. Losses are allocated, after considering special allocations, according to each Partner's allocation of net profits previously allocated. The MajorCo Agreement provides for a planned capital amount to be contributed by the Partners ("Total Mandatory Contributions"), which represents the sum of $4.2 billion, which includes agreed upon values attributable to the contributions of certain additional PCS licenses by a Partner. The Total Mandatory Contributions amount is required to be contributed in accordance with capital contribution schedules to be set forth in approved annual budgets. The partnership board of Holdings may request capital contributions to be made in the absence of an approved budget or more quickly than provided for in an approved budget, but always subject to the Total Mandatory Contributions limit. The proposed budget for fiscal 1997 has not yet been approved by the partnership board. An additional Amended and Restated Capital Contribution Agreement (the "Amended Agreement") was executed effective October 2, 1996. The Amended Agreement recognizes that through December 31, 1995, approximately $2.2 billion of the Total Mandatory Contributions had been contributed to Sprint Spectrum L.P., and designates that $1.0 billion of the balance of the Total Mandatory Contributions amount shall be contributed to Sprint Spectrum L.P. At December 31, 1996, approximately $3.0 billion of the Total Mandatory Contributions had been contributed by the Partners to Holdings and its affiliated partnerships, of which $2.6 billion had been contributed to Sprint Spectrum L.P. PARENT UNDERTAKING - Each Parent has entered into an agreement which provides for certain undertakings by each Parent in favor of other Partners and which addresses certain obligations of the Parent pertaining to items including provision of services, confidentiality, foreign ownership, purchasing, restrictions on disposition and certain other matters. IV-46 286 DEVELOPMENT STAGE ENTERPRISES - The Company and its subsidiaries are development stage enterprises. The success of the Company's development is dependent on a number of business factors, including securing financing to complete network construction and fund initial operations, successfully deploying the PCS network and attaining profitable levels of market demand for Company products and services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements have been prepared from the date of inception, October 24, 1994, for WirelessCo, and from the dates of inception, for other consolidated subsidiaries, through December 31, 1996. The assets, liabilities, results of operations and cash flows of entities in which the Company has a controlling interest have been consolidated. All significant intercompany accounts and transactions have been eliminated. MinorCo, the limited partner, has been allocated approximately $227,000 in income and $1,830,000 of losses incurred by NewTelco, L.P. for the years ended December 31, 1996 and 1995, respectively, as losses in excess of the general partner's capital account (which consisted of $1,000) are to be allocated to the limited partner to the extent of its capital account. TRADEMARK AGREEMENT - Sprint(R) is a registered trademark of Sprint Communications Company, L.P. and is licensed to the Company on a royalty-free basis pursuant to a trademark license agreement between the Company and Sprint. REVENUE RECOGNITION - Operating revenues for PCS services are recognized as service is rendered. Operating revenues for equipment sales are recognized at the time the equipment is sold to a customer or an unaffiliated agent. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents. Under the Company's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are included in Accounts payable in the consolidated balance sheets. ACCOUNTS RECEIVABLE - Accounts receivable are net of an allowance for doubtful accounts of approximately $202,000 at December 31, 1996. No allowance was recorded for the year ended December 31, 1995. INVENTORY - Inventory consists of wireless communication equipment (primarily handsets). Inventory is stated at lower of cost or replacement cost. Gains and losses on the sales of handsets are recognized at the time of sale. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Construction work in progress represents costs incurred to design and construct the PCS network. Repair and maintenance costs are charged to expense as incurred. When network equipment is retired, or otherwise disposed of, its book value, net of salvage, is charged to accumulated depreciation. When non-network equipment is sold, retired or abandoned, the cost and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Property, plant and equipment are IV-47 287 depreciated using the straight-line method based on estimated useful lives of the assets. Depreciable lives range from 3 to 20 years. INVESTMENT IN PCS LICENSES AND OTHER INTANGIBLES - During 1994 and 1995, the Federal Communications Commission ("FCC") auctioned PCS licenses in specific geographic service areas. The FCC grants licenses for terms of up to ten years, and generally grants renewals if the licensee has complied with its license obligations. The Company believes it has and will continue to meet all requirements necessary to secure renewal of its PCS licenses. The Company has also incurred costs associated with microwave relocation in the construction of the PCS network. Amortization of PCS licenses and microwave relocation costs will commence as each service area becomes operational, over estimated useful lives of 40 years. Amortization expense of $1,711,000 is included in Depreciation and amortization expense in the consolidated statement of operations for the year ended December 31, 1996. No amortization expense was recorded in 1995 or 1994. Interest expense capitalized pertaining to the acquisition of the PCS licenses has been included in Property, plant and equipment. The ongoing value and remaining useful life of intangible assets are subject to periodic evaluation. The Company currently expects the carrying amounts to be fully recoverable. Impairments of intangibles and long-lived assets are assessed based on an undiscounted cash flow methodology. CAPITALIZED INTEREST - Interest costs associated with the construction of capital assets incurred during the period of construction are capitalized. The total capitalized in 1996 was approximately $30,461,000. There were no amounts capitalized in 1995 or 1994. DEBT ISSUANCE COSTS - Included in Other assets are costs associated with obtaining financing. Such costs are capitalized and amortized to interest expense over the term of the related debt instruments using the effective interest method. Amortization expense for the year ended December 31, 1996 was approximately $1,944,000. MAJOR CUSTOMER - The Company markets its products through multiple distribution channels, including Company-owned retail stores and third-party retail outlets. Sales to one third-party retail customer exceeded 10% of Equipment revenue in the consolidated statement of operations for the year ended December 31, 1996. INCOME TAXES - The Company has not provided for federal or state income taxes since such taxes are the responsibility of the individual Partners. FINANCIAL INSTRUMENTS - The carrying value of the Company's short-term financial instruments, including cash and cash equivalents, receivables from customers and affiliates and accounts payable approximates fair value. The fair value of the Company's long-term debt is based on quoted market prices for the same issues or current rates offered to the Company for similar debt. A summary of the fair value of the Company's long-term debt at December 31, 1996 is included in Note 5. USE OF 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 and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IV-48 288 RECLASSIFICATIONS - Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 financial statement presentation. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31, 1996 and 1995 (in thousands):
1996 1995 ---------- ---------- Land ....................................................... $ 905 $ -- Buildings and leasehold improvements ....................... 86,467 -- Office furniture and fixtures .............................. 68,210 2,902 Network equipment .......................................... 255,691 -- Telecommunications plant - construction work in progress ... 1,006,990 29,200 ---------- ---------- 1,418,263 32,102 Less accumulated depreciation .............................. (9,583) (205) ---------- ---------- $1,408,680 $ 31,897 ========== ==========
4. INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS AMERICAN PCS, L.P. - On January 9, 1995, WirelessCo acquired a 49% limited partnership interest in American PCS, L.P. ("APC"). American Personal Communications II, L.P. ("APC II") holds a 51% partnership interest in APC and is the general managing partner. The investment in APC is accounted for under the equity method. Concurrently with the execution of the partnership agreement, the Company entered into an affiliation agreement with APC which provides for the reimbursement of certain allocable costs and payment of affiliate fees. Effective August 31, 1996, WirelessCo's interest in APC, the existing loans to APC, and obligations to provide additional funding to APC were transferred to Holdings pursuant to an amendment to the partnership agreement. Summarized financial information is as follows (in thousands):
December 31, December 31, 1996 1995 ------------ ------------ Total assets ..................................... $ 331,556 $ 237,326 Total liabilities ................................ 450,690 171,180 Total revenues ................................... 71,838 5,153 Net loss ......................................... 202,626 51,551
The partnership agreement between the Company and APC II specifies that losses are allocated based on percentage ownership interests and certain other factors. In January 1997, the Company and APC II amended the APC partnership agreement with respect to the allocation of profits and losses. For financial reporting purposes, profits and losses are to be allocated in proportion to Holdings' and APC IV-49 289 II's respective partnership interests, except for costs related to stock appreciation rights and interest expense attributable to the FCC interest payments which shall be allocated entirely to APC II. Holding's investment in APC was approximately $75,546,000 at December 31, 1995. Holdings share of the losses of APC for the year ended December 31, 1996, totaling approximately $96,850,000, has exceeded its investment balance by approximately $20,554,000. The unamortized excess of the Company's investment over its equity in the underlying net assets of APC at the date of acquisition was approximately $10,139,000. This excess investment has been eliminated as a result of the recognition of Holding's equity in APC's losses. Amortization included in equity in loss of unconsolidated partnership prior to such elimination totaled approximately $128,000 and $240,000 for the years ended December 31, 1996 and 1995, respectively. The call option in APC acquired on January 9, 1995, provides the Company with the right to purchase an additional interest in APC from APC II in annual increments beginning five years after the initial PCS network build-out is completed. The first increment, an additional 20% of the APC II ownership interest, can be acquired in each of the fifth through seventh years with the remaining interest available for purchase in the eighth through tenth year. APC II also has the right to put a portion of its ownership interest to the Company on an annual basis beginning after the completion of the initial PCS network build-out, through the fifth anniversary date the greater of (i) one-fifth of APC II's initial percentage interest of 51% in APC or (ii) the portion of APC II's interest equal to APC II's obligation for annual FCC payments to be made by APC. The exercise price of the call and put options are based on the Fair Value, as defined, of APC at the date of exercise. The amount recorded at December 31, 1996 and 1995 for such option, net of accumulated amortization, was $9,250,000 and $10,000,000, respectively. As of December 31, 1996, APC II has not exercised any put options. The Company is committed to arrange or provide certain funding for procurement of APC's CDMA network. APC is under a contractual obligation to repay any amounts provided by the Company, plus interest. During the initial five year build-out period, which began in December 1994, APC II and the Company are obligated as follows: (a) APC II is obligated to make capital contributions in an amount equal to the aggregate principal and interest payments to the FCC, provided APC II has sufficient cash flows or can obtain financing from a third party; (b) if APC II is unable to meet such obligation, the Company is required to contribute the shortfall, upon ten days prior notice. Under certain circumstances, APC II has the right and is obligated to exercise its put right to the extent necessary to fund additional capital contributions; (c) the Company is required to contribute to APC cash necessary for operations up to an amount of approximately $98 million; and (d) the Company is obligated to fund the cash requirements of APC in excess of that described in (a), (b), and (c) above, in the form of either loans or additional capital up to $275 million. As of December 31, 1996, $98 million of equity had been contributed and approximately $232 million of partner advances had been extended, fulfilling the Company's obligations under (c) and (d) above. In January 1997, additional advances of $20 million were extended. All advances were repaid in full in February 1997 and no further obligation for (c) and (d) above exists. COX COMMUNICATIONS PCS, L.P. - On December 31, 1996, the Company acquired a 49% limited partner interest in Cox Communications PCS, L.P. ("Cox PCS"). Cox Pioneer Partnership ("CPP") holds a 50.5% general and a 0.5% limited partner interest and is the general and managing partner. The investment in Cox PCS is accounted for under the equity method. As of December 31, 1996, approximately $168 million in equity, including $2.45 million to PCS Leasing Co, L.P. IV-50 290 ("LeasingCo"), a wholly owned subsidiary of Cox PCS, had been contributed to Cox PCS by the Company. The excess of the Company's investment over its equity in the underlying net assets on December 31, 1996 was approximately $32.7 million. A portion of the initial contribution totaling approximately $23 million was payable at December 31, 1996. Under the terms of the partnership agreement, CPP and the Company are obligated as follows: (a) if the FCC consents to the assumption and recognition of the license payment obligations by Cox PCS, CPP is obligated to make capital contributions in an amount equal to such liability and related interest; (b) if the FCC does not consent, Cox PCS is obligated to reimburse Cox Communications, Inc. for interest payments exceeding the amount that would have been payable by Cox Communications, Inc. to the FCC had the interest rate been 5.875% through the date that Cox Communications, Inc. completes refinancing of the FCC liability; (c) the Company is obligated to make capital contributions of approximately $369,908,000 to Cox PCS; (d) the Company is not obligated to make any cash capital contributions upon the assumption by Cox PCS of the FCC payment obligations until CPP has contributed cash in an amount equal to the aggregate principal and interest of such obligations; and, (e) CPP and the Company are obligated to make additional capital contributions in an amount equal to such partner's percentage interest times the amount of additional capital contributions being requested. Additionally, the Company acquired a 49% limited partner interest in LeasingCo. LeasingCo is a limited partnership formed to acquire, construct or otherwise develop equipment and other personal property to be leased to Cox PCS. The Company is not obligated to make additional capital contributions beyond the initial funding of approximately $2,450,000. Concurrently with the execution of the partnership agreement, the Company entered into an affiliation agreement with Cox PCS which provides for the reimbursement of certain allocable costs and payment of affiliate fees. For the year ended December 31, 1996, allocable costs of approximately $7,339,000 are netted against the related operating expense captions in the accompanying consolidated statement of operations and in receivables from affiliates in the consolidated balance sheet. In addition, the Company purchases certain equipment, such as handsets, on behalf of Cox PCS. Receivables from affiliates for handsets and related equipment were approximately $6 million at December 31, 1996. 5. LONG-TERM DEBT AND BORROWING ARRANGEMENTS Long-term debt consists of the following at of December 31, 1996 (in thousands): 11% Senior Notes due in 2006 ........................................ $250,000 12 1/2% Senior Discount Notes due in 2006, net of unamortized discount of $214,501 .............................. 285,499 Credit facility - term loan ......................................... 150,000 Other ............................................................... 742 -------- Total debt .......................................................... 686,241 Less current maturities ............................................. 49 -------- Long-term debt ...................................................... $686,192 ========
IV-51 291 SENIOR NOTES AND SENIOR DISCOUNT NOTES - In August 1996, Sprint Spectrum L.P. and Sprint Spectrum Finance Corporation (together, the "Issuers") issued $250 million aggregate principal amount of 11% Senior Notes due 2006 ("the Senior Notes"), and $500 million aggregate principal amount at maturity of 12 1/2% Senior Discount Notes due 2006 (the "Senior Discount Notes" and, together with the Senior Notes, the "Notes"). The Senior Discount Notes were issued at a discount to their aggregate principal amount at maturity and generated proceeds of approximately $273 million. Cash interest on the Senior Notes will accrue at a rate of 11% per annum and is payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 1997. Cash interest will not accrue or be payable on the Senior Discount Notes prior to August 15, 2001. Thereafter, cash interest on the Senior Discount Notes will accrue at a rate of 12 1/2% per annum and will be payable semi-annually in arrears on each February 15 and August 15, commencing February 15, 2002. On August 15, 2001, the Issuers will be required to redeem an amount equal to $384.772 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding ($192 million in aggregate principal amount at maturity, assuming all of the Senior Discount Notes remain outstanding at such date). The Notes are redeemable at the option of the Issuers, in whole or in part, at any time on or after August 15, 2001 at the redemption prices set forth below, respectively, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12 month period beginning on August 15 of the years indicated below:
SENIOR DISCOUNT SENIOR NOTES NOTES REDEMPTION REDEMPTION YEAR PRICE PRICE ---- ------------ --------------- 2001 ....................................... 105.500% 110.000% 2002 ....................................... 103.667% 106.500% 2003 ....................................... 101.833% 103.250% 2004 and thereafter ........................ 100.000% 100.000%
In addition, prior to August 15, 1999, the Issuers may redeem up to 35% of the originally issued principal amount of the Notes. The redemption price of the Senior Notes is equal to 111.0% of the principal amount of the Senior Notes so redeemed, plus accrued and unpaid interest, if any, to the redemption date with the net proceeds of one or more public equity offerings, provided that at least 65% of the originally issued principal amount of Senior Notes would remain outstanding immediately after giving effect to such redemption. The redemption price of the Senior Discount Notes is equal to 112.5% of the accreted value at the redemption date of the Senior Discount Notes so redeemed, with the net proceeds of one or more public equity offerings, provided that at least 65% of the originally issued principal amount at maturity of the Senior Discount Notes would remain outstanding immediately after giving effect to such redemption. The Notes contain certain restrictive covenants, including (among other requirements) limitations on additional indebtedness, limitations on restricted payments, limitations on liens, and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. IV-52 292 BANK CREDIT FACILITY - Sprint Spectrum L.P. (the "Borrower") entered into an agreement with The Chase Manhattan Bank ("Chase") as administrative agent for a group of lenders for a $2 billion bank credit facility dated October 2, 1996. The proceeds of this facility are to be used to finance working capital needs, subscriber acquisition costs, capital expenditures and other general Borrower purposes. The facility consists of a revolving credit commitment of $1.7 billion and a $300 million term loan commitment, $150 million of which was drawn down subsequent to closing and $150 million of which was to be drawn within 90 days after closing. The amount available under the revolving credit facility was $450 million on December 31, 1996. There were no borrowings under the revolving credit facility as of December 31, 1996. The availability will be increased upon the achievement of certain financial and operating conditions as defined in the agreement. Commitment fees for the revolving portion of the agreement are payable quarterly based on average unused revolving commitments. The revolving credit commitment expires July 13, 2005. Availability will be reduced in quarterly installments ranging from $75 million to $175 million commencing January 2002. Further reductions may be required after January 1, 2000, to the extent that the Borrower meets certain financial conditions. Subsequent to December 31, 1996, the Borrower drew down $200 million under the revolving credit facility. The term loans are due in sixteen consecutive quarterly installments beginning January 2002 in aggregate principal amounts of $125,000 for each of the first fifteen payments with the remaining aggregate outstanding principal amount of the term loans due as the last installment. Interest on the term loans and/or the revolving credit loans is at the applicable LIBOR rate plus 2.5% ("Eurodollar Loans"), or the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5% ("ABR Loans"), at the Company's option. The interest rate may be adjusted downward for improvements in the bond rating and/or leverage ratios. Interest on ABR Loans and Eurodollar Loans with interest period terms in excess of 3 months is payable quarterly. Interest on Eurodollar Loans with interest period terms of less than 3 months is payable on the last day of the interest period. As of December 31, 1996, the interest rate on the first $150 million term loan was 8.19%. Borrowings under the Bank Credit Facility are secured by the Company's interests in WirelessCo, RealtyCo and EquipmentCo and certain other personal and real property (the "Shared Lien"). The Shared Lien equally and ratably secures the Bank Credit Facility, the Vendor Financing (Note 6) and certain other indebtedness of the Company. The credit facility is jointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners. The Bank Credit Facility agreement and Vendor Financing agreements (Note 6) contain certain restrictive financial and operating covenants, including (among other requirements) maximum debt ratios (including debt to total capitalization), limitations on capital expenditures, limitations on additional indebtedness and limitations on dividends and other payment restrictions affecting certain restricted subsidiaries. The loss of the right to use the Sprint trademark, the termination or non-renewal of any FCC license that reduces population coverage below specified limits, or changes in controlling interest in the Company, as defined, among other provisions, constitute events of default. IV-53 293 The estimated fair value of the Company's long-term debt at December 31, 1996 is as follows (in thousands):
Carrying Estimated Amount Fair Value -------- ---------- 11% Senior Notes $250,000 $270,625 12 1/2% Senior Discount Notes 285,499 337,950 Credit facility - term loan 150,000 151,343
At December 31, 1996, scheduled maturities of long-term debt during each of the next five years are as follows (in thousands): 1997 $ 49 1998 54 1999 60 2000 66 2001 192,459
6. COMMITMENTS AND CONTINGENCIES OPERATING LEASES - Minimum rental commitments as of December 31, 1996, for all noncancelable operating leases, consisting principally of leases for cell and switch sites and office space, are as follows (in thousands): 1997 $ 68,616 1998 61,186 1999 57,407 2000 38,356 2001 13,468
Gross rental expense for cell and switch sites aggregated approximately $13,097,000 for the year ended December 31, 1996. Gross rental expense for office space approximated $11,432,000, $687,000 and $105,000 for the years ended December 31, 1996 and 1995, and the period from October 24, 1994 (date of inception) through December 31, 1994, respectively. Certain leases contain renewal options that may be exercised from time to time and are excluded from the above amounts. PROCUREMENT CONTRACTS - On January 31, 1996, the Company entered into procurement and services contracts with AT&T Corp. (subsequently assigned to Lucent Technologies, Inc., "Lucent") and Northern Telecom, Inc. ("Nortel" and together with Lucent, the "Vendors") for the engineering and construction of a PCS network. Each contract provides for an initial term of ten years with renewals for additional one-year periods. The Vendors must achieve substantial completion of the PCS network within an established time frame and in accordance with criteria specified in the procurement contracts. Pricing for the initial equipment, software and engineering services has been established in the procurement contracts. The procurement contracts provide for payment terms based on delivery dates, substantial completion dates, and final acceptance dates. In the event of delay in the completion IV-54 294 of the PCS network, the procurement contracts provide for certain amounts to be paid to the Company by the Vendors. The minimum commitments for the initial term are $0.8 billion and $1.0 billion from Lucent and Nortel, respectively, which include, but are not limited to, all equipment required for the establishment and installation of the PCS network. HANDSET PURCHASE AGREEMENTS - In June, 1996, the Company entered into a three-year purchase and supply agreement with a vendor for the purchase of handsets and other equipment totaling approximately $500 million. During 1996, the Company purchased $85 million under the agreement. The total purchase commitment must be satisfied by April 30, 1998. In September, 1996, the Company entered into a second three-year purchase and supply agreement for the purchase of handsets and other equipment totaling more than $600 million. Purchases under the second agreement will commence on or after April 1, 1997, and the total purchase commitment must be satisfied during the three-year period after the initial handset purchase. VENDOR FINANCING - As of October 2, 1996, the Company entered into financing agreements with Nortel and Lucent for multiple drawdown term loan facilities totaling $1.3 billion and $1.8 billion, respectively. The proceeds of such facilities are to be used to finance the purchase of goods and services provided by the Vendors. Nortel has committed to provide financing in two phases. During the first phase, Nortel will finance up to $800 million. Once the full $800 million has been utilized and the Company obtains additional equity commitments and/or subordinated unsecured loans of at least $400 million and achieves certain operating conditions, Nortel will finance up to an additional $500 million. The amount available under the Nortel facility was $1.3 billion on December 31, 1996. In addition, the Company will be obligated to pay origination fees on the date of the initial draw down loan under the first and second phases. The Nortel agreement terminates on the earliest of (a) the date the availability under the commitments is reduced to zero, (b) December 31, 2000, or (c) March 31, 1997 if no borrowings under the agreements have been drawn. Lucent has committed to financing up to $1.5 billion through December 31, 1997, and up to an aggregate of $1.8 billion thereafter. The Company pays a facility fee on the daily amount of loans outstanding under the agreement, payable quarterly. The Lucent agreement terminates June 30, 2001. Subsequent to December 31, 1996, the Company borrowed approximately $274 million under the Lucent facility. Certain amounts included under Construction Obligations on the consolidated balance sheet may be financed under the Vendor Financing agreements. The principal amounts of the loans drawn under both the Nortel and Lucent agreements are due in twenty consecutive quarterly installments, commencing on the date which is thirty-nine months after the last day of such "Borrowing Year" (defined in the agreements as any one of the five consecutive 12-month periods following the date of the initial drawdown of the loan). The aggregate amount due each year is equal to percentages ranging from 10% to 30% multiplied by the total principal amount of loans during each Borrowing Year. The agreements provide two borrowing rate options. During the first phase of the Nortel agreement and throughout the term of the Lucent agreement "ABR Loans" bear interest at the greater of the IV-55 295 prime rate or 0.5% plus the Federal Funds effective rate, plus 2%. "Eurodollar Loans" bear interest at the London interbank (LIBOR) rate (any one of the 30-, 60- or 90-day rates, at the discretion of the Company), plus 3%. During the second phase of the Nortel agreement, ABR Loans bear interest at the greater of the prime rate or 0.5% plus the Federal Funds effective rate, plus 1.5%; and Eurodollar loans bear interest at the LIBOR rate plus 2.5%. Interest from the date of each loan through one year after the last day of the Borrowing Year is added to the principal amount of each loan. Thereafter, interest is payable quarterly. Borrowings under the Vendor Financing are secured by the Shared Lien (Note 5). The Vendor Financing is jointly and severally guaranteed by WirelessCo, RealtyCo and EquipmentCo and is non-recourse to the Parents and the Partners. SERVICE AGREEMENT - The Company has entered into an agreement with a vendor to provide PCS call record and retention services. Monthly rates per subscriber are variable based on overall subscriber volume. If subscriber fees are less than specified annual minimum charges, the Company will be obligated to pay the difference between the amounts paid for processing fees and the annual minimum. Annual minimums range from $20 million to $60 million through 2001. The agreement extends through December 31, 2001, with two automatic, two-year renewal periods, unless terminated by the Company. The company may terminate the agreement prior to the expiration date, but would be subject to specified termination penalties. 8. EMPLOYEE BENEFITS Employees performing services for the Company were employed by Sprint Corporation through December 31, 1995. Amounts paid to Sprint Corporation relating to pension expense and employer contributions to the Sprint Corporation 401(k) plan for these employees approximated $323,000 in 1995. No expense was incurred through December 31, 1994. The Company maintains short-term and long-term incentive plans. All salaried employees are eligible for the short-term incentive plan commencing at date of hire. Short-term incentive compensation is based on incentive targets established for each position based on the Company's overall compensation strategy. Targets contain both an objective Company component and a personal objective component. Charges to operations for the short-term plan approximated $12,332,000 and $3,491,000 for the years ended December 31, 1996 and 1995, respectively. No expense was incurred through December 31, 1994. LONG-TERM COMPENSATION OBLIGATION - Effective July 1, 1996, a long-term compensation plan was adopted. Employees meeting certain eligibility requirements are considered to be participants in the plan. Participants will receive 100% of the pre-established targets for the period from July 1, 1995 to June 30, 1996 (the "Introductory Term"). Participants may elect a payout of the amount due or convert 50% or 100% of the award to appreciation units. Unless converted to appreciation units, payment for the Introductory Term will be made in the third quarter of 1998. Appreciation units vest 25% per year commencing on the second anniversary of the date of grant. Participants have until March 15, 1997 to make payout or conversion elections. For the years ended December 31, 1996 and 1995, $9.5 million and $1.9 million, respectively, has been expensed. The ultimate liability will be based on actual payout vs. conversion elections and the final results of an independent valuation of the IV-56 296 Company as of June 30, 1997. The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to Employees" for 1996. No significant difference would have resulted if SFAS No. 123, "Accounting for Stock-Based Compensation" had been applied. SAVINGS PLAN - Effective January, 1996, the Company established a savings and retirement program (the "Savings Plan") for certain employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code. Most permanent full-time, and certain part-time, employees are eligible to become participants in the plan after one year of service or upon reaching age 35, whichever occurs first. Participants make contributions to a basic before tax account and supplemental before tax account. The maximum contribution for any participant for any year is 16% of such participant's compensation. For each eligible employee who elects to participate in the Savings Plan and makes a contribution to the basic before tax account, the Company makes a matching contribution. The matching contributions equal 50% of the amount of the basic before tax contribution of each participant up to the first 6% that the employee elects to contribute. Contributions to the Savings Plan are invested, at the participants discretion, in several designated investment funds. Distributions from the Savings Plan generally will be made only upon retirement or other termination of employment, unless deferred by the participant. Expense under the Savings Plan approximated $1,125,000 in 1996. PROFIT SHARING (RETIREMENT) PLAN - Effective January, 1996, the Company established a profit sharing plan for its employees. Employees are eligible to participate in the plan after completing one year of service. Profit sharing contributions are based on the compensation, age, and years of service of the employee. Profit sharing contributions are deposited into individual accounts of the Company's 401(k) plan. Vesting occurs once a participant completes five years of service. For the year ended December 31, 1996, expense under the profit sharing plan approximated $726,000. 9. RELATED PARTY TRANSACTIONS BUSINESS SERVICES - The Company reimburses Sprint Corporation for certain accounting and data processing services, for participation in certain advertising contracts, for certain cash payments made by Sprint Corporation on behalf of the Company and other management services. The Company is allocated the costs of such services based on direct usage. Allocated expenses of approximately $11,900,000 and $2,646,000 are included in Selling and General and administrative expense in the consolidated statement of operations for 1996 and 1995, respectively. No reimbursement was made through December 31, 1994. PAGING SERVICES - In 1996, the Company commenced paging services pursuant to agreements with Paging Network Equipment Company ("PageNet") and Sprint Communications Company, L.P. ("Sprint Communications"). For the year ended December 31, 1996, Sprint Communications received agency fees of approximately $4.9 million. ADVANCES FROM PARTNERS - In December 1996, the Partners advanced approximately $168 million to the Company, which was contributed to Cox PCS (Note 4). The advances bear interest at the prime rate (8.25% at December 31, 1996) and were repaid in February 1997. IV-57 297 10. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 and 1995 is as follows (in thousands):
1996 First Second Third Fourth ---- ----- ------ ----- ------ Operating revenues ................. $ -- $ -- $ -- $ 4,175 Operating expenses ................. 30,978 46,897 87,135 195,038 Net loss ........................... 67,425 90,770 101,497 183,402 1995 ---- Operating revenues ................. $ -- $ -- $ -- $ -- Operating expenses ................. 3,655 4,589 11,844 46,463 Net loss ........................... 6,789 9,718 19,488 74,434
IV-58 298 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, INC. Dated: March 28, 1997 By /s/ John C. Malone -------------------------------- John C. Malone Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ John C. Malone Chairman of the Board, March 28, 1997 - ------------------------------ Chief Executive John C. Malone Officer and Director /s/ Jerome H. Kern Director March 28, 1997 - ------------------------------ Jerome H. Kern /s/ John W. Gallivan Director March 28, 1997 - ------------------------------ John W. Gallivan /s/ Donne F. Fisher Director March 28, 1997 - ------------------------------ Donne F. Fisher /s/ J.C. Sparkman Director March 28, 1997 - ------------------------------ J.C. Sparkman /s/ Paul A. Gould Director March 28, 1997 - ------------------------------ Paul A. Gould /s/ Leo J. Hindery, Jr. President and Chief Operating March 28, 1997 - ------------------------------ Officer Leo J. Hindery, Jr. /s/ Stephen M. Brett Executive Vice President March 28, 1997 - ------------------------------ and Secretary Stephen M. Brett /s/ Brendan R. Clouston Executive Vice President and March 28, 1997 - ------------------------------ Chief Financial Officer Brendan R. Clouston (Principal Financial Officer) /s/ Gary K. Bracken Senior Vice President of March 28, 1997 - ------------------------------ TCI Communications, Inc. Gary K. Bracken (Principal Accounting Officer)
IV-59 299 EXHIBIT INDEX Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K): 3 - Articles of Incorporation and Bylaws: 3.1 The Restated Certificate of Incorporation, dated August 4, 1994, as amended on August 4, 1994, August 16, 1994, October 11, 1994, October 21, 1994, January 26, 1995, August 3, 1995, August 3, 1995, January 25, 1996 and January 25, 1996. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 3.2 The Bylaws as adopted June 16, 1994. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10 - Material Contracts: 10.1 Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Form S-4 Registration Statement (Commission File No. 33-54263). 10.2 Tele-Communications, Inc. 1995 Employee Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.3 Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.4 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and Bob Magness.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.5 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and Bob Magness.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.6 Restated and Amended Employment Agreement, dated as of November 1, 1992, between the Company and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). (continued) 300 10 - Material contracts, continued: 10.7 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and John C. Malone.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.8 Restricted Stock Award Agreement, made as of December 10, 1992, among Tele-Communications, Inc., Donne F. Fisher and WestMarc Communications, Inc.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.9 Consulting Agreement, dated as of January 1, 1996, between Tele-Communications, Inc. and Donne F. Fisher. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.10 Consulting Agreement, dated as March 11, 1995, between Tele-Communications, Inc. and J.C. Sparkman.* 10.11 Deferred Compensation Plan for Non-Employee Directors, effective on November 1, 1992.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, as amended by Form 10-K/A for the year ended December 31, 1992 (Commission File No. 0-5550). 10.12 Amended and Restated Employment Agreement, dated as of July 18, 1995, among Tele-Communications, Inc., Tele-Communications International, Inc. and Fred A. Vierra.* Incorporated herein by reference to Tele-Communications International, Inc.'s Registration Statement on Form S-1 (Commission File No. 33-80491). 10.13 Employment Agreement, dated as of January 1, 1993, between Tele-Communications, Inc. and Larry E. Romrell.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.14 Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, Tele- Communications, Inc. and Larry E. Romrell.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). 10.15 Form of 1992 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). (continued) 301 10 - Material contracts, continued: 10.16 Form of 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.17 Non-Qualified Stock Option and Stock Appreciation Rights Agreement, dated as of November 12, 1993, by and between Tele-Communications, Inc. and Jerome H. Kern.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.18 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, Liberty Media Corporation and grantee relating to stock appreciation rights granted pursuant to letter dated September 17, 1991.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.19 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, Liberty Media Corporation and grantee relating to the assumption of options and related stock appreciation rights granted under the Liberty Media Corporation 1991 Stock Incentive Plan pursuant to letter dated July 26, 1993.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.20 Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and a director of Tele-Communications, Inc. relating to assumption of options and related stock appreciation rights granted outside of an employee benefit plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.21 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights granted under Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1993 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). (continued) 302 10 - Material contracts, continued: 10.22 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of grants pursuant to the Agreement and Plan of Merger dated June 6, 1991 between United Artists Entertainment Company and Tele-Communications, Inc.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.23 Form of letter dated September 17, 1991 from Liberty Media Corporation to grantee relating to grant of stock appreciation rights.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.24 Form of letter dated July 26, 1993 from Liberty Media Corporation to grantee relating to grant of options and stock appreciation rights.* Incorporated by reference to Tele-Communications, Inc.'s Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.25 Form of Assumption and Amended and Restated Stock Option Agreement between the Company, TCI/Liberty Holding Company and grantee relating to assumption of options and related stock appreciation rights under Tele-Communications, Inc.'s 1992 Stock Incentive Plan pursuant to Tele-Communications, Inc.'s 1992 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Post Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-54263). 10.26 Forms of Assumption and Amended and Restated Stock Option Agreements relating to options granted under the United Artists Entertainment Company 1988 Incentive and Non-Qualified Stock Option Plan and executed by employees who did not have employment agreements with United Artists Entertainment Company.* Incorporated herein by reference to Tele-Communications, Inc.'s Post-Effective Amendment No. 1 to Form S-4 Registration Statement on Form S-8 Registration Statement (Commission File No. 33-43009). 10.27 Form of Indemnification Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A for the year ended December 31, 1993 (Commission File No. 0-5550). 10.28 Form of 1994 Non-Qualified Stock Option and Stock Appreciation Rights Agreement.* Incorporated herein by reference to the Company's Annual Report on Form 10-K dated December 31, 1994, as amended by Form 10-K/A (Commission File No. 0-20421). (continued) 303 10 - Material contracts, continued: 10.29 Qualified Employee Stock Purchase Plan of Tele-Communications, Inc., as amended.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-57635). 10.30 Form of Restricted Stock Award Agreement for 1995 Award of Series A TCI Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.31 Form of Restricted Stock Award Agreement for 1995 Award of Series A Liberty Media Group Restricted Stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.32 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.33 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.34 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele-Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.35 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) 304 10 - Material contracts, continued: 10.36 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A TCI Group common stock pursuant to the Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.37 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Liberty Media Group common stock pursuant to the Tele-Communications, Inc. 1996 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.38 The Tele-Communications International, Inc. 1995 Stock Incentive Plan. Incorporated herein by reference to Tele-Communications International, Inc. Registration Statement on Form S-1 (Commission File No. 33-91876). 10.39 Form of Restricted Stock Award Agreement for 1995 Award of Series A Tele-Communications International, Inc. Restricted Stock pursuant to the Tele-Communications International 1995 Stock Incentive Plan. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.40 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock pursuant to the Tele-Communications International, Inc. 1995 Stock Incentive Plan.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.41 Form of Non-Qualified Stock Option and Stock Appreciation Rights Agreement for 1995 Grant of Options with tandem stock appreciation rights to purchase Series A Tele-Communications International, Inc. common stock.* Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.42 Restricted Stock Award Agreement, made as of July 1, 1996, among Tele-Communications, Inc., Brendan Clouston and WestMarc Communictions, Inc. * 10.43 Option Agreement, dated as of December 4, 1996, by and between TCI Satellite Entertainment, Inc. and Brendan R. Clouston.* Incorporated herein by reference to the TCI Satellite Entertainment, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-21317). (continued) 305 10 - Material contracts, continued: 10.44 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Telephony Services, Inc., Grantee and Tele-Communications, Inc.* 10.45 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Wireline, Inc., Grantee and Tele-Communications, Inc.* 10.46 Form of Option to Purchase Common Stock Agreement made as of the 1st day of December 1996 by and among TCI Internet Services, Inc., Grantee and Tele-Communications, Inc. * 10.47 Letter Agreement, dated December 26, 1996, by Tele-Communications, Inc. to purchase WestMarc Series C Cumulative Compounding Redeemable Preferred Stock from Larry E. Romrell. 10.48 Employee Stock Purchase Plan for Bargaining Unit Employees of United Cable Television of Baltimore Limited Partnership.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60839). 10.49 Employee Stock Purchase Plan for Bargaining Unit Employees of Heritage Cable Vision Associates, L.P. D/B/A TCI of Michiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-60843). 10.50 Employee Stock Purchase Plan for Bargaining Unit Employees of UACC Midwest, Inc. d/b/a TCI of Central Indiana.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64827). 10.51 The Settlement Plan and Rabbi Trust Agreement Entered into Pursuant to Thomas Adams, Mark Adamski, et. al. v. TCI of Northern New Jersey, Inc. and the Tele-Communications, Inc. Employee Stock Purchase Plan.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64829). 10.52 Employee Stock Purchase Plan for Bargaining Unit Employees of TCI of Northern New Jersey, Inc.* Incorporated herein by reference to the Tele-Communications, Inc. Registration Statement on Form S-8 (Commission File No. 33-64831). (continued) 306 10 - Material contracts, continued: 10.53 Amended and Restated Agreement of Limited Partnership of MajorCo, L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI Network Services, Comcast Telephony Services and Cox Telephony Partnership. Second Amended and Restated Joint Venture Formation Agreement, dated as of January 31, 1996, by and between Sprint Corporation, Tele-Communications, Inc., Comcast Corporation and Cox Communications, Inc. Parents Agreement, dated as of January 31, 1996, by Tele-Communications, Inc. and Sprint Corporation. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated February 9, 1996 (Commission File No. 0-20421). 10.54 Amended and Restated Stock Purchase Agreement, dated as of April 25, 1995, by and among Eduardo Eurnekian, stockholders of shares of the Common Stock of Cablevision S.A., Televisora Belgrano S.A., Construred S.A., Univent's S.A., and TCI International Holdings, Inc. Amended and Restated Stockholders Agreement, dated April 25, 1995, between Eduardo Eurnekian and TCI International Holdings, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated May 4, 1995, as amended by Form 8-K/A (Commission File No. 0-20421). 10.55 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Subscription Agreement, dated as of July 24, 1995, among Viacom International, Inc., Tele-Communications, Inc. and TCI Communications, Inc. Implementation Agreement, dated as of July 24, 1995, between Viacom International, Inc. and Viacom International Services, Inc. Incorporated herein by reference to the Company's Current Report on Form 8-K, dated July 26, 1995 (Commission File No. 0-20421). 10.56 Agreement of Purchase and Sale of Partnership Interest, dated as of January 31, 1996, among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.57 Consent and Amendment of Amended Agreement of Partnership for Halcyon Communications Partners, dated as of January 31, 1996, by and among Halcyon Communications, Inc., ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.58 Assignment and Assumption Agreement, made as of January 31, 1996, between ECP Holdings, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) 307 10 - Material contracts, continued: 10.59 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and ECP Holdings, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.60 Agreement of Purchase and Sale of Partnership Interests, dated as of January 31, 1996, among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.61 Consent and First Amendment of Amended and Restated Agreement of Limited Partnership for Halcyon Communications Limited Partnership, dated as of January 31, 1996, by and among Halcyon Communications, Inc., American Televenture of Minersville, Inc., TCI Cablevision of Nevada, Inc., TCI Cablevision of Utah, Inc., TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.62 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Utah, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.63 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Utah, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.64 Assignment and Assumption Agreement, made as of January 31, 1996, between TCI Cablevision of Nevada, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.65 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TCI Cablevision of Nevada, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.66 Assignment and Assumption Agreement, made as of January 31, 1996, between American Televenture of Minersville, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). (continued) 308 10 - Material contracts, continued: 10.67 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and American Televenture of Minersville, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.68 Assignment and Assumption Agreement, made as of January 31, 1996, between TEMPO Cable, Inc. and Fisher Communications Associates, L.L.C. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.69 Option Agreement, dated as of January 31, 1996, between Fisher Communications Associates, L.L.C. and TEMPO Cable, Inc. Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-20421). 10.70 Employment Agreement, effective as of October 1, 1995, by and between Tele-Communications, Inc. and Tony Coelho.* 10.71 Agreement Regarding Shares, as of April 3, 1996, among ETC w/tci, Inc., Tele-Communications, Inc., TCI ETC Holdings, Inc. and Tony Coelho.(1) 10.72 1996 Incentive Plan of ETC w/tci, Inc.* 10.73 Coelho Option Agreement, as of April 3, 1996, betwen ETC w/tci, Inc. and Tony Chelho.* 21 - Subsidiaries of Tele-Communications, Inc. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of KPMG Peat Marwick LLP. 23.3 Consent of KPMG Peat Marwick LLP. 23.4 Consent of KPMG Audit Plc. 23.5 Consent of Deloitte & Touche LLP. 23.6 Consent of Price Waterhouse LLP. 27 - Financial data schedule *Constitutes management contract or compensatory arrangement. (1) Certain exhibits have been omitted. A copy of any omitted exhibit or schedule will be furnished supplementally to the Commission upon request. EX-10.10 2 CONSULTING AGREEMENT 1 EXHIBIT 10.10 CONSULTING AGREEMENT CONSULTING AGREEMENT dated as of March 11, 1995, between TELECOMMUNICATIONS, INC., a Delaware corporation (the "Company"), and J. C. SPARKMAN, now residing at 2530 South Dudley Street, Lakewood, Colorado 80227 ("Consultant"). On the date hereof, Consultant resigned as an officer, director and employee of the Company, its subsidiaries and its controlled affiliates. This Consulting Agreement replaces the Employment Agreement dated as of November 1, 1992 ("Employment Agreement"), between TCI Communications, Inc. and Consultant which was assumed by the Company pursuant to an Assignment and Assumption Agreement, dated as of August 4, 1994, among TCI/Liberty Holding Company, the Company and Consultant, and sets forth the terms and conditions of the consultancy arrangement between the Company and Consultant. In consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, do hereby agree as follows: 1. Term and Termination. (a) Term. The term of Consultant's consultant arrangement under this Agreement (the "Term") shall commence on the date hereof and end on September 30, 2002. During the Term, Consultant agrees to serve the Company as a consultant as provided herein upon and subject to the terms and conditions set forth in this Agreement. (b) Termination by the Company. Consultant's consultancy by the Company may be terminated by the Company only as provided in clauses (i) and (ii) below. (i) Upon the death of Consultant. (ii) Upon giving written notice of such termination to Consultant six (6) months prior to the effective date thereof and by paying to Consultant in a lump sum upon such termination all remaining compensation that would have been payable under Section 4 hereof if this Agreement remained in full force and effect for the full balance of the Term. (c) Effect of Death of Consultant. If Consultant dies prior to December 31, 1997, the Company shall, as promptly as practicable following Consultant's death, pay to Consultant's designated beneficiary or beneficiaries in a lump sum an amount equal to one year's compensation under Section 4(a) of this Agreement, in each case calculated at the annual rate in effect at the time of Consultant's death. The phrase "designated beneficiary or beneficiaries" has the meaning ascribed to such phrase in Section 4(d) hereof. 2 2. Services to Be Rendered by Consultant. Consultant agrees to serve the Company as a consultant (when and for what purpose as then requested by the Company's Chief Executive Officer) to advise the Company's Chief Executive Officer regarding the allocation of the Company's resources and other matters generally and with respect to the domestic cable operations of the Company in particular. If Consultant is elected a director of the Company's subsidiaries or affiliates, Consultant will serve in any such capacities without further compensation except as may be decided by the Company at the Company's sole election. Consultant shall discharge his responsibilities and shall in all other respects serve the Company faithfully and to the best of his ability. 3. Time to Be Devoted by Consultant. (a) If Consultant is requested to provided consultancy services to the Company, Consultant will, where practical, be given 14 days' notice. In no event will Consultant be required to provide more than 700 hours per year in consultancy services to the Company. (b) Company shall provide to Consultant an office at the Company's headquarters and secretarial service if such is required by Consultant to reasonably provide any Company-requested consultancy services; but in any event, until March 31, 1996, Consultant will be provided with an office and secretarial services at the Company's headquarters. 4. Compensation Payable to Consultant. (a) From March 11, 1995, through December 31, 1997, the Company shall pay to Consultant a sum equal to the rate of $773,000 per annum. From January 1, 1998, through the Term, the Company shall pay to Consultant a sum equal to the rate of $500,000 per annum. (b) Consultant's annual payments shall be paid in accordance with the Company's regular policy but not less frequently than once a month. (c) (i) The sum of the amounts deferred pursuant to Section 4(b) of the Employment Agreement plus all interest (compounded annually at the rate of 8% per annum) accrued thereon to December 31, 1997 (the "Determination Date") (the "total deferred amount") shall be calculated as of the Determination Date and shall be paid to Consultant in substantially equal monthly payments over a 120-month period commencing on the first business day immediately following the Determination Date and continuing on the first day of each calendar month thereafter until paid in full. Each such payment shall equal $7294.32. Consultant and Company agree to such payment notwithstanding the terms of the Employment Agreement. 2 3 (ii) The provisions of Section 4 of the Employment Agreement, dated as of January 1, 1983, between the Company and Consultant, as heretofore amended (the "Prior Agreement"), shall continue to govern with respect to the calculation of, and accrual of interest on, the payments which were deferred in accordance with the terms of Section 4 of the Prior Agreement, and such provisions as they relate to such deferred compensation shall survive the execution and delivery of this Agreement unaffected hereby, except as modified hereby and except that the 240 monthly payments set forth therein shall be made in equal monthly payments of $15,116.03. The Consultant and the Company agree to such payments notwithstanding the terms of the Prior Agreement. (d) Upon the death of Consultant, all payments due to Consultant under Section 4(c) be made to Consultant's then surviving spouse. If there is no such surviving spouse at the time of Consultant's death, or upon the subsequent death of such surviving spouse (either such event shall be called a "Lump Sum Payment Event"), the following shall occur: (i) If the Lump Sum Payment Event occurs prior to the Determination Date, the amount payable pursuant to Section 4(c) above shall be calculated as promptly as practicable but in no event later than the first business day of the first full calendar month following such date (which date of calculation shall for this purpose be the Determination Date) and shall be paid forthwith in a lump sum to Consultant's designated beneficiary or beneficiaries. (ii) If the Lump Sum Payment Event occurs after the Determination Date and before the expiration of the respective periods during which the deferred payments provided for in Section 4(c) above are to be paid, the remaining deferred payments, adjusted by deducting therefrom the interest portion thereon (at their respective interest rates of 8% and 13%), shall be paid forthwith in a lump sum to Consultant's designated beneficiary or beneficiaries. (iii) The phrase "designated beneficiary or beneficiaries" shall mean the person or persons named from time to time by Consultant in a signed instrument filed with the Company. If such a designation was not made, is not in force or if the designation made in any such signed instrument shall for any reason be ineffective, the phrase "designated beneficiary or beneficiaries" shall mean Consultant's estate. (e) The amount of deferred compensation payable hereunder (together with the interest applicable thereto) shall not in any way be reserved or held in trust by the Company. Neither Consultant nor any designated beneficiary or personal representative shall have any rights against the Company in respect of such deferred payments other than the rights of an unsecured creditor of the Company. Deferred payments provided for herein shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment pledge, encumbrance of charge, and shall not in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of Consultant, nor of any designated beneficiary or personal representative. The payment to Consultant of such deferred payments shall be subject to the further condition that Consultant shall comply with the provisions of Section 10 of this Agreement during the entire payment period, and Consultant shall comply with the provisions of Sections 9 and 12 of this Agreement for the first two (2) years of the payment period. 3 4 5. Salary Continuation Plan. (a) Commencing January 1, 1998, Consultant shall be entitled to receive from the Company 240 consecutive monthly payments of $6,250, increased at the rate of 12% per annum compounded annually from January 1, 1988, to January 1, 1998 (the foregoing being referred to in this Agreement as the "Benefit"). At January 1, 1998, the amount of the 240 equal monthly payments which shall commence on January 1, 1998, shall be $19,411.55. (b) Upon the Lump Sum Payment Event, the payments provided for in Section 5(a) above (or, if such Lump Sum Payment Event occurs after December 31, 1997, and during the payment period contemplated by Section 5(a), any remaining such payments) shall be made to Consultant's designated beneficiary or beneficiaries, as defined in Section 4(d) above. (c) The payment to Consultant of the Benefit shall be subject to the condition that Consultant shall comply with the provisions of Section 10 of this Agreement during the entire payment period, and Consultant shall comply with the provisions of Sections 9 and 12 of this Agreement during the first two years of the payment period. (d) The Benefit payable under this Agreement shall not in any way be reserved or held in trust by the Company. Neither Consultant nor any designated beneficiary or personal representative shall have any rights against the Company in respect of such Benefit other than the rights of an unsecured general creditor of the Company. Payments of the Benefit shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and shall not in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of Consultant, nor of any designated beneficiary or personal representative. The Company shall not be obligated under any circumstances to fund its obligations under this Section 5, but it may, however, at its sole option elect to fund such obligations, in whole or in part, in any manner whatsoever, including, but not limited to, the purchase of life insurance on the life of Consultant, in any amounts the Company deems appropriate. Any such funding shall remain a general unrestricted asset of the Company and in no way security for the Company's performance under this Section 5. Consultant Agrees to cooperate with the Company, if so requested, in its obtaining such insurance. (e) The Benefit provided for in this Section 5 is intended by the parties to be in substitution for, and not in addition to, the "Benefit" as defined in and contemplated by Section 5 of the Prior Agreement and, accordingly, the terms and provisions of Section 5 of the Prior Agreement are superseded in their entirety by the terms and provisions of this Section 5. 6. Expenses. The Company shall reimburse Consultant for the reasonable amount of dining, hotel, traveling, entertainment and other expenses necessarily incurred by Consultant in the discharge of his consulting obligations hereunder. 4 5 7. Executive Benefit Plans During the Term, Consultant shall be entitled to participate in and to be accorded all rights and benefits under all group insurance policies maintained or established by the Company for the benefit of its employees, and for this purpose Consultant shall be deemed to be a full-time employee of the Company during such period. Further, during the period that continues after the Term ("Deferred Compensation Period") that any deferred compensation is payable to Consultant pursuant to Section 4 of this Agreement or Section 4 of the Prior Agreement, Consultant shall continue to be entitled to participate in, and to be accorded all rights and benefits under, all group insurance policies maintained or established by the Company for the benefit of its employees, and for this purpose Consultant shall be deemed to be a full-time employee of the Company during such period. In addition, during the Term and Deferred Compensation Period, Consultant shall be entitled to free cable television service if Consultant has residences located within areas serviced by the Company's cable television services. 8. Indemnification. The Company will indemnify and hold harmless Consultant, to the fullest extent permitted by applicable law, in respect of any liability, damage, cost or expense (including reasonable counsel fees) incurred in connection with the defense of any claim, action, suit or proceeding to which he is a party, or threat thereof, by reason of his being or having been an officer or director of, or a consultant to, the Company or any subsidiary of the Company, or his serving or having served at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, business organization, enterprise or other entity, including service with respect to employee benefit plans. Without limiting the generality of the foregoing the Company will pay the expenses (including reasonable counsel fees) of defending any such claim, action, suit or proceeding in advance of its final disposition, upon receipt of an undertaking by Consultant to repay all amounts advanced if it should ultimately be determined that Consultant is not entitled to be indemnified under this Section. 9. Noncompetition. Consultant agrees that during the Term he will not, directly or indirectly, as principal or agent, or in any other capacity, own, manage, operate, participate in or be employed by or otherwise be interested in, or connected in any manner with, any person, firm corporation or other enterprise which directly competes in a material respect with the business of the Company or any of its majority-owned subsidiaries as it is then conducted. Nothing herein contained shall be construed as denying Consultant (i) the right to own securities of any such corporation which is listed on a national securities exchange or quoted in the NASDAQ System to the extent of an aggregate of 5% of the amount of such securities outstanding or (ii) provide consultancy services to others which may violate the provisions of the first sentence of this Section if the Company's Chief Executive Officer approves in writing of such provision of consultancy services. 5 6 10. Confidentiality. Consultant agrees that during the Term (otherwise than in the performance of his duties hereunder) and thereafter, not to, directly or indirectly, make use of, or divulge to any person, firm, corporation, entity or business organization, and he shall use his best efforts to prevent the publication or disclosure of, any confidential or proprietary information concerning the business, accounts or finances of, or any of the methods of doing business used by the Company or of the dealings, transactions or affairs of the Company or any of its customers which have or which may have come to his knowledge; but this Section 10 shall not prevent Consultant from responding to any subpoena, court order or threat of other legal duress, provided Consultant notifies the Company thereof with reasonable promptness to that the Company may seek a protective order or other appropriate relief 11. Delivery of Materials. Consultant agrees that upon the expiration of the Term he will deliver to the Company all documents, papers, materials and other property of the Company relating to its affairs which may then be in his possession or under his control. 12. Noninterference. Consultant agrees that he will not during the Term solicit the employment of any employee of the Company on behalf of any other person, firm, corporation, entity or business organization or otherwise interfere with the employment relationship between any employee or officer of the Company and the Company. 13. Remedies of the Company. Consultant agrees that, in the event of a material breach by Consultant of this Agreement, in addition to any other rights that the Company may have pursuant to this Agreement, the Company shall be entitled, if it so elects, to institute and prosecute proceedings at law or in equity to obtain damages with respect to such breach or to enforce the specific performance of this Agreement by Consultant or to enjoin Consultant from engaging in any activity in violation hereof. Consultant agrees that because Consultant's services to the Company are of such a unique and extraordinary character, a suit at law may be an inadequate remedy with respect to a breach by Consultant of Sections 9, 10, 11 and 12 hereof, and that upon any such breach or threatened breach by him of such Sections the Company shall be entitled, in addition to any other lawful remedies that may be available to it, to injunctive relief. 6 7 14. Notices. All notices to be given hereunder shall be deemed duly given when delivered personally in writing or mailed, certified mail, return receipt requested, postage prepaid and addressed as follows: (a) If to be given to the Company: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: Dr. John C. Malone with a copy similarly addressed and marked to the attention of the Legal Department (b) If to be given to Consultant: Mr. J. C. Sparkman 2530 South Dudley Street Lakewood, Colorado 80227 or to such other address as a party may request by notice given in accordance with this Section 14. 15. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and replaces and supersedes as of the date hereof any and all prior agreements and understandings with respect to Consultant's employment by the Company, whether oral or written, between the parties hereto, including, without limitation, the Employment Agreement and, except to the extent provided in Section 4(c) hereof, the Prior Agreement. This Agreement may not be changed nor may any provision hereof by waived except by an instrument in writing duly signed by the party to be charged. This Agreement shall be interpreted, governed and controlled by the law of the State of Colorado without reference to principles of conflict of laws. (b) All options to acquire the Company's Class A Common Stock currently held by Consultant which by their terms are not currently exercisable are now currently exercisable. Consultant shall be deemed to be an employee of the Company for purposes of paragraph 8 of the option agreements under which said options were granted. 7 8 IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. TELE-COMMUNICATIONS, INC. By: /s/ Donne F. Fisher ---------------------------------- Executive Vice President /s/ J. C. SPARKMAN ------------------------------------- J. C. Sparkman ATTEST: /s/ Stephen M. Brett - -------------------------- 8 EX-10.42 3 RESTRICTED STOCK AWARD AGREEMENT 1 EXHIBIT 10.42 RESTRICTED STOCK AWARD AGREEMENT This Restricted Stock Award Agreement (the "Agreement") is made as of July 1, 1996 among Tele-Communications, Inc., a Delaware corporation (the "Company"), Brendan Clouston ("Executive") and WestMarc Communications, Inc., a Nevada corporation ("WestMarc"). The parties agree as follows: 1. Grant of Preferred Stock (a) As a reward for past, and an incentive for future, employment performance by Executive and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company is (i) effective as of July 1, 1996, transferring to Executive, upon and subject to the terms and conditions set forth in this Agreement, all of the Company's right title and interest in and to 62 (sixty-two) shares (the "Initial Shares") of the 12% Series C Cumulative Compounding Preferred Stock, par value $.01 per share, of WestMarc ("Preferred Stock"), owned by the Company and (ii) simultaneously with the execution and delivery of this Agreement, paying to Executive of $199,970 in cash, representing the sum of the amount of the dividends on the Initial Shares that Executive would have received if he had been the record owner of the Initial Shares on and at all times since January 1, 1996. The parties acknowledge that, because the Company was the record owner of the Initial Shares on the record date for the payment of dividends thereon for the quarterly dividend period ended July 1, 1996, dividends declared and paid on such Initial Shares for such quarterly dividend period shall be the property of the Company. As used in this Agreement, (i) the term "Restricted Shares" will mean all Initial Shares and any and all other shares of stock and other securities which Executive later acquires or has the right to acquire by reason of ownership of or otherwise with respect to any Initial Shares or other Restricted Shares, irrespective of the time and manner of such acquisition, including, without limitation, any shares or other securities (whether issued by WestMarc or otherwise) acquired by reason of any split-up, recapitalization, dividend, distribution, combination, conversion or exchange of shares of capital stock or other securities of WestMarc (or any other issuer), or acquired by reason of any merger or consolidation of WestMarc, any sale or other disposition of all or substantially all of the assets of WestMarc (or any other issuer) or any dissolution of WestMarc (or any other issuer); and (ii) the term "Restricted Share Distributions" means any cash or other property, except stock or other securities, which Executive acquires or receives or has the right to acquire or receive by reason of ownership of or otherwise with respect to any Restricted Shares, including, without limitation, any cash or other such property acquired or received by reason of any event specified in clause (i) of this sentence. (b) If a Forfeiture Event (as defined below) occurs at any time prior to the Vesting Date (as defined below), all Restricted Shares and, subject to the last sentence of Section 1(c), Restricted Share Distributions held by or for the account of Executive or which Executive has the right to acquire or receive, and all rights and benefits of Executive with respect to such Restricted Shares and Restricted Share Distributions, automatically will be forfeited to and vest in the Company. As used in this Agreement, (i) the term "Forfeiture Event" means either (a) the 2 termination of Executive's employment with the Company by the Company for cause or (b) the termination of Executive's employment with the Company by Executive; (ii) the term "Vesting Date" means the first to occur of (A) December 13, 2005, (B) the death of Executive (C) the Executive's Disability and (D) the termination by the Company of Executive's employment with the Company otherwise than for cause; and (iii) the term "Disability" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, as determined by the Board of Directors of the Company in good faith. For purposes of this Agreement, "cause" for termination of Executive's employment shall be deemed to have occurred only on the happening of any of the following: (i) the plea of guilty to, or conviction for, the commission of a felony offense by Executive; (ii) a material breach by Executive of a material fiduciary duty owed to the Company; (iii) a material breach by Executive of any of the terms or conditions of any employment, confidentiality, non-competition or other similar agreement relating to the employment of Executive by the Company or any of its affiliates which may at any time and from time to time be in effect; or (iv) the willful and gross neglect by Executive of the material duties specifically and expressly required of him in his capacity as an officer or employee of the Company or any of its affiliates; provided, however, that (A) any claim that "cause", within the meaning of clause (ii), (iii) or (iv) above, exists for the termination of Executive's employment may be asserted on behalf of the Company only by a duly adopted resolution of the Board of Directors of the Company and only after 30 days prior written notice to Executive during which period he may cure the breach or neglect that is the basis of any such claim, if curable; (B) no illness or disability which incapacitates Executive from performing his duties may, directly or indirectly, in whole or in part, be the basis for a claim that "cause", within the meaning of clause (iv) above, exists for the termination of Executive's employment; (C) during the period of twelve (12) consecutive months following a change in control of the Company (as defined below), "cause" shall be deemed to have occurred only upon the happening of an event referred to in clause (i) above; and (D) the term "material" as used in clauses (ii), (iii) and (iii) above shall be construed by reference to the effect of the relevant action or omission on the Company taken as a whole. For purposes of the foregoing, a change in control of the Company will be considered to have occurred if the group in control of the Company shall no longer include at least one of the following: (i) Bob Magness, members of his family or representatives thereof, (2) John C. Malone, members of his family or representatives thereof, or (iii) representatives of Kearns-Tribune Corporation (but only if the present shareholders remain in control of such corporation). The term "family" as used herein means the named person's estate, spouse and lineal descendants and any trust or other investment 2 3 vehicle for the primary benefit of such named person or members of his family and the term "representatives" includes executors and trustees. (c) By giving notice to Executive, the Company at any time: (i) may require that any or all of the certificates or other instruments or property evidencing or constituting any or all of the Restricted Shares or any or all Restricted Share Distributions then subject to forfeiture be held in escrow by a bank or other institution, or by the Company itself, until the Vesting Date; (ii) may require that Executive deliver a stock power or other instrument endorsed in blank relating to any Restricted Shares held in escrow; and (iii) may require that any and all Restricted Shares be held in the name of such escrow agent (in such capacity) as registered or record owner. Any Restricted Shares and Restricted Share Distributions held in escrow which no longer are subject to forfeiture (as determined pursuant to Section 1(b) hereof) will be delivered out of escrow to Executive within a reasonable time after the Vesting Date, subject to the satisfaction by Executive of applicable federal and state securities laws and withholding tax requirements, including any federal, state or local withholding taxes. Any Restricted Share Distributions which are not held in escrow may be received and retained by Executive free of the restrictions and forfeiture provisions of this Section 1. (d) Except as provided by this Agreement, prior to the Vesting Date, Executive will not transfer or otherwise dispose of any Restricted Shares which are subject to forfeiture or transfer or dispose of any such Restricted Share Distributions held in escrow pursuant to Section 1(c), and any such attempt to dispose of or transfer any such Restricted Shares or Restricted Share Distributions will be void and ineffective for all purposes. Each stock certificate or other instrument evidencing Restricted Shares subject to forfeiture will bear the following legend: SHARES OF THE CORPORATION REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RESTRICTED STOCK AWARD AGREEMENT DATED AS OF JULY 1, 1996 WHICH CONTAINS PROVISIONS RESTRICTING TRANSFER OF SUCH SHARES, REQUIRING SUCH SHARES TO BE FORFEITED TO TELE-COMMUNICATIONS, INC. IN CERTAIN CIRCUMSTANCES AND OTHER MATTERS. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. The words "transfer" and "dispose" include the making of any sale, exchange or other transfer or disposition of any ownership interest whatsoever with respect to the Restricted Shares or subject to the last sentence of Section 1(c), Restricted Share Distributions. Nothing in this Section 1(d) will prevent the transfer or other disposition, without consideration, of Restricted Shares or Restricted Share Distributions to a personal representative of Executive or to one or more members of Executive's immediate family or to trusts or similar entities for their benefit; provided, however, that in the case of such a transfer, each transferee must agree in writing to take such Restricted Shares or Restricted Share Distributions subject to the forfeiture provisions 3 4 described above and to be fully bound by this Agreement. As used in this Agreement, the term "personal representative" will mean the executor or executors of the will or administrator or administrators of the estate and all other legal representatives (by operation of law or otherwise) of Executive. (e) Whenever any Restricted Shares become free of the rights and restrictions imposed by this Agreement, the holder of such Restricted Shares will be entitled to receive a certificate or certificates not bearing the restrictive legend provided for in Section 1(d). If the certificate(s) evidencing such Restricted Shares are not held in escrow pursuant to Section 1(c), then the holders thereof must deliver them to the Company in order to receive the unlegended certificate(s) contemplated by this Section 1(e). (f) Executive represents and warrants that he will be acquiring the Restricted Shares to be acquired by him pursuant to this Agreement for his own account and not with a view to reselling or distributing all or any part of the Restricted Shares in any transaction which would constitute a "distribution" within the meaning of the Securities Act of 1933, as now or subsequently in effect (the "Securities Act"). Executive acknowledges that the Initial Shares have not been, and it is likely that any other Restricted Shares will not be, registered under the Securities Act; that WestMarc neither is obligated nor intends to effect such registration; that absent such registration (or an exemption from registration), Executive may be required to hold the Restricted Shares for an indefinite period of time; that the exemption from registration under the Securities Act provided by Rule 144 promulgated under the Securities Act likely will not be available to Executive; and that even if available, such Rule would permit resales of the Restricted Shares only in limited amounts and upon compliance with the terms and conditions of such Rule. (g) Executive agrees that the certificates evidencing Restricted Shares to be registered in the name of Executive will bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT IS IN EFFECT WITH RESPECT TO SUCH SECURITIES OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS APPLICABLE. (h) If at any time the Board of Directors of WestMarc determines, in its discretion, that the listing, registration or qualification of any Restricted Shares (other than the Initial Shares) issuable pursuant to Section 1(a) or otherwise upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with such issuance, then such Restricted Shares need not be issued unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to WestMarc's 4 5 Board of Directors. WestMarc in no event will be obligated to issue any Restricted Shares in any manner in contravention of the Securities Act or any state securities law provided, however, that if WestMarc does not issue such Restricted Shares for the reasons set forth in this sentence or the prior sentence, it will substitute a distribution of cash or other property to compensate for the failure to issue such Restricted Shares. The Board of Directors of WestMarc may, in connection with any issuance of Restricted Shares (other than the Initial Shares) pursuant to Section 1(a), require that, as a condition precedent to such issuance, in whole or in part, Executive make written representations to the effect set forth in Section 1(f) and also may impose such other terms and conditions as WestMarc's Board of Directors may reasonably require in order to cause such issuance to comply with all applicable laws. (i) Executive will make appropriate arrangements with the Company and WestMarc for any taxes which either of them is obligated to collect in connection with any issuance, payment, distribution, transfer or disposition of any Restricted Shares or Restricted Share Distributions, including any federal, state, or local withholding taxes (but excluding any stock transfer taxes payable in connection with the transfer by the Company of the Initial Shares to Executive, which taxes will be paid by the Company), and the Company and WestMarc, as applicable, will be entitled to withhold from amounts or other consideration payable or issuable to Executive under this Agreement or otherwise such amounts as may be required by applicable law. (j) Subject to Sections 1(b) through (i), Executive will have, with respect to each type or class of Restricted Shares, all rights of a holder of Restricted Shares of such type or class, including, without limitation, voting rights and rights to receive dividends or other distributions with respect to the Restricted Shares. (k) WestMarc agrees not to effect the transfer by Executive or any subsequent holder (except as otherwise expressly contemplated hereby) of any of the Restricted Shares on its books during any period in which such Restricted Shares are subject to forfeiture to the Company as set forth in Section 1(b) hereof. A copy of this Agreement shall be filed with the Secretary of WestMarc. (l) The Company represents and warrants to Executive that (A) it owns of record and beneficially, and has good title to, the Initial Shares being awarded hereby to Executive and (B) it has the right, power and authority to enter into this Agreement and to transfer and deliver the Initial Shares to Executive in accordance with and subject to the terms of this Agreement, free and clear of any liens and encumbrances other than those set forth in or contemplated by this Agreement. 2. Notices. All notices to be given under this Agreement will be in writing and will be deemed duly given when delivered personally or mailed, certified mail, return receipt requested, postage prepaid and addressed as follows: (a) If to be given to the Company: 5 6 Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: President with a copy similarly addressed and marked to the attention of: General Counsel (b) If to be given to WestMarc: WestMarc Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: Chairman of the Board with a copy similarly addressed and marked to the attention of the Legal Department (c) If to be given to Executive Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: Brendan Clouston or to such other address as any part may furnish to the other parties in writing in accordance with this Section 2. 3. SEVERABILITY. The provisions of this Agreement are severable and if any such provision or its application to any person or circumstance is held by a court or governmental authority of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions of this Agreement, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, will remain in full force and effect and will in no way be affected, impaired or invalidated; provided, that if any provision or its application is so held to be invalid, void or unenforceable by a court or governmental authority the Company may substitute a suitable and equitable provision in order to carry out the intent and purpose of the invalid, void or unenforceable provision. 6 7 4. Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion will not be considered a waiver of any breach of that or any other provision of this Agreement. 5. Miscellaneous. This agreement may not be changed nor can any provision be waived except by an instrument in writing duly signed by the party to be charged, and this Agreement constitutes the entire agreement among the Company, WestMarc and Executive with respect to the subject matter (other than, in the case of the Company and Executive, the Employment Agreement). This Agreement will be interpreted, governed and controlled by the law of the State of Colorado, without reference to principles of conflict of laws. This Agreement has been executed as of the day and year first above written. /s/ Brendan R. Clouston -------------------------------------- BRENDAN CLOUSTON TELE-COMMUNICATIONS, INC. By: /s/ John C. Malone ----------------------------------- John C. Malone President WESTMARC COMMUNICATIONS, INC. By: /s/ John C. Malone ----------------------------------- John C. Malone Chairman of the Board 7 EX-10.44 4 TCI TELEPHONY 1 EXHIBIT 10.44 TCI TELEPHONY SERVICES, INC. OPTION TO PURCHASE COMMON STOCK THIS AGREEMENT ("AGREEMENT") is made as of the 1st day of December, 1996, by and among TCI TELEPHONY SERVICES, INC., a Delaware corporation (the "COMPANY"), GRANTEE and, for purposes of paragraphs 11(b), 11(c) and 12 only, TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI"). The Company is on the date hereof a subsidiary of TCI. The Board of Directors of the Company ("COMPANY BOARD") and the Board of Directors of TCI have each determined that it is in the best interests of the Company to grant Grantee the rights and option set forth herein in order to provide Grantee with additional remuneration for services rendered to the Company and its predecessors, to encourage Grantee to remain in the employ of TCI and/or one or more of its Subsidiaries, including the Company, and to provide additional incentive to Grantee by increasing Grantee's proprietary interest in the continued success and progress of the Company. Capitalized terms used herein and not otherwise defined are defined in paragraph 19 below. Accordingly, the Company, Grantee and, for purposes of paragraphs 11(b), 11(c) and 12 only, TCI hereby agree as follows: 1. GRANT OF OPTION; OPTION TERM. The Company hereby grants to Grantee the right and option (the "OPTION"), on the terms and subject to the conditions set forth herein, to purchase the Option Shares from the Company for a price per Option Share equal to the Option Price. The Option Price and Option Shares are subject to adjustment pursuant to paragraph 9 below. Subject to paragraph 2, the Option shall be exercisable in whole at any time and in part from time to time during the period commencing on the date hereof and expiring at 5:00 p.m., Denver, Colorado time ("CLOSE OF BUSINESS") on the tenth anniversary of the Determination Date, or such earlier date as the Option may be terminated pursuant to paragraph 6 or paragraph 9(c) (the "OPTION TERM"). 2. CONDITIONS OF EXERCISE; VESTING. Except as otherwise provided in the last sentence of this paragraph 2 or in paragraph 9(c), the Option shall not be exercisable until the first anniversary of the Determination Date, and, from the first anniversary of the Determination Date to the fifth anniversary of the Determination Date, the Option shall be exercisable only to the extent the Option Shares have become available for purchase in accordance with the following schedule: 2
Anniversary of Percentage of Option Shares Determination Date Available for Purchase ------------------ --------------------------- 1st 20% 2nd 40% 3rd 60% 4th 80% 5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for purchase if during the Option Term (i) Grantee's employment with the TCI Group shall terminate by reason of (x) termination by the TCI Group without Cause, (y) termination by Grantee for Good Reason or (z) Disability, (ii) Grantee's employment shall terminate pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time) or (iii) Grantee dies while employed by the TCI Group. A change of employment is not a termination of employment within the meaning of this paragraph 2, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. 3. MANNER OF EXERCISE. The Option may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of shares specified in the notice referred to in clause (a) below)) on the later of (i) the first business day on which the Company has received all of the following deliveries and (ii) the date of exercise designated in the written notice referred to in clause (a) below (or if such date is not a business day, the first business day thereafter): (a) written notice, in such form as the Company Board may reasonably require, stating that Grantee is exercising the Option and setting forth the date of such exercise, the number of Option Shares to be purchased, the aggregate Option Price to be paid for such Option Shares in accordance with this Agreement and the manner in which such payment is being made ("OPTION EXERCISE NOTICE"); (b) payment of the Option Price for each Option Share to be purchased upon such exercise, in cash or in such other form or combination of forms of payment contemplated by paragraph 10, together with payment of, or other provision acceptable to the Company Board for, any and all withholding taxes required to be withheld by the Company upon such exercise, in accordance with paragraph 4; (c) any other documentation that the Company Board may reasonably require (including, without limitation, proof satisfactory to the Company Board that the Option is then exercisable for the number of Option Shares set forth in such notice); and 2 3 (d) evidence satisfactory to the Company Board that Grantee is validly and simultaneously exercising the same proportion of the stock option granted to him by TCI Wireline, Inc. pursuant to that certain option agreement, dated as of the date hereof, among TCI Wireline, Inc., Grantee and TCI, as the same may hereafter be amended, modified or supplemented from time to time. 4. WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Option that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Company Board. 5. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all the items required by paragraph 3 with respect to any exercise of the Option, and subject to the withholding referred to in paragraph 4, the Company shall deliver or cause to be delivered to Grantee certificates issued in Grantee's name for the number of whole Option Shares purchased upon such exercise. If delivery is by mail, delivery of Option Shares shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to Grantee, and any cash payment (for fractional shares or otherwise) shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to Grantee, in each case in accordance with paragraph 13. 6. EARLY TERMINATION OF OPTION. Unless otherwise determined by the Company Board in its sole discretion, the Option shall terminate, prior to the expiration of the ten-year period provided for in paragraph 1, as follows: (a) If Grantee's employment with the TCI Group terminates other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's death or Disability, (iii) with the written consent of the applicable member(s) of the TCI Group, (iv) without such consent if such termination is pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or (v) by the TCI Group with or without Cause, then the Option shall terminate at the Close of Business on the first business day following the expiration of the 90-day period beginning on the date of termination of Grantee's employment; (b) If Grantee dies while employed by the TCI Group, or prior to the expiration of a relevant period of time during which the Option remains exercisable as provided in this paragraph 6, the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of death; 3 4 (c) If Grantee's employment with the TCI Group terminates by reason of Disability, then the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of termination of Grantee's employment; (d) If Grantee's employment with the TCI Group is terminated by the TCI Group for Cause, then the Option shall terminate immediately upon such termination of Grantee's employment; and (e) If Grantee terminates his employment with the TCI Group (i) with Good Reason, (ii) with the written consent of the applicable member(s) of the TCI Group or (iii) pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or if the TCI Group terminates Grantee's employment with the TCI Group without Cause, then the Option Term shall not terminate prior to the end of the ten-year period provided for in paragraph 1, except as otherwise provided for in paragraph 6(b) or 9(c). In any event in which the Option remains exercisable for a period of time following the date of termination of Grantee's employment as provided above, the Option may be exercised during such period of time only to the extent it was exercisable as provided in paragraph 2 or paragraph 9(c) on such date of termination of Grantee's employment. A change of employment is not a termination of employment within the meaning of this paragraph 6, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. Anything contained herein to the contrary notwithstanding, the Option shall in any event terminate upon the expiration of the ten-year period provided for in paragraph 1, if not theretofore terminated. 7. NONTRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option is not and shall not be transferable (voluntarily or involuntarily) other than pursuant to a Domestic Relations Order and, except as otherwise required pursuant to a Domestic Relations Order, is exercisable only by Grantee or Grantee's court appointed legal representative. Grantee may designate a beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Company on the form annexed hereto as Exhibit A or such other form as may be prescribed by the Company Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive Grantee's death, the Option shall pass by will or the laws of descent and distribution. Following Grantee's death, the Option, if otherwise exercisable, may be exercised by the person to whom the Option passes according to the foregoing, and such person shall be deemed to be Grantee for purposes of any applicable provisions of this Agreement. 4 5 8. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT. (a) Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any Option Shares unless and until such Option Shares have been issued to Grantee by the Company. The existence of this Agreement or the Option shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Company Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue in the employ of the TCI Group or any member thereof or interfere in any way with the right of TCI, the Company or any employing member of the TCI Group to terminate Grantee's employment at any time, with or without Cause, except as otherwise expressly provided in any written employment agreement between the applicable member(s) of the TCI Group and Grantee. 9. ADJUSTMENTS; ACCELERATION. (a) If, after December 31, 1996, the Company (i) pays a dividend or makes a distribution on the Company Common Stock in shares of Company Common Stock; (ii) subdivides the outstanding shares of Company Common Stock into a greater number of shares or (iii) combines the outstanding shares of Company Common Stock into a smaller number of shares, then this Option and the number of Option Shares and the Option Price per share in effect immediately prior to the opening of business on the record date for such dividend or distribution or the effective date of such subdivision or combination shall be adjusted so that Grantee upon exercise thereafter of the Option may receive the number of shares of Company Common Stock that Grantee would have owned immediately following such event if Grantee had exercised the Option immediately prior to the record date for, or effective date of, as the case may be, such event. The adjustment contemplated by the preceding sentence shall be made successively whenever any event listed above shall occur. For a dividend or distribution, the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision or combination, the adjustment shall become effective immediately after the effective date of the subdivision or combination. (b) The Option shall also be subject to adjustment (including, without limitation, as to the number of Option Shares and the Option Price per share) in the sole discretion of the Company Board and in such manner as the Company Board may deem equitable and appropriate in connection with the occurrence of any of the following events after December 31, 1996 that affects the Company Common Stock such that an adjustment would be required in order to preserve the benefits or potential benefits intended to be made available under this Agreement: any dividend or distribution on the Company Common Stock in shares of the Company's capital stock (other than Company Common Stock); any reclassification of the Company Common Stock into shares of the Company's capital stock (other than a reclassification by way of an Approved Transaction); any extraordinary cash dividend; any distribution of any rights, warrants or options to holders of Company Common Stock; any distribution of any assets or debt securities (other than cash dividends or distributions that are not extraordinary cash dividends); any recapitalization, reorganization, split up or spin off; and any merger, consolidation or binding share exchange that reclassifies or changes the outstanding Company Common Stock or other similar corporate event (other than those which 5 6 constitute Approved Transactions). Notwithstanding the foregoing, in the event of any reclassification or recapitalization of the Company Common Stock into two or more classes or series of common stock with different voting rights (however the same may be effected), no adjustment to the Option shall be required that would entitle Grantee to receive shares of any class or series of common stock of the Company other than the class or series with the fewest number of votes per share. Adjustments to the Option Price shall be made on a per share basis so that the aggregate remaining Option Price is unchanged. (c) The Company Board may at any time in its sole discretion determine that the Option shall become exercisable in full, without regard to paragraph 2, whether immediately, upon the occurrence of specified events, or otherwise. Without limiting the generality of the foregoing, in the event of any Board Change, Control Purchase or Approved Transaction that occurs with respect to TCI following December 31, 1996 and prior to the earlier of such time as the Company ceases to be a Subsidiary of TCI or such time as the Company becomes a Public Company, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. In the event that (i) at any time after December 31, 1996 while the Company is a Subsidiary of TCI, an Approved Transaction occurs with respect to the Company after giving effect to which the Company will cease to be a Subsidiary of TCI or (ii) an Approved Transaction, Board Change or Control Purchase occurs with respect to the Company at a time following December 31, 1996 that the Company is no longer a Subsidiary of TCI, then, in any such case, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. Notwithstanding the foregoing, the Company Board may, in its discretion, determine that the Option will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Company Board is equitable and appropriate to substitute a new stock option for the Option evidenced by this Agreement or to assume this Agreement and the Option evidenced hereby and in order to make such new or assumed stock option, as nearly as may be practicable, equivalent to the Option evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Company Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Company Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. 6 7 (d) All actions taken by the Company Board with respect to the Option pursuant to this paragraph 9 shall be consistent with any actions taken by the Company Board with respect to the Other Options. When an adjustment to the Option pursuant to paragraph 9(a) or 9(b) becomes effective immediately after the record date for an event, the Company may defer until the occurrence of such event issuing to Grantee the additional shares of Company Common Stock (or cash, securities or other property) issuable or deliverable upon any exercise of the Option after such record date and before the occurrence of such event by reason of the adjustment required by such event over and above the shares of Company Common Stock that would have been issuable upon such exercise absent such adjustment. 10. MANNER OF PAYMENT. The method or methods of payment of the Option Price for the shares of Company Common Stock to be purchased upon exercise of the Option and any amounts required by paragraph 4 shall consist of (i) cash, (ii) check, (iii) promissory note in such form and with such security as shall be acceptable to the Company Board in its sole discretion (except that this method of payment will not be available for amounts required by paragraph 4), (iv) whole shares of Company Common Stock already owned by Grantee, (v) the withholding of shares of Company Common Stock issuable upon exercise of the Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price (except that this method of payment will not be available until the Company is a Public Company), or (vii) any combination of the foregoing methods of payment, as Grantee may elect and shall designate in the Option Exercise Notice, subject, however, to any restrictions or limitations of applicable law or of any agreement evidencing indebtedness of the Company for borrowed money. Any shares of Company Common Stock delivered or withheld in payment of any amount due hereunder shall be valued for such purposes (i) if the Option is exercised prior to such time as the Company is a Public Company, at the Appraised Public Trading Value of such shares on the applicable date of exercise of the Option, determined as provided in paragraph 11(c), and (ii) if the Option is exercised when the Company is a Public Company, at the Fair Market Value of such shares on the applicable date of exercise of the Option. 11. RESTRICTIONS IMPOSED BY LAW; CERTAIN PUT RIGHTS; APPRAISAL PROCEDURES. (a) Grantee acknowledges that neither the Option nor any of the Option Shares has been registered under the Securities Act of 1933 and that the Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Option Shares, or any transfer of Option Shares, under the Securities Act of 1933, the Exchange Act or any other state or federal securities law. Certificates representing Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Grantee agrees that Grantee will not exercise the Option (and that the Company shall not be obligated to deliver any Option Shares upon any exercise of the Option) if counsel for the Company determines that such exercise or delivery would violate any applicable law or any rule or regulation of any governmental authority, 7 8 or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Company Common Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Option or the resulting delivery of the shares of Company Common Stock to comply with any such law, rule, regulation or agreement. Without limiting the generality of the foregoing, but subject to paragraph 11(b), Grantee acknowledges and agrees that unless and until the Company becomes a Public Company or, if earlier, ceases to be a Subsidiary of TCI, the Option Shares may not be transferred to any person (other than to Grantee's designated beneficiary pursuant to paragraph 7 upon Grantee's death) without the prior written consent of TCI. (b) In the event that the Company has not become a Public Company on or before February 1, 2001, Grantee shall have the right, by written notice given to TCI at any time thereafter, to require TCI to purchase all, and not less than all, the Option Shares for a purchase price equal to the Appraised Public Trading Value of the Option Shares determined as provided in paragraph 11(c) (the "PUT RIGHT"); provided, however, that the Put Right shall expire upon the first to occur of the Company's becoming a Public Company and the Company's ceasing to be a Subsidiary of TCI; and, provided, further, that if Grantee dies prior to February 1, 2001, the Put Right shall become exercisable by his beneficiary or beneficiaries pursuant to paragraph 7 or his heirs, devisees or distributees as applicable, from and after the date of Grantee's death. Grantee's notice of the exercise of his Put Right (the "PUT EXERCISE NOTICE") shall set forth the number of Option Shares then owned by Grantee and/or that remain subject to the Option and shall contain the information required by paragraph 11(c). In the event that any Option Shares remain subject to the Option, Grantee shall exercise the balance of the Option in full prior to the closing of the purchase pursuant to the Put Right. If the Put Right is exercised, TCI shall have the right to pay the purchase price for the Option Shares in cash, shares of Tele-Communications, Inc. Series A TCI Group Common Stock, $1.00 par value per share, or any successor class or series of TCI's common stock (collectively the "TCI GROUP A STOCK"), or any combination of cash and shares of TCI Group A Stock as TCI may elect. If TCI elects to pay all or any portion of the purchase price for the Option Shares in shares of TCI Group A Stock, said shares shall be valued for such purpose on the basis of the average of the daily Closing Prices of the TCI Group A Stock during the period of 10 consecutive trading days commencing 20 trading days prior to the closing of such purchase. The closing of the purchase of the Option Shares pursuant to this paragraph 11(b) shall occur on the 10th day following the receipt by Grantee and TCI of notice pursuant to paragraph 11(c) of the final determination of the Appraised Public Trading Value of the Option Shares (or on such other date as the parties may agree). At the closing, if TCI has elected to pay all or a portion of the purchase price in shares of TCI Group A Stock, it shall enter into a registration rights agreement with Grantee, providing Grantee registration rights with respect to the shares so delivered on the terms and subject to the conditions contained in TCI's standard form of such agreement with such variations as the parties agree. (c) Grantee's Put Exercise Notice and any Option Exercise Notice that provides for the delivery or withholding of shares of Company Common Stock as a manner of payment of the Option Price or of amounts required under paragraph 4 shall identify the Public Appraiser selected by Grantee to make the determination of Appraised Public Trading Value ("FIRST APPRAISER"). Within 10 days after receipt of the Put Exercise Notice or Option Exercise Notice, as applicable, TCI or the Company, as applicable, shall notify Grantee in writing of the Applicable Person's selection 8 9 of a Public Appraiser (the "SECOND APPRAISER"). The First Appraiser and the Second Appraiser shall each submit its determination of the Appraised Public Trading Value of the Option Shares to Grantee and the Applicable Person within 30 days of the date of its selection. If the respective determinations of Appraised Public Trading Value by such Public Appraisers vary by less than 10% of the higher determination, then the Appraised Public Trading Value shall be the average of the two determinations. If such determinations vary by ten (10%) or more of the higher determination, the two Public Appraisers shall promptly designate a third Public Appraiser (the "THIRD APPRAISER"). Neither Grantee nor the Applicable Person shall provide, and the First Appraiser and Second Appraiser shall be instructed not to provide, any information to the Third Appraiser as to the determination of the First Appraiser and Second Appraiser or otherwise influence such Third Appraiser's determination. The Third Appraiser shall submit its determination of the Appraised Public Trading Value to Grantee and the Applicable Person within 30 days of the date of its selection. The Appraised Public Trading Value shall be equal to the average of the two closest of the three determinations, provided that, if the difference between the highest and middle determinations is no more than 105% and no less than 95% of the difference between the middle and lowest determinations, the Appraised Public Trading Value shall be equal to the middle determination. The Public Appraisers shall jointly notify the Applicable Person and Grantee in writing of their final determination of the Appraised Public Trading Value of the Option Shares within five (5) days thereafter. Grantee and the Applicable Person shall each pay the fees and expenses of his or its own Public Appraiser and one-half of the fees and expenses of the Third Appraiser, if any. 12. SUBSTITUTION OF TRACKING STOCK OPTION. In the event that, at any time after the date hereof and prior to any exercise by Grantee of its Put Right, TCI's stockholders authorize the creation of the proposed new series of TCI's common stock to be designated as Tele-Communications, Inc. Series A Telephony Group Common Stock, $1.00 par value per share (the "SERIES A TELEPHONY TRACKING STOCK"), which is designed to reflect the separate performance of businesses and assets that include the Company and its subsidiaries and its and their assets, and thereafter TCI issues any shares of Series A Telephony Tracking Stock, then effective upon such initial issuance, this Agreement shall be canceled and superseded in its entirety by the agreement set forth as Exhibit B to this Agreement, and the Option granted pursuant hereto shall be canceled and the option contemplated by the attached agreement will be substituted therefor. 13. NOTICE. Unless the Company or TCI, as applicable, notifies Grantee in writing of a change of address, any notice or other communication to the Applicable Person with respect to this 9 10 Agreement shall be in writing and shall be delivered personally or sent by first class mail, postage prepaid and addressed as follows: If to the Company: TCI Telephony Services, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel If to TCI: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel Any notice or other communication by the Company or TCI to Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of TCI on the date hereof, unless the Company has received written notification from Grantee of a change of address. Except as otherwise provided in paragraph 5, all notices and other communications hereunder, including without limitation any Option Exercise Notice or Put Exercise Notice, shall be effective when actually received. 14. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 15. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms refer to this Agreement, including all Exhibits, as a whole, unless the context otherwise requires. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. All decisions of the Company Board upon questions regarding this Agreement shall be conclusive. 16. DUPLICATE ORIGINALS. The Company, TCI and Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 17. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between or among TCI, the Company and Grantee, or any of them, with respect to the subject matter hereof. Each of TCI, the Company and Grantee hereby declares and represents that no promise or agreement not herein expressed has been made and 10 11 that this Agreement contains the entire agreement between and among the parties hereto with respect to the Option and supersedes and makes null and void any prior agreements between or among TCI, the Company and Grantee, or any of them, regarding the Option. 18. AMENDMENT. This Agreement may be amended, modified or supplemented by the Company, without the consent of the Grantee, (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including, without limitation, any applicable federal or state securities laws. Except as provided above, this Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. 19. DEFINITIONS. As used in this Agreement, the following terms have the corresponding meanings: "APPLICABLE PERSON" means TCI or the Company, as applicable. "APPRAISED PUBLIC TRADING VALUE" means the aggregate cash proceeds, net of underwriters' fees, discounts and commissions and other selling expenses customarily borne by selling stockholders, that would be received by Grantee from the sale of the Options Shares in an underwritten public offering registered under the Securities Act of 1933. "APPROVED TRANSACTION", when used with respect to TCI or the Company, as applicable, means any transaction in which the Relevant Board (or, if approval of the Relevant Board is not required as a matter of law, the stockholders of the Applicable Person) shall approve (i) any consolidation or merger of the Applicable Person, or binding share exchange, pursuant to which shares of common stock of the Applicable Person would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the common stockholders of the Applicable Person immediately prior to such transaction have the same proportionate ownership of the common stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Applicable Person is a party as a result of which the persons who are common stockholders of the Applicable Person immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Applicable Person, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Applicable Person. Notwithstanding the foregoing, none of such transactions that occur with respect to the Company while the Company is a Subsidiary of TCI and that are effected in connection with a spin off of the Company or rights offering of 11 12 Company Common Stock to TCI's stockholders or equivalent transaction shall constitute an Approved Transaction. "BOARD CHANGE" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Relevant Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "CAUSE" has the meaning ascribed thereto in any employment agreement between Grantee and the applicable member of the TCI Group, and in the absence of any such employment agreement means insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind, or refusal to perform one's duties and responsibilities for any reason other than illness or incapacity, or negligence in the performance of any of one's material duties or responsibilities that continues after written notice from the Company, as determined conclusively by the Company Board. "CLOSING PRICE" of a share of TCI Group A Stock on any day means the last sale price (or, if no last sale is reported, the average of the high bid and low asked prices) for a share of TCI Group A Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the TCI Group A Stock is listed on an exchange, on the principal exchange on which the TCI Group A Stock is listed. If for any day the Closing Price of a share of TCI Group A Stock is not determinable by any of the foregoing means, then the Closing Price for such day shall be determined in good faith by TCI on the basis of such quotations and other considerations as TCI may deem appropriate. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. "COMPANY COMMON STOCK" means the Common Stock, $1.00 par value per share, of the Company. "CONTROL PURCHASE" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person or any employee benefit plan sponsored by the Applicable Person or any Subsidiary of the Applicable Person) shall purchase any common stock of the Applicable Person (or securities convertible into common stock of the Applicable Person) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Relevant Board, or (ii) any person (as such term is so defined), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person, any employee benefit plan sponsored 12 13 by the Applicable Person or any Subsidiary of the Applicable Person, or any Controlling Person (as defined below)) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Applicable Person representing 20% or more of the combined voting power of the then outstanding securities of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Applicable Person's securities), other than in a transaction (or series of related transactions) approved by the Relevant Board. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Applicable Person as of December 31, 1996, (b) the respective family members, estates and heirs of each of the persons referred to in clause (a) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (c) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "DETERMINATION DATE" means February 1, 1996. "DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that (a) can be expected to result in death or (b) has lasted or can be expected to last for a continuous period of not less than 12 months. "DOMESTIC RELATIONS ORDER" means a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. References to any specific section of the Exchange Act or rule thereunder shall include any successor section or rule. "FAIR MARKET VALUE" of a share of Company Common Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Company Common Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Company Common Stock is listed on an exchange, on the principal exchange on which the Company Common Stock is listed. If for any day the Fair Market Value of a share of Company Common Stock is not determinable by any of the foregoing means, then the Fair Market Value for such day shall be determined in good faith by the Company Board on the basis of such quotations and other considerations as the Company Board deems appropriate. 13 14 "GOOD REASON" means the occurrence of any of the following prior to any termination of employment by Grantee: (i) any involuntary reduction in Grantee's annual rate of salary; (ii) a failure by TCI or the Company to continue in effect any employee benefit plan in which Grantee was participating, or the taking of any action by TCI or the Company that would adversely affect Grantee's participation in, or materially reduce Grantee's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of the corporate management of TCI or the Company (as applicable) generally; or (iii) the assignment to Grantee of duties and responsibilities that are materially more oppressive or onerous than those attendant to Grantee's position on the date hereof. "NASDAQ" means the Nasdaq Stock Market. "OPTION PRICE" means $________ per Option Share, plus an interest factor of 6% per annum on such amount from the date hereof to the date of exercise (calculated on the basis of a 365-day year and actual days elapsed), as such amount per Option Share may be adjusted from time to time pursuant to paragraph 9. Notwithstanding the foregoing, each time TCI makes a Tax Use the Option Price will be recalculated in accordance with the following provisions of this definition. The Option Price payable upon an exercise of the Option during the period following such Tax Use and preceding the next Tax Use shall be the dollar amount resulting from the following formula ($X), plus an interest factor of 6% per annum on such amount from the date TCI made the applicable Tax Use to the date of exercise (calculated on the basis of a 365-day year and actual days elapsed): $X = .01(A-B) + D. -------- C For purposes of the foregoing formula: "A" = $_________ "B" = as of the date of the Tax Use requiring the recalculation of the Option Price, the aggregate amount of the Company tax benefits used in such Tax Use and all prior Tax Uses. "C" = the number of Option Shares as of the date of the applicable Tax Use, determined without regard to any prior exercise(s) of this Option. 14 15 "D" = that portion of the Option Price that, as of the date of the applicable Tax Use and before giving effect to the recalculation of the Option Price, represents accrued interest on the initial Option Price (i.e., the Option Price as of the date hereof) to the date of such Tax Use. "OPTION SHARES" means an aggregate number of shares of Company Common Stock equal to 10 (which number represents 1% of the number of shares of Company Common Stock issued and outstanding on the date hereof), as such number of shares may be adjusted from time to time pursuant to paragraph 9. "OTHER OPTIONS" means the options to purchase shares of Company Common Stock granted pursuant to those other Option Agreements dated as of the date hereof among TCI, the Company and the grantees named therein, respectively. "PUBLIC APPRAISER" means, as of any date of selection, an investment banking firm of national reputation that is not affiliated with TCI, the Company or Grantee and that is one of the 20 leading investment banking firms based on aggregate proceeds of public offerings of common stock in the United States for which it acted as a managing underwriter during the preceding two full calendar years. "PUBLIC COMPANY" means a person the common equity securities of which are registered under Section 12(b) or 12(g) of the Exchange Act and which common equity securities are listed for trading on the New York Stock Exchange or the NASDAQ National Market. "RELEVANT BOARD", when used with respect to TCI, means the Board of Directors of TCI and, when used with respect to the Company, means the Company Board. "SUBSIDIARY", when used with respect to TCI or the Company, as applicable, means any present or future subsidiary (as defined in Section 424(f) of the Code) of the Applicable Person or any business entity in which the Applicable Person owns, directly or indirectly, 50% or more of the voting, capital or profits interests. An entity shall be deemed a Subsidiary of the Applicable Person for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained. "TAX SHARING AGREEMENT" means that certain Third Amendment to the Tax Sharing Agreement, dated as of December 1, 1996, among TCI, TCI Telephony Holdings, Inc. (the parent corporation of the Company), and certain other subsidiaries of TCI. "TAX USE" means the use by TCI in its consolidated return of tax benefits generated by the Company and its subsidiaries for which TCI, pursuant to Section C.4.c. of the Tax Sharing Agreement, is not obligated to provide a credit to or otherwise reimburse the Company. The aggregate amount of Company tax benefits that may be so used by TCI is $500 million. 15 16 "TCI GROUP" means TCI and its Subsidiaries, collectively, or the applicable of TCI or a Subsidiary of TCI, as the context may require. If the Company ceases to be a Subsidiary of TCI, the Company and its Subsidiaries shall, notwithstanding the last sentence of the definition of Subsidiary above, be deemed for purposes of this definition only to continue to be Subsidiaries of TCI and, accordingly, members of the TCI Group. 20. RULES BY COMPANY BOARD. The rights of Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Company Board may adopt from time to time hereafter. IN WITNESS WHEREOF, the Company, Grantee and, for purposes of paragraphs 11(b), 11(c) and 12 only, TCI have caused this Agreement to be duly executed and delivered as of the date first written above. ATTEST: TCI TELEPHONY SERVICES, INC. By: - -------------------------------- ------------------------------------ Assistant Secretary Name: Title: --------------------------------------- TELE-COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: 16 17 Exhibit A to Agreement dated as of December 1, 1996 TCI TELEPHONY SERVICES, INC. Option to Purchase Common Stock Designation of Beneficiary I, ___________________________________ (the "Grantee"), hereby declare that upon my death ____________________________________ (the "Beneficiary") of Name ______________________________________________________________________________, Street Address City State Zip Code who is my ___________________________________________, shall be entitled to the Relationship to Grantee Option and all other rights accorded Grantee by the above-referenced grant agreement (the "Agreement"). It is understood that this Designation of Beneficiary is made pursuant to the Agreement and is subject to the conditions stated herein, including the Beneficiary's survival of Grantee's death. If any such condition is not satisfied, such rights shall devolve according to Grantee's will or the laws of descent and distribution. All prior designations of beneficiary under the Agreement are hereby revoked. This Designation of Beneficiary may only be revoked in writing, signed by Grantee, and filed with Tele-Communications, Inc. and TCI Telephony Services, Inc., prior to Grantee's death. - ----------------------- --------------------------------------- Date Grantee 18 Exhibit B to Agreement dated as of December 1, 1996 TELE-COMMUNICATIONS, INC. OPTION TO PURCHASE COMMON STOCK THIS AGREEMENT ("AGREEMENT") is made as of the ____ day of __________, 199__, by and among TCI TELEPHONY SERVICES, INC., a Delaware corporation (the "COMPANY"), GRANTEE and TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI"). The Company is on the date hereof a subsidiary of TCI and a member of the Telephony Group, as defined in TCI's Restated Certificate of Incorporation. Pursuant to that certain agreement dated as of December 1, 1996 (the "PRIOR OPTION AGREEMENT") among Grantee, the Company and TCI, the Company granted to Grantee an option to purchase shares of the Company's common stock (the "PRIOR OPTION") The Board of Directors of the Company (the "COMPANY BOARD") and the Board of Directors of TCI had each determined that it is in the best interests of the Company to grant Grantee the rights and option set forth in the Prior Option Agreement in order to provide Grantee with additional remuneration for services rendered to the Company and its predecessors, to encourage Grantee to remain in the employ of TCI and/or one or more of its Subsidiaries, including the Company, and to provide additional incentive to Grantee by increasing Grantee's proprietary interest in the continued success and progress of the Company. Subsequent to the grant of the Prior Option, the stockholders of TCI, at a special meeting held on March 12, 1997 (the "MEETING"), approved an amendment to TCI's Restated Certificate of Incorporation authorizing, among other things, the creation of two new series of TCI Common Stock--Series A Telephony Group Common Stock and Series B Telephony Group Common Stock--that are designed to reflect the separate performance of the Telephony Group, which consists principally of the Company and its subsidiaries. On _________, 199__, TCI issued shares of Series A Telephony Group Common Stock to the public. As required by Section 12 of the Prior Option Agreement, this Agreement is being entered into, effective as of the closing of such issuance, to replace in its entirety the Prior Option Agreement and in order to substitute the Option granted herein for the Prior Option. Capitalized terms used herein and not otherwise defined are defined in paragraph 18 below. Accordingly, TCI, the Company and Grantee hereby agree as follows: 19 1. GRANT OF OPTION; OPTION TERM. The Company hereby grants to Grantee the right and option (the "OPTION"), on the terms and subject to the conditions set forth herein, to purchase the Option Shares for a price per Option Share equal to the Option Price. TCI hereby agrees to issue the Option Shares to Grantee upon receipt of notice from the Company that the Option has been validly exercised in accordance with paragraph 3. The parties understand and agree that the payment of the Option Price will be credited to the Telephony Group and that the Option Shares issued will reduce the shares of Telephony Group Common Stock available for issuance for the account of the Telephony Group. The Option Price and Option Shares are subject to adjustment pursuant to paragraph 9 below. Subject to paragraph 2, the Option shall be exercisable in whole at any time and in part from time to time during the period commencing on the date hereof and expiring at 5:00 p.m., Denver, Colorado time ("CLOSE OF BUSINESS") on the tenth anniversary of the Determination Date, or such earlier date as the Option may be terminated pursuant to paragraph 6 or paragraph 9(c) (the "OPTION TERM"). The Option is hereby substituted for the Prior Option and the Prior Option is hereby canceled. 2. CONDITIONS OF EXERCISE; VESTING. Except as otherwise provided in the last sentence of this paragraph 2 or in paragraph 9(c), the Option shall not be exercisable until the first anniversary of the Determination Date, and, from the first anniversary of the Determination Date to the fifth anniversary of the Determination Date, the Option shall be exercisable only to the extent the Option Shares have become available for purchase in accordance with the following schedule:
Anniversary of Percentage of Option Shares Determination Date Available for Purchase ------------------ --------------------------- 1st 20% 2nd 40% 3rd 60% 4th 80% 5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for purchase if during the Option Term (i) Grantee's employment with the TCI Group shall terminate by reason of (x) termination by the TCI Group without Cause, (y) termination by Grantee for Good Reason or (z) Disability, (ii) Grantee's employment shall terminate pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time) or (iii) Grantee dies while employed by the TCI Group. A change of employment is not a termination of employment within the meaning of this paragraph 2, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. 3. MANNER OF EXERCISE. The Option may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of shares specified 2 20 in the notice referred to in clause (a) below)) on the later of (i) the first business day on which the Company has received all of the following deliveries and (ii) the date of exercise designated in the written notice referred to in clause (a) below (or if such date is not a business day, the first business day thereafter): (a) written notice, in such form as the Company Board may reasonably require, stating that Grantee is exercising the Option and setting forth the date of such exercise, the number of Option Shares to be purchased, the aggregate Option Price to be paid for such Option Shares in accordance with this Agreement and the manner in which such payment is being made ("OPTION EXERCISE NOTICE"); (b) payment of the Option Price for each Option Share to be purchased upon such exercise, in cash or in such other form or combination of forms of payment contemplated by paragraph 10, together with payment of, or other provision acceptable to the Company Board for, any and all withholding taxes required to be withheld by the Company upon such exercise, in accordance with paragraph 4; (c) any other documentation that the Company Board may reasonably require (including, without limitation, proof satisfactory to the Company Board that the Option is then exercisable for the number of Option Shares set forth in such notice); and (d) evidence satisfactory to the Company Board that Grantee is validly and simultaneously exercising the same proportion of the stock option granted to him by TCI Wireline, Inc. pursuant to that certain option agreement, dated as of December 1, 1996, among TCI Wireline, Inc., Grantee and TCI, as the same may hereafter be amended, modified or supplemented from time to time. 4. WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Option that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Company Board. 5. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all the items required by paragraph 3 with respect to any exercise of the Option, and subject to the withholding referred to in paragraph 4, the Company shall so notify TCI and TCI shall deliver or cause to be delivered to Grantee certificates issued in Grantee's name for the number of whole Option Shares purchased upon such exercise. If delivery is by mail, delivery of Option Shares shall be deemed effected for all purposes when TCI or a stock transfer agent of TCI shall have deposited the certificates in the United States mail, addressed to Grantee, and any cash payment (for fractional shares or otherwise) shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to Grantee, in each case in accordance with paragraph 12. 3 21 6. EARLY TERMINATION OF OPTION. Unless otherwise determined by the Company Board in its sole discretion, the Option shall terminate, prior to the expiration of the ten-year period provided for in paragraph 1, as follows: (a) If Grantee's employment with the TCI Group terminates other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's death or Disability, (iii) with the written consent of the applicable member(s) of the TCI Group, (iv) without such consent if such termination is pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or (v) by the TCI Group with or without Cause, then the Option shall terminate at the Close of Business on the first business day following the expiration of the 90-day period beginning on the date of termination of Grantee's employment; (b) If Grantee dies while employed by the TCI Group, or prior to the expiration of a relevant period of time during which the Option remains exercisable as provided in this paragraph 6, the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of death; (c) If Grantee's employment with the TCI Group terminates by reason of Disability, then the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of termination of Grantee's employment; (d) If Grantee's employment with the TCI Group is terminated by the TCI Group for Cause, then the Option shall terminate immediately upon such termination of Grantee's employment; and (e) If Grantee terminates his employment with the TCI Group (i) with Good Reason, (ii) with the written consent of the applicable member(s) of the TCI Group or (iii) pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or if the TCI Group terminates Grantee's employment with the TCI Group without Cause, then the Option Term shall not terminate prior to the end of the ten-year period provided for in paragraph 1, except as otherwise provided for in paragraph 6(b) or 9(c). In any event in which the Option remains exercisable for a period of time following the date of termination of Grantee's employment as provided above, the Option may be exercised during such period of time only to the extent it was exercisable as provided in paragraph 2 or paragraph 9(c) on such date of termination of Grantee's employment. A change 4 22 of employment is not a termination of employment within the meaning of this paragraph 6, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. Anything contained herein to the contrary notwithstanding, the Option shall in any event terminate upon the expiration of the ten-year period provided for in paragraph 1, if not theretofore terminated. 7. NONTRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option is not and shall not be transferable (voluntarily or involuntarily) other than pursuant to a Domestic Relations Order and, except as otherwise required pursuant to a Domestic Relations Order, is exercisable only by Grantee or Grantee's court appointed legal representative. Grantee may designate a beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Company on the form annexed hereto as Exhibit A or such other form as may be prescribed by the Company Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive Grantee's death, the Option shall pass by will or the laws of descent and distribution. Following Grantee's death, the Option, if otherwise exercisable, may be exercised by the person to whom the Option passes according to the foregoing, and such person shall be deemed to be Grantee for purposes of any applicable provisions of this Agreement. 8. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT. (a) Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of TCI with respect to any Option Shares unless and until such Option Shares have been issued to Grantee by TCI. The existence of this Agreement or the Option shall not affect in any way the right or power of TCI or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by TCI, the TCI Board, the Company or the Company Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue in the employ of the TCI Group or any member thereof or interfere in any way with the right of TCI, the Company or any employing member of the TCI Group to terminate Grantee's employment at any time, with or without Cause, except as otherwise expressly provided in any written employment agreement between the applicable member(s) of the TCI Group and Grantee. 9. ADJUSTMENTS; ACCELERATION. (a) If, after December 31, 1996, TCI (i) pays a dividend or makes a distribution on the Series A Telephony Group Common Stock in shares of Series A Telephony Group Common Stock; (ii) subdivides the outstanding shares of Series A Telephony Group Common Stock into a greater number of shares or (iii) combines the outstanding shares of Series A Telephony Group Common Stock into a smaller number of shares, then this Option and the number of Option Shares and the Option Price per share in effect immediately prior to the opening of business on the record date for such dividend or distribution or the effective date of such subdivision or combination shall be adjusted so that Grantee upon exercise thereafter of the Option may receive the number of shares of Series A Telephony Group Common Stock that Grantee would 5 23 have owned immediately following such event if Grantee had exercised the Option immediately prior to the record date for, or effective date of, as the case may be, such event. The adjustment contemplated by the preceding sentence shall be made successively whenever any event listed above shall occur. For a dividend or distribution, the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision or combination, the adjustment shall become effective immediately after the effective date of the subdivision or combination. (b) The Option shall also be subject to adjustment (including, without limitation, as to the number of Option Shares and the Option Price per share) in the sole discretion of the Company Board and in such manner as the Company Board may deem equitable and appropriate in connection with the occurrence of any of the following events after December 31, 1996 that affects the Series A Telephony Group Common Stock such that an adjustment would be required in order to preserve the benefits or potential benefits intended to be made available under this Agreement: any dividend or distribution on the Series A Telephony Group Common Stock in shares of TCI's capital stock (other than Series A Telephony Group Common Stock); any reclassification of the Series A Telephony Group Common Stock into shares of TCI's capital stock (other than a reclassification by way of an Approved Transaction); any extraordinary cash dividend; any distribution of any rights, warrants or options to holders of Series A Telephony Group Common Stock; any distribution of any assets or debt securities (other than cash dividends or distributions that are not extraordinary cash dividends); any recapitalization, reorganization, split up or spin off; and any merger, consolidation or binding share exchange that reclassifies or changes the outstanding Series A Telephony Group Common Stock or other similar corporate event (other than those which constitute Approved Transactions). Notwithstanding the foregoing, in the event of any reclassification or recapitalization of the Series A Telephony Group Common Stock into two or more classes or series of common stock with different voting rights (however the same may be effected), no adjustment to the Option shall be required that would entitle Grantee to receive shares of any class or series of common stock of TCI other than the class or series with the fewest number of votes per share. Adjustments to the Option Price shall be made on a per share basis so that the aggregate remaining Option Price is unchanged. (c) The Company Board may at any time in its sole discretion determine that the Option shall become exercisable in full, without regard to paragraph 2, whether immediately, upon the occurrence of specified events, or otherwise. Without limiting the generality of the foregoing, in the event of any Board Change, Control Purchase or Approved Transaction that occurs with respect to TCI following December 31, 1996, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. Notwithstanding the foregoing, the Company Board may, in its discretion, determine that the Option will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the TCI Board or 6 24 the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the TCI Board is equitable and appropriate to substitute a new stock option for the Option evidenced by this Agreement or to assume this Agreement and the Option evidenced hereby and in order to make such new or assumed stock option, as nearly as may be practicable, equivalent to the Option evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the TCI Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Telephony Group Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. (d) All actions taken by the TCI Board or the Company Board with respect to the Option pursuant to this paragraph 9 shall be consistent with any actions taken by such Board with respect to the Other Options. When an adjustment to the Option pursuant to paragraph 9(a) or 9(b) becomes effective immediately after the record date for an event, the Company may defer until the occurrence of such event issuing to Grantee the additional shares of Series A Telephony Group Common Stock (or cash, securities or other property) issuable or deliverable upon any exercise of the Option after such record date and before the occurrence of such event by reason of the adjustment required by such event over and above the shares of Series A Telephony Group Common Stock that would have been issuable upon such exercise absent such adjustment. 10. MANNER OF PAYMENT. The method or methods of payment of the Option Price for the shares of Series A Telephony Group Common Stock to be purchased upon exercise of the Option and any amounts required by paragraph 4 shall consist of (i) cash, (ii) check, (iii) promissory note in such form and with such security as shall be acceptable to the Company Board in its sole discretion (except that this method of payment will not be available for amounts required by paragraph 4), (iv) whole shares of TCI Common Stock already owned by Grantee, (v) the withholding of shares of Series A Telephony Group Common Stock issuable upon exercise of the Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, or (vii) any combination of the foregoing methods of payment, as Grantee may elect and shall designate in the Option Exercise Notice, subject, however, to any restrictions or limitations of applicable law or of any agreement evidencing indebtedness of the Company for borrowed money. Any shares of capital stock delivered or withheld in payment of any amount due hereunder shall be valued for such purposes at the Fair Market Value of such shares on the applicable date of exercise of the Option. 11. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Option nor any of the Option Shares has been registered under the Securities Act of 1933 and that the Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither TCI nor any other person shall have any obligation to register any Option Shares, or any transfer of Option Shares, under the Securities Act of 1933, the Exchange Act or any other state or federal securities law. Certificates representing Option Shares purchased by 7 25 Grantee hereunder may bear such restrictive and other legends as counsel for TCI shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Grantee agrees that Grantee will not exercise the Option (and that TCI shall not be obligated to issue, and the Company shall not be obligated to deliver, any Option Shares upon any exercise of the Option) if counsel for TCI determines that such exercise or delivery would violate any applicable law or any rule or regulation of any governmental authority, or any rule or regulation of, or agreement of TCI with, any securities exchange or association upon which the Series A Telephony Group Common Stock is listed or quoted. Neither TCI nor the Company shall in any event be obligated to take any affirmative action in order to cause the exercise of the Option or the resulting delivery of the shares of Series A Telephony Group Common Stock to comply with any such law, rule, regulation or agreement. 12. NOTICE. Unless the Company or TCI, as applicable, notifies Grantee in writing of a change of address, any notice or other communication to the Applicable Person with respect to this Agreement shall be in writing and shall be delivered personally or sent by first class mail, postage prepaid and addressed as follows: If to the Company: TCI Telephony Services, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel If to TCI: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel Any notice or other communication by the Company or TCI to Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of TCI on the date hereof, unless the Company has received written notification from Grantee of a change of address. Except as otherwise provided in paragraph 5, all notices and other communications hereunder, including without limitation any Option Exercise Notice, shall be effective when actually received. 13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 14. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms refer to this Agreement, including all Exhibits, as 8 26 a whole, unless the context otherwise requires. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. All decisions of the Company Board and the TCI Board, as applicable, upon questions regarding this Agreement shall be conclusive. 15. DUPLICATE ORIGINALS. The Company, TCI and Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 16. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between or among TCI, the Company and Grantee, or any of them, with respect to the subject matter hereof. Each of TCI, the Company and Grantee hereby declares and represents that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between and among the parties hereto with respect to the Option and supersedes and makes null and void any prior agreements between or among TCI, the Company and Grantee, or any of them, regarding the Option, including, without limitation, the Prior Option Agreement. 17. AMENDMENT. This Agreement may be amended, modified or supplemented by TCI and the Company, without the consent of the Grantee, (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make such other changes as TCI or the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including, without limitation, any applicable federal or state securities laws. Except as provided above, this Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. 18. DEFINITIONS. As used in this Agreement, the following terms have the corresponding meanings: "APPLICABLE PERSON" means TCI or the Company, as applicable. "APPROVED TRANSACTION" means any transaction in which the TCI Board (or, if approval of the TCI Board is not required as a matter of law, the stockholders of TCI) shall approve (i) any consolidation or merger of TCI, or binding share exchange, pursuant to which shares of common stock of TCI would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the common stockholders of TCI immediately prior to such transaction have the same proportionate ownership of the common stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which TCI is a party as a result of which the persons who are common stockholders of TCI immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of TCI ordinarily (and apart from the rights 9 27 accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of TCI, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of TCI. "BOARD CHANGE" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire TCI Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "CAUSE" has the meaning ascribed thereto in any employment agreement between Grantee and the applicable member of the TCI Group, and in the absence of any such employment agreement means insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind, or refusal to perform one's duties and responsibilities for any reason other than illness or incapacity, or negligence in the performance of any of one's material duties or responsibilities that continues after written notice from the Company, as determined conclusively by the Company Board. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. "CONTROL PURCHASE" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than TCI, any Subsidiary of TCI or any employee benefit plan sponsored by TCI or any Subsidiary of TCI) shall purchase any common stock of TCI (or securities convertible into common stock of TCI) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the TCI Board, or (ii) any person (as such term is so defined), corporation or other entity (other than TCI, any Subsidiary of TCI, any employee benefit plan sponsored by TCI or any Subsidiary of TCI, or any Controlling Person (as defined below)) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of TCI representing 20% or more of the combined voting power of the then outstanding securities of TCI ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire TCI's securities), other than in a transaction (or series of related transactions) approved by the TCI Board. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of TCI as of December 31, 1996, (b) the respective family members, estates and heirs of each of the persons referred to in clause (a) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (c) Kearns-Tribune Corporation, a Delaware corporation. As used with respect 10 28 to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "DETERMINATION DATE" means February 1, 1996. "DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that (a) can be expected to result in death or (b) has lasted or can be expected to last for a continuous period of not less than 12 months. "DOMESTIC RELATIONS ORDER" means a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. References to any specific section of the Exchange Act or rule thereunder shall include any successor section or rule. "FAIR MARKET VALUE" of a share of Series A Telephony Group Common Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Telephony Group Common Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Telephony Group Common Stock is listed on an exchange, on the principal exchange on which the Series A Telephony Group Common Stock is listed. If for any day the Fair Market Value of a share Series A Telephony Group Common Stock is not determinable by any of the foregoing means, then the Fair Market Value for such day shall be determined in good faith by the Company Board on the basis of such quotations and other considerations as the Company Board deems appropriate. "GOOD REASON" means the occurrence of any of the following prior to any termination of employment by Grantee: (i) any involuntary reduction in Grantee's annual rate of salary; (ii) a failure by TCI or the Company to continue in effect any employee benefit plan in which Grantee was participating, or the taking of any action by TCI or the Company that would adversely affect Grantee's participation in, or materially reduce Grantee's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of the corporate management of TCI or the Company (as applicable) generally; or 11 29 (iii) the assignment to Grantee of duties and responsibilities that are materially more oppressive or onerous than those attendant to Grantee's position on the date hereof. "NASDAQ" means the Nasdaq Stock Market. "OPTION PRICE"means $________ per Option Share, plus an interest factor of 6% per annum on such amount from the date hereof to the date of exercise (calculated on the basis of a 365-day year and actual days elapsed), as such amount per Option Share may be adjusted from time to time pursuant to paragraph 9. Notwithstanding the foregoing, each time TCI makes a Tax Use the Option Price will be recalculated in accordance with the following provisions of this definition. The Option Price payable upon an exercise of the Option during the period following such Tax Use and preceding the next Tax Use shall be the dollar amount resulting from the following formula ($X), plus an interest factor of 6% per annum on such amount from the date TCI made the applicable Tax Use to the date of exercise (calculated on the basis of a 365-day year and actual days elapsed): $X = .01(A-B) + D. -------- C For purposes of the formula: "A" = $_________ [NOTE: This number shall be the same as the corresponding number in the definition of "Option Price" in the Prior Option Agreement, unless the Prior Option was exercised in part in which case such number shall be adjusted accordingly.] "B" = as of the date of the Tax Use requiring the recalculation of the Option Price, the aggregate amount of the Company tax benefits used in such Tax Use and all prior Tax Uses. "C" = the number of Option Shares as of the date of the applicable Tax Use, determined without regard to any prior exercise(s) of this Option. "D" = that portion of the Option Price that, as of the date of the applicable Tax Use and before giving effect to the recalculation of the Option Price, represents accrued interest on the initial Option Price (i.e., the Option Price as of the date hereof) to the date of such Tax Use. "OPTION SHARES" means an aggregate number of shares of Series A Telephony Group Common Stock equal to ________, as such number of shares may be adjusted from time to time pursuant to paragraph 9. [NOTE: This number shall be 1% of the Number of Shares Issuable With Respect to the Telephony Group Inter-Group Interest (as defined in the Certificate of Amendment 12 30 to TCI's Restated Certificate of Incorporation authorizing the Series A Telephony Group Common Stock and Series B Telephony Group Common Stock) immediately prior to the issuance of any shares of Telephony Group Common Stock ; provided that if, subsequent to the approval of such Certificate of Amendment by TCI's stockholders at the Meeting and prior to the issuance of any shares of Telephony Group Common Stock, the composition of the Telephony Group is expanded from that contemplated by the definitive proxy statement for the Meeting, then, for purposes of determining the number of Option Shares, the Number of Shares Issuable With Respect to the Telephony Group Inter-Group Interest shall be determined solely on the basis of the assets and liabilities that such definitive proxy statement contemplated would comprise the Telephony Group. In the event that the Prior Option was exercised in part, the number of Option Shares shall be adjusted accordingly.] "OTHER OPTIONS" means the options to purchase shares of Series A Telephony Group Common Stock granted pursuant to those other Option Agreements dated as of the date hereof among TCI, the Company and the grantees named therein, respectively. "SERIES A TELEPHONY GROUP COMMON STOCK" means the series of TCI Common Stock designated Tele- Communications, Inc. Series A Telephony Group Common Stock. "SERIES B TELEPHONY GROUP COMMON STOCK" means the series of TCI Common Stock designated Tele- Communications, Inc. Series B Telephony Group Common Stock. "SUBSIDIARY", when used with respect to TCI or the Company, as applicable, means any present or future subsidiary (as defined in Section 424(f) of the Code) of the Applicable Person or any business entity in which the Applicable Person owns, directly or indirectly, 50% or more of the voting, capital or profits interests. An entity shall be deemed a Subsidiary of the Applicable Person for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained. "TAX SHARING AGREEMENT" means that certain Third Amendment to the Tax Sharing Agreement, dated as of December 1, 1996, among TCI, TCI Telephony Holdings, Inc. (the parent corporation of the Company), and certain other subsidiaries of TCI. "TAX USE" means the use by TCI in its consolidated return of tax benefits generated by the Company and its subsidiaries for which TCI, pursuant to Section C.4.c. of the Tax Sharing Agreement, is not obligated to provide a credit to or otherwise reimburse the Company. The aggregate amount of Company tax benefits that may be so used by TCI is $500 million. "TCI COMMON STOCK" means the Common Stock, $1.00 par value per share, of TCI. "TCI GROUP" means TCI and its Subsidiaries, collectively, or the applicable of TCI or a Subsidiary of TCI, as the context may require. If the Company ceases to be a Subsidiary of TCI, the Company and its Subsidiaries shall, notwithstanding the last sentence of the definition of 13 31 Subsidiary above, be deemed for purposes of this definition only to continue to be Subsidiaries of TCI and, accordingly, members of the TCI Group. 19. RULES BY COMPANY BOARD. The rights of Grantee and obligations of TCI and the Company hereunder shall be subject to such reasonable rules and regulations as the TCI Board or the Company Board may adopt from time to time hereafter. IN WITNESS WHEREOF, TCI, the Company and Grantee have caused this Agreement to be duly executed and delivered as of the date first written above. ATTEST: TELE-COMMUNICATIONS, INC. - ------------------------------ By: Assistant Secretary ------------------------------------ Name: Title: TCI TELEPHONY SERVICES, INC. By: ------------------------------------ Name: Title: --------------------------------------- 14 EX-10.45 5 TCI WIRELESS 1 EXHIBIT 10.45 TCI WIRELINE, INC. OPTION TO PURCHASE COMMON STOCK THIS AGREEMENT ("AGREEMENT") is made as of the 1st day of December, 1996, by and among TCI WIRELINE, INC., a Delaware corporation (the "COMPANY"), "GRANTEE" and, for purposes of paragraphs 11(b) and 11(c) only, TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI"). The Company is on the date hereof a subsidiary of TCI. The Board of Directors of the Company ("COMPANY BOARD") and the Board of Directors of TCI have each determined that it is in the best interests of the Company to grant Grantee the rights and option set forth herein in order to provide Grantee with additional remuneration for services rendered to the Company and its predecessors, to encourage Grantee to remain in the employ of TCI and/or one or more of its Subsidiaries, including the Company, and to provide additional incentive to Grantee by increasing Grantee's proprietary interest in the continued success and progress of the Company. Capitalized terms used herein and not otherwise defined are defined in paragraph 18 below. Accordingly, the Company, Grantee and, for purposes of paragraphs 11(b) and 11(c) only, TCI hereby agree as follows: 1. GRANT OF OPTION; OPTION TERM. The Company hereby grants to Grantee the right and option (the "OPTION"), on the terms and subject to the conditions set forth herein, to purchase the Option Shares from the Company for a price per Option Share equal to the Option Price. The Option Price and Option Shares are subject to adjustment pursuant to paragraph 9 below. Subject to paragraph 2, the Option shall be exercisable in whole at any time and in part from time to time during the period commencing on the date hereof and expiring at 5:00 p.m., Denver, Colorado time ("CLOSE OF BUSINESS") on the tenth anniversary of the Determination Date, or such earlier date as the Option may be terminated pursuant to paragraph 6 or paragraph 9(c) (the "OPTION TERM"). 2. CONDITIONS OF EXERCISE; VESTING. Except as otherwise provided in the last sentence of this paragraph 2 or in paragraph 9(c), the Option shall not be exercisable until the first anniversary of the Determination Date, and, from the first anniversary of the Determination Date to the fifth anniversary of the Determination Date, the Option shall be exercisable only to the extent the Option Shares have become available for purchase in accordance with the following schedule: 2
Anniversary of Percentage of Option Shares Determination Date Available for Purchase ------------------ --------------------------- 1st 20% 2nd 40% 3rd 60% 4th 80% 5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for purchase if during the Option Term (i) Grantee's employment with the TCI Group shall terminate by reason of (x) termination by the TCI Group without Cause, (y) termination by Grantee for Good Reason or (z) Disability, (ii) Grantee's employment shall terminate pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time) or (iii) Grantee dies while employed by the TCI Group. A change of employment is not a termination of employment within the meaning of this paragraph 2, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. 3. MANNER OF EXERCISE. The Option may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of shares specified in the notice referred to in clause (a) below)) on the later of (i) the first business day on which the Company has received all of the following deliveries and (ii) the date of exercise designated in the written notice referred to in clause (a) below (or if such date is not a business day, the first business day thereafter): (a) written notice, in such form as the Company Board may reasonably require, stating that Grantee is exercising the Option and setting forth the date of such exercise, the number of Option Shares to be purchased, the aggregate Option Price to be paid for such Option Shares in accordance with this Agreement and the manner in which such payment is being made ("OPTION EXERCISE NOTICE"); (b) payment of the Option Price for each Option Share to be purchased upon such exercise, in cash or in such other form or combination of forms of payment contemplated by paragraph 10, together with payment of, or other provision acceptable to the Company Board for, any and all withholding taxes required to be withheld by the Company upon such exercise, in accordance with paragraph 4; (c) any other documentation that the Company Board may reasonably require (including, without limitation, proof satisfactory to the Company Board that the Option is then exercisable for the number of Option Shares set forth in such notice); and 2 3 (d) evidence satisfactory to the Company Board that Grantee is validly and simultaneously exercising the same proportion of the stock option granted to him by TCI Telephony Services, Inc. pursuant to that certain option agreement, dated as of the date hereof, among TCI Telephony Services, Inc., Grantee and TCI, as the same may hereafter be amended, modified or supplemented from time to time or, if said stock option has been superseded by the option contemplated by Exhibit B to said option agreement, then evidence satisfactory to the Company Board that Grantee is simultaneously exercising the same proportion of the latter option. 4. WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Option that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Company Board. 5. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all the items required by paragraph 3 with respect to any exercise of the Option, and subject to the withholding referred to in paragraph 4, the Company shall deliver or cause to be delivered to Grantee certificates issued in Grantee's name for the number of whole Option Shares purchased upon such exercise. If delivery is by mail, delivery of Option Shares shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to Grantee, and any cash payment (for fractional shares or otherwise) shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to Grantee, in each case in accordance with paragraph 12. 6. EARLY TERMINATION OF OPTION. Unless otherwise determined by the Company Board in its sole discretion, the Option shall terminate, prior to the expiration of the ten-year period provided for in paragraph 1, as follows: (a) If Grantee's employment with the TCI Group terminates other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's death or Disability, (iii) with the written consent of the applicable member(s) of the TCI Group, (iv) without such consent if such termination is pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or (v) by the TCI Group with or without Cause, then the Option shall terminate at the Close of Business on the first business day following the expiration of the 90-day period beginning on the date of termination of Grantee's employment; (b) If Grantee dies while employed by the TCI Group, or prior to the expiration of a relevant period of time during which the Option remains exercisable as provided in this 3 4 paragraph 6, the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of death; (c) If Grantee's employment with the TCI Group terminates by reason of Disability, then the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of termination of Grantee's employment; (d) If Grantee's employment with the TCI Group is terminated by the TCI Group for Cause, then the Option shall terminate immediately upon such termination of Grantee's employment; and (e) If Grantee terminates his employment with the TCI Group (i) with Good Reason, (ii) with the written consent of the applicable member(s) of the TCI Group or (iii) pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or if the TCI Group terminates Grantee's employment with the TCI Group without Cause, then the Option Term shall not terminate prior to the end of the ten-year period provided for in paragraph 1, except as otherwise provided for in paragraph 6(b) or 9(c). In any event in which the Option remains exercisable for a period of time following the date of termination of Grantee's employment as provided above, the Option may be exercised during such period of time only to the extent it was exercisable as provided in paragraph 2 or paragraph 9(c) on such date of termination of Grantee's employment. A change of employment is not a termination of employment within the meaning of this paragraph 6, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. Anything contained herein to the contrary notwithstanding, the Option shall in any event terminate upon the expiration of the ten-year period provided for in paragraph 1, if not theretofore terminated. 7. NONTRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option is not and shall not be transferable (voluntarily or involuntarily) other than pursuant to a Domestic Relations Order and, except as otherwise required pursuant to a Domestic Relations Order, is exercisable only by Grantee or Grantee's court appointed legal representative. Grantee may designate a beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Company on the form annexed hereto as Exhibit A or such other form as may be prescribed by the Company Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive Grantee's death, the Option shall pass by will or the laws of descent and distribution. Following Grantee's death, the Option, if otherwise exercisable, may be exercised by the person to whom the Option 4 5 passes according to the foregoing, and such person shall be deemed to be Grantee for purposes of any applicable provisions of this Agreement. 8. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT. (a) Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any Option Shares unless and until such Option Shares have been issued to Grantee by the Company. The existence of this Agreement or the Option shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Company Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue in the employ of the TCI Group or any member thereof or interfere in any way with the right of TCI, the Company or any employing member of the TCI Group to terminate Grantee's employment at any time, with or without Cause, except as otherwise expressly provided in any written employment agreement between the applicable member(s) of the TCI Group and Grantee. 9. ADJUSTMENTS; ACCELERATION. (a) If, after December 31, 1996, the Company (i) pays a dividend or makes a distribution on the Company Common Stock in shares of Company Common Stock; (ii) subdivides the outstanding shares of Company Common Stock into a greater number of shares or (iii) combines the outstanding shares of Company Common Stock into a smaller number of shares, then this Option and the number of Option Shares and the Option Price per share in effect immediately prior to the opening of business on the record date for such dividend or distribution or the effective date of such subdivision or combination shall be adjusted so that Grantee upon exercise thereafter of the Option may receive the number of shares of Company Common Stock that Grantee would have owned immediately following such event if Grantee had exercised the Option immediately prior to the record date for, or effective date of, as the case may be, such event. The adjustment contemplated by the preceding sentence shall be made successively whenever any event listed above shall occur. For a dividend or distribution, the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision or combination, the adjustment shall become effective immediately after the effective date of the subdivision or combination. (b) The Option shall also be subject to adjustment (including, without limitation, as to the number of Option Shares and the Option Price per share) in the sole discretion of the Company Board and in such manner as the Company Board may deem equitable and appropriate in connection with the occurrence of any of the following events after December 31, 1996 that affects the Company Common Stock such that an adjustment would be required in order to preserve the benefits or potential benefits intended to be made available under this Agreement: any dividend or distribution on the Company Common Stock in shares of the Company's capital stock (other than Company Common Stock); any reclassification of the Company Common Stock into shares of the Company's capital stock (other than a reclassification by way of an Approved Transaction); any extraordinary cash dividend; any distribution of any rights, warrants or options to holders of Company Common Stock; any distribution of any assets or debt securities (other than cash dividends 5 6 or distributions that are not extraordinary cash dividends); any recapitalization, reorganization, split up or spin off; and any merger, consolidation or binding share exchange that reclassifies or changes the outstanding Company Common Stock or other similar corporate event (other than those which constitute Approved Transactions). Notwithstanding the foregoing, in the event of any reclassification or recapitalization of the Company Common Stock into two or more classes or series of common stock with different voting rights (however the same may be effected), no adjustment to the Option shall be required that would entitle Grantee to receive shares of any class or series of common stock of the Company other than the class or series with the fewest number of votes per share. Adjustments to the Option Price shall be made on a per share basis so that the aggregate remaining Option Price is unchanged. (c) The Company Board may at any time in its sole discretion determine that the Option shall become exercisable in full, without regard to paragraph 2, whether immediately, upon the occurrence of specified events, or otherwise. Without limiting the generality of the foregoing, in the event of any Board Change, Control Purchase or Approved Transaction that occurs with respect to TCI following December 31, 1996 and prior to the earlier of such time as the Company ceases to be a Subsidiary of TCI or such time as the Company becomes a Public Company, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. In the event that (i) at any time after December 31, 1996 while the Company is a Subsidiary of TCI, an Approved Transaction occurs with respect to the Company after giving effect to which the Company will cease to be a Subsidiary of TCI or (ii) an Approved Transaction, Board Change or Control Purchase occurs with respect to the Company at a time following December 31, 1996 that the Company is no longer a Subsidiary of TCI, then, in any such case, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. Notwithstanding the foregoing, the Company Board may, in its discretion, determine that the Option will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Company Board is equitable and appropriate to substitute a new stock option for the Option evidenced by this Agreement or to assume this Agreement and the Option evidenced hereby and in order to make such new or assumed stock option, as nearly as may be practicable, equivalent to the Option evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Company Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets 6 7 into or for which the Company Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. (d) All actions taken by the Company Board with respect to the Option pursuant to this paragraph 9 shall be consistent with any actions taken by the Company Board with respect to the Other Options. When an adjustment to the Option pursuant to paragraph 9(a) or 9(b) becomes effective immediately after the record date for an event, the Company may defer until the occurrence of such event issuing to Grantee the additional shares of Company Common Stock (or cash, securities or other property) issuable or deliverable upon any exercise of the Option after such record date and before the occurrence of such event by reason of the adjustment required by such event over and above the shares of Company Common Stock that would have been issuable upon such exercise absent such adjustment. 10. MANNER OF PAYMENT. The method or methods of payment of the Option Price for the shares of Company Common Stock to be purchased upon exercise of the Option and any amounts required by paragraph 4 shall consist of (i) cash, (ii) check, (iii) promissory note in such form and with such security as shall be acceptable to the Company Board in its sole discretion (except that this method of payment will not be available for amounts required by paragraph 4), (iv) whole shares of Company Common Stock already owned by Grantee, (v) the withholding of shares of Company Common Stock issuable upon exercise of the Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price (except that this method of payment will not be available until the Company is a Public Company), or (vii) any combination of the foregoing methods of payment, as Grantee may elect and shall designate in the Option Exercise Notice, subject, however, to any restrictions or limitations of applicable law or of any agreement evidencing indebtedness of the Company for borrowed money. Any shares of Company Common Stock delivered or withheld in payment of any amount due hereunder shall be valued for such purposes (i) if the Option is exercised prior to such time as the Company is a Public Company, at the Appraised Public Trading Value of such shares on the applicable date of exercise of the Option, determined as provided in paragraph 11(c), and (ii) if the Option is exercised when the Company is a Public Company, at the Fair Market Value of such shares on the applicable date of exercise of the Option. 11. RESTRICTIONS IMPOSED BY LAW; CERTAIN PUT RIGHTS; APPRAISAL PROCEDURES. (a) Grantee acknowledges that neither the Option nor any of the Option Shares has been registered under the Securities Act of 1933 and that the Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Option Shares, or any transfer of Option Shares, under the Securities Act of 1933, the Exchange Act or any other state or federal securities law. Certificates representing Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Grantee agrees that Grantee 7 8 will not exercise the Option (and that the Company shall not be obligated to deliver any Option Shares upon any exercise of the Option) if counsel for the Company determines that such exercise or delivery would violate any applicable law or any rule or regulation of any governmental authority, or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Company Common Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Option or the resulting delivery of the shares of Company Common Stock to comply with any such law, rule, regulation or agreement. Without limiting the generality of the foregoing, but subject to paragraph 11(b), Grantee acknowledges and agrees that unless and until the Company becomes a Public Company or, if earlier, ceases to be a Subsidiary of TCI, the Option Shares may not be transferred to any person (other than to Grantee's designated beneficiary pursuant to paragraph 7 upon Grantee's death) without the prior written consent of TCI. (b) In the event that the Company has not become a Public Company on or before February 1, 2001, Grantee shall have the right, by written notice given to TCI at any time thereafter, to require TCI to purchase all, and not less than all, the Option Shares for a purchase price equal to the Appraised Public Trading Value of the Option Shares determined as provided in paragraph 11(c) (the "PUT RIGHT"); provided, however, that the Put Right shall expire upon the first to occur of the Company's becoming a Public Company and the Company's ceasing to be a Subsidiary of TCI; and, provided, further, that if Grantee dies prior to February 1, 2001, the Put Right shall become exercisable by his beneficiary or beneficiaries pursuant to paragraph 7 or his heirs, devisees or distributees, as applicable, from and after the date of Grantee's death. Grantee's notice of the exercise of his Put Right (the "PUT EXERCISE NOTICE") shall set forth the number of Option Shares then owned by Grantee and/or that remain subject to the Option and shall contain the information required by paragraph 11(c). In the event that any Option Shares remain subject to the Option, Grantee shall exercise the balance of the Option in full prior to the closing of the purchase pursuant to the Put Right. If the Put Right is exercised, TCI shall have the right to pay the purchase price for the Option Shares in cash, shares of Tele-Communications, Inc. Series A TCI Group Common Stock, $1.00 par value per share, or any successor class or series of TCI's common stock, or if any class or series of TCI's common stock is hereafter created that is intended to track the separate performance of specified assets or businesses of TCI that include assets and businesses of the Company, shares of such class or series (and if more than one series of such "tracking stock" is created with different voting rights, the series with the lower voting rights) (collectively the "TCI STOCK"), or any combination of cash and shares of TCI Stock as TCI may elect. If TCI elects to pay all or any portion of the purchase price for the Option Shares in shares of TCI Stock, said shares shall be valued for such purpose on the basis of the average of the daily Closing Prices of the TCI Stock during the period of 10 consecutive trading days commencing 20 trading days prior to the closing of such purchase. The closing of the purchase of the Option Shares pursuant to this paragraph 11(b) shall occur on the 10th day following the receipt by Grantee and TCI of notice pursuant to paragraph 11(c) of the final determination of the Appraised Public Trading Value of the Option Shares (or on such other date as the parties may agree). At the closing, if TCI has elected to pay all or a portion of the purchase price in shares of TCI Stock, it shall enter into a registration rights agreement with Grantee, providing Grantee registration rights with respect to the shares so delivered on the terms and subject to the conditions contained in TCI's standard form of such agreement with such variations as the parties agree. 8 9 (c) Grantee's Put Exercise Notice and any Option Exercise Notice that provides for the delivery or withholding of shares of Company Common Stock as a manner of payment of the Option Price or of amounts required under paragraph 4 shall identify the Public Appraiser selected by Grantee to make the determination of Appraised Public Trading Value ("FIRST APPRAISER"). Within 10 days after receipt of the Put Exercise Notice or Option Exercise Notice, as applicable, TCI or the Company, as applicable, shall notify Grantee in writing of the Applicable Person's selection of a Public Appraiser (the "SECOND APPRAISER"). The First Appraiser and the Second Appraiser shall each submit its determination of the Appraised Public Trading Value of the Option Shares to Grantee and the Applicable Person within 30 days of the date of its selection. If the respective determinations of Appraised Public Trading Value by such Public Appraisers vary by less than 10% of the higher determination, then the Appraised Public Trading Value shall be the average of the two determinations. If such determinations vary by ten (10%) or more of the higher determination, the two Public Appraisers shall promptly designate a third Public Appraiser (the "THIRD APPRAISER"). Neither Grantee nor the Applicable Person shall provide, and the First Appraiser and Second Appraiser shall be instructed not to provide, any information to the Third Appraiser as to the determination of the First Appraiser and Second Appraiser or otherwise influence such Third Appraiser's determination. The Third Appraiser shall submit its determination of the Appraised Public Trading Value to Grantee and the Applicable Person within 30 days of the date of its selection. The Appraised Public Trading Value shall be equal to the average of the two closest of the three determinations, provided that, if the difference between the highest and middle determinations is no more than 105% and no less than 95% of the difference between the middle and lowest determinations, the Appraised Public Trading Value shall be equal to the middle determination. The Public Appraisers shall jointly notify the Applicable Person and Grantee in writing of their final determination of the Appraised Public Trading Value of the Option Shares within five (5) days thereafter. Grantee and the Applicable Person shall each pay the fees and expenses of his or its own Public Appraiser and one-half of the fees and expenses of the Third Appraiser, if any. 12. NOTICE. Unless the Company or TCI, as applicable, notifies Grantee in writing of a change of address, any notice or other communication to the Applicable Person with respect to this Agreement shall be in writing and shall be delivered personally or sent by first class mail, postage prepaid and addressed as follows: If to the Company: TCI Wireline, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel 9 10 If to TCI: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel Any notice or other communication by the Company or TCI to Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of TCI on the date hereof, unless the Company has received written notification from Grantee of a change of address. Except as otherwise provided in paragraph 5, all notices and other communications hereunder, including without limitation any Option Exercise Notice or Put Exercise Notice, shall be effective when actually received. 13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 14. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms refer to this Agreement, including all Exhibits, as a whole, unless the context otherwise requires. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. All decisions of the Company Board upon questions regarding this Agreement shall be conclusive. 15. DUPLICATE ORIGINALS. The Company, TCI and Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 16. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between or among TCI, the Company and Grantee, or any of them, with respect to the subject matter hereof. Each of TCI, the Company and Grantee hereby declares and represents that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between and among the parties hereto with respect to the Option and supersedes and makes null and void any prior agreements between or among TCI, the Company and Grantee, or any of them, regarding the Option. 17. AMENDMENT. This Agreement may be amended, modified or supplemented by the Company, without the consent of the Grantee, (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including, without limitation, any applicable federal or state 10 11 securities laws. Except as provided above, this Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. 18. DEFINITIONS. As used in this Agreement, the following terms have the corresponding meanings: "APPLICABLE PERSON" means TCI or the Company, as applicable. "APPRAISED PUBLIC TRADING VALUE" means the aggregate cash proceeds, net of underwriters' fees, discounts and commissions and other selling expenses customarily borne by selling stockholders, that would be received by Grantee from the sale of the Options Shares in an underwritten public offering registered under the Securities Act of 1933. "APPROVED TRANSACTION", when used with respect to TCI or the Company, as applicable, means any transaction in which the Relevant Board (or, if approval of the Relevant Board is not required as a matter of law, the stockholders of the Applicable Person) shall approve (i) any consolidation or merger of the Applicable Person, or binding share exchange, pursuant to which shares of common stock of the Applicable Person would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the common stockholders of the Applicable Person immediately prior to such transaction have the same proportionate ownership of the common stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Applicable Person is a party as a result of which the persons who are common stockholders of the Applicable Person immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Applicable Person, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Applicable Person. Notwithstanding the foregoing, none of such transactions that occur with respect to the Company while the Company is a Subsidiary of TCI and that are effected in connection with a spin off of the Company or rights offering of Company Common Stock to TCI's stockholders or equivalent transaction shall constitute an Approved Transaction. "BOARD CHANGE" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Relevant Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "CAUSE" has the meaning ascribed thereto in any employment agreement between Grantee and the applicable member of the TCI Group, and in the absence of any such employment 11 12 agreement means insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind, or refusal to perform one's duties and responsibilities for any reason other than illness or incapacity, or negligence in the performance of any of one's material duties or responsibilities that continues after written notice from the Company, as determined conclusively by the Company Board. "CLOSING PRICE" of a share of TCI Stock on any day means the last sale price (or, if no last sale is reported, the average of the high bid and low asked prices) for a share of TCI Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the TCI Stock is listed on an exchange, on the principal exchange on which the TCI Stock is listed. If for any day the Closing Price of a share of TCI Stock is not determinable by any of the foregoing means, then the Closing Price for such day shall be determined in good faith by TCI on the basis of such quotations and other considerations as TCI may deem appropriate. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. "COMPANY COMMON STOCK" means the Common Stock, $1.00 par value per share, of the Company. "CONTROL PURCHASE" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person or any employee benefit plan sponsored by the Applicable Person or any Subsidiary of the Applicable Person) shall purchase any common stock of the Applicable Person (or securities convertible into common stock of the Applicable Person) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Relevant Board, or (ii) any person (as such term is so defined), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person, any employee benefit plan sponsored by the Applicable Person or any Subsidiary of the Applicable Person, or any Controlling Person (as defined below)) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Applicable Person representing 20% or more of the combined voting power of the then outstanding securities of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Applicable Person's securities), other than in a transaction (or series of related transactions) approved by the Relevant Board. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Applicable Person as of December 31, 1996, (b) the respective family members, estates and heirs of each of the persons referred to in clause (a) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (c) 12 13 Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "DETERMINATION DATE" means February 1, 1996. "DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that (a) can be expected to result in death or (b) has lasted or can be expected to last for a continuous period of not less than 12 months. "DOMESTIC RELATIONS ORDER" means a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. References to any specific section of the Exchange Act or rule thereunder shall include any successor section or rule. "FAIR MARKET VALUE" of a share of Company Common Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Company Common Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Company Common Stock is listed on an exchange, on the principal exchange on which the Company Common Stock is listed. If for any day the Fair Market Value of a share of Company Common Stock is not determinable by any of the foregoing means, then the Fair Market Value for such day shall be determined in good faith by the Company Board on the basis of such quotations and other considerations as the Company Board deems appropriate. "GOOD REASON" means the occurrence of any of the following prior to any termination of employment by Grantee: (i) any involuntary reduction in Grantee's annual rate of salary; (ii) a failure by TCI or the Company to continue in effect any employee benefit plan in which Grantee was participating, or the taking of any action by TCI or the Company that would adversely affect Grantee's participation in, or materially reduce Grantee's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of the corporate management of TCI or the Company (as applicable) generally; or 13 14 (iii) the assignment to Grantee of duties and responsibilities that are materially more oppressive or onerous than those attendant to Grantee's position on the date hereof. "NASDAQ" means the Nasdaq Stock Market. "OPTION PRICE" means $________ per Option Share, plus an interest factor of 6% per annum on such amount from the date hereof to the date of exercise (calculated on the basis of a 365-day year and actual days elapsed), as such amount per Option Share may be adjusted from time to time pursuant to paragraph 9. "OPTION SHARES" means an aggregate number of shares of Company Common Stock equal to 10 (which number represents 1% of the number of shares of Company Common Stock issued and outstanding on the date hereof), as such number of shares may be adjusted from time to time pursuant to paragraph 9. "OTHER OPTIONS" means the options to purchase shares of Company Common Stock granted pursuant to those other Option Agreements dated as of the date hereof among TCI, the Company and the grantees named therein, respectively. "PUBLIC APPRAISER" means, as of any date of selection, an investment banking firm of national reputation that is not affiliated with TCI, the Company or Grantee and that is one of the 20 leading investment banking firms based on aggregate proceeds of public offerings of common stock in the United States for which it acted as a managing underwriter during the preceding two full calendar years. "PUBLIC COMPANY" means a person the common equity securities of which are registered under Section 12(b) or 12(g) of the Exchange Act and which common equity securities are listed for trading on the New York Stock Exchange or the NASDAQ National Market. "RELEVANT BOARD", when used with respect to TCI, means the Board of Directors of TCI and, when used with respect to the Company, means the Company Board. "SUBSIDIARY", when used with respect to TCI or the Company, as applicable, means any present or future subsidiary (as defined in Section 424(f) of the Code) of the Applicable Person or any business entity in which the Applicable Person owns, directly or indirectly, 50% or more of the voting, capital or profits interests. An entity shall be deemed a Subsidiary of the Applicable Person for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained. "TCI GROUP" means TCI and its Subsidiaries, collectively, or the applicable of TCI or a Subsidiary of TCI, as the context may require. If the Company ceases to be a Subsidiary of TCI, the Company and its Subsidiaries shall, notwithstanding the last sentence of the definition of 14 15 Subsidiary above, be deemed for purposes of this definition only to continue to be Subsidiaries of TCI and, accordingly, members of the TCI Group. 19. RULES BY COMPANY BOARD. The rights of Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Company Board may adopt from time to time hereafter. IN WITNESS WHEREOF, the Company, Grantee and, for purposes of paragraphs 11(b) and 11(c) only, TCI have caused this Agreement to be duly executed and delivered as of the date first written above. ATTEST: TCI WIRELINE, INC. By: - ------------------------- ----------------------------- Assistant Secretary Name: Title: ---------------------------------- TELE-COMMUNICATIONS, INC. By: ------------------------------ Name: Title: 15 16 Exhibit A to Agreement dated as of December 1, 1996 TCI WIRELINE, INC. Option to Purchase Common Stock Designation of Beneficiary I, __________________________________ (the "Grantee"), hereby declare that upon my death ____________________________ (the "Beneficiary") of Name _____________________________________________________________________, Street Address City State Zip Code who is my __________________________________, shall be entitled to the Relationship to Grantee Option and all other rights accorded Grantee by the above-referenced grant agreement (the "Agreement"). It is understood that this Designation of Beneficiary is made pursuant to the Agreement and is subject to the conditions stated herein, including the Beneficiary's survival of Grantee's death. If any such condition is not satisfied, such rights shall devolve according to Grantee's will or the laws of descent and distribution. All prior designations of beneficiary under the Agreement are hereby revoked. This Designation of Beneficiary may only be revoked in writing, signed by Grantee, and filed with Tele-Communications, Inc. and TCI Wireline, Inc., prior to Grantee's death. ________________________________ ________________________________________ Date Grantee EX-10.46 6 TCI INTERNET SERVICE 1 EXHIBIT 10.46 TCI INTERNET SERVICES, INC. OPTION TO PURCHASE COMMON STOCK THIS AGREEMENT ("AGREEMENT") is made as of the 1st day of December, 1996, by and among TCI INTERNET SERVICES, INC., a Colorado corporation (the "COMPANY"), GRANTEE and, for purposes of paragraphs 11(b) and (c) only, TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI"). The Company is on the date hereof a subsidiary of TCI. The Board of Directors of the Company ("COMPANY BOARD") and the Board of Directors of TCI have each determined that it is in the best interests of the Company to grant Grantee the rights and option set forth herein in order to provide Grantee with additional remuneration for services rendered to the Company and its predecessors, to encourage Grantee to remain in the employ of TCI and/or one or more of its Subsidiaries, including the Company, and to provide additional incentive to Grantee by increasing Grantee's proprietary interest in the continued success and progress of the Company. Capitalized terms used herein and not otherwise defined are defined in paragraph 18 below. Accordingly, the Company, Grantee and, for purposes of paragraphs 11(b) and 11(c) only, TCI hereby agree as follows: 1. GRANT OF OPTION; OPTION TERM. The Company hereby grants to Grantee the right and option (the "OPTION"), on the terms and subject to the conditions set forth herein, to purchase the Option Shares from the Company for a price per Option Share equal to the Option Price. The Option Price and Option Shares are subject to adjustment pursuant to paragraph 9 below. Subject to paragraph 2, the Option shall be exercisable in whole at any time and in part from time to time during the period commencing on the date hereof and expiring at 5:00 p.m., Denver, Colorado time ("CLOSE OF BUSINESS") on the tenth anniversary of the Determination Date, or such earlier date as the Option may be terminated pursuant to paragraph 6 or paragraph 9(c) (the "OPTION TERM"). 2. CONDITIONS OF EXERCISE; VESTING. Except as otherwise provided in the last sentence of this paragraph 2 or in paragraph 9(c), the Option shall not be exercisable until the first anniversary of the Determination Date, and, from the first anniversary of the Determination Date to the fifth anniversary of the Determination Date, the Option shall be exercisable only to the extent the Option Shares have become available for purchase in accordance with the following schedule: 2
Anniversary of Percentage of Option Shares Determination Date Available for Purchase ------------------ --------------------------- 1st 20% 2nd 40% 3rd 60% 4th 80% 5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for purchase if during the Option Term (i) Grantee's employment with the TCI Group shall terminate by reason of (x) termination by the TCI Group without Cause, (y) termination by Grantee for Good Reason or (z) Disability, (ii) Grantee's employment shall terminate pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time) or (iii) Grantee dies while employed by the TCI Group. A change of employment is not a termination of employment within the meaning of this paragraph 2, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. 3. MANNER OF EXERCISE. The Option may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of shares specified in the notice referred to in clause (a) below)) on the later of (i) the first business day on which the Company has received all of the following deliveries and (ii) the date of exercise designated in the written notice referred to in clause (a) below (or if such date is not a business day, the first business day thereafter): (a) written notice, in such form as the Company Board may reasonably require, stating that Grantee is exercising the Option and setting forth the date of such exercise, the number of Option Shares to be purchased, the aggregate Option Price to be paid for such Option Shares in accordance with this Agreement and the manner in which such payment is being made ("OPTION EXERCISE NOTICE"); (b) payment of the Option Price for each Option Share to be purchased upon such exercise, in cash or in such other form or combination of forms of payment contemplated by paragraph 10, together with payment of, or other provision acceptable to the Company Board for, any and all withholding taxes required to be withheld by the Company upon such exercise, in accordance with paragraph 4; and (c) any other documentation that the Company Board may reasonably require (including, without limitation, proof satisfactory to the Company Board that the Option is then exercisable for the number of Option Shares set forth in such notice). 2 3 4. WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Option that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Company Board. 5. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all the items required by paragraph 3 with respect to any exercise of the Option, and subject to the withholding referred to in paragraph 4, the Company shall deliver or cause to be delivered to Grantee certificates issued in Grantee's name for the number of whole Option Shares purchased upon such exercise. If delivery is by mail, delivery of Option Shares shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to Grantee, and any cash payment (for fractional shares or otherwise) shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to Grantee, in each case in accordance with paragraph 12. 6. EARLY TERMINATION OF OPTION. Unless otherwise determined by the Company Board in its sole discretion, the Option shall terminate, prior to the expiration of the ten-year period provided for in paragraph 1, as follows: (a) If Grantee's employment with the TCI Group terminates other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's death or Disability, (iii) with the written consent of the applicable member(s) of the TCI Group, (iv) without such consent if such termination is pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or (v) by the TCI Group with or without Cause, then the Option shall terminate at the Close of Business on the first business day following the expiration of the 90-day period beginning on the date of termination of Grantee's employment; (b) If Grantee dies while employed by the TCI Group, or prior to the expiration of a relevant period of time during which the Option remains exercisable as provided in this paragraph 6, the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of death; (c) If Grantee's employment with the TCI Group terminates by reason of Disability, then the Option shall terminate at the Close of Business on the first business day following the expiration of the one-year period beginning on the date of termination of Grantee's employment; 3 4 (d) If Grantee's employment with the TCI Group is terminated by the TCI Group for Cause, then the Option shall terminate immediately upon such termination of Grantee's employment; and (e) If Grantee terminates his employment with the TCI Group (i) with Good Reason, (ii) with the written consent of the applicable member(s) of the TCI Group or (iii) pursuant to provisions of a written employment agreement, if any, between Grantee and the applicable member(s) of the TCI Group which expressly permits Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or if the TCI Group terminates Grantee's employment with the TCI Group without Cause, then the Option Term shall not terminate prior to the end of the ten-year period provided for in paragraph 1, except as otherwise provided for in paragraph 6(b) or 9(c). In any event in which the Option remains exercisable for a period of time following the date of termination of Grantee's employment as provided above, the Option may be exercised during such period of time only to the extent it was exercisable as provided in paragraph 2 or paragraph 9(c) on such date of termination of Grantee's employment. A change of employment is not a termination of employment within the meaning of this paragraph 6, provided that, after giving effect to such change, Grantee is an employee of, or becomes or continues to be a consultant to, any member of the TCI Group. Anything contained herein to the contrary notwithstanding, the Option shall in any event terminate upon the expiration of the ten-year period provided for in paragraph 1, if not theretofore terminated. 7. NONTRANSFERABILITY OF OPTION. During Grantee's lifetime, the Option is not and shall not be transferable (voluntarily or involuntarily) other than pursuant to a Domestic Relations Order and, except as otherwise required pursuant to a Domestic Relations Order, is exercisable only by Grantee or Grantee's court appointed legal representative. Grantee may designate a beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Company on the form annexed hereto as Exhibit A or such other form as may be prescribed by the Company Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive Grantee's death, the Option shall pass by will or the laws of descent and distribution. Following Grantee's death, the Option, if otherwise exercisable, may be exercised by the person to whom the Option passes according to the foregoing, and such person shall be deemed to be Grantee for purposes of any applicable provisions of this Agreement. 8. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT. (a) Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any Option Shares unless and until such Option Shares have been issued to Grantee by the Company. The existence of this Agreement or the Option shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. 4 5 (b) Nothing contained in this Agreement, and no action by the Company or the Company Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue in the employ of the TCI Group or any member thereof or interfere in any way with the right of TCI, the Company or any employing member of the TCI Group to terminate Grantee's employment at any time, with or without Cause, except as otherwise expressly provided in any written employment agreement between the applicable member(s) of the TCI Group and Grantee. 9. ADJUSTMENTS; ACCELERATION. (a) If, after December 31, 1996, the Company (i) pays a dividend or makes a distribution on the Company Common Stock in shares of Company Common Stock; (ii) subdivides the outstanding shares of Company Common Stock into a greater number of shares or (iii) combines the outstanding shares of Company Common Stock into a smaller number of shares, then this Option and the number of Option Shares and the Option Price per share in effect immediately prior to the opening of business on the record date for such dividend or distribution or the effective date of such subdivision or combination shall be adjusted so that Grantee upon exercise thereafter of the Option may receive the number of shares of Company Common Stock that Grantee would have owned immediately following such event if Grantee had exercised the Option immediately prior to the record date for, or effective date of, as the case may be, such event. The adjustment contemplated by the preceding sentence shall be made successively whenever any event listed above shall occur. For a dividend or distribution, the adjustment shall become effective immediately after the record date for the dividend or distribution. For a subdivision or combination, the adjustment shall become effective immediately after the effective date of the subdivision or combination. (b) The Option shall also be subject to adjustment (including, without limitation, as to the number of Option Shares and the Option Price per share) in the sole discretion of the Company Board and in such manner as the Company Board may deem equitable and appropriate in connection with the occurrence of any of the following events after December 31, 1996 that affects the Company Common Stock such that an adjustment would be required in order to preserve the benefits or potential benefits intended to be made available under this Agreement: any dividend or distribution on the Company Common Stock in shares of the Company's capital stock (other than Company Common Stock); any reclassification of the Company Common Stock into shares of the Company's capital stock (other than a reclassification by way of an Approved Transaction); any extraordinary cash dividend; any distribution of any rights, warrants or options to holders of Company Common Stock; any distribution of any assets or debt securities (other than cash dividends or distributions that are not extraordinary cash dividends); any recapitalization, reorganization, split up or spin off; and any merger, consolidation or binding share exchange that reclassifies or changes the outstanding Company Common Stock or other similar corporate event (other than those which constitute Approved Transactions). Notwithstanding the foregoing, in the event of any reclassification or recapitalization of the Company Common Stock into two or more classes or series of common stock with different voting rights (however the same may be effected), no adjustment to the Option shall be required that would entitle Grantee to receive shares of any class or series of common stock of the Company other than the class or series with the fewest number of votes per 5 6 share. Adjustments to the Option Price shall be made on a per share basis so that the aggregate remaining Option Price is unchanged. (c) The Company Board may at any time in its sole discretion determine that the Option shall become exercisable in full, without regard to paragraph 2, whether immediately, upon the occurrence of specified events, or otherwise. Without limiting the generality of the foregoing, in the event of any Board Change, Control Purchase or Approved Transaction that occurs with respect to TCI following December 31, 1996 and prior to the earlier of such time as the Company ceases to be a Subsidiary of TCI or such time as the Company becomes a Public Company, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. In the event that (i) at any time after December 31, 1996 while the Company is a Subsidiary of TCI, an Approved Transaction occurs with respect to the Company after giving effect to which the Company will cease to be a Subsidiary of TCI or (ii) an Approved Transaction, Board Change or Control Purchase occurs with respect to the Company at a time following December 31, 1996 that the Company is no longer a Subsidiary of TCI, then, in any such case, the Option shall become exercisable in full, without regard to paragraph 2, effective upon the Board Change or Control Purchase or immediately prior to consummation of the Approved Transaction, as applicable (or at such earlier time as the Company Board in its sole discretion may determine); provided, however, that to the extent not theretofore exercised the Option shall terminate upon the first to occur of the consummation of the Approved Transaction or the expiration or early termination of the Option Term. Notwithstanding the foregoing, the Company Board may, in its discretion, determine that the Option will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Company Board is equitable and appropriate to substitute a new stock option for the Option evidenced by this Agreement or to assume this Agreement and the Option evidenced hereby and in order to make such new or assumed stock option, as nearly as may be practicable, equivalent to the Option evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Company Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Company Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. (d) All actions taken by the Company Board with respect to the Option pursuant to this paragraph 9 shall be consistent with any actions taken by the Company Board with respect to the Other Options. When an adjustment to the Option pursuant to paragraph 9(a) or 9(b) becomes effective immediately after the record date for an event, the Company may defer until the occurrence of such event issuing to Grantee the additional shares of Company Common Stock (or cash, 6 7 securities or other property) issuable or deliverable upon any exercise of the Option after such record date and before the occurrence of such event by reason of the adjustment required by such event over and above the shares of Company Common Stock that would have been issuable upon such exercise absent such adjustment. 10. MANNER OF PAYMENT. The method or methods of payment of the Option Price for the shares of Company Common Stock to be purchased upon exercise of the Option and any amounts required by paragraph 4 shall consist of (i) cash, (ii) check, (iii) promissory note in such form and with such security as shall be acceptable to the Company Board in its sole discretion (except that this method of payment will not be available for amounts required by paragraph 4), (iv) whole shares of Company Common Stock already owned by Grantee, (v) the withholding of shares of Company Common Stock issuable upon exercise of the Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price (except that this method of payment will not be available until the Company is a Public Company), or (vii) any combination of the foregoing methods of payment, as Grantee may elect and shall designate in the Option Exercise Notice, subject, however, to any restrictions or limitations of applicable law or of any agreement evidencing indebtedness of the Company for borrowed money. Any shares of Company Common Stock delivered or withheld in payment of any amount due hereunder shall be valued for such purposes (i) if the Option is exercised prior to such time as the Company is a Public Company, at the Appraised Public Trading Value of such shares on the applicable date of exercise of the Option, determined as provided in paragraph 11(c), and (ii) if the Option is exercised when the Company is a Public Company, at the Fair Market Value of such shares on the applicable date of exercise of the Option. 11. RESTRICTIONS IMPOSED BY LAW; CERTAIN PUT RIGHTS; APPRAISAL PROCEDURES. (a) Grantee acknowledges that neither the Option nor any of the Option Shares has been registered under the Securities Act of 1933 and that the Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Option Shares, or any transfer of Option Shares, under the Securities Act of 1933, the Exchange Act or any other state or federal securities law. Certificates representing Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Grantee agrees that Grantee will not exercise the Option (and that the Company shall not be obligated to deliver any Option Shares upon any exercise of the Option) if counsel for the Company determines that such exercise or delivery would violate any applicable law or any rule or regulation of any governmental authority, or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Company Common Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Option or the resulting delivery of the shares of Company Common Stock to comply with any such law, rule, regulation or agreement. Without limiting the generality of the foregoing, but subject to paragraph 7 8 11(b), Grantee acknowledges and agrees that unless and until the Company becomes a Public Company or, if earlier, ceases to be a Subsidiary of TCI, the Option Shares may not be transferred to any person (other than to Grantee's designated beneficiary pursuant to paragraph 7 upon Grantee's death) without the prior written consent of TCI. (b) In the event that the Company has not become a Public Company on or before February 1, 2001, Grantee shall have the right, by written notice given to TCI at any time thereafter, to require TCI to purchase all, and not less than all, the Option Shares for a purchase price equal to the Appraised Public Trading Value of the Option Shares determined as provided in paragraph 11(c) (the "PUT RIGHT"); provided, however, that the Put Right shall expire upon the first to occur of the Company's becoming a Public Company and the Company's ceasing to be a Subsidiary of TCI; and, provided, further, that if Grantee dies prior to February 1, 2001, the Put Right shall become exercisable by his beneficiary or beneficiaries pursuant to paragraph 7 or his heirs, devisees or distributees, as applicable, from and after the date of Grantee's death. Grantee's notice of the exercise of his Put Right (the "PUT EXERCISE NOTICE") shall set forth the number of Option Shares then owned by Grantee and/or that remain subject to the Option and shall contain the information required by paragraph 11(c). In the event that any Option Shares remain subject to the Option, Grantee shall exercise the balance of the Option in full prior to the closing of the purchase pursuant to the Put Right. If the Put Right is exercised, TCI shall have the right to pay the purchase price for the Option Shares in cash, shares of Tele-Communications, Inc. Series A TCI Group Common Stock, $1.00 par value per share, or any successor class or series of TCI's common stock, or if any class or series of TCI's common stock is hereafter created that is intended to track the separate performance of specified assets or businesses of TCI that include assets and businesses of the Company, shares of such class or series (and if more than one series of such "tracking stock" is created with different voting rights, the series with the lower voting rights) (collectively, the "TCI STOCK"), or any combination of cash and shares of TCI Stock as TCI may elect. If TCI elects to pay all or any portion of the purchase price for the Option Shares in shares of TCI Stock, said shares shall be valued for such purpose on the basis of the average of the daily Closing Prices of the TCI Stock during the period of 10 consecutive trading days commencing 20 trading days prior to the closing of such purchase. The closing of the purchase of the Option Shares pursuant to this paragraph 11(b) shall occur on the 10th day following the receipt by Grantee and TCI of notice pursuant to paragraph 11(c) of the final determination of the Appraised Public Trading Value of the Option Shares (or on such other date as the parties may agree). At the closing, if TCI has elected to pay all or a portion of the purchase price in shares of TCI Stock, it shall enter into a registration rights agreement with Grantee, providing Grantee registration rights with respect to the shares so delivered on the terms and subject to the conditions contained in TCI's standard form of such agreement with such variations as the parties agree. (c) Grantee's Put Exercise Notice and any Option Exercise Notice that provides for the delivery or withholding of shares of Company Common Stock as a manner of payment of the Option Price or of amounts required under paragraph 4 shall identify the Public Appraiser selected by Grantee to make the determination of Appraised Public Trading Value ("FIRST APPRAISER"). Within 10 days after receipt of the Put Exercise Notice or Option Exercise Notice, as applicable, TCI or the Company, as applicable, shall notify Grantee in writing of the Applicable Person's selection of a Public Appraiser (the "SECOND APPRAISER"). The First Appraiser and the Second Appraiser shall each submit its determination of the Appraised Public Trading Value of the Option Shares to 8 9 Grantee and the Applicable Person within 30 days of the date of its selection. If the respective determinations of Appraised Public Trading Value by such Public Appraisers vary by less than 10% of the higher determination, then the Appraised Public Trading Value shall be the average of the two determinations. If such determinations vary by ten (10%) or more of the higher determination, the two Public Appraisers shall promptly designate a third Public Appraiser (the "THIRD APPRAISER"). Neither Grantee nor the Applicable Person shall provide, and the First Appraiser and Second Appraiser shall be instructed not to provide, any information to the Third Appraiser as to the determination of the First Appraiser and Second Appraiser or otherwise influence such Third Appraiser's determination. The Third Appraiser shall submit its determination of the Appraised Public Trading Value to Grantee and the Applicable Person within 30 days of the date of its selection. The Appraised Public Trading Value shall be equal to the average of the two closest of the three determinations, provided that, if the difference between the highest and middle determinations is no more than 105% and no less than 95% of the difference between the middle and lowest determinations, the Appraised Public Trading Value shall be equal to the middle determination. The Public Appraisers shall jointly notify the Applicable Person and Grantee in writing of their final determination of the Appraised Public Trading Value of the Option Shares within five (5) days thereafter. Grantee and the Applicable Person shall each pay the fees and expenses of his or its own Public Appraiser and one-half of the fees and expenses of the Third Appraiser, if any. 12. NOTICE. Unless the Company or TCI, as applicable, notifies Grantee in writing of a change of address, any notice or other communication to the Applicable Person with respect to this Agreement shall be in writing and shall be delivered personally or sent by first class mail, postage prepaid and addressed as follows: If to the Company: TCI Internet Services, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel If to TCI: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: General Counsel 9 10 Any notice or other communication by the Company or TCI to Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of TCI on the date hereof, unless the Company has received written notification from Grantee of a change of address. Except as otherwise provided in paragraph 5, all notices and other communications hereunder, including without limitation any Option Exercise Notice or Put Exercise Notice, shall be effective when actually received. 13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 14. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms refer to this Agreement, including all Exhibits, as a whole, unless the context otherwise requires. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. All decisions of the Company Board upon questions regarding this Agreement shall be conclusive. 15. DUPLICATE ORIGINALS. The Company, TCI and Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 16. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between or among TCI, the Company and Grantee, or any of them, with respect to the subject matter hereof. Each of TCI, the Company and Grantee hereby declares and represents that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between and among the parties hereto with respect to the Option and supersedes and makes null and void any prior agreements between or among TCI, the Company and Grantee, or any of them, regarding the Option. 17. AMENDMENT. This Agreement may be amended, modified or supplemented by the Company, without the consent of the Grantee, (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including, without limitation, any applicable federal or state securities laws. Except as provided above, this Agreement may be amended, modified or supplemented only by written agreement of the parties hereto. 18. DEFINITIONS. As used in this Agreement, the following terms have the corresponding meanings: "APPLICABLE PERSON" means TCI or the Company, as applicable. 10 11 "APPRAISED PUBLIC TRADING VALUE" means the aggregate cash proceeds, net of underwriters' fees, discounts and commissions and other selling expenses customarily borne by selling stockholders, that would be received by Grantee from the sale of the Options Shares in an underwritten public offering registered under the Securities Act of 1933. "APPROVED TRANSACTION", when used with respect to TCI or the Company, as applicable, means any transaction in which the Relevant Board (or, if approval of the Relevant Board is not required as a matter of law, the stockholders of the Applicable Person) shall approve (i) any consolidation or merger of the Applicable Person, or binding share exchange, pursuant to which shares of common stock of the Applicable Person would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the common stockholders of the Applicable Person immediately prior to such transaction have the same proportionate ownership of the common stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Applicable Person is a party as a result of which the persons who are common stockholders of the Applicable Person immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Applicable Person, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Applicable Person. Notwithstanding the foregoing, none of such transactions that occur with respect to the Company while the Company is a Subsidiary of TCI and that are effected in connection with a spin off of the Company or rights offering of Company Common Stock to TCI's stockholders or equivalent transaction shall constitute an Approved Transaction. "BOARD CHANGE" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Relevant Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "CAUSE" has the meaning ascribed thereto in any employment agreement between Grantee and the applicable member of the TCI Group, and in the absence of any such employment agreement means insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind, or refusal to perform one's duties and responsibilities for any reason other than illness or incapacity, or negligence in the performance of any of one's material duties or responsibilities that continues after written notice from the Company, as determined conclusively by the Company Board. "CLOSING PRICE" of a share of TCI Stock on any day means the last sale price (or, if no last sale is reported, the average of the high bid and low asked prices) for a share of TCI Stock 11 12 on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the TCI Stock is listed on an exchange, on the principal exchange on which the TCI Stock is listed. If for any day the Closing Price of a share of TCI Stock is not determinable by any of the foregoing means, then the Closing Price for such day shall be determined in good faith by TCI on the basis of such quotations and other considerations as TCI may deem appropriate. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section. "COMPANY COMMON STOCK" means the Common Stock, $1.00 par value per share, of the Company. "CONTROL PURCHASE" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person or any employee benefit plan sponsored by the Applicable Person or any Subsidiary of the Applicable Person) shall purchase any common stock of the Applicable Person (or securities convertible into common stock of the Applicable Person) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Relevant Board, or (ii) any person (as such term is so defined), corporation or other entity (other than the Applicable Person, any Subsidiary of the Applicable Person, any employee benefit plan sponsored by the Applicable Person or any Subsidiary of the Applicable Person, or any Controlling Person (as defined below)) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Applicable Person representing 20% or more of the combined voting power of the then outstanding securities of the Applicable Person ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Applicable Person's securities), other than in a transaction (or series of related transactions) approved by the Relevant Board. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Applicable Person as of December 31, 1996, (b) the respective family members, estates and heirs of each of the persons referred to in clause (a) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (c) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "DETERMINATION DATE" means February 1, 1996. "DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that (a) can be expected to 12 13 result in death or (b) has lasted or can be expected to last for a continuous period of not less than 12 months. "DOMESTIC RELATIONS ORDER" means a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto, and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. References to any specific section of the Exchange Act or rule thereunder shall include any successor section or rule. "FAIR MARKET VALUE" of a share of Company Common Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Company Common Stock on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Company Common Stock is listed on an exchange, on the principal exchange on which the Company Common Stock is listed. If for any day the Fair Market Value of a share of Company Common Stock is not determinable by any of the foregoing means, then the Fair Market Value for such day shall be determined in good faith by the Company Board on the basis of such quotations and other considerations as the Company Board deems appropriate "GOOD REASON" means the occurrence of any of the following prior to any termination of employment by Grantee: (i) any involuntary reduction in Grantee's annual rate of salary; (ii) a failure by TCI or the Company to continue in effect any employee benefit plan in which Grantee was participating, or the taking of any action by TCI or the Company that would adversely affect Grantee's participation in, or materially reduce Grantee's benefits under, any such employee benefit plan, unless such failure or such taking of any action adversely affects the senior members of the corporate management of TCI or the Company (as applicable) generally; or (iii) the assignment to Grantee of duties and responsibilities that are materially more oppressive or onerous than those attendant to Grantee's position on the date hereof. "NASDAQ" means the Nasdaq Stock Market. "OPTION PRICE" means $_______ per Option Share, plus an interest factor of 6% per annum on such amount from the date hereof to the date of exercise (calculated on the basis of a 365- 13 14 day year and actual days elapsed), as such amount per Option Share may be adjusted from time to time pursuant to paragraph 9. "OPTION SHARES" means an aggregate number of shares of Company Common Stock equal to 10 (which number represents 1% of the number of shares of Company Common Stock issued and outstanding on the date hereof), as such number of shares may be adjusted from time to time pursuant to paragraph 9. "OTHER OPTIONS" means the options to purchase shares of Company Common Stock granted pursuant to those other Option Agreements dated as of the date hereof among the Company, TCI and the grantees named therein, respectively. "PUBLIC APPRAISER" means, as of any date of selection, an investment banking firm of national reputation that is not affiliated with TCI, the Company or Grantee and that is one of the 20 leading investment banking firms based on aggregate proceeds of public offerings of common stock in the United States for which it acted as a managing underwriter during the preceding two full calendar years. "PUBLIC COMPANY" means a person the common equity securities of which are registered under Section 12(b) or 12(g) of the Exchange Act and which common equity securities are listed for trading on the New York Stock Exchange or the NASDAQ National Market. "RELEVANT BOARD", when used with respect to TCI, means the Board of Directors of TCI and, when used with respect to the Company, means the Company Board. "SUBSIDIARY", when used with respect to TCI or the Company, as applicable, means any present or future subsidiary (as defined in Section 424(f) of the Code) of the Applicable Person or any business entity in which the Applicable Person owns, directly or indirectly, 50% or more of the voting, capital or profits interests. An entity shall be deemed a Subsidiary of the Applicable Person for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained. "TCI GROUP" means TCI and its Subsidiaries, collectively, or the applicable of TCI or a Subsidiary of TCI, as the context may require. If the Company ceases to be a Subsidiary of TCI, the Company and its Subsidiaries shall, notwithstanding the last sentence of the definition of Subsidiary above, be deemed for purposes of this definition only to continue to be Subsidiaries of TCI and, accordingly, members of the TCI Group. 19. RULES BY COMPANY BOARD. The rights of Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Company Board may adopt from time to time hereafter. 14 15 IN WITNESS WHEREOF, the Company, Grantee and, for purposes of paragraphs 11(b) and (c) only, TCI have caused this Agreement to be duly executed and delivered as of the date first written above. ATTEST: TCI INTERNET SERVICES, INC. By: - -------------------------------- ------------------------------------ Assistant Secretary Name: Title: --------------------------------------- TELE-COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: 15 16 Exhibit A to Agreement dated as of December 1, 1996 TCI INTERNET SERVICES, INC. OPTION TO PURCHASE COMMON STOCK DESIGNATION OF BENEFICIARY I, ___________________________________________ (the "Grantee"), hereby declare that upon my death ____________________________________________________ Name (the "Beneficiary") of ________________________________________________________, Street Address _______________________________________________________________________________, City State Zip Code who is my ______________________________________________________________, shall Relationship to Grantee be entitled to the Option and all other rights accorded Grantee by the above-referenced grant agreement (the "Agreement"). It is understood that this Designation of Beneficiary is made pursuant to the Agreement and is subject to the conditions stated herein, including the Beneficiary's survival of Grantee's death. If any such condition is not satisfied, such rights shall devolve according to Grantee's will or the laws of descent and distribution. All prior designations of beneficiary under the Agreement are hereby revoked. This Designation of Beneficiary may only be revoked in writing, signed by Grantee, and filed with Tele-Communications, Inc. and TCI Internet Services, Inc., prior to Grantee's death. - ------------------------ -------------------------------------- Date Grantee EX-10.47 7 LETTER AGREEMENT 1 EXHIBIT 10.47 [TCI LETTERHEAD] December 26, 1996 Mr. Larry E. Romrell Tele-Communications, Inc. 5619 DTC Parkway Englewood, CO 80111 Dear Larry: This letter sets forth the agreement of Tele-Communications, Inc. ("TCI") to purchase from you or Colorado National Bank, as your assignee pursuant to your $850,000 Credit Line and $1,800,000 Term Note, insofar as such purchase is permitted under TCI's loan agreements (as of today's date, no TCI loan agreement would prohibit this purchase), any and all of the 103 shares of the WestMarc Series C Cumulative Compounding Redeemable Preferred Stock owned by you at the date of purchase. TCI agrees to purchase each such share from you or Colorado National Bank (free and clear of any liens or other encumbrances) upon ten business days' notice from you at the Liquidation Price of $32,250 per share plus any accrued, but unpaid, dividends on such shares through the date of purchase. This agreement expires on January 1, 2002. Sincerely yours, /s/ John C. Malone John C. Malone SMB/sww EX-10.70 8 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.70 EXECUTION COPY EMPLOYMENT AGREEMENT THIS AGREEMENT made and entered into effective as of October 1, 1995, by and between Tele-Communications, Inc. ("TCI"), a Delaware corporation, and Tony Coelho (the "Executive"). RECITALS TCI conducts, among other enterprises and businesses, an education business consisting primarily of an electronic delivery of education services to homes, schools and businesses (the "Education Business"); and TCI desires to employ Executive to manage the Education Business; and Executive desires to accept employment with TCI as manager of the Education Business; and TCI and Executive desire to form a corporation which corporation will own and operate either directly or indirectly all of the Education Business (such corporation hereinafter referred to as "Education Company"); and Each of TCI and Executive desire to evidence their agreement that Executive will be the Chairman of the Board and Chief Executive Officer of the Education Company and become an employee of the Education Company and TCI on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, the parties hereto agree as follows: 1. Employment. TCI hereby agrees to employ Executive as an employee of TCI and as the Chairman of the Board and Chief Executive Officer of the Education Business commencing October 1, 1995 and extending through September 30, 2000 (the "Term of Employment"). TCI and Executive will act promptly after the execution of this Agreement to form the Education Company and cause Executive to be elected as Chief Executive Officer of the Education Company. -1- 2 2. Compensation. a. TCI or the Education Company (hereinafter sometimes collectively referred to as the "Employer") shall pay the Executive during the Term of Employment a Base Salary of not less than $400,000 per annum. The Employer, in its discretion, may increase (but may not decrease) the Executive's Base Salary (and if so increased may not be thereafter decreased) from time to time. b. During the Term of Employment, the Executive shall be eligible to participate in TCI's employee benefit plans, programs and practices on the same basis as other salaried employees of TCI and on the same basis as those similarly situated senior executives of TCI. Executive shall be entitled to four weeks of vacation per year, which may be taken in accordance with TCI's generally applicable vacation policy. c. Upon the execution of this Agreement, Executive shall be granted under the Tele-Communications, Inc. 1996 Stock Incentive Plan nonqualified stock options on 100,000 shares of the Series A TCI Group Common Stock, a par value of $1.00 per share, of Tele-Communications, Inc. at an exercise price equal to $17 per share. Such options shall have a 10 year term, vesting and other provisions customary in option grants to senior executives of TCI and shall be evidenced by an option agreement substantially in the form attached hereto as Exhibit A. d. Promptly after the formation of the Education Company, Executive shall purchase 15% of the common equity of the Education Company at the fair value thereof at such time provided that Executive enters into an agreement regarding such shares having terms described in Exhibit B and hereby incorporated as part of this Agreement. e. Executive shall be reimbursed by Employer for all reasonable expenses incurred in connection with his employment pursuant to this Agreement, in accordance with the prevailing policies of the Employer. 3. Duties and Responsibilities of the Executive as an Employee. During the term of Employment, the Executive shall devote as much time and services as may be required in order to perform his duties and responsibilities assigned to him by the Chief Executive Officer of TCI ETC Holding, Inc. (TCI ETC Holdings being the entity that initially will own all of the stock of the Education Company) or such other entity which shall own the majority of the voting securities of the Education Company but in any event not less than the majority of his business time, to the best of his abilities and with reasonable diligence, which duties and responsibilities shall be consistent with such matters normally assigned to the Chairman of the Board and the Chief Executive Officer of a company. The responsibility and duties of the Executive would include, not by way of limitation, revenues, expenditures and capital budgets, including any capital expenditures (and, if necessary, funding) which must be made by other TCI -2- 3 entities in order to provide requisite transmission services. The parties contemplate that, while a substantial portion of the Education Company's business will be conducted in Denver, Colorado, Executive will reside in and his business headquarters will be in suburban Virginia or the District of Columbia, and Employer will pay Executive's reasonable costs incurred in commuting between business locations in Virginia or the District of Columbia and Colorado and performing services pursuant to this Agreement. It is understood that Executive has substantial involvement with benevolent, political professional and civic affairs and as a director, consultant or advisor to or partner or member of entities including Arter & Hadden, CICO International LLC, Circus Circus Enterprises, Inc., Coelho Associates LLC, Cyberonics, Crop Growers Corporation, Fleishman-Hillard, Inc., ICF Kaiser International, Inc., International Planning & Analysis Center and related entities, Kistler Aerospace Corporation, Schroder Wertheim Investment Services, Inc., Schroder Wertheim & Co. Incorporated, Service Corporation International, Specialty Retail Group, Inc., Sports International, Tanknology Environmental, Inc., Togar LLC and Tomar and shall be permitted to continue his involvement with such entities and to engage in other such activities with other entities in the future. 4. Restrictive Covenants. a. Upon termination of Executive's employment, the Executive agrees for the one year period the following such termination, unless this termination is by TCI and/or the Education Company without "cause" (as defined herein), not to compete, directly or indirectly, with TCI or the Education Company or any of their affiliates are subsidiaries by engaging in or being employed by a rendering services or advice to any business or enterprise which directly competes in a material respect with the business of the Education Business. Executive acknowledges that in an event of a breach of this covenant by Executive, the remedies of the Education Company and/or TCI at law may be inadequate to protect them from injury which may occur and therefore the Executive consents to either TCI or the Education Company seeking injunctive relief in a court of competent jurisdiction to restrict Executive's violation of this covenant not to compete which violation of such covenant could result in irreparable injury to TCI and/or the Education Company. Nothing herein contained shall be construed as denying Executive the right to own securities of any corporation which is listed on a national securities exchange or quoted in the NASDAQ System to the extent of an aggregate of 5% of the amount of such securities outstanding. b. The Executive shall hold in a fiduciary capacity for the benefit of TCI and the Education Company all secret or confidential information, knowledge or data relating to the Education Business which shall have been obtained by the Executive during the Executive's employment by either TCI or the Education Company or during Executive's serving as a member of the Board of Directors of either and which shall not be or become public knowledge (other than by acts of the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment under this Agreement, the Executive shall not, without the prior written consent of the appropriate of TCI or the Education Company, or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than TCI or the Education Company and those designated by either. -3- 4 5. Source of Payments. All payments provided in this Agreement shall be made in cash from the general funds of either TCI or the Education Company and no special or separate funds shall be established and no other subrogation of assets shall be made to assure payment. 6. ENTIRE AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. THIS AGREEMENT SUPERSEDES ANY PRIOR EMPLOYMENT, SEVERANCE OR SIMILAR AGREEMENT BETWEEN TCI AND ANY OF ITS AFFILIATES AND THE EXECUTIVE. 7. General Provisions. a. Assignability; Binding Effect. This Agreement is personal to the Executive and shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be binding on and enforceable by the Executive's legal representatives and permitted successors and assigns. The rights of the Employer under this Agreement may be assigned or transferred by the Employer to any subsidiary of TCI, provided that the assignee or transferee assumes all the liabilities, obligations and duties of the assignor, as contained in this Agreement, either contractually or as a matter of law. This Agreement shall inure to the benefit of and be binding on and enforceable by the successors and assigns of the Employer. b. No Attachment. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, execution, attachment, levy or similar process or assignment, voluntary or involuntary, by operation of law or otherwise, and any attempt, to effect such action shall be null, void and of no effect. c. Notices. All notices and other communications hereunder shall be in writing and shall be given if by the Executive to the Employer by telecopy or facsimile transmission at the telecommunications number set forth below and if by either the Employer or the Executive either by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: -4- 5 If to the Executive: Coelho Associates, Inc. 1325 Avenue of the Americas, 26th Floor New York, New York 10019 Telecopy No.: (212) 424-2660 If to the Employer: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Telecopy No.: (303) 488-3245 Attention: Stephen M. Brett or to such address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. 8. Modification and Waiver. a. Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. b. Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there by an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 9. Severability. If any provision of this Agreement shall be held invalid in whole or in part, such invalidity shall in no way affect the rest of such provision not held so invalid, and the rest of such provision, together with all provisions of this Agreement, shall to the full extent consistent with law continue in full force and effect. If this Agreement or any portion thereof conflicts with any law or regulation governing the activities of the Employer, this Agreement or appropriate portion thereof shall be deemed invalid and of no force or effect. -5- 6 10. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED IN THE STATE OF COLORADO, AND ITS VALIDITY, INTERPRETATION, PERFORMANCE, AND ENFORCEMENT SHALL BE GOVERNED BY THE LAWS OF SAID STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 11. Titles; References. The titles of the Sections and subsections of this Agreement are for the convenience of reference only and are not to be considered in construing this Agreement. References herein to Sections or subsections are to Sections or subsections of this Agreement unless otherwise specified. 12. Termination. a. Termination by the Employer. Executive's employment by the Employer may be terminated by the Employer only as provided in clauses (i), (ii) and (iii) below. (i) Upon the death of Executive. (ii) Effective as of December 31 of any year, upon giving written notice of such termination of Executive six (6) months prior to the effective date thereof and by paying to Executive in a lump sum in cash upon such termination all remaining compensation that would have been payable under Section 2 hereof if this Agreement remained in full force and effect for the balance of the Term of Employment. (iii) At any time for "cause," which for purposes of this Agreement shall be deemed to have occurred only on the happening of any of the following: (A) the plea of guilty to, or conviction for, the commission of a felony offense by Executive; provided, however, that after indictment, the Employer may suspend Executive from the rendition of services but without limiting or modifying in any other way the Employer's obligations under this Agreement; (B) a material breach by Executive of a material fiduciary duty owed to the Employer; (C) a material breach by Executive of the covenants made by him in Section 4 hereof; or -6- 7 (D) the willful and gross neglect by Executive of the material duties specifically and expressly required by this Agreement; provided, however, that any claim that "cause," within the meaning of clause (B), (C) or (D) above, exists for the termination of Executive's employment may be asserted on behalf of the Employer only by a duly adopted resolution of the Board of Directors of TCI and only after 30 days prior written notice to Executive during which period he may cure the breach or neglect that is the basis of any such claim, if curable. b. Effect of Termination by Employer. If Executive's employment by the Employer is terminated by the Employer pursuant to Section 12(a) hereof, all compensation under Section 2 of this Agreement that has accrued in favor of Executive as of the date of such termination, to the extent unpaid or undelivered shall be paid or delivered to Executive on the date of termination. Upon such termination of Executive's employment and payment of such amount (and, if applicable, the full amount payable pursuant to clause ii of Section 12(a)), the Employer's obligations under this Agreement shall terminate, except as provided in Section 2(e) (as it relates to expenses incurred prior to such termination) and Section 2(d). Executive acknowledges that his obligations under Section 4 hereof will survive any such termination. c. Termination by Executive. Executive shall have the right to terminate his employment by the Employer, and be relieved of any obligation to render or provide any further services hereunder upon six months prior written notice to the Employer of the effective date of such termination. If Executive's employment by the Employer is terminated by Executive pursuant to this Section 12(c), all compensation under Section 2 of this Agreement that has accrued in favor of Executive as of the date of such termination, to the extent unpaid or undelivered shall be paid or delivered to Executive in a lump sum in cash on the date of termination. Upon such termination of Executive's employment and payment of such amounts, Executive and the Employer shall each be relieved of any further obligations under this Agreement, except (in the case of Executive) as provided in Section 4 of this Agreement, and except (in the case of the Employer) as provided in Section 2(e) (as it relates to expenses incurred prior to such termination) and Section 2(d). -7- 8 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Employer has caused these presents to be executed in its name on its behalf effective as of the Effective Date. /s/ TONY COELHO ------------------------------ Tony Coelho TELE-COMMUNICATIONS, INC. By: /s/ Stephen M. Brett ----------------------- Name: Title: -8- 9 EXHIBIT A STANDARD TCI OPTION AGREEMENT EX-10.71 9 AGREEMENT REGARDING SHARES 1 EXHIBIT 10.71 EXECUTION COPY AGREEMENT REGARDING SHARES This Agreement Regarding Shares (this "Agreement") is entered into as of April 3, 1996, among ETC w/tci, Inc., a Delaware corporation (the "Company"), Tele-Communications, Inc., a Delaware corporation ("TCI"), TCI ETC Holdings, Inc., a Delaware corporation ("Holdings"), and Tony Coelho (the "Executive"). RECITALS The parties have jointly created the Company to own and operate an education business including all of the education business currently conducted by TCI, consisting primarily of electronic delivery of education services to homes, schools and businesses; and The parties desire (i) that Holdings acquire from the Company shares of Common Stock, par value $.01 per share, of the Company (the "Common Stock"), and shares of Preferred Stock, par value $.01 per share, of the Company (the "Preferred Stock"), (ii) that the Executive acquire from the Company shares of Common Stock, and (iii) to make various arrangements pertaining to the ownership and management of the Company. AGREEMENT NOW THEREFORE, in consideration of the mutual promises and agreements set forth herein, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. Unless the context requires otherwise, capitalized terms used in this Agreement will have the meanings set forth below. "Act" means the Securities Act of 1933, as amended. "Affiliate" of a Person means any other Person that controls, is controlled by or is under common control with, such Person. For purposes of this definition, "control" means the ownership, directly or indirectly, of equity securities or other ownership interests in a Person by another Person, which represent the right to elect at least a majority of the directors (or similar officials) of such Person or the power to direct or cause the direction of the management and policies of such Person, whether by ownership of voting securities, contract or otherwise. 2 "Board" means the Company's board of directors. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in New York, New York or Denver, Colorado are closed for business. "Cause" shall have the meaning set forth in any employment agreement from time to time in effect between TCI or the Company and the Executive. If there is no such agreement or if such agreement does not include a definition of "cause," "cause" shall be deemed to have occurred upon the happening of any of the following with respect to the Executive: (i) the plea of guilty to, or conviction for, the commission of a felony offense by the Executive; (ii) a material breach by the Executive of a material fiduciary duty owed to TCI or the Company; (iii) a material breach by the Executive of the covenants made by him in his employment agreement, if any, with TCI or the Company; or (iv) the willful and gross neglect by the Executive of the material duties assigned to him by the Board of Directors or a responsible officer of TCI or the Company. "Change in Control" shall be deemed to have occurred if (i) any Person (other than the TCI Group or the Executive Group) shall acquire Control of the Company or (ii) any Person or "group" shall acquire Control of TCI if such Person or "group" does not include as "members" (each within the meaning of the Securities and Exchange Act of 1934 and the rules and regulations promulgated thereunder, as amended), either John C. Malone, Bob Magness, members of their respective families or representatives thereof. For purposes of this definition a Person's "family" shall include such Person's estate, spouse and lineal descendants and any trust or other investment vehicle for the primary benefit of such Person or members of his family, and a Person's "representatives" shall include executors and trustees. "Control" means the power, directly or indirectly, to elect at least a majority of the directors of a Person or the power to direct or cause the direction of management and policies of such Person, whether by ownership of voting securities, contract or otherwise. "Executive Group" means the Executive and any Permitted Transferee who agrees to be bound by the terms of this Agreement by signing a counterpart signature page hereto. -2- 3 "Fair Market Value" of any class or series of capital stock on any trading day means the average of the high and low reported sales prices regular way of a share of such class or series as of the end of such trading day or in case no such reported sale takes place on such trading day the average of the reported closing bid and asked prices regular way of a share of such class or series as of the end of such trading day, in either case on a national securities exchange or the Nasdaq Stock Market, or if the shares of such class or series are not listed on a national securities exchange or quoted on such Nasdaq Stock Market, or if the shares of such class or series are not traded on such national securities exchange or quoted on such Nasdaq Stock Market on such trading day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such trading day as furnished by any New York Stock Exchange member firm selected from time to time by the Company, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such trading day, the fair market value of a share of such class or series as reasonably determined by the Board. "Marketable Securities" means, as of any date on which it is necessary to determine whether securities are Marketable Securities, securities of a corporation domiciled in the United States of America, which securities are freely traded and are listed on a national securities exchange or quoted on the Nasdaq Stock Market. "Permitted Transferee" means any spouse, child, adopted child, lineal descendent, sibling or parent (each, a "Family Member") of the Executive, any recipient of Shares from the Executive pursuant to a Qualified Domestic Relations Order (as defined in the Internal Revenue Code of 1986, as amended), any trustee of a trust for the benefit of the Executive or Family Members, and any executor, administrator, trustee or beneficiary of the Executive under his will or other instrument taking effect at death or under applicable laws of inheritance, succession, descent and distribution, provided that such Person agrees in writing to become a party to this Agreement and to be bound by all the terms and conditions of this Agreement. "Person" means a human being or a corporation, partnership, limited liability company, trust, unincorporated organization, association or other entity. "Public Offering" means the completion of a sale of Shares pursuant to a registration statement which has become effective under the Act (excluding registration statements on Form S-4, S-8 or similar limited purpose forms). "Share Equivalents" means, at any date of determination and without duplication, (i) Shares that are issued and outstanding, (ii) Shares that are issuable upon conversion or exchange -3- 4 of any other debt or equity securities of the Company without payment of additional consideration and (iii) Shares that are issuable upon exercise of any option, warrant or similar right to acquire Shares, including in each case, Shares subject to repurchase rights or vesting, forfeiture or similar conditions, whether or not presently exercisable or earned. "Shares" means shares of the Company's Common Stock. "Stockholder" means Holdings, the Executive and each Person who acquires Shares and becomes a party to this Agreement subsequent to the date hereof by signing a counterpart signature page to this Agreement and agreeing to be bound by the terms of this Agreement. "TCI Group" means the group consisting of TCI and any Affiliate of TCI who acquires Shares and agrees to be bound by the terms of this Agreement by signing a counterpart signature page hereto. "Trading Day" means each weekday other than any day on which any relevant class or series of capital stock is not traded on a national securities exchange or quoted on the Nasdaq Stock Market or in the over-the- counter market. "Transfer" means a sale, exchange, pledge, granting of security interest, assignment or other disposition, whether voluntary or by operation of law. 1.2 Additional Definitions. The following terms are defined in the sections indicated below:
Defined Term Section ------------ ------- Additional Shares 6.1 Calculation Notice 5.2 Call 5.2 Call Exercise Notice 5.2 Company Value 5.2 Derivative Securities 6.3 Determination Event 5.2 Determination Date 5.2 Determination Period 5.2 Nominees 4.2 Purchase Price 5.2 Purchased Shares 2.1 Put 5.2 Put Exercise Notice 5.2 Subject Shares 5.2 Take Along Notice 5.4 TCI Assets 2.1 TCI Common Shares 2.1
-4- 5 TCI Preferred Shares 2.1 TCI Shares 2.1 Unwind 5.2
ARTICLE 2 SALE AND TRANSFER OF SHARES 2.1 Shares. Promptly after the execution and delivery of this Agreement by all of the parties hereto, (i) the Company shall issue and sell to the Executive, and the Executive shall purchase from the Company, 1,500 Shares (the "Purchased Shares") at a purchase price of $0.10 per share, and (ii) the Company shall issue and sell to Holdings, and Holdings shall purchase from the Company, 8,000 Shares (the "TCI Common Shares") and 20,000 shares of Preferred Stock (the "TCI Preferred Shares"; the TCI Common Shares and the TCI Preferred Shares are collectively known as the "TCI Shares") for the consideration (the "TCI Assets") set forth on Exhibit A hereto. 2.2 Deliveries. Promptly after the execution and delivery of this Agreement by each of the parties hereto, the Company shall deliver to the Executive certificates representing the Purchased Shares, registered in the name of the Executive, and the Executive shall deliver to the Company a check in the amount of $150.00. ARTICLE 3 REPRESENTATIONS, WARRANTIES AND COVENANTS 3.1 Representations of TCI. TCI represents and warrants to the other parties hereto that, as of the date of this Agreement: (a) Organization and Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and has all necessary corporate power and authority to conduct its business as presently conducted and to enter into and perform its obligations under this Agreement. Attached to this Agreement as Exhibit B are true and complete copies of the Company's certificate of incorporation and bylaws, each as amended to date and presently in effect. (b) Capitalization of the Company. The authorized capital stock of the Company consists of 1,000,000 Shares and 100,000 shares of Preferred Stock, none of which are issued and outstanding. Except as provided in this Agreement, (i) no subscription, warrant, option, convertible security or other right to purchase or acquire any Shares or any shares of Preferred Stock is authorized or outstanding, (ii) the Company has no obligation to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any Shares or any shares of Preferred Stock any evidences of indebtedness or assets of the Company and (iii) the Company has no obligation to purchase, redeem or otherwise acquire any Shares, any shares of -5- 6 Preferred Stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. (c) Authority, Etc. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be affected by bankruptcy, insolvency or other laws affecting the rights of creditors generally and by general equitable principles. (d) Shares. All Purchased Shares and TCI Shares issued and sold pursuant to this Agreement, when issued and sold in accordance with this Agreement, will be duly authorized, validly issued, fully paid and nonassessable and will be free and clear of any security interest, pledge or other encumbrance except as may be created by or pursuant to this Agreement. 3.2 Representations of the Executive. The Executive represents and warrants to each of the Company and TCI that, as of the date of this Agreement: (a) Investment Intent. The Executive is acquiring the Shares for his own account for investment only and not with a view to any distribution thereof. (b) Validity. This Agreement has been duly executed and delivered by the Executive and constitutes the valid and binding obligation of the Executive enforceable in accordance with its terms, except as enforceability may be affected by bankruptcy, insolvency or other laws affecting the rights of creditors generally and by general equitable principles. (c) Investigation. The Executive has made such inquiries concerning the Company and its business as the Executive has deemed necessary. TCI and the Company have made available to the Executive any and all information which he has requested and have answered to the Executive's satisfaction all inquiries made by the Executive. The Executive has sufficient knowledge and experience in investing in companies similar to the Company so as to be able to evaluate the risks and merits of its investment in the Company and is able financially to bear the risks thereof. (d) Accredited Investor. The Executive is an Accredited Investor as such term is defined in Rule 501(a) promulgated under the Securities Act of 1933, as amended. 3.3 Representations of Holdings and TCI. Holdings and TCI jointly and severally represent and warrant to the other parties hereto that, as of the date of this Agreement: (a) Organization and Standing. Each of Holdings and TCI is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and -6- 7 has all necessary corporate power and authority to conduct its business as presently conducted and to enter into and perform its obligations under this Agreement. (b) Authority, Etc. The execution, delivery and performance of this Agreement by each of Holdings and TCI and the consummation by each of them of the transactions contemplated hereby have been duly authorized by all necessary corporate action. This Agreement has been duly executed and delivered by each of Holdings and TCI and constitutes the valid and binding obligation of each of them, enforceable against each of them in accordance with its terms, except as enforceability may be affected by bankruptcy, insolvency or other laws affecting the rights of creditors generally and by general equitable principles. (c) Investment Intent. Holdings is acquiring the TCI Shares for its own account for investment only and not with a view to any distribution thereof. (d) Accredited Investor. Holdings is an Accredited Investor as such term is defined in Rule 501(a) promulgated under the Securities Act of 1933, as amended. ARTICLE 4 OTHER AGREEMENTS 4.1 RIGHT TO COMPETE. TCI AND ANY AFFILIATE OF TCI MAY ENGAGE IN OR POSSESS INTERESTS IN OTHER BUSINESSES OR VENTURES OF ANY NATURE OR DESCRIPTION, WITHOUT REGARD TO WHETHER SUCH BUSINESSES OR VENTURES ARE OR MAY BE DEEMED TO BE COMPETITIVE IN ANY WAY WITH THE BUSINESS OF THE COMPANY. NONE OF TCI OR ANY OF ITS AFFILIATES OR ANY DIRECTOR, OFFICER OR EMPLOYEE OF TCI OR ANY OF ITS AFFILIATES (INCLUDING ANY SUCH DIRECTOR, OFFICER OR EMPLOYEE WHO SERVES AS A DIRECTOR, OFFICER OR EMPLOYEE OF THE COMPANY) WILL BE OBLIGATED TO PRESENT TO THE COMPANY ANY PARTICULAR INVESTMENT OR BUSINESS OPPORTUNITY, REGARDLESS OF WHETHER SUCH OPPORTUNITY IS OF A CHARACTER THAT THE COMPANY COULD TAKE ADVANTAGE OF IF IT WERE PRESENTED TO THE COMPANY, BUT INSTEAD, TCI AND ITS AFFILIATES WILL HAVE THE RIGHT TO TAKE SUCH OPPORTUNITY FOR THEIR OWN ACCOUNT OR FOR THE ACCOUNT OF ANY OTHER PERSON WITHOUT ANY OBLIGATION WHATSOEVER TO THE COMPANY. 4.2 Nomination and Election of Directors. The Board of Directors of the Company will be nominated and elected as follows: (a) The members of the Executive Group and the TCI Group will hold all Shares held by them now or in the future subject to, and will vote their Shares in accordance with, the provisions of this Section 4.2. -7- 8 (b) Each time the shareholders of the Company meet, or act by written consent in lieu of a meeting, for the purpose of electing directors during the term of this Agreement, the members of the Executive Group and the TCI Group will vote all their Shares to fix the number of Directors at five, seven or nine, as requested by the Executive, and for the election of each of the nominees as follows (the "Nominees"): (i) (x) if the Board consists of five directors, two designees of the Executive, (y) if the Board consists of seven directors, three designees of the Executive, and (z) if the Board consists of nine directors, four designees of the Executive, and (ii) The number of designees of the TCI Group equal to the number of directors remaining to be elected after giving effect to (i) above. The Company will furnish written notice to the holders of Shares at least 20 days prior to any meeting or proposed action by written consent in lieu of a meeting for the election of directors. The Executive and the TCI Group each will furnish written notice to the other no later than 10 days following receipt of the Company's notice of any such meeting, or proposed action by written consent in lieu of a meeting, of the name of the Nominees designated by them as set forth in (i) and (ii) above. In the absence of such notice, the directors then serving on behalf of or previously nominated by the parties entitled to nominate will be deemed to be the Nominees of the respective person or group. (c) No party hereto shall vote to remove any member of the Board of Directors unless the designating party so votes, and if the designating party so votes then the non-designating parties shall likewise so vote. Any vacancy on the Board of Directors created by the resignation, removal, incapacity or death of any person designated under this Agreement shall be promptly filled by another person designated by the original designating party or his or its successors, or assigns. The parties hereto shall vote their respective Shares in accordance with such new designation, and any such vacancy shall not be filled in the absence of a new designation by the original designating party or parties. The Company will provide the Executive with prompt notice of any actions taken by written consent of the Board, provided that any failure to give such notice will not affect the validity of the action taken. (d) The Company covenants that it shall have no committee of the Board of Directors without the consent of Executive. (e) The TCI Group will not Transfer any Shares unless the transferee of such shares agrees in writing to become a party to this Agreement and to be bound by all the terms and conditions of this Agreement. 4.3 Registration Rights. The Company and each member of the Executive Group will enter into a registration rights agreement in the form of Exhibit C hereto. -8- 9 ARTICLE 5 TRANSFERS OF SHARES 5.1 Limitations On Transfers. No member of the Executive Group may transfer any Share Equivalents except to a Permitted Transferee or in accordance with the provisions of this Article. No Stockholder may transfer any Share Equivalents unless any applicable legal requirements have been complied with to the reasonable satisfaction of the Company. Any transfer made in violation of this Article will be null and void. 5.2 Put and Call Options. (a) Any time after September 30, 2000, the Executive will have the right (the "Put"), exercisable by notice to TCI to such effect (a "Put Exercise Notice"), to require TCI to purchase all of the Executive Group's Share Equivalents for a purchase price determined in accordance with this Section 5.2. (b) Any time after the termination of the employment of the Executive with the Company, by reason of termination by the Company with Cause or voluntary termination by the Executive, TCI will have the right (the "Call"), exercisable within 90 days of the date of such termination by notice to the Executive to such effect (a "Call Exercise Notice"), to require the Executive Group to sell all of its Share Equivalents to TCI or any one or more other members of the TCI Group (provided that TCI shall remain responsible hereunder for the performance of the applicable member of the TCI Group) as set forth in the Call Exercise Notice, for a purchase price determined in accordance with this Section 5.2. (c) On September 30, 2001, each member of the Executive Group shall be obligated to sell and TCI shall be obligated to purchase (the "Unwind") all of the Executive Group's Share Equivalents for a purchase price determined in accordance with this Section 5.2. (d) Whenever an event occurs that requires a purchase price to be determined (a "Determination Event"), TCI and the Executive Group will use their good faith efforts to determine the fair market value for the Share Equivalents that are the subject thereof (the "Subject Shares") in accordance with the provisions of this Section 5.2. (e) If TCI and the Executive Group are unable to agree on a purchase price for the Subject Shares within 45 days after the earlier of (x) the conclusion of the 90 day period after the exercise of a Put or Call, as the case may be (the "Determination Period") or (y) the date of the Unwind occurs (the earlier to occur of the events described in clause (x) and clause (y) above being herein referred to as the "Determination Date"), then they will cause the Company Value (as defined below) as of the Determination Date to be determined by a qualified appraiser acceptable to TCI and the Executive Group. -9- 10 (f) If the parties are unable to agree upon a single appraiser within 60 days after the Determination Date, each will have an additional 10 days to select one appraiser nationally recognized in valuing enterprises such as the Company. If either fails to appoint an appraiser, then the determination of Company Value by the one appraiser appointed will be binding. (g) Each appraiser will determine the purchase price which the Company would receive if the assets and business of the Company and its subsidiaries on a consolidated basis were sold to a third party in a transaction structured as a sale of all the assets and business of the Company and its subsidiaries on a consolidated basis as a going concern, without any reduction for, or assumption of, and free and clear of, any liens or liabilities of the Company and its subsidiaries on a consolidated basis, that is consummated as of the Determination Date (the "Company Value"). The Company, TCI and the Executive Group will use their reasonable best efforts to cause each appraiser to submit to TCI and the Executive Group a written report indicating its determination of such value within 30 days after the date such appraiser is selected. (h) If the higher of the two appraisals is 120% or less of the lower appraisal, the average of the two will be the Company Value. (i) If the higher of the two appraisals is more than 120% of the lower appraisal, the Company will immediately notify the two appraisers and cause them to appoint a third similarly qualified appraiser within 10 days of such notice. The Company, TCI and the Executive Group will use their reasonable best efforts to cause such third appraiser (who will not be apprised of the determination of the other appraisers) to submit a written report to each of them indicating such appraiser's determination of the Company Value within 30 days of the date such third appraiser is selected. If three appraisals are necessary, then the average of the two appraisals in which the determinations of Company Value are closest together will be the Company Value or, if the highest and lowest are equidistant from the middle determination, then the middle determination will be the Company Value. (j) With respect to the determination of Company Value required in connection with each Determination Event, TCI and the Executive Group each will pay the fees and costs of the appraiser it appoints and, if a single or third appraiser is used, TCI and the Executive Group will split the fees and costs of such appraiser. (k) Immediately after the determination of the Company Value, the Company will make a calculation reflecting the cash distribution that would be made to the Executive Group with respect to the Subject Shares if, as of the Determination Date, the Company were deemed to have received such Company Value in connection with an all-cash sale of its assets and business and the Company were then dissolved and liquidated in accordance with its certificate of incorporation and applicable law. Such calculation shall not take into account any tax benefit or tax cost associated with such sale or liquidation. The amount of such theoretical distribution will be the purchase price for the Subject Shares. The Company will promptly give notice (the "Calculation Notice") to the Executive Group and TCI of the amount of such distribution, including a schedule setting forth in reasonable detail the calculation thereof. For purposes of making such calculation, the amount of liabilities, including contingent liabilities, deemed to be paid or reserved against by the Company will be determined as of the Determination Date on a consolidated basis and otherwise in accordance with generally accepted accounting principles applied on a basis consistent with those -10- 11 applicable to preparation of the Company's financial statements for the most recent prior period for which such financial statements were prepared. (l) The closing of any purchase pursuant to this Section will be held at the principal office of the Company at 10:00 a.m., Washington D.C. time, on the date that is 10 days after determination of the purchase price pursuant to this Section 5.2, or if later, five Business Days after all required consents from governmental authorities or other third parties have been obtained with respect to such transaction. At the closing, TCI will cause the purchase price to be delivered to the respective member of the Executive Group (less the amount of any exercise or purchase price remaining to be paid by such member of the Executive Group with respect to such Subject Shares, any taxes withheld and such members' Shares of any expenses to be paid pursuant to this Section 5.2), and such person will transfer the Subject Shares, free and clear of all liens, claims and encumbrances and will deliver such stock certificates, assignments and other agreements and instruments and will take all such other reasonable actions to effect such transfer as TCI may request. The purchase price for the Subject Shares may be paid, at TCI's option, in cash or by delivery of such number of shares of Marketable Securities of TCI as equals the quotient obtained by dividing the purchase price of the Subject Shares by the average Fair Market Value of one share of such Marketable Securities over the 10- Trading Day period ending on the third -11- 12 Trading Day preceding the date of closing. In the event that TCI elects to deliver Marketable Securities of TCI to a member of the Executive Group pursuant to the Section 5.2, TCI and the Executive Group shall enter into a Registration Rights Agreement in substantially the form of Exhibit D hereto and TCI shall at the election of the recipient make all necessary withholding for taxes in such Marketable Securities. 5.3 Bring Along Right of TCI Group. (a) If one or more members of the TCI Group desires to sell at least a majority of the Shares owned by all members of the TCI Group to a third party or third parties not included in the TCI Group, TCI at its option may require each member of the Executive Group to sell the same percentage of its Shares as the TCI Group desires to sell to the purchaser selected by the TCI Group at the same price per Share and otherwise on the same terms and conditions as TCI. Upon the closing of any sale of Shares pursuant to this Section, the Executive Group will deliver at the closing certificates or other instruments representing such Shares free and clear of any lien, charge or encumbrance (except for any of the foregoing which are to be released in connection with such closing) duly endorsed or accompanied by stock powers executed in blank and such other documents as may be reasonably necessary to effect the sale. (b) The TCI Group may exercise its rights pursuant to this Section 5.3 by giving at least 30 days' prior notice to the Executive Group, which notice will specify in reasonable detail the terms of the proposed transaction. (c) The rights granted to the TCI Group under this Section 5.3 may only be exercised if no member of the TCI Group has a direct or indirect equity interest in the proposed transferee (other than an equity interest of 5% or less in a proposed transferee that is a publicly held corporation) and if no other rights or consideration (other than customary representations and warranties) are given by the purchaser to the TCI Group or any of its Affiliates which are not also afforded to the Executive Group. 5.4 Take Along Right of the Executive Group. (a) To the extent that Section 5.3 does not apply, the Executive Group will have the right to participate pro rata in any sale of Shares by the TCI Group (other than to another member of the TCI Group). The TCI Group will give prompt written notice (the "Take Along Notice") to the Executive Group of any proposed sale subject to this Section 5.4, which notice will set forth (i) the number of Shares proposed to be sold pursuant to such transaction, (ii) the purchase price and all consideration to be received by the TCI Group, (iii) a summary of any other material terms, and (iv) copies of all documents or drafts thereof relating to the sale and the purchaser. If any member of the Executive Group elects to exercise the option granted by this Section 5.4 it must do so by providing the TCI Group with a written notice of acceptance within 15 days after the date of receipt of the Take Along Notice, which notice of acceptance will constitute the agreement of such member of the Executive Group to be bound by the terms of such sale. The maximum number of Shares to be sold by such member of the Executive Group will be an amount equal to the product of (i) the total number of Shares held by such member and (ii) a fraction, the numerator of which will -12- 13 be the total number of Shares to be purchased in the proposed transaction as set forth in the Take-Along Notice and the denominator of which will be the total number of Shares held by the TCI Group. To the extent that the number of Shares desired to be sold by the Stockholders in accordance with the foregoing formula exceeds the number of Shares which the purchaser desires to purchase, the number of Shares permitted to be sold by each of the TCI Group and the members of the Executive Group electing to participate will be reduced pro rata based on the respective number of Shares each participant is seeking to sell in the Transaction. At a closing, the time and place of which will be reasonably specified by the TCI Group, the members of the Executive Group electing to participate will deliver certificates representing Shares to be sold free and clear of any lien, charge or encumbrance whatsoever (except for any of the foregoing which are to be released in connection with such closing), duly endorsed or accompanied by stock powers executed in blank and such other documents as may be reasonably necessary to effect the sale. 5.5 Other Conditions to Transfers: No Voting Agreements. Anything in this Agreement to the contrary notwithstanding, (i) no member of the Executive Group or the TCI Group will Transfer Share Equivalents to any transferee (including any Permitted Transferee) unless the transferor delivers to the Company an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed Transfer does not violate the Securities Act of 1933, as amended, or any applicable state law, and (ii) no member of the Executive Group or the TCI Group will effect any Transfer of any securities issued by the Company in violation of any applicable state or federal law. The Company agrees that it will not require an opinion of counsel for ordinary transactions complying with Rule 144 under the Securities Act of 1933, as amended. Except as specifically provided in this Agreement, no member of the Executive Group or the TCI Group will grant any proxy or become a party to any voting trust or other agreement regarding voting or Transfer of Share Equivalents to the extent that such would conflict with such party's obligations under this Agreement. ARTICLE 6 PREEMPTIVE RIGHTS 6.1 Issue of Additional Shares. If and whenever the Company issues any additional Shares or other capital stock ("Additional Shares"), except as provided in Section 6.3 or Section 6.5, the TCI Group and each member of the Executive Group will have the right, but not the obligation, to purchase such Additional Shares up to an amount sufficient to permit such Group or member to maintain its percentage common equity interest in the Company (based on the total number of Share Equivalents held by such Group or member) at the level existing immediately prior to the issuance of the Additional Shares. If the Company desires to issue Additional Shares, it will first give notice thereof to each Group and each member of the Executive Group stating the number of Additional Shares proposed to be issued, the total consideration to be received by the Company upon sale of the Additional Shares and any other material terms of the transaction. Within 30 days after the receipt of such notice, each member of the Executive Group and the TCI Group may exercise its rights under this Section 6.1 by giving written notice to that effect to the Company. Failure to give such notice within that 30-day period or failure to pay at the required time the purchase price for any Additional Shares as to which a right to purchase will have been exercised will constitute a waiver of the rights granted by this Section 6.1 as to the particular issuance of -13- 14 Additional Shares specified in the Company's notice. In the event that at the conclusion of such 30-day period, any member of the Executive Group fails to exercise his or her rights as to any portion of the Additional Shares he or she is entitled to purchase, the Executive shall have the right within 5 business days after the expiration of such 30-day period to elect to purchase any or all of such Additional Shares by written notice to that effect to the Company. Subject to the limitation on the total number of Additional Shares that may be purchased by the TCI Group as determined pursuant to this Section 6.1, the number of Additional Shares that may be purchased by the TCI Group (and the allocation of such Additional Shares among members of the TCI Group) will be wholly within the discretion of that Group. Nothing in this Article 6 will be deemed to prohibit sales of Additional Shares to the TCI Group, the Executive Group or any of TCI's other Affiliates so long as such sales of Additional Shares are conducted in compliance with this Section. 6.2 Per Share Price. The per share purchase price to be paid upon exercise of the rights granted under this Article 6 will be equal to the per share consideration at which the Additional Shares are offered or proposed to be offered by the Company to another party. The total consideration for which Additional Shares are offered or proposed to be offered will be determined as follows: (i) in case of the proposed issuance of Additional Shares for cash, the consideration to be received by the Company will be the amount of cash for which the Additional Shares are proposed to be issued and (ii) in case of the proposed issuance of Additional Shares in whole or in part for consideration other than cash, the value of the consideration to be received by the Company other than cash will be the Fair Market Value of that consideration as determined by the Board. 6.3 Derivative Securities. If and whenever the Company issues any securities convertible into or exchangeable or exercisable for Additional Shares or rights or options to subscribe for or to purchase Additional Shares ("Derivative Securities"), except as provided in Section 6.5, the TCI Group and each member of the Executive Group will have the right but not the obligation, to purchase Derivative Securities of like kind up to an amount which when converted, exchanged or exercised would be sufficient to permit such Group or member to maintain its percentage common equity interest in the Company (based on the total number of Share Equivalents held by such Group or member) at the level existing immediately prior to the issuance of the Derivative Securities. If the Company desires to issue Derivative Securities, it will first give notice thereof to the TCI Group and each member of the Executive Group stating the number of Derivative Securities proposed to be issued and the total consideration to be received by the Company upon sale of the Derivative Securities. Within 30 days after the receipt of such notice, each member of the TCI Group and the Executive Group may exercise its rights under this Section 6.3 by giving written notice to that effect to the Company. Failure to give such notice within that 30-day period or failure to pay at the required time the purchase price for any Derivative Securities as to which a right to purchase will have been exercised will constitute a waiver of the rights granted by this Section 6.3 as to the particular issuance of Derivative Securities specified in the Company's notice. In the event that at the conclusion of such 30-day period, any member of the Executive Group fails to exercise his or her rights as to any portion of the Derivative Securities he or she is entitled to purchase, the Executive shall have the right within 5 business days after the expiration of such 30-day period to elect to purchase any or all of such Derivative Securities by written notice to that effect to the -14- 15 Company. Subject to the limitation on the total number of Derivative Securities that may be purchased by a Group as determined pursuant to this Section 6.3, the amount of Derivative Securities that may be purchased by the TCI Group (and the allocation of such Additional Shares among members of that Group) will be wholly within the discretion of that Group. 6.4 Purchase Price of Derivative Securities. The purchase price to be paid upon exercise of the rights granted under Section 6.3 will be in proportion to the consideration proposed to be received by the Company upon the original issuance to another party of Derivative Securities. The amount of consideration to be received by the Company upon the original issuance of such Derivative Securities will be determined in the manner provided in Section 6.2. With respect to Derivative Securities convertible into or exchangeable or exercisable for Additional Shares, the rights of the Groups will apply only to the issuance of such Derivative Securities and the Groups will have no rights under this Agreement with respect to the Company's issuance of Additional Shares upon the conversion, exchange or exercise of such Derivative Securities. 6.5 Limitations. The provisions of this Article 6 will not apply to (i) Shares issued as a stock dividend to all holders of Shares or upon any subdivision or combination of Shares, (ii) securities issued for the acquisition by the Company of another entity or business by merger or such other transaction as would result in the ownership by the Company of not less than a majority of the voting power of the other entity or for the purchase of all the assets of an entity or business, (iii) Shares or Derivative Securities that are sold by the Company pursuant to a registration statement filed under the Act, or (iv) Shares or Derivative Securities issued to employees of the Company which together with Shares issued to the Executive do not exceed 20% of the aggregate of the number of Shares issued pursuant to this Agreement plus such Shares or Derivative Securities. 6.6 Terms of Payment of Purchase Price. Unless otherwise agreed to by the parties to this Agreement, the purchase price to be paid by each Group upon exercise of its rights under this Article 6 will be paid upon terms which are the same as those on which Shares or Derivative Securities are sold to the third party purchasers, unless those terms provide for payment in a manner which could not be duplicated by a Group, such as the transfer of specific property to the Company, in which event such payment will be in cash in an amount equal to the Fair Market Value of such specific property as determined by the Board. ARTICLE 7 MISCELLANEOUS 7.1 Stock Certificate Legend. All certificates representing Shares owned by any of the Stockholders will bear a legend substantially to the effect of the following: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be sold, pledged or otherwise transferred or encumbered unless registered under the Securities Act of 1933, as amended, and any applicable state securities laws or unless an exemption is available and except in accordance with the provisions of the -15- 16 Agreement Regarding Shares dated as of April 3, 1996, a copy of which agreement is available for inspection at the offices of the Company." 7.2 Further Assurances. Each party will do and perform or cause to be done or performed all such further acts and things and will execute and deliver all such agreements, certificates, instruments and documents as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 7.3 Amendment of Corporate Documents. To the extent the provisions of the Company's certificate of incorporation or bylaws are inconsistent with this Agreement, the parties will take or cause to be taken such actions as may be necessary to amend those instruments to cause such inconsistency to be removed, it being agreed, however, that the parties in any event will comply with the provisions of this Agreement except to the extent such compliance is expressly prohibited by applicable law. 7.4 Time. Time is of the essence under this Agreement. If the last day for giving any notice or the taking of action under this Agreement is not a Business Day, then the time for giving such notice or taking such action will be deemed extended to the next Business Day. 7.5 Governing Law. This Agreement and the rights and obligations of the parties hereunder will be governed by, and construed and interpreted in accordance with, the laws of the State of Colorado, without giving effect to the choice of law principles thereof. 7.6 Specific Performance. The parties acknowledge that there will be no adequate remedy at law for a violation of any of the provisions of this Agreement and that, in addition to other remedies which may be available, all such provisions will be specifically enforceable in accordance with their terms. 7.7 Severability. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction will not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including such provision, in any other jurisdiction. 7.8 Notices. All notices and other communications hereunder will be in writing and will be deemed to be properly delivered or given if delivered in person, by telecopy or by first class, prepaid, registered or certified mail, as follows: -16- 17 To the Company: ETC w/tci, Inc. 700 14th Street, N.W. Washington, D.C. 20005 Telecopy No.: (202-626-1856) Attention: Michael P. Duffy To TCI or any member of the TCI Group: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Telecopy No.: (303) 488-3245 Attention: Stephen M. Brett To the Executive or the Executive Group: Tony Coelho Coelho Associates, LLC 1325 Avenue of the Americas 26th Floor New York, NY 10019 Telecopy No.: (212) 424-2660 To other members of the Executive Group, to such addresses as are provided on their counterpart of this Agreement. A party may change the address to which notices are required to be sent by giving notice of such change in the manner provided in this paragraph, provided that such notice will not be effective until actual receipt by the other party. Notice will be deemed given: (i) if delivered in person, upon receipt; (ii) if by telecopy, addressed as provided above, when sent; and (iii) if by mail, addressed as provided above, four days after the date of mailing. A party may change the address to which notices are to be delivered by giving notice of such other address to the other party in the manner provided above. 7.9 Parties Obligated and Benefitted; Amendments and Waivers. This Agreement will be binding upon the parties and their respective assigns and successors in interest and will inure solely to the benefit of the parties and their respective successors and assigns. The failure of any party to enforce any right arising under this Agreement on one or more occasions will not operate as a waiver of that or any other right on that or any other occasion. This Agreement may be amended upon the written consent of holders of Shares representing at least a majority of the voting -17- 18 power of the Shares owned by each Group and any amendment so approved will be binding upon all Stockholders. Waivers of compliance with any provisions of this Agreement and any other action required or permitted to be taken by a Group will be deemed to have been duly taken upon the written consent of members of the Group holding at least a majority of the Shares owned by such Group. If there are members of the TCI Group other than TCI, each right of TCI under this Agreement will be exercisable by the TCI Group in the manner approved by the holders of Shares representing at least a majority of the Shares held by the TCI Group for the benefit of one or more members of the TCI Group, as the members of the TCI Group may determine. If there are members of the Executive Group other than the Executive, each right of the Executive Group under this Agreement will be exercisable by the Executive Group in the manner approved by the holders of Shares representing at least a majority of the Shares held by the Executive Group for the benefit of one or more members of the Executive Group, as the members of the Executive Group may determine. 7.10 Termination. This Agreement will terminate immediately following the closing of the Company's initial Public Offering. The provisions of Article 4.2 shall, in any event, terminate on the tenth anniversary of the date of this Agreement. 7.11 No Tax Sharing. The parties acknowledge that nothing in this Agreement or otherwise will be deemed to imply any obligation on the part of the TCI Group to reimburse the Company for any tax benefits received by the TCI Group in respect of its ownership of Shares or, conversely, will anything in this Agreement be deemed to imply an obligation on the part of the Company to reimburse the TCI Group for any tax liability incurred by the TCI Group in respect of its ownership of Shares. 7.12 Entire Agreement. This Agreement constitutes the entire Agreement, and supersedes all prior agreements and understandings, oral or written, among the parties hereto with respect to the subject matter hereof. 7.13 Headings and Captions; Execution and Counterparts. The headings and captions contained herein are for convenience only and will not control or affect the meaning or construction of any provision hereof. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original and which together will constitute one and the same instrument. [Signatures continued on next page] -18- 19 IN WITNESS WHEREOF, this Agreement has been signed by and on behalf of each of the parties hereto, all as of the date first above written. ETC w/tci, Inc. By: /s/ Stephen M. Brett ------------------------------ Name: Title: TCI ETC Holdings, Inc. By: /s/ Stephen M. Brett ------------------------------ Name: Title: Tele-Communications, Inc. By: /s/ Stephen M. Brett ------------------------------ Name: Title: /s/ TONY COELHO ------------------------------------- Tony Coelho 20 Exhibit Index to Agreement Regarding Shares Exhibit A: Description of TCI Assets. Exhibit B: Certificate of Incorporation and Bylaws of ETC w/tci. Exhibit C: ETC Registration Rights Agreement, dated as of April 3, 1996, by and among ETC w/tci, Inc. and Tony Coehlo. Exhibit D: Form of TCI Registration Rights Agreement. EX-10.72 10 1996 INCENTIVE PLAN 1 EXHIBIT 10.72 EXECUTION COPY 1996 INCENTIVE PLAN OF ETC W/TCI, INC. 1. Plan. This 1996 Incentive Plan of ETC w/tci, Inc. (the "Plan") was adopted by the Board of Directors of ETC w/tci, Inc., a Delaware corporation (the "Company"), to reward certain corporate officers and key employees of the Company by enabling them to acquire shares of Common Stock, par value $.01 per share, of the Company. 2. Objectives. This Plan is designed to attract and retain key employees of the Company and its Subsidiaries (as hereinafter defined), to encourage the sense of proprietorship of such employees and to stimulate the active interest of such persons in the development and financial success of the Company and its Subsidiaries. These objectives are to be accomplished by making Awards (as hereinafter defined) under this Plan and thereby providing Participants (as hereinafter defined) with a proprietary interest in the growth and performance of the Company and its Subsidiaries. 3. Definitions. As used herein, the terms set forth below shall have the following respective meanings: "Additional Shares" shall have the meaning set forth in Section 19(a). "Affected Participants" shall have the meaning set forth in Section 15(d). "Affiliate" of a Person means any other Person that Controls, is Controlled by or is under common Control with, such Person. "Agreement Regarding Shares" shall have the meaning as set forth in Section 21. "Authorized Officer" means the Chairman of the Board or the Chief Executive Officer of the Company (or any other senior officer of the Company to whom either of them shall delegate the authority to execute any Award Agreement). "Award" means the grant of an Option to a Participant pursuant to such applicable terms, conditions and limitations as the Committee may establish in order to fulfill the objectives of the Plan. "Award Agreement" means a written agreement between the Company and a Participant setting forth the terms, conditions and limitations applicable to an Award. 2 "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in New York, New York are closed for business. "Board" means the Board of Directors of the Company. "Calculation Notice" shall have the meaning set forth in Section 15(d). "Call" shall have the meaning set forth in Section 15(b). "Call Exercise Notice" shall have the meaning set forth in Section 15(b). "Change in Control" shall be deemed to have occurred if (i) any Person (other than TCI or any subsidiary of TCI) shall acquire Control of the Company or (ii) any Person or "group" shall acquire Control of TCI if such Person or "group" does not include as "members" (each within the meaning of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, as amended) either John C. Malone or Bob Magness or their respective Permitted Transferees. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Coelho Option" shall have the meaning set forth in Section 21. "Coelho Option Agreement" shall have the meaning set forth in Section 21. "Committee" means the Board or such committee of the Board as is designated by the Board to administer the Plan. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Company" means ETC w/tci, Inc., a Delaware corporation and its successors. "Company Value" shall have the meaning set forth in Section 15(d). "Control" means the power, directly or indirectly, to elect at least a majority of the directors of a Person or the power to direct or cause the direction of management and polices of such Person, whether by ownership of voting securities, contract or otherwise. "Derivative Securities" shall have the meaning set forth in Section 19(c). "Determination Date" shall have the meaning set forth in Section 15(d). "Determination Event" shall have the meaning set forth in Section 15(d). -2- 3 "Determination Period" shall have the meaning set forth in Section 15(d). "Effective Date" has the meaning set forth in paragraph 24 hereof. "Employee" means an employee of the Company or any of its Subsidiaries. "Executive" means Tony Coelho. "Fair Market Value" of any class or series of capital stock on any trading day means the average of the high and low reported sales prices regular way of a share of such class or series as of the end of such trading day or in case no such reported sale takes place on such trading date the average of the reported closing bid and asked prices regular way of a share of such class or series as of the end of such trading day, in either case on a national securities exchange or the Nasdaq Stock Market, or if the shares of such class or series are not listed on a national securities exchange or quoted on such Nasdaq Stock Market, or if the shares of such class or series are not traded on such national securities exchange or quoted on such Nasdaq Stock Market on such trading day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such trading day as furnished by any New York Stock Exchange member firm selected from time to time by the Company, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such trading day, the fair market value of a share of such class or series as reasonably determined by the Board. "Incentive Option" means an Option that is intended to comply with the requirements set forth in Section 422 of the Code. "Marketable Securities" means, as of any date on which it is necessary to determine whether securities are Marketable Securities, securities of a corporation domiciled in the United States of America, which securities are (i) freely tradable (or subject to a Registration Rights Agreement in the form of Exhibit B hereto) and (ii) listed on a national securities exchange or quoted on the Nasdaq Stock Market. "Nonqualified Stock Option" means an Option that is not an Incentive Option. "Option" means a right to purchase a specified number of shares of Common Stock at a specified price. "Participant" means an Employee to whom an Award has been made under this Plan. "Permitted Transferee" as to any Person means any spouse, child, adopted child, lineal descendant, sibling or parent (each, a "Family Member") of such Person, any recipient of securities from such Person pursuant to a Qualified Domestic Relations Order (as defined in the Code), any trustee of a trust for the benefit of such Person or his or her Family Members, and any executor, administrator, trustee or beneficiary of such Person under his or her will or other instrument taking effect at death or under applicable laws of inheritance, succession, descent and -3- 4 distribution, provided that if such Person is a transferee of a Participant, such Person agrees in writing to be bound by all the terms and conditions of the Plan and any applicable Option agreement. "Person" means any human being or a corporation, partnership, limited liability company, trust, unincorporated organization, association or other entity. "Public Offering" means the completion of a sale of shares of Common Stock of the Company to the public in an underwritten offering with an aggregate price to the public of not less than $20,000,000 pursuant to a registration statement which has become effective under the Securities Act of 1933, as amended (excluding registration statements on Form S-4, S-8 or similar limited purpose forms.) "Put" shall have the meaning set forth in Section 15(a). "Put Exercise Notice" shall have the meaning set forth in Section 15(a). "Subject Shares" shall have the meaning set forth in Section 15(d). "Subsidiary" means (i) in the case of a corporation, any corporation of which the Company, directly or indirectly, owns shares representing 50% or more of the combined voting power of the shares of all classes or series of capital stock of such corporation which have the right to vote generally on matters submitted to a vote of the stockholders of such corporation, and (ii) in the case of a partnership or other business entity not organized as a corporation, any such business entity of which the Company directly or indirectly owns 50% or more of the voting, capital or profits interests (whether in the form of partnership interests, membership interests or otherwise). "Take Along Notice" shall have the meaning set forth in Section 17(a). "TCI" means Tele-Communications, Inc., a Delaware corporation and its successors. "TCI Group" means the group consisting of TCI and any affiliate of TCI (other than Tony Coelho or the Company) who acquires shares of Common Stock of the Company. "Transfer" means a sale, exchange, pledge, granting of security interest, assignment or other disposition, whether voluntary or by operation of law. "Unwind" shall have the meaning set forth in Section 15(c). "Vested Stock" means, as of any date, shares of Common Stock which were acquired upon exercise of an Award granted hereunder, shares of Common Stock which could be acquired upon exercise of a then exercisable Award and shares which were acquired upon exercise of preemptive rights (and any shares of Common Stock issued with respect thereto as a result of reorganization, recapitalization, dividend, stock split or other similar event). -4- 5 4. Eligibility. Key Employees eligible for Awards under this Plan are those who hold positions of responsibility and whose performance, in the judgment of the Committee, can have a significant effect on the success of the Company and its Subsidiaries. 5. Common Stock Available for Awards. Subject to the provisions of paragraph 13 hereof, there shall be available for issuance upon exercise of Awards under this Plan an aggregate of 5,000 shares of Common Stock of the Company. The number of shares of Common Stock that are the subject of Awards under this Plan that expire unexercised shall again immediately become available for Awards hereunder; provided, however, that all shares that are now or hereafter available for Awards hereunder shall, in certain circumstances as set forth in the Coelho Option Agreement attached hereto as Exhibit A, be subject to the Coelho Option as described in Section 21 hereof. As a condition to any subsequent award to a Participant, the Committee shall have the right in its sole discretion, to require such Participant to return to the Company Awards (other than the Coelho Option) previously granted to such Participant under the Plan. Subject to the provisions of the Plan, each Award shall be on such terms and conditions as are specified by the Committee at the time the new Award is granted, provided, however, that in no event will the terms and conditions of such new Award, taken as a whole, be worse from an economic point of view to the Participant than the previous Award. The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate consistent with the provisions of the Plan. The Board and the appropriate officers of the Company shall from time to time take whatever actions are necessary to file any required documents with governmental authorities, stock exchanges and transaction reporting systems to ensure that shares of Common Stock are available for issuance pursuant to Awards. 6. Administration. (a) This Plan shall be administered by the Committee. (b) Subject to the provisions hereof, the Committee shall have full and exclusive power and authority to administer this Plan and to take all actions that are specifically contemplated hereby or are necessary or appropriate in connection with the administration hereof. The Committee shall also have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or proper, all of which powers shall be exercised in the best interests of the Company and in keeping with the objectives of this Plan. The Committee may, in its discretion, provide for the extension of the exercisability of an Award, accelerate the vesting or exercisability of an Award, waive any restriction or other provision of this Plan or an Award or otherwise amend or modify an Award in any manner that is either (i) not adverse to the Participant to whom such Award was granted or (ii) consented to by such Participant. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent the Committee deems necessary or desirable to further the Plan purposes. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. -5- 6 (c) No member of the Committee or officer of the Company to whom the Committee has delegated authority in accordance with the provisions of paragraph 7 of this Plan shall be liable for anything done or omitted to be done by him or her, by any member of the Committee or by any officer of the Company in connection with the performance of any duties under this Plan, except for his or her own willful misconduct or as expressly provided by statute. 7. Delegation of Authority. Subject to requirements of applicable law, the Committee may delegate to an Authorized Officer of the Company its duties under this Plan pursuant to such conditions or limitations as the Committee may establish. 8. Awards. An Award shall be in the form of an Option. An Option awarded pursuant to this Plan may consist of an Incentive Option and/or a Nonqualified Option. The price at which shares of Common Stock may be purchased upon the exercise of an Incentive Option shall be not less than the greater of the Fair Market Value of the Common Stock on the date of grant and its par value. The price at which shares of Common Stock may be purchased upon the exercise of a Nonqualified Option shall be not less than its par value. Each Option must provide that it will terminate on August 31, 2001 unless a Public Offering has occurred. Subject to the foregoing provisions, the terms, conditions and limitations applicable to any Options awarded pursuant to this Plan, including the term of any Options and the date or dates upon which they become exercisable, shall be determined by the Committee. The Committee shall designate from time to time the Employees who are to be the recipients of such Awards. Each Award may be embodied in an Award Agreement, which shall contain such terms, conditions and limitations as shall be determined by the Committee in its sole discretion and shall be signed by the Participant to whom the Award is made and by an Authorized Officer for and on behalf of the Company. Awards may also be made in combination or in tandem with, in replacement of, or as alternatives to, other grants or rights under this Plan (other than the Coelho Option) or any other employee plan of the Company or any of its Subsidiaries, including the plan of any acquired entity. All or part of an Award may be subject to conditions established by the Committee, which may include, but are not limited to, continuous service with the Company and its Subsidiaries, achievement of specific business objectives, increases in specified indices, attainment of specified growth rates and other comparable measurements of performance. Upon the termination of employment by a Participant, any unexercised, deferred, unvested or unpaid Awards shall be treated as set forth in the applicable Award Agreement and as set forth in Section 5 hereof. 9. Stock Option Exercise. The price at which shares of Common Stock may be purchased under an Option shall be paid in full at the time of exercise in cash or, if elected by the optionee, the optionee may purchase such shares by means of tendering Common Stock or surrendering part of the instant Award or all or part of another Award, in any case valued at Fair Market Value on the date of exercise, or any combination thereof. In addition, the Committee may in its discretion permit payment to be made by a full recourse note having such other terms as the Committee may prescribe. The Committee shall determine acceptable methods for Participants to tender Common Stock or other Awards; provided that any Common Stock that is or was the subject of an Award may be so tendered only if it has been held by the Participant for six months. The -6- 7 Committee may provide for procedures to permit the exercise or purchase of such Awards by use of the proceeds to be received from the sale of Common Stock issuable pursuant to an Award. 10. Tax Withholding. The Company shall have the right to deduct applicable taxes from any Award payment and withhold, at the time of delivery of shares of Common Stock under this Plan, an appropriate number of shares of Common Stock for payment of taxes required by law or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for withholding of such taxes. The Committee may also permit withholding to be satisfied by the transfer to the Company of shares of Common Stock theretofore owned by the holder of the Award with respect to which withholding is required. If shares of Common Stock are used to satisfy tax withholding, such shares shall be valued based on the Fair Market Value when the tax withholding is required to be made. The Committee may provide for loans, on either a short-term or demand basis, from the Company to a Participant to permit the payment of taxes required by law. 11. Amendment, Modification, Suspension or Termination. The Board may amend, modify, suspend or terminate this Plan for the purpose of meeting or addressing any changes in legal requirements or for any other purpose permitted by law, except that no amendment or alteration that would adversely affect the rights, taken as a whole, of any Participant under any Award previously granted to such Participant shall be made without the consent of such Participant and provided, however, that the Plan shall terminate in any event on September 30, 2001 although Awards granted hereunder need not so terminate. 12. Assignability. The Committee may prescribe and include in applicable Award Agreements restrictions on transfer. Unless otherwise provided in an Award Agreement, and except in the case of an Incentive Stock Option, transfer shall be permitted to any Permitted Transferee of a Participant who agrees in writing to be bound by the terms of such Award Agreement and this Plan. Any attempted assignment of an Award or any other benefit under this Plan in violation of this paragraph 12 shall be null and void. 13. Adjustments. (a) The existence of outstanding Awards shall not affect in any manner the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the capital stock of the Company or its business or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock (whether or not such issue is prior to, on a parity with or junior to the Common Stock) or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding of any kind, whether or not of a character similar to that of the acts or proceedings enumerated above. (b) In the event of any subdivision or consolidation of outstanding shares of Common Stock, declaration of a dividend payable in shares of Common Stock or other stock split, then (i) the number of shares of Common Stock reserved under this Plan, (ii) the -7- 8 number of shares of Common Stock covered by outstanding Awards in the form of Common Stock or units denominated in Common Stock, (iii) the exercise or other price in respect of such Awards, and (iv) the appropriate Fair Market Value and other price determinations for such Awards shall each be proportionately adjusted by the Committee to reflect such transaction. In the event of any other recapitalization or capital reorganization of the Company, any consolidation or merger of the Company with another corporation or entity, the adoption by the Company of any plan of exchange affecting the Common Stock or any distribution to holders of Common Stock of securities or property (other than normal cash dividends or dividends payable in Common Stock), the Committee shall make appropriate adjustments to (i) the number of shares of Common Stock covered by Awards in the form of Common Stock or units denominated in Common Stock, (ii) the exercise or other price in respect of such Awards, and (iii) the appropriate Fair Market Value and other price determinations for such Awards shall each be proportionately adjusted by the Committee to reflect such transaction. In the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Committee shall be authorized to issue or assume Awards by means of substitution of new Awards, as appropriate, for previously issued Awards or to assume previously issued Awards as part of such adjustment, subject to the provisions of Section 5 hereof. 14. Restrictions. No Common Stock shall be issued with respect to any Award unless the Company shall be satisfied based on the advice of its counsel that such issuance will be in compliance with applicable federal and state securities laws. Certificates evidencing shares of Common Stock delivered under this Plan (to the extent that such shares are so evidenced) may be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange or transaction reporting system upon which the Common Stock is then listed or to which it is admitted for quotation and any applicable federal or state securities law. The Committee may cause a legend or legends to be placed upon such certificates (if any) to make appropriate reference to such restrictions. 15. Put and Call Options. (a) Any time after September 30, 2000, each Participant shall have the right (the "Put"), exercisable by notice to TCI to such effect (a "Put Exercise Notice"), to require the Company to purchase all of the Vested Stock then held by such Participant and its Permitted Transferees for a purchase price determined in accordance with this Section 15. (b) Except to the extent set forth in a Participant's Award Agreement, any time after the termination of the employment of the Participant with the Company, the Company will have the right (the "Call"), exercisable within 90 days of the date of such termination by notice to the Participant to such effect (a "Call Exercise Notice"), to require the Participant and its Permitted Transferees to sell all of his or her shares of Vested Stock then held by such Participant and its Permitted Transferees to the Company as set forth in the Call Exercise Notice, for a purchase price determined in accordance with this Section 15. -8- 9 (c) On September 30, 2001, each Participant and its Permitted Transferees shall be obligated to sell, and TCI shall be obligated to purchase (the "Unwind"), all shares of Vested Stock then held by such Participant and its Permitted Transferees for a purchase price determined in accordance with this Section 15. (d) Whenever an event occurs that requires a purchase price to be determined (a "Determination Event"), TCI or the Company, as the case may be and all participants who (i) have exercised a Put, or are subject to a Call exercised, within 90 days of the first such event to occur (the "Determination Period") or (ii) are participating in the Unwind (collectively, the "Affected Participants" (which term shall include the Executive if he would be deemed to be an Affected Participant hereunder by virtue of the occurrence of a "Put", "Call" or "Unwind" under the Agreement Regarding Shares)) will use their good faith efforts to determine the fair market value for the Vested Shares held by each Affected Participant ("Subject Shares") in accordance with the provisions of this Section 15(d). Whenever an action is to be taken or determination is to be made by the Affected Participants, it shall be taken or made based on the decision of the holders of a majority of the Vested Shares held by the Affected Participants. (i) If TCI or the Company, as the case may be, and the Affected Participants are unable to agree on a purchase price for the Subject Shares within 45 days after the earlier of (x) the conclusion of the Determination Period or (y) the date the Unwind occurs (the "Determination Date"), then (A) if the number of Vested Shares held by all Affected Participants is less than 2% of the total number of shares of Common Stock outstanding (including for the purpose of this calculation all Vested Shares and all other shares of capital stock of the Company immediately convertible into shares of Common Stock), the Company Value (as defined below) will be determined in good faith by the Board of Directors of the Company and (B) if clause A is not applicable, TCI or the Company, as the case may be, and the Affected Participants will cause the Company Value (as defined below) as of the Determination Date to be determined by a qualified appraiser acceptable to TCI or the Company, as the case may be, and the Affected Participants. (ii) If TCI or the Company, as the case may be, and the Affected Participants are unable to agree upon a single appraiser within 60 days after the Determination Date, each of TCI, or the Company, as the case may be, on the one hand, and the Affected Participants on the other will have an additional 10 days to select one appraiser nationally recognized in valuing enterprises such as the Company. If either fails to appoint an appraiser, then the determination of Company Value by the one appraiser appointed will be binding. (iii) Each appraiser will determine the purchase price which the Company would receive if the assets and business of the Company and its subsidiaries on a consolidated basis were sold to a third party in a transaction structured as a sale of all the assets and business of the Company and its subsidiaries on a consolidated basis as a going concern, without any reduction for, or assumption of, and free and clear of, any liens or liabilities of the Company and its subsidiaries on a consolidated -9- 10 basis, that is consummated as of the Determination Date (the "Company Value"). TCI, or the Company, as the case may be, and the Affected Participants will use their reasonable best efforts to cause each appraiser to submit to the Company, TCI, and each of the Affected Participants a written report indicating its determination of such value within 30 days after the date such appraiser is selected. (iv) If the higher of the two appraisals is 120% or less of the lower appraisal, the average of the two will be the Company Value. (v) If the higher of the two appraisals is more than 120% of the lower appraisal, the Company will immediately notify the two appraisers and cause them to appoint a third similarly qualified appraiser within 10 days of such notice. The Company, TCI and each of the Affected Participants will use their reasonable best efforts to cause such third appraiser (who will not be apprised of the determination of the other appraisers) to submit a written report to each of them indicating such appraiser's determination of the Company Value within 30 days of the date such third appraiser is selected. If three appraisals are necessary, then the average of the two appraisals in which the determinations of Company Value are closest together will be the Company Value or, if the highest and lowest are equidistant from the middle determination, then the middle determination will be the Company Value. (vi) With respect to the determination of Company Value required in connection with each Determination Event, the Company or TCI, as the case may be, on the one hand, and the Affected Participants, on the other hand, each will pay the fees and costs of the appraiser they appoint and, if a single or third appraiser is used, the Company or TCI, as the case may be, and the Affected Participants will split the fees and costs of such appraiser, the costs to be shared among the Affiliated Participants based upon the proportionate pre-tax value they will receive as a result of the appraisal process. (vii) Immediately after the determination of the Company Value, the Company will make a calculation reflecting the cash distribution that would be made to each of the Affected Participants with respect to their Subject Shares if, as of the Determination Date, the Company were deemed to have received such Company Value in connection with an all-cash sale of its assets and business and the Company were then dissolved and liquidated in accordance with its certificate of incorporation and applicable law. Such calculation shall not take into account any tax benefit or tax cost associated with such sale or liquidation. The amount of such theoretical distribution will be the purchase price for the Subject Shares. The Company will promptly give notice (the "Calculation Notice") to TCI and each of the Affected Participants of the amount of such distribution, including a schedule setting forth in reasonable detail the calculation thereof. For purposes of making such calculation, -10- 11 the amount of liabilities, including contingent liabilities, deemed to be paid or reserved against by the Company will be determined as of the Determination Date on a consolidated basis and otherwise in accordance with generally accepted accounting principles applied on a basis consistent with those applicable to preparation of the Company's financial statements for the most recent prior period for which such financial statements were prepared. (viii) The closing of any purchase pursuant to this Section 15 will be held at the principal office of the Company at 10:00 a.m., Washington, D.C. time, on the date that is 10 days after determination of the purchase price pursuant to this Section 15, or if later, five Business Days after all required consents from governmental authorities or other third parties have been obtained with respect to such transaction. At the closing, the Company will cause the applicable purchase price to be delivered to each Affected Participant (less the amount of any exercise or purchase price remaining to be paid by such Affected Participant with respect to such subject shares, any taxes withheld and such Participant's share of any expenses to be paid pursuant to Section 15(d)(vi)), and such person will transfer the Subject Shares, free and clear of all liens, claims and encumbrances and will deliver such stock certificates, assignments and other agreements and instruments and will take all such other reasonable actions to effect such transfer as the Company or TCI may request. The purchase price for the Subject Shares may be paid, at TCI's option, in cash or by delivery of such number of shares of Marketable Securities of TCI as equals the quotient obtained by dividing the purchase price of the Subject Shares by the average Fair Market Value of one share of such Marketable Securities over the 10-Trading Day period ending on the third Trading Day preceding the date of closing. In the event that TCI elects to deliver Marketable Securities of TCI to an Affected Participant pursuant to this Section 15(d), TCI and such Affected Participant shall enter into a Registration Rights Agreement in substantially the form of Exhibit B hereto and TCI shall at the election of the recipient make all necessary withholding for taxes in such Marketable Securities. All Affected Participants who receive Marketable Securities shall become parties to the same Registration Rights Agreement at such time or at the time they receive Marketable Securities. 16. Bring Along Right of TCI Group. Each Award Agreement shall contain provisions pursuant to which: (a) If one or more members of the TCI Group desires to sell at least a majority of the shares of Common Stock of the Company owned by all members of the TCI Group to a third party or third parties not included in the TCI Group, TCI at its option may require each Participant to sell the same percentage of its Vested Stock as the TCI Group desires to sell to the purchaser selected by the TCI Group at the same price per share of Common Stock of the Company and otherwise on the same terms and conditions as TCI. Upon the closing of any sale of shares of Common Stock of the Company pursuant to this Section 16, each of the Participants will deliver at the closing certificates or other instruments representing such -11- 12 shares of Common Stock of the Company free and clear of any lien, charge or encumbrance (except for any of the foregoing which are to be released in connection with such closing) duly endorsed or accompanied by stock powers executed in blank and such other documents as may be reasonably necessary to effect the sale. (b) The TCI Group may exercise its rights pursuant to this Section 16 by giving at least 30 days' prior notice to the Company and the Participants, which notice will specify in reasonable detail the terms of the proposed transaction. (c) The rights granted to the TCI Group under this Section 16 may only be exercised if no member of the TCI Group has a direct or indirect equity interest in the proposed transferee (other than an equity interest of 5% or less in a proposed transferee that is a publicly held corporation) and if no other rights or consideration (other than customary representations and warranties) are given by the purchaser to the TCI Group or any of its Affiliates which are not also afforded to the Participants. 17. Take Along Right of the Participants. Each Award Agreement shall contain provisions pursuant to which: (a) To the extent that Section 16 does not apply, each Participant will have the right to participate pro rata in any sale of shares of Common Stock of the Company by the TCI Group (other than to another member of the TCI Group). The TCI Group will give prompt written notice (the "Take Along Notice") to the Company and the Participants of any proposed sale subject to this Section 17, which notice will set forth (i) the number of shares Common Stock of the Company proposed to be sold pursuant to such transaction, (ii) the purchase price and all consideration to be received by the TCI Group, (iii) a summary of any other material terms, and (iv) copies of all documents or drafts thereof relating to the sale and the purchaser. If any Participant elects to exercise the option granted by this Section 17, he or she must do so by providing the Company and the TCI Group with a written notice of acceptance within 15 days after the date of receipt of the Take Along Notice, which notice of acceptance will constitute the agreement of such Participant to be bound by the terms of such sale. The maximum number of shares of Common Stock of the Company to be sold by such Participant will be an amount equal to the product of (i) the total number of shares of Vested Stock held by such Participant and (ii) a fraction, the numerator of which will be the total number of shares of Common Stock of the Company to be purchased in the proposed transaction as set forth in the Take-Along Notice and the denominator of which will be the total number of shares of Common Stock of the Company held by the TCI Group. To the extent that the number of shares of Common Stock of the Company desired to be sold by the Participants in accordance with the foregoing formula exceeds the number of shares of Common Stock of the Company which the purchaser desires to purchase, the number of shares of Common Stock of the Company permitted to be sold by each member of the TCI Group and each of the Participants electing to participate will be reduced pro rata based on the respective number of shares of Common Stock of the Company each member of the TCI Group and each Participant is seeking to sell to such purchaser. At a closing, the time and -12- 13 place of which will be reasonably specified by the TCI Group, each of the Participants electing to participate will deliver certificates representing shares of Common Stock of the Company to be sold free and clear of any lien, charge or encumbrance whatsoever (except for any of the foregoing which are to be released in connection with such closing), duly endorsed or accompanied by stock powers executed in blank and such other documents as may be reasonably necessary to effect the sale. 18. Other Conditions to Transfers: No Voting Agreements. Anything in this Agreement to the contrary notwithstanding, (i) no Participant will Transfer shares of Common Stock of the Company to any transferee (including any Permitted Transferee) unless the transferor delivers to the Company an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed Transfer does not violate the Securities Act of 1933, as amended, or any applicable state law, and (ii) no Participant will effect any Transfer of any securities issued by the Company in violation of any applicable state or federal law. The Company agrees that it will not require an opinion of counsel for ordinary transaction complying with Rule 144 under the Securities Act of 1933, as amended. Except as specifically provided in this Plan, no Participant will grant any proxy or become a party to any voting trust or other agreement regarding voting or Transfer of shares of Common Stock of the Company to the extent that such would conflict with such party's obligations under this Plan. 19. Preemptive Rights. (a) Issue of Additional Shares. If and whenever the Company issues any additional shares of Common Stock of the Company ("Additional Shares"), except as provided in this Section 19, each Participant will have the right, but not the obligation, to purchase such Additional Shares up to an amount sufficient to permit such Participant to maintain his or her percentage common equity interest in the Company (based on the total number of shares of Vested Shares held by such Participant) at the level existing immediately prior to the issuance of the Additional Shares. If the Company desires to issue Additional Shares, it will first give notice thereof to each Participant stating the number of Additional Shares proposed to be issued, the total consideration to be received by the Company upon sale of the Additional Shares and any other material terms of the transaction. Within 30 days after the receipt of such notice, each Participant may exercise its rights under this Section 19 by giving written notice to that effect to the Company. Failure to give such notice within that 30-day period or failure to pay at the required time the purchase price for any Additional Shares as to which a right to purchase will have been exercised will constitute a waiver of the rights granted by this Section 19 as to the particular issuance of Additional Shares specified in the Company's notice. In the event that at the conclusion of such 30-day period, any Participant fails to exercise his or her rights as to any portion of the Additional Shares he or she is entitled to purchase, the Executive shall have the right within 5 business days after the expiration of such 30-day period to elect to purchase any or all of such Additional Shares by written notice to that effect to the Company. Nothing in this Section 19 will be deemed to prohibit sales of Additional Shares to any Participant so long as such sales of Additional Shares are conducted in compliance with this Section 19. -13- 14 (b) Per Share Price. The per share purchase price to be paid upon exercise of the rights granted under this Section 19 will be equal to the per share consideration at which the Additional Shares are offered or proposed to be offered by the Company to another party. The total consideration for which Additional Shares are offered or proposed to be offered will be determined as follows: (i) in case of the proposed issuance of Additional Shares for cash, the consideration to be received by the Company will be the amount of cash for which the Additional Shares are proposed to be issued and (ii) in case of the proposed issuance of Additional Shares in whole or in part for consideration other than cash, the value of the consideration to be received by the Company other than cash will be the Fair Market Value of that consideration as determined by the Board. (c) Derivative Securities. If and whenever the Company issues any securities convertible into or exchangeable or exercisable for Additional Shares or rights or options to subscribe for or to purchase Additional Shares ("Derivative Securities"), except as provided in this Section 19, each Participant will have the right but not the obligation, to purchase Derivative Securities of like kind up to an amount which when converted, exchanged or exercised would be sufficient to permit such Participant to maintain its percentage common equity interest in the Company (based on the total number of Vested Shares held by such Participant) at the level existing immediately prior to the issuance of the Derivative Securities. If the Company desires to issue Derivative Securities, it will first give notice thereof to each Participant stating the number of Derivative Securities proposed to be issued and the total consideration to be received by the Company upon sale of the Derivative Securities. Within 30 days after the receipt of such notice, each Participant may exercise its rights under this Section 19 by giving written notice to that effect to the Company. Failure to give such notice within that 30-day period or failure to pay at the required time the purchase price for any Derivative Securities as to which a right to purchase will have been exercised will constitute a waiver of the rights granted by this Section 19 as to the particular issuance of Derivative Securities specified in the Company's notice. In the event that at the conclusion of such 30-day period, any Participant fails to exercise his or her rights as to any portion of the Derivative Securities he or she is entitled to purchase, the Executive shall have the right within 5 business days after the expiration of such 30-day period to elect to purchase any or all of such Derivative Securities by written notice to that effect to the Company. (d) Purchase Price of Derivative Securities. The purchase price to be paid upon exercise of the rights granted under Section 19 will be in proportion to the consideration proposed to be received by the Company upon the original issuance to another party of Derivative Securities. The amount of consideration to be received by the Company upon the original issuance of such Derivative Securities will be determined in the manner provided in Section 19(b). With respect to Derivative Securities convertible into or exchangeable or exercisable for Additional Shares, the rights of the Participants will apply only to the issuance of such Derivative Securities and the Participants will have no rights under this Agreement with respect to the Company's issuance of Additional Shares upon the conversion, exchange or exercise of such Derivative Securities. -14- 15 (e) Limitations. The provisions of this Section 19 will not apply to (i) shares of Common Stock of the Company issued as a stock dividend to all holders of Shares or upon any subdivision or combination of shares of Common Stock of the Company, (ii) securities issued for the acquisition by the Company of another entity or business by merger or such other transaction as would result in the ownership by the Company of not less than a majority of the voting power of the other entity or for the purchase of all the assets of an entity or business, (iii) shares of Common Stock of the Company or Derivative Securities that are sold by the Company pursuant to a registration statement filed under the Act, or (iv) shares of Common Stock of the Company or Derivative Securities issued to employees of the Company (including shares issued pursuant to the Plan) which together with shares of Common Stock of the Company issued to the Executive do not exceed 20% of the aggregate of the number of shares of Common Stock of the Company issued pursuant to the Agreement Among Shareholders plus such shares of Common Stock of the Company or Derivative Securities. (f) Terms of Payment of Purchase Price. Unless otherwise agreed to by the parties to this Agreement, the purchase price to be paid by each Participant upon exercise of its rights under this Section 19 will be paid upon terms which are the same as those on which Shares or Derivative Securities are sold to the third party purchasers, unless those terms provide for payment in a manner which could not be duplicated by a Participant, such as the transfer of specific property to the Company, in which event such payment will be in cash in an amount equal to the Fair Market Value of such specific property as determined by the Board. 20. Termination of Certain Provisions. The rights of the Participants and the TCI Group granted under or pursuant to Sections 15, 16, 17 and 19, will terminate and be of no further force or effect upon the closing of the Company's initial Public Offering. 21. The Coelho Option. In addition to any rights and preferences of the Executive set forth in this Plan and set forth in the Agreement Regarding Shares between the Company and the Executive (the "Agreement Regarding Shares"), the Company shall, on the Effective Date, grant to the Executive an option (the "Coelho Option") to purchase certain shares of capital stock of the Company on the terms and subject to the conditions set forth in the Coelho Option Agreement attached hereto as Exhibit A (the "Coelho Option Agreement"). Notwithstanding anything to the contrary herein, the Coelho Option shall be governed by the Coelho Option Agreement and the Agreement Regarding Shares. 22. Acceleration upon a Change in Control. In the event a Change in Control of the Company occurs, unless otherwise specified in the applicable Award Agreement, all shares of Common Stock subject to outstanding Awards shall become Vested Stock and each Option may be immediately and freely exercised by the Participant or such Participant's Permitted Transferees. -15- 16 23. Governing Law. This Plan and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by mandatory provisions of the Code or the securities laws of the United States, shall be governed by and construed in accordance with the laws of the State of Delaware. 24. Effectiveness. This Plan shall be effective as of April 3, 1996, (the "Effective Date"), the date on which it was approved by the Board of Directors of the Company. -16- EX-10.73 11 COELITO OPTION AGREEMENT 1 EXHIBIT 10.73 EXECUTION COPY COELHO OPTION AGREEMENT This Coelho Option Agreement (the "Option Agreement"), entered into as of April 3,1996, between ETC w/tci, Inc., a Delaware corporation (the "Company"), and Tony Coelho (the "Executive"). W I T N E S S E T H: WHEREAS, the Company has adopted the 1996 Incentive Plan (the "Plan") effective as of the Effective Date (as defined in the Plan) in order, among other things, retain and attract key employees of the Company and its subsidiaries to encourage a sense of proprietorship of such employees and to stimulate the active interest of such persons in the development and financial success of the Company and; WHEREAS, Section 21 of the Plan provides that the Executive shall be granted an option to purchase certain shares of Common Stock, par value $.01 per share of the Company (the "Common Stock"), upon the occurrence of specified events; WHEREAS, capitalized terms used herein but not defined herein shall have the meanings assigned to such terms in the Plan; NOW, THEREFORE, in consideration of the premises, the terms and conditions set forth herein, the mutual benefits to be gained by the performance thereof and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Subject to the terms and conditions set forth herein, the Company hereby grants to the Executive an option (the "Coelho Option") to purchase (i) all shares of Common Stock initially available for Awards under the Plan on the Effective Date as adjusted from time to time pursuant thereto ("Plan Shares") which are not Vested Stock as of the close of business on the Option Exercise Date (as defined in Section 2 hereof) and all shares of Common Stock acquired by Participants pursuant to the exercise of their preemptive rights and subsequently repurchased by the Company pursuant to the Call (as defined in the Plan) (collectively, the "Primary Shares"); and (ii) all Plan Shares which from time to time cease to be subject to outstanding Awards after the Option Exercise Date other than as a result of their acquisition by a Participant free and clear of any restriction on disposition or risk of forfeiture ("Secondary Shares"). 2 2. The Coelho Option shall become exercisable as to all Primary Shares on the Option Exercise Date and as to Secondary Shares at such times after the Option Exercise Date as such shares cease to be subject to an outstanding Award. The Coelho Option shall expire on the date which is five years and thirty days after the termination of the Plan in accordance with Section 11 thereof. For purposes of this Option Agreement, the "Option Exercise Date" shall occur upon the earliest to occur of the following: (i) the date of the termination of the Plan in accordance with Section 11 thereof; (ii) 30 days prior to the date of the Unwind unless the Company's Public Offering shall have occurred; (iii) the date a Change in Control of the Company is consummated; (iv) any date to or upon which vesting of Awards is accelerated generally under the Plan; and (v) the date of effectiveness of any plan of dissolution or liquidation of the Company. The Company will promptly notify Coelho of the occurrence of any event specified in clauses (iii), (iv) or (v) above. Notwithstanding any other provision of this Agreement, the Coelho Option shall be exercisable for not less than 30 days after receipt of such notice or the occurrence of an event set forth in clauses (i) through (v) above, which is later. 3. The Coelho Option will be exercisable at the following prices: (i) as to the Option Shares which are shares of Common Stock acquired by Participants pursuant to the exercise of their preemptive rights and subsequently repurchased by the Company pursuant to the Call, at a price per share equal to the purchase price paid by the Company upon exercise of the Call and (ii) as to all other Option Shares, at a price per Option Share equal to the Fair Market Value of the Common Stock of the Company on the date hereof as determined by the Board of Directors which shall be $0.10 per share. 4. The Coelho Option granted pursuant to this Option Agreement may be exercised during the Option Period, by the Executive giving written notice to the Secretary of the Company setting forth the Executive's desire to exercise the Coelho Option, which notice shall be accompanied by payment of the full amount of the exercise price for the Coelho Option and any appropriate withholding taxes in accordance with Section 8 hereto. In addition, such notice shall specify the address to which the certificate or certificates for such shares are to be mailed. All payments by the Executive hereunder shall be made in cash or by means of tendering theretofore owned Common Stock which has been held by the Executive for more than six months, valued at Fair Market Value on date of exercise, or any combination thereof. As promptly as practicable following the receipt of such written notification and payment, the Company shall deliver to the -2- 3 Executive certificates for the number of Option Shares with respect to which such Coelho Option has been exercised. 5. In the event that the termination of employment of the Executive with the Company occurs by reason of voluntary termination by the Executive or termination by the Company with cause (provided that a Change in Control has not occurred prior to such termination) and the Option Exercise Date has not yet occurred, the Coelho Option granted pursuant to this Option Agreement shall terminate and shall not at any time thereafter be exercisable by the Executive. 6. The Coelho Option granted pursuant hereto shall not be assignable or otherwise transferable by the Executive other than to a Permitted Transferee. No assignment of the Coelho Option herein granted shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of such documents and evidence as the Company may deem necessary to establish the validity of the assignment and the acceptance by the assignee or assignees of the terms and conditions hereof. 7. The Executive shall have no rights as a stockholder of the Company with respect to the Option Shares unless and until the Coelho Option has been exercised with respect to such Option Shares. Until such time, the Executive shall not be entitled to dividends or distributions in respect of any Option Shares or to vote such shares on any matter submitted to the shareholders of the Company. In addition, the number of shares which are Option Shares at any time after the date hereof shall be adjusted by the Board of Directors in the same manner as the adjustments made to the shares Common Stock subject to Awards under the Plan as provided in Section 13 of the Plan. 8. The Company shall have the right to deduct or withhold applicable taxes upon exercise of the Coelho Option. At the Executive's option, such withholding may be satisfied by the payment of taxes or the withholding of shares of Common Stock otherwise issuable upon such exercise. In addition to the foregoing, any withholding obligation may be satisfied at the option of the Executive by the delivery to the Company of shares of Common Stock already owned by the Executive. If shares of Common Stock are used to satisfy withholding, such shares shall be valued based on their Fair Market Value on the date of exercise the Coelho Option. 9. Upon the acquisition of any Option Shares pursuant to the exercise of the Coelho Option granted pursuant hereto, the Executive may be required to enter into such written representations, warranties and agreements as the Company may reasonably request in order to comply with applicable securities laws. In addition, the certificates representing any Option Shares purchased upon the exercise of the Coelho Option will be stamped or otherwise imprinted with a legend in such form as the Company may require with respect to any applicable restrictions on sale or transfer required pursuant to state or federal securities laws, and the stock transfer records of the Company will reflect stop-transfer instructions, as appropriate, with respect to such shares. -3- 4 10. Unless otherwise provided herein, any notice or other communication hereunder shall be in writing and shall be given by registered or certified mail. All notices of the exercise by the Executive of the Coelho Option granted pursuant hereto shall be directed to ETC w/tci, 700 Fourteenth Street, N.W., 5th Floor, Washington, D.C. 20005, Attention: Secretary or at such other address as directed by the Company. Any notice given by the Company to the Executive directed to him at his address on file with the Company or such other address of which the Executive or his assignee shall notify the Company shall be effective to bind any other person who shall acquire rights hereunder. Except as otherwise provided herein or in the Plan, the Company shall be under no obligation whatsoever to advise or notify the Executive of the existence, maturity or termination of any rights hereunder and the Executive shall be deemed to have familiarized himself with all matters contained herein and in the Plan which may affect any of the Executive's rights or privileges hereunder. [Signatures continued on next page] -4- 5 IN WITNESS WHEREOF, this Option Agreement has been executed as of the date first above written. ETC w/tci, Inc. By:/s/ Stephen M. Brett --------------------------- Name: Title: EXECUTIVE: /s/ TONY COELHO ------------------------------ Tony Coelho EX-21 12 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 A table of the subsidiaries of Tele-Communications, Inc. as of December 31, 1996, is set forth below, indicating as to each the state or the jurisdiction of incorporation or organization and the names under which such subsidiaries do business (Trade Names). Subsidiaries not included in the table are inactive or, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary.
STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION At Home Corporation DE BET Film Productions [jv] DE BET Movies/STARZ!3, LLC DE CareerTrack, Inc. CO Digital Direct, Inc. CO TCI Telephony, Inc. Digital Frontier Studios, Inc. CO DMX Inc. DE ETC NSCI Holdings, Inc. DE ETC w/tci, Inc. DE Ingenius [jv] CO Kaleidoscope Interactive, LLC TX Kansas City Fiber Network, L.P. CA MajorCo, L.P. [lp] DE Sprint Spectrum Holding Company, L.P. Materials Handling Services, Inc. CO Western Communications Materials Handling Services, Inc. MinorCo, L.P. [lp] DE National School Conference Institute, Inc. AZ NewTeleco, L.P. [lp] DE NHT Partnership [gp] NY PhillieCo, L.P. DE QE+ Ltd. [lp] CO RecoveryNet Interactive LLC DE RL Ingenius, Inc. CO Sprint Spectrum, L.P. [lp] DE TCI Academic Systems Holdings, Inc. CO TCI CT Holdings, Inc. DE TCI CTrack Asset Corp. CO TCI Digital Frontier, Inc. CO TCI ETC Holdings, Inc. DE TCI Interactive, Inc. CO TCI Internet Holdings, Inc. CO TCI Internet Services, Inc. CO TCI INZ Sports Holdings, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Lightspan Holdings, Inc. CO TCI Music, Inc. CO TCI Online Entertainment Holdings, Inc. CO TCI Online KI Holdings, Inc. CO TCI Online Recoverynet Holdings, Inc. CO TCI Online Sports Holdings, Inc. CO TCI Online Village Holdings, Inc. CO TCI Philadelphia Holdings, Inc. DE TCI Spectrum Holdings, Inc. CO TCI Starz, Inc. CO TCI Telephony Holdings, Inc. DE TCI Telephony Services of California, Inc. CO TCI Telephony Services of Colorado, Inc. CO TCI Telephony Services of Connecticut, Inc. CO TCI Telephony Services of Illinois, Inc. CO TCI Telephony Services of Minnesota, Inc. CO TCI Telephony Services of Oklahoma, Inc. CO TCI Telephony Services of Texas, Inc. CO TCI Telephony Services of Wisconsin, Inc. CO TCI Telephony Services, Inc. DE TCI Teleport Holdings, Inc. DE TCI Teleport, Inc. CO TCI UVSG, Inc. CO TCI Wireless Holdings, Inc. DE TCI Wireline Holdings, Inc. DE TCI Wireline, Inc. DE TeleCable KCFN Holding Corp. VA TEMPO DBS, Inc. CO United Video Satellite Group, Inc. DE Western Information Systems, Inc. CO WIS Western Tele-Communications, Inc. CO Western Tele-Communications, Inc./Retail Sales Group CO WirelessCo, L.P. [lp] DE WTCI of Montana, Inc. CO Alabama T.V. Cable, Inc. AL American Cable Of Redlands Joint Venture [jv] CO American Cable TV Investors 2 [lp] CA American Cable TV Investors 3 [lp] CA American Cable TV Investors 4, Ltd. [lp] CO American Cable TV Investors 5, Ltd. [lp] CO American Cable TV of Lower Delaware American Cable TV of St. Mary's County American Microwave & Communications, Inc. MI American Movie Classics Investment, Inc. CO American TeleVenture of Minersville, Inc. CO Ames Cablevision, Inc. IA TCI of Central Iowa
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Antares Satellite Corporation CO ARP Partnership [gp] DE Athena Cablevision Corporation of Knoxville TN Athena Cablevision of Tennessee and Kentucky, Inc. TN Athena Realty, Inc. NV Atlantic American Cablevision of Florida, Inc. FL TCI Cablevision of Pasco County TCI Media Services Atlantic American Cablevision, Inc. DE Atlantic American Holdings, Inc. FL Atlantic Cablevision of Florida, Inc. FL Baton Rouge Cablevision Associates, L.P. [lp] CO Bay Area Interconnect [gp] CA Bay Cable Advertising BCA Beatrice Cable TV Company NE TCI Cable of Beatrice Bellevue Cablevision, Inc. DE TCI Media Services Billings Tele-Communications, Inc. OR Bob Magness, Inc. WY Bresnan Communications Company Limited Partnership [lp] MI Brigand Pictures, Inc. NY Broadview Television Company WA Brookhaven Cable TV, Inc. NY TCI Cable of Brookhaven Brookings Cablevision [gp] CO Brookside Antenna Company OH Cable Accounting, Inc. CO Cable AdNet Partners [gp] DE Cable Adnet Hudson Valley Cable Group TCI Media Services Cable Advertising Partners[gp] CA Cable Network Television, Inc. NV Cable Shopping Investment, Inc. CO Cable Television Advertising Group, Inc. WY Cable Television of Gary, Inc. IN Cable TV of Marin, Inc. CA Cable TV Puget Sound, Inc. WA TCI of Washington Cabletime, Inc. CO Cablevision Associates of Gary Joint Venture [jv] IN Cablevision IV, Ltd. (Corp) IA Cablevision of Arcadia/Sierra Madre, Inc. DE Cablevision of Baton Rouge, Ltd. [lp] CO Cablevision V, Inc. IA Cablevision VI, Inc. IA TCI Cablevision of the Rockies, Inc. TCI of the Heartlands Cablevision VII, Inc. IA TCI Cablevision of the Rockies, Inc. TCI of the Heartlands TCI of Eastern Iowa TCI Media Services
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Capital Region Cable Advertising Interconnect, L.P. [lp] NY Capital Region Cable Advertising Network CAT Partnership [gp] DE CATV Facility Co., Inc. CO Channel 3 Everett, Inc. WA Channel 64 Acquisition, Inc. DE Chicago Cable Network Joint Venture [jv] IL Cincinnati Cable Advertising Interconnect, L.P. DE Clear View Cable Systems, Inc. CA Clinton Cablevision [gp] IA Clinton TV Cable Company, Inc. IA Coconut Creek Cable T.V., Inc. FL TCI of North Broward Colorado Cablevision Company [lp] CO TCI of Colorado Colorado Terrace Tower II Corporation CO Com-Cable TV, Inc. DE Command Cable of Eastern Illinois LP NJ TCI Cablevision of Southern Illinois Communication Investment Corporation VA Communications & Cable of Chicago, Inc. IL Chicago Cable TV Communications Services, Inc. KS TCI Cablevision of Central Texas TCI Cablevision of East Oklahoma TCI Cablevision of North Texas TCI Cablevision of Northeast Texas TCI Cablevision of Oklahoma (CSI), Inc. TCI Cablevision of Texas (CSI), Inc. TCI Communications Services, Inc. TCI Media Services TCI of Arkansas TCI of Arkansas (CSI), Inc. TCI of Kansas (CSI), Inc. TCI of Louisiana TCI of Louisiana (CSI), Inc. Community Cable Television (gp) WY TCI Cablevision of Southwest Texas TCI Cablevision of West Oakland County Community Realty, Inc. NV Nevada Community Realty, Inc. Community Telecable of Bellevue, Inc. WA TCI of Washington Community Telecable of Seattle, Inc. WA Community Television Systems, Inc. DE TCI Cablevision of South Central Connecticut Connecticut Cable Advertising, L.P. DE Connecticut Cable Advertising, L.P. DE Consumer Entertainment Services, Inc. WY Contra Costa Cable Co. WA Corsair Pictures, Inc. DE Brigand Pictures, Inc. Crockett Cable System, Inc. WA Daniels Communication Partners Limited Partnership [lp] DE Daniels Hauser-Holdings [gp] CO Davis County Cablevision, Inc. UT DCP-85, Ltd. [lp] CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION DigiVentures, LLC DE Direct Broadcast Satellite Services, Inc. DE Discovery Programming Investment, Inc. CO District Cablevision Limited Partnership [lp] DC TCI Media Services East Arkansas Cablevision, Inc. AR TCI Media Services TCI of Arkansas East Arkansas Investments, Inc. CO Eastex Microwave, Inc. TX ECP Holdings, Inc. OK Elbert County Cable Partners, L. P. [lp] CO TCI of Colorado Everett Cablevision, Inc. WA TCI of Washington FAB Communications, Inc. OK Far-West Communications, Inc. OR TCI of Oregon Foothills Cablevision, Ltd. [lp] CO Four Flags Cable TV [jv] MI Four Flags Cablevision [jv] MI General Communications and Entertainment Company, Inc. DE Gill Bay Interconnect, Inc. CA Greater Birmingham Interconnect[gp] AL GBI Guide Investments, Inc. CO H-C-G Cablevision, Inc. CA Halcyon Communications Limited Partnership[lp] OK TCI Cablevision of East Oklahoma Halcyon Communications Partners [gp] OK Harbor Communications Joint Venture [jv] WA Harris County Cable TV, Inc. VA Hawkeye Communications of Clinton, Inc. IA Heritage Cable Partners, Inc. IA Heritage Cablevision Associates, a Limited Partnership [lp] IA TCI of Bedford TCI of Michiana Heritage Cablevision of California, Inc. DE TCI of San Jose Heritage Cablevision of Colorado, Inc. CO TCI Cablevision of Southern Colorado, Inc. Heritage Cablevision of Dallas, Inc. IA Bay Cablevision Cable Oakland TCI Cablevision of California TCI Cablevision of New Castle County TCI Media Services TCI of Colorado TCI of Fort Collins Heritage Cablevision of Delaware, Inc. DE Heritage Cablevision of Maine II, Inc. ME Heritage Cablevision of Massachusetts, Inc. MA TCI Cablevision of Andover Heritage Cablevision of South East Massachusetts, Inc. MA Heritage Cablevision of Tennessee, Inc. TN TCI of Colorado Heritage Cablevision of Texas, Inc. IA TCI Cablevision of South Texas Heritage Cablevision, Inc. TX Heritage Cablevision, Inc. IA TCI Media Services
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI of the Heartlands TCI of Central Iowa TCI of Southern Iowa TCI of Northern Iowa TCI of Eastern Iowa Heritage Cablevue, Inc. DE TCI Cablevision of New England Heritage Communications Products Corp. IA Heritage Communications, Inc. IA Heritage Investments, Inc. IA Heritage Media Corporation Heritage ROC Holdings Corp. IA Heritage/Indiana Cablevision II, Inc. CO Heritage/Indiana Cablevision, Inc. IA Hillcrest Cablevision Company OH Home Sports Network, Inc. CO Independence Cable TV Company [jv] MI TCI Cablevision of Oakland County, Inc. InterMedia Capital Management II, L.P. CA Intermedia Capital Partners IV, L.P.(ICP-IV) CA Intermedia Partners Limited Partnership (IP-I) CA International Telemeter Corporation NV IR-TCI Partners II, L.P. [lp] CA IR-TCI Partners III, L.P. [lp] CA IR-TCI Partners IV, L.P. [lp] CO IR-TCI Partners V, L.P. [lp] CO Knox Cable T.V., Inc. TN KTMA-TV, Inc. TX LaSalle Telecommunications, Inc. IL Chicago Cable TV-IV Lawrence County Cable Partners CO Liberty - CSI, Inc. CO Liberty Cable Partner, Inc. WY Liberty Capital Corp. WY Liberty Command II, Inc. CO Liberty Command, Inc. CO Liberty of Northern Indiana, Inc. DE Liberty of Paterson II, Inc. CO Liberty of Paterson, Inc. NV LVO Cable Properties, Inc. OK LVOC Management, Inc. OK Margate Video Systems, Inc. FL TCI Media Services TCI of North Broward Marin Cable Television, Inc. CA Miami Tele-Communications, Inc. FL Micro-Relay, Inc. MD Mid-Kansas, Inc. KS Mile Hi Cable Partners, L.P. [lp] CO TCI of Colorado Mississippi Cablevision, Inc. MS TCI of North Mississippi
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI of Kansas Moonlight Bowl, Inc. CA Mountain Cable Network, Inc. NV Mountain Cable Advertising TCI Media Services Mountain States General Partner Co. CO Mountain States Limited Partner Co. CO Mountain States Video [gp] CO TCI Media Services Mountain States Video Communications Co., Inc. CO TCI of Colorado Mountain States Video, Inc. CO TCI of Colorado TCI Media Services MSV Subsidiary, Inc. CO Muskegon Cable TV Co. [gp] MI Narragansett Cablevision Corporation RI Heritage Cablevision of Narragansett National Digital Television Center, Inc. DE Newport News Cablevision Associates, L.P. [lp] CO Newport News Cablevision Ltd. [lp] CO Northern Video, Inc. MN TCI of Central Minnesota Northwest Cable Advertising [gp] NY TV Mart TCI Media Services Northwest Illinois Cable Corporation DE Northwest Illinois TV Cable Co. DE TCI Cablevision of Galesburg/Monmouth Northwest Illinois TV Cable Company [lp] IL NTT, Inc. TX Ohio Cablevision Network, Inc. IA TCI Cablevision of Northwestern Ohio Ottumwa Cablevision, Inc. IA TCI of Southen Iowa Pacific Microwave Joint Venture [jv] CA Parkland Cablevision, Inc. FL TCI of North Broward Pennsylvania Educational Communications Systems PA Pittsburg Cable TV, Inc. KS TCI of Pittsburg Portland Cable Advertising, L.P. [lp] DE Preview Magazine Corporation NY Prime Cable II Systems, Inc. TX Robert Fulk, Ltd. DE Robin Cable Systems of Sierra Vista, L.P. CA TCI of Southern Arizona Robin Cable Systems of Tucson, an Arizona Limited AZ TCI Media Services Partnership TCI of Tucson Tucson Cablevision S/D Cable Partners Ltd. [lp] CO TCI Cablevision of Princeton, L.P. TCI Cablevision of Rock Falls, L.P. San Leandro Cable Television, Inc. CA TCI Cablevision of Hayward Santa Fe Cablevision Company NM TCI Cablevision of Santa Fe TCI Media Services Santa Fe Cablevison Co. [lp] NM Satellite Services of Puerto Rico, Inc. DE Satellite Services, Inc. DE SCC Programs, Inc. IL
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Semaphore Partners [gp] CO Silver Spur Land and Cattle Co. WY Silver Spur Ranch Skyview TV, Inc. MT South Chicago Cable, Inc. IL Chicago Cable TV-V TCI Chicago South Florida Cable Advertising[gp] FL Southwest TeleCable, Inc. TX Southwest Washington Cable, Inc. WA Southwestern Satellite, Inc. TX SSI 2, Inc. NV St. Louis Tele-Communications, Inc. MO TCI Cablevision of St. Louis Tampa Bay Interconnect [gp] FL TBI TCC Spectrum, Inc. DE TCI-UC, INC. DE TCI AIT, Inc. CO TCI American Cable Holdings II, L.P. [lp] CO TCI American Cable Holdings, L.P. [lp] CO TCI of Washington TCI Baton Rouge Ventures, Inc. CO TCI Bay Interconnect, Inc. CA TCI Cable Adnet, Inc. CO TCI Cable Management Corporation CO TCI Media Services TCI Cable Partners of St. Louis, L.P. CO TCI of Illinois TCI Cablevision Associates, Inc. DE TCI Cablevision of Alabama, Inc. AL TCI Media Services TCI Cablevision of Arizona, Inc. AZ TCI Customer Satisfaction Center TCI Cablevision of Baker/Zachary, Inc. DE TCI of Louisiana TCI Cablevision of California, Inc. CA TCI Media Services TCI Cablevision of Canon City, Ltd. [lp] CO TCI Cablevision of Colorado, Inc. CO TCI Customer Satisfaction Center TCI Media Services TCI of Colorado TCI Cablevision of Dallas, Inc. TX TCI Media Services TCI Cablevision of Florida, Inc. FL TCI Media Services TCI of Colorado TCI Southeast - South Region TCI Cablevision of Georgia, Inc. GA TCI Media Services TCI of Louisiana TCI Cablevision of Great Falls, Inc. DE TCI Cablevision of Idaho, Inc. ID TCI Customer Satisfaction Center TCI Cablevision of Kentucky, Inc. KY TCI Cablevision of Kiowa, Inc. CO TCI Cablevision of Leesville, Inc. DE TCI Cablevision of Maryland, Inc. MD TCI Media Services TCI Cablevision of Massachusetts, Inc. MA TCI Cablevision of Michigan, Inc. MI TCI North Central Region TCI Cablevision of Minnesota, Inc. MN TCI of Minnesota
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Cablevision of Missouri, Inc. MO TCI Media Services TCI Cablevision of Montana, Inc. MT TCI Media Services TCI Cablevision of Nebraska, Inc. NE TCI Media Services TCI Cablevision of Nevada, Inc. NV TCI Media Services TCI Cablevision of New Hampshire, Inc. NH TCI Cablevision of New Mexico, Inc. NM TCI Media Services TCI Cablevision of North Central Kentucky, Inc. KY TCI Cablevision of Ohio, Inc. OH TCI Media Services TCI Cablevision of Okanogan Valley, Inc. WA TCI of Washington TCI Cablevision of Oklahoma, Inc. OK TCI Cablevision of Oregon, Inc. OR TCI Media Services TCI of Oregon TCI Cablevision of Pasco County [gp] FL TCI Media Services TCI Cablevision of Pinellas County, Inc. FL TCI Cablevision of Sierra Vista II, Inc. CO TCI Cablevision of Sierra Vista, Inc. CO TCI Cablevision of South Dakota, Inc. SD TCI Media Services TCI Cablevision of St. Bernard, Inc. LA TCI of Louisiana TCI Cablevision of Texas, Inc. TX TCI Media Services TCI Cablevision of Tucson, Inc. CO TCI Cablevision of Tucson II, Inc. CO TCI Cablevision of Twin Cities, Inc. WA TCI of Washington TCI Cablevision of Utah, Inc. UT TCI Media Services TCI Cablevision of Vermont, Inc. DE TCI Cablevision of Washington, Inc. WA TCI Media Services TCI of Washington TV Mart TCI Cablevision of Wisconsin, Inc. WI TCI Media Services TCI Cablevision of Wyoming, Inc. WY TCI Media Services TCI Cablevision of Yakima Valley, Inc. WA TCI of Washington TCI Cablevision of Yakima, Inc. WA TCI of Washington TCI Central, Inc. DE TCI Challenger, Inc. CO TCI Communications Financing I DE TCI Communications Financing II DE TCI Communications Financing III DE TCI Communications Financing IV DE TCI Communications Financing V DE TCI Communications Financing VI DE TCI Communications, Inc. DE TCI Cablevision of Durango, Inc. TCI Development Corporation CO TCI Digital TV, Inc. CO TCI East, Inc. DE TCI Fleet Services, Inc. CO TCI Great Lakes, Inc. DE TCI Hits At Home, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Hits, Inc. CO TCI Holdings II, Inc. CO TCI Holdings, Inc. CO TCI Investments, Inc. CO TCI IP, Inc. DE TCI IP-1, Inc. CO TCI K-1, Inc. CO TCI Liberty, Inc. DE TCI Materials Management, Inc. CO TCI Microwave, Inc. DE TCI National Digital Television Center - Hong Kong, Inc. DE TCI News, Inc. CO TCI News-Damn Right, Inc. CO TCI News-Presidential, Inc. CO TCI North Central, Inc. DE TCI Northeast, Inc. DE TCI of Arkansas, Inc. AR TCI of Arlington, Inc. OK TCI of Beckley, Inc. WV TCI Media Services TCI of Bloomington/Normal, Inc. VA TCI of Cleveland, Inc. TN TCI Media Services TCI of Columbus, Inc. GA TCI Media Services TCI of Connecticut, Inc. CT TCI of Council Bluffs, Inc. IA TCI of D.C., Inc. DC TCI of Dayton, Inc. DE TCI of Decatur, Inc. AL TCI Media Services TCI of Delaware, Inc. DE TCI of Greensburg [gp] CO TCI of Greenville, Inc. SC TCI Media Services TCI of Hawaii, Inc. CO TCI TCI of Houston, Inc. CO TCI Media Services TCI of Illinois, Inc. IL TCI Cablevision of Dubuque, Inc. TCI Media Services TCI of Indiana, Inc. IN TCI Media Services TCI Midwest Region TCI of Iowa, Inc. IA TCI Cablevision of Dubuque, Inc. TCI Media Services TCI Southeast - Northwest Region TCI of Kansas, Inc. KS TCI Cablevision of Stillwater TCI Cablevision of Tulsa TCI of Kokomo, Inc. CO TCI of Lee County, Inc. AL TCI of Lexington, Inc. KY TCI Media Services TCI of Maine, Inc. ME TCI of Mississippi, Inc. MS
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI of New Jersey, Inc. NV TCI of New York, Inc. NY TCI Media Services TCI Northeast Region TCI Telemarketing TCI of North Broward, Inc. FL TCI of North Central Kentucky, Inc. KY TCI of North Dakota, Inc. ND TCI of Northern California, Inc. CA TCI of Northern New Jersey, Inc. WA TCI Cablevision of Cental Colorado TCI Cablevision of Northeastern Oregon TCI Cablevision of the Treasure Coast TCI Media Services TCI of Northern New Jersey TCI of Oregon TCI of Washington TCI of Overland Park, Inc. KS TCI of Pennsylvania, Inc. PA TCI East Region TCI Media Services TCI of California TCI of Piedmont, Inc. SC TCI of Plano, Inc. TX TCI of Princeton, Inc. VA TCI of Racine, Inc. WI TCI Media Services TCI of Radcliff, Inc. KY TCI Media Services TCI of Rhode Island, Inc. RI TCI of Richardson, Inc. TX TCI of Roanoke Rapids, Inc. VA TCI of Selma, Inc. AL TCI of South Carolina, Inc. SC TCI of Southern Maine, Inc. ME TCI of Southern Minnesota, Inc. DE TCI Media Services TCI of Southern Minnesota TCI of Southern Washington [gp] WA TCI of Washington TCI of Spartanburg, Inc. SC TCI of Springfiled, Inc. MO TCI Media Services TCI of Tacoma, Inc. DE TCI of Washington TCI of Tennessee, Inc. TN TCI of the Blufflands, Inc. DE TCI Cable of La Crosse TCI Media Services TCI of Southern Minnesota TCI of Tualatin Valley, Inc. OR TCI of Oregon TCI of Virginia, Inc. VA TCI Media Services TCI of Watertown, Inc. IA TCI of West Virginia, Inc. WV TCI Media Services TCI of Wytheville, Inc. VA TCI Oscar I, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Pacific Communications, Inc DE TCI Media Services TCI Pacific Microwave, Inc. CO Pacific Microwave TCI Pacific, Inc. DE TCI PCS Holdings, Inc. DE TCI Private Ventures, Inc. CO TCI Realty Investments Company DE TCI Southeast Divisional Headquarters, Inc. AL TCI Southeast, Inc. DE TCI Sports, Inc. NV TCI Sports[gp] UT TCI STS, Inc. CO TCI STS-MTVI, Inc. TX TCI Summitrack of Texas, Inc. CO TCI Telecom, Inc. DE TCI Teleport of Houston, Inc. TX TCI TKR Cable I, Inc. DE TCI TKR Cable II, Inc. DE TCI TKR Cable III, Inc. DE TCI TKR Limited Partnership [lp] CO TCI TKR of Alabama, Inc. DE TCI Media Services TCI of Alabama TCI TKR of Central Florida, Inc. FL TCI Media Services TCI of Central Florida TCI TKR of Dallas, Inc. DE TCI TKR of Florida, Inc. DE TCI TKR of Georgia, Inc. DE TCI Media Services TCI of Georgia TCI TKR of Hollywood, Inc. DE TCI of Hollywood TCI TKR of Houston, Inc. TX TCI Cablevision of Houston TCI TKR of Jefferson County, Inc. KY TKR Cable of Greater Louisville, Inc. TCI TKR of Kentucky, Inc. DE TCI TKR of Metro Dade, Inc. DE TCI TKR of Northern Kentucky, Inc. KY TKR Cable of Northern Kentucky, Inc. TCI TKR of South Dade, Inc. FL TCI of South Dade TCI TKR of South Florida, Inc. DE TCI Media Services TCI of South Florida TCI TKR of Southeast Texas, Inc. DE TCI TKR of Southern Kentucky, Inc. DE TKR Cable of Southern Kentucky, Inc. TCI TKR of the Gulf Plains, Inc. DE TCI of the Gulf Plains TCI TKR of The Metroplex, Inc. TX TCI Cablevision of the Metroplex TCI TKR of Wyoming, Inc. WY TCI TKR, INC. DE TCI TVC, Inc. CA TCI UAI, Inc. CO TCI UA, Inc. DE TCI VCI, Inc. CA
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Ventures Five, Inc. CO TCI Ventures Four, Inc. CO TCI Ventures, Inc. CO TCI Washington Associates, L.P. DE TCI West, Inc. DE TCI Woodlands Ventures, Inc. CO The Woodlands Security Company TCI/CA Acquisition Sub Corp. CO TCI/CI Merger Sub Corp. DE TCID-Commercial Music, Inc. CO TCID-ICP III, Inc. CO TCID-IP III, Inc. CO TCID-IP IV, Inc. CO TCID-IP V, Inc. CO TCID-SVHH, Inc. DE TCID Data Transport, Inc. CO TCID KHC, Inc. CO TCID NEA, Inc. CO TCID Networks, Inc. DE TCID of Carson, Inc. CA TCID of Chicago, Inc. IL TCID of Florida, Inc. FL TCI Cablevision of Pasco County TCI Media Services TCID of Michigan, Inc. NV TCID of South Chicago, Inc. IL TCID Partners II, Inc. CO TCID Partners, Inc. CO TCID VFC, Inc. CO TCID Video Enterprises, Inc. CO TCID X*PRESS, Inc. CO TCIP, Inc. CO Tele-Communications of Colorado, Inc. CO TCI Colorado Community Cable Television, Inc. Tele-Communications of South Suburbia, Inc. IL Tele-Vue Systems, Inc. WA TCI of Washington TCI of Houston Telecommunications Cable Systems, Inc. LA TCI Media Services TCI of Louisiana TCI Southeast - Southwest Region Telenois, Inc. IL Televents Group Joint Venture [gp] CO TCI of Central Iowa TCI of Eastern Iowa TCI of the Heartlands Televents Group, Inc. NV Televents of Colorado, Inc. CO Televents of East County, Inc. WY TCI Cablevision of East County Televents of Florida, Inc. WY Televents of Powder River, Inc. WY
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Televents of San Joaquin, Inc. WY TCI Cablevision of San Joaquin Televents of Wyoming, Inc. WY Televents, Inc. NV TCI Cablevision of Contra Costa County Televester, Inc. DE Television Cable Service, Inc. TX TCI Cablevision of Abilene TCI Cablevision of East Texas TCI Cablevision of Perryton TCI Cablevision of West Texas TCI Media Services Television Signal Corporation CA TEMPO Cable, Inc. OK TCI Cablevision of Central Oklahoma, Inc. TCI Cablevision of Nocona TCI Cablevision of Oklahoma (Tempo), Inc. TCI Cablevision of Texas (Tempo), Inc. TCI of Arkansas (Tempo), Inc. TEMPO Development Corporation OK TEMPO Television, Inc. OK The Chicago Cable Interconnect[gp] IL GCCI The Detroit Cable Interconnect L.P. DE The Detroit Cable Interconnect Limited Partners The Greater Philadelphia Cable Advertising PA PCA Interconnect[gp] Trans-Muskingum, Incorporated WV Tribune-United Cable of Oakland County [jv] MI TCI Cablevision of Oakland County, Inc. Tribune Company Cable of Michigan, Inc. DE Tribune-United Cable of Oakland County [jv] Tulsa Cable Television, Inc. OK TCI Cablevision of Tulsa TCI Media Services UA-Columbia Alpine Tower, Inc. NJ UA-Columbia Cablevision of Massachusetts, Inc. MA TCI Cablevision of North Attlebboro/Taunton UA-Columbia Cablevision of New Jersey, Inc. NJ UA-Columbia Cablevision of Westchester, Inc. NY TCI Media Services TCI Cable of Westchester TCI of Northern New Jersey UA Think, Inc. CO UACC Midwest, Inc. DE TCI Media Services TCI of South Mississippi TCI Cablevision of Asheville TCI Cablevision of Decatur TCI Cablevision of Central Illinois TCI of Central Indiana TCI of Evansville TCI Cablevision of West Michigan, Inc. TCI Cablevision of Merced County TCI Cablevision of Santa Cruz County TCI Cablevision of Tracy TCI Cablevision of Vacaville TCI Cablevision of Walnut Creek TCI Cablevision of Northshore
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION UAII Merger Corp. DE UAII Sub No. 24, Inc. DE UATC Merger Corp. NY UCT Aircraft, Inc. CO UCT Video, Inc. CO UCTC LP Company DE UCTC of Baltimore, Inc. DE UCTC of Los Angeles County, Inc. DE TCI Cablevision of Los Angeles County United Advertising Network, Inc. CO United Artists Broadcast Properties, Inc. DE United Artists Cable Holdings, Inc. CO United Artists Cable Investments, Inc. DE United Artists Cablesystems Corporation DE United Artists Entertainment Company DE United Artists Holdings, Inc. DE United Artists Investments, Inc. CO United Artists K-1 Investments, Inc. CO United Artists Operator Services Corporation CO United Artists Payphone Corporation CO United Artists Preferred Investment, Inc. CO United Artists Republic Investments, Inc. CO United Artists Satellite, Inc. CO United Artists TeleCommunications, Inc. DE United Cable Ad-Link, Inc. CO United Cable Advertising, Inc. CO United Cable Investment of Baltimore, Inc. MD United Cable Productions, Inc. CO United Cable Realty Co. of California, Inc. CO United Cable Shopping Channel, Inc. CO United Cable T.V. of Oakland County, Inc. MI TCI Cablevision of Oakland County, Inc. United Cable Television Acquisition Corporation CO TCI of Colorado United Cable Television Corp. of Eastern Connecticut CT TCI Cablevision of Central Connecticut United Cable Television Corporation DE TCI Cable of the Midlands TCI Cablevisi of Hayward TCI Cablevision of Treasure Valley TCI Media Services United Cable Television Corporation of Michigan MI TCI Cablevision of Woodhaven, Inc. United Cable Television Corporation of Northern Illinois IL TCI Cablevision of Northern Illinois United Cable Television Financing Corporation CO United Cable Television Investments, Ltd. CO United Cable Television of Alameda, Inc. CA UCT of Alameda, Inc. #2 TCI Cablevision of Alameda United Cable Television of Baldwin Park, Inc. CO TCI Cablevision of Los Angeles County United Cable Television of Baltimore Limited Partnership[lp] CO TCI Communications of Baltimore TCI Media Services United Cable Television of Bossier City, Inc. DE TCI Media Services
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI of Louisiana United Cable Television of California, Inc. CA TCI Cablevision of Cupertion/Los Altos TCI Cablevision of Davis United Cable Television of Chaska, Inc. CO United Cable Television of Colorado, Inc. CO TCI of Colorado United Cable Television of Cupertino, Inc. CA TCI of Cupertino/Los Altos Colorado United Cable Television of East San Fernando Valley, Ltd.[lp] CO United Cable Television of Eastern Shore, Inc. DE TCI of Eastern Shore TCI Media Services United Cable Television of Hillsborough, Inc. CO TCI Cablevision of Hayward United Cable Television of Illinois Valley, Inc. IL TCI Cablevision of Illinois Valley United Cable Television of Los Angeles, Inc. CA TCI Cablevision of Los Angeles County United Cable Television of Mid-Michigan, Inc. DE TCI Cablevision of Mid-Michigan, Inc. United Cable Television of Northern Indiana, Inc. DE TCI of Northern Indiana United Cable Television of Oakland County, Ltd. [lp] CO United Cable Television of Pico Rivera, Inc. CO United Cable Television of Santa Cruz, Inc. CO TCI Cablevision of Santa Cruz County United Cable Television of Sarpy County, Inc. NE TCI Cable of the Midlands TCI Media Services United Cable Television of Scottsdale, Inc. AZ TCI Cable of Scottsdale United Cable Television of Southern Illinois, Inc. DE TCI Cablevision of Southern Illinois United Cable Television of Western Colorado, Inc. CO TCI Cablevision of Western Colorado, Inc. TCI Media Services United Cable Television Real Estate Corporation CO United Cable Television Services Corporation OK TCI Cablevision of Central Connecticut TCI Media Services United Cable Television Services of Colorado, Inc. CO United Cable Video Investment, Inc. CO United Carphone Corporation CO United CATV, Inc. MD TCI Cablevision of Annapolis TCI Media Services United Community Antenna System, Inc. WA TCI of Washington United Corporate Communications Company CO United Entertainment Corporation CO United Hockey, Inc. CO United Microwave Corporation DE United of Oakland, Inc. DE TCI Cablevision of Oakland County, Inc. Tribune/United Cable of Oakland County United Paging Corporation CO United Tribune Paging Corporation CO United's Home Video Centers, Inc. CO Universal Telecom, Inc. MD Upper Valley Telecable Company, Inc. ID TCI Cablevision of Idaho (UVTC), Inc. TCI Media Services US Cable of Allamuchy, LP NJ US Cable of Paterson (gp) NJ
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION UTI Purchase Company CO Vacationland Cablevision, Inc. WI TCI of South Central Wisconsin Valley Cable TV, Inc. TX Vista Television, Inc. WA TCI of Washington VSC Cable, Inc. DE W.A.V., Inc. CA Waltham Tele-Communications [gp] MA TCI Cablevision of Waltham Waltham Tele-Communications, Inc. CO Wasatch Community T.V., Incorporated UT Wentronics, Inc. NM TCI Cablevision of Western Colorado, Inc. TCI Cablevision of Casper TCI Cablevision of Gallup TCI Cablevision of Moab TCI Media Services Western Community TV, Inc. MT Western New York Cable Advertising L.P.[lp] NY Western Satellite 2, Inc. CO WestMarc Cable Group, Inc. DE WestMarc Cable Holding, Inc. DE TCI Media Services TCI of Central Minnesota TCI of Northern Iowa TCI of Northern Minnesota TCI of the Valley WestMarc Communications of Minnesota, Inc. DE TCI of Central Minnesota TCI of Southern Minnesota WestMarc Communications, Inc. NV WestMarc Development II, Inc. CO WestMarc Development III, Inc. CO WestMarc Development IV, Inc. CO WestMarc Development Joint Venture[gp] CO TCI Cablevision of Greater Michigan, Inc. TCI Cablevision of Northwestern Connecticut TCI Cablevision of Cape Cod TCI Cablevision of Nantucket TCI Media Services TCI Twin State Cable TV TCI/Twin Valley Cable TCI Cable of Vermont TCI Media Services WestMarc Development, Inc. CO TCI Cablevision of Greater Michigan, Inc. WestMarc Realty, Inc. CO WTCI Uplink, Inc. PA CCC-NJFT, Inc. CO CCC Sub, Inc. CO Country Cable Co. CO SCI Cable Partners Country Cable II, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Country Cable III, Inc. CO Kansas City Cable Partners (gp) CO American Cablevision of Kansas City Kansas City Fiber Network, L.P. CA KRC/CCC Investment Partnership [gp] CO LCNI II, Inc. DE LCNI, Inc. DE Lenfest Communications, Inc. DE Liberty Cable of Missouri, Inc. MO Liberty Cable, Inc. CO Liberty Capital Corp. WY Liberty Evangola, Inc. WY Liberty Holdings, Inc. WY Liberty Lake II, Inc. CO Liberty Lake, Inc. WY Liberty Michigan, Inc. DE Liberty MTC, Inc. WY Liberty of Greenwich, Inc. CO Liberty of South Dakota, Inc. CO Liberty Programming Corporation WY Liberty Tri-County, Inc. WY LMC Cable AdNet II, Inc. WY LMC Cable AdNet, Inc. PA Cable Adnet LMC Lenfest, Inc. CO Sioux Falls Cable Television (gp) SD TCI Atlantic, Inc. CO TCI Cable Investments, Inc. DE TCI Holdings, Inc. CO TCI Holdings, Inc. CO TCI Holdings, Inc. CO TCI TKR Limited Partnership CO TKR Cable Co. of Warwick, Inc. DE TKR Cable Co. of Ramapo, Inc. DE TKR Cable Co. Wildwood, Inc. DE TKR Cable Company (gp) CO TKR Cable Company, LLC DE TKR Cable Company, LLC DE TKR Cable Partners (gp) CO US Cable of Evangola (lp) NJ US Cable of Lake County (lp) NJ US Cable of Northern Indiana (lp) IN US Cable of Tri-County, Ltd. NJ Admi, Inc. DE Bresnan International Partners (Chile), L.P. DE Bresnan International Partners (Poland), L.P. DE Cable AdNet of Puerto Rico, Inc. DE Cable Adnet
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Cable Programme Partners-1 Limited Partnership DE Cable Programme Partners (1) Ltd. UNITED KINGDOM Cablevision S.A. ARGENTINA Caguas/Humacao Cable Systems [gp] CT Cathay Television and Communication Company CO Construred, S.A. ARGENTINA Discovery (UK) Ltd. UNITED KINGDOM Fibertel-TCI2 ARGENTINA Flextech plc UNITED KINGDOM International Sports Programming Partners [gp] DE ISP Distribution LP DE ISP Transponder LP DE ISP US Deportiva LP DE Jupiter Programming Co., Ltd. JAPAN Liberty/TINTA Australia, Inc. DE Liberty/TINTA Distribution, Inc. DE Liberty/TINTA LLC DE Liberty/TINTA Transponder, Inc. DE Liberty/TINTA U.S. Deportiva, Inc. DE LNT International Sports Programming (Distribution) Ltd. CAYMAN ISLANDS LNT International Sports Programming (Australia) Ltd CAYMAN ISLANDS LNT International Sports Programming (Latin America) Ltd. CAYMAN ISLANDS LNT International Sports Programming Partners Austalia[gp] DE Melita Cable Holdings Ltd. [Malta LLC] MALTA Melita Cable TV Limited [Malta LLC] MALTA Melita Partnership [gp] CO TCI-Australia, Inc. CO TCI Argentina, Inc. CO TCI Cable Holding Company I DE TCI Cable Programme Partners, Inc. CO TCI Cablevision of Puerto Rico, Inc. DE TCI Cathay TV, Inc. CO TCI Chile, Inc, CO TCI DTH Mexico, Inc. CO TCI International DTH Service, Inc. CO TCI International Investments Ltd. UNITED KINGDOM TCI International Partnership Holdings, Inc. CO TCI Japan, Inc. CO TCI Movies Australia Pty. Limited AUSTRALIA TCI of PR, Inc. CO TCI of Puerto Rico, Inc. CO TCI Poland, Inc. CO TCID of New Zealand Limited NEW ZEALAND TCID of Puerto Rico, Inc. NV Tele-Communications Dominicana, Inc. DE Tele-Communications International, Inc. DE TINTA
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Squared, Inc. Televisora Belgrano, S.A. ARGENTINA TeleWest Communications PLC UNITED KINGDOM TeleWest Europe Group [gp] CO Tevel Israel International Communications Ltd. ISRAEL TINTA Sports Programming, Inc. DE Tishdoret Achzakot Ltd. ISRAEL TW Holdings, L.L.C. CO UA-France, Inc. CO UA-UII Management, Inc. CO UA-UII, Inc. CO UA European Theatres, Inc. CO UCT-Netherlands, B.V. NETHERLANDS UII-Ireland Limited Liability Company UT UII-Ireland, Ltd. [gp] CO UII Management [gp] CO United Artists (Learning Channel) Ltd. UNITED KINGDOM United Artists Cable Television International Holdings, CO Inc. United Artists Cable Television International Ltd. UNITED KINGDOM United Artists Cable Television UK Holdings, Inc. DE United Artists European Broadcasting Ltd. UNITED KINGDOM United Artists European Holdings Limited UNITED KINGDOM United Artists International, Inc. CO United Artists Programming-Europe, Inc. CO United Artists Programming International, Inc. CO United Artists, B.V. NETHERLANDS United International Investments [gp] CO Univent's S.A. ARGENTINA A-1 TV, Inc. CO Affiliated Regional Communications, Ltd. CO Americana Telelvision Productions LLC CO Animal Planet, L.P. DE ARC Holding, Ltd. [lp] TX Asian Television and Communications International LLC CO Bay TV Joint Venture CA BDTV II Inc. DE BDTV Inc. DE BET Movies/STARZ!3, LLC DE CLJV, L.P. [lp] DE Communication Capital Corp. DE Colorado Communication Capital Corp. Courtroom Television Network [gp] NY Cutthroat Productions LP CA CVN, Inc. CA DMX Inc. DE Dry Creek Productions, Inc. CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Encore Asia Management Limited HKG Encore Asia, Inc. CO Encore Australia Management Pty Limited AUS Encore Australia Management, Inc. DE Encore ICCP, Inc. CO EMC Entertainment International, Inc. Encore International Newco, Inc. CO Encore International, Inc. CO Encore Media Corporation CO Encore Encore Newco LLC CO Encore Pictures, Inc. CO Encore QE Programming Corp. CO F&V Channel LLC DE FIT TV Partnership [gp] DE Fox Sports Net, LLC DE Fox/Liberty Network Sales, Inc. DE Fox/Liberty Networks, LLC DE FoxWatch Productions, Inc. DE fX Networks, LLC DE Home Team Sports Limited Partnership [lp] DE International Cable Channels Partnership, Ltd. [lp] CO International Sports Programming Partners [gp] DE Intro Production Management Corporation CO ISP Distribution LP DE ISP Transponder LP DE ISP US Deportiva LP DE KBL Sports Network, Inc. CO KBL Entertainment Network Liberty Bay, Inc. CO Liberty Broadcasting, Inc. OR Liberty Central Services, Inc. DE Liberty CHC, Inc. CO Liberty Club, Inc. CO Liberty CNBC, Inc. CO Liberty Computer Ventures, Inc. CO Liberty Court, Inc. WY Liberty Creative Corporation CO Liberty Distribution, Inc. CO Liberty DMX, Inc. CO Liberty fX, Inc. DE Liberty HSN, Inc. CO Liberty IFE, Inc. CO Liberty Media Corporation DE Liberty MLP, Inc. CO Liberty Newco International, Inc. DE Liberty NSPP, Inc. DE Liberty Productions, Inc. CO Liberty Program Investments, Inc. WY
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Liberty Program Supply, Inc. WY Liberty Programming Development Corporation WY Liberty QVC, Inc. CO Liberty Sports Distribution, Inc. DE Liberty Sports ILH, Inc. CO Liberty Sports Member, Inc. DE Liberty Sports Sales, Inc. CO Liberty Sports, Inc. CO Liberty SportSouth, Inc. GA Liberty Starz, Inc. CO Liberty TW, Inc. CO Liberty VC, Inc. CO Liberty VJN, Inc. CO Liberty Women's Sports League, Inc. CO Liberty/Fox ARC L.P. DE Liberty/Fox Arizona LLC DE Liberty/Fox Bay Area L.P. DE Liberty/Fox Canada LLC DE Liberty/Fox Central Services LLC DE Liberty/Fox Chicago L.P DE Liberty/Fox Distribution L.P. DE Liberty/Fox KBL L.P. DE Liberty/Fox Network Programming, LLC DE Liberty/Fox Northwest L.P. DE Liberty/Fox Southeast L.P. DE Liberty/Fox Sports Financing LLC DE Liberty/Fox Sunshine LLC DE Liberty/Fox Upper Midwest L.P. DE Liberty/Fox Utah LLC DE Liberty/Fox West LLC DE Liberty/TINTA Australia, Inc. DE Liberty/TINTA Distribution, Inc. DE Liberty/TINTA LLC DE Liberty/TINTA Transponder, Inc. DE Liberty/TINTA U.S. Deportiva, Inc. DE LMC Animal Planet, Inc. CO LMC Arizona Sports, Inc. DE LMC Bay Area Sports, Inc. CO BASN Bay Area Sports Network PSN Pacific Sports Network LMC BET, Inc. CO LMC Canada, Inc. Canada LMC Chicago Sports, Inc. WY LMC Classics, Inc. NV LMC Entertainment, Inc. NV
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION LMC Finco, Inc. DE LMC Information Services, Inc. NV X*Press Information Services LMC International, Inc. CO LMC Music, Inc. CO LMC Network Programming, Inc. DE LMC Newco U.S., Inc. DE LMC Northwest Cable Sports, Inc. CO NCS Northwest Cable Sports PSN Prime Sports Northwest LMC Prime Sports Northwest, Inc. CO LMC Regional Sports, Inc. CO LMC SatCom, Inc. GA LMC Silver King, Inc. CO LMC Southeast Sports, Inc. CO LMC Sunshine, Inc. CO LMC Upper Midwest Sports, Inc. CO LMC Utah Sports, Inc. I CO LMC West Sports, Inc. DE LNT International Sports Programming (Distribution) Ltd. CAY LNT International Sports Programming (Australia) Ltd Cayman LNT International Sports Programming (Latin America) Ltd. Cayman LNT International Sports Programming Partners Austalia[gp] DE LSI Deportiva, Inc. CO LSI Facilities, Inc. CO LSI Nostalgic Sports, Inc. CO LSI Showcase, Inc. CO MacNeil/Lehrer Productions [gp] NY Mountain Mobile Television Limited Liability Company NV Netlink International, Inc. CO Netlink USA [gp] CO New Concepts Enterprises, Inc. NJ New LMC ARC, Inc. DE New LMC Bay Area, Inc. DE New LMC Canada, Inc. DE New LMC Chicago, Inc. DE New LMC KBL, Inc. DE New LMC Northwest, Inc. DE New LMC Southeast, Inc. DE New LMC Sunshine, Inc. DE New LMC Upper Midwest, Inc. DE New LMC Utah Sports, Inc. DE Prime Network Limited Liability Company WY Prime Philadelphia Sports Limited Liability Company WY Prime Sports Events, Inc. CO Liberty Prime Sports Events, Inc. Prime Sports Merchandising, Inc. CO Fan Fair
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION Prime Sports Fan Fair Prime Sports Network-Upper Midwest [jv] MN Prime Sports Northwest Network [gp] DE Prime Sports West, L.P. [lp] CA Prime SportsChannel Networks Associates [gp] NY Prime Network Newsport Prime Ticket Networks , L.P. [lp] CA QE+ Ltd. [lp] CO QVC Investment, Inc. CO Reiss Media Enterprises, Inc. DE Republic Pictures Television [gp] CA Rocky Mountain Prime Sports Network [jv] CO Rocky Mountain Sports and Lifestyle Channel, Inc. DE Royal Communications, Inc. CO RTV Associates, L.P. [lp] DE Southern Satellite Systems, Inc. GA Tempo One-Stop Satellite Programming Sports Holding, Inc. TX SportsChannel Chicago Associates [gp] NY SportsChannel Pacific Associates [gp] NY SportsChannel Prism Associates [gp] NY SportSouth Network, Ltd. [ltd] DE Sunshine Network [jv] FL Superstar/Netlink Group LLC DE TCI Cable Education, Inc. CO TCI Cutthroat Island, Inc. CO TCI E! Entertainment, Inc. CO TCI Prime Sports, Inc. CO TCI Republic Pictures Inc. CO TCI Request, Inc. CO TCI Sillerman-Magee, Inc. CO TCI TVRO Management Corporation CO TCI/Fox Funding Partnership [jv] NY TCID, Inc. CO Telluride Cablevision, Inc. DE U.S. Surfing L.P. TX Upper Midwest Cable Partners [gp] MN Vision Group Incorporated CO Westlink, Inc. CO X*PRESS Electronic Services, Ltd. CO X*PRESS Information Services, Ltd. CO ACTC, L.P. MCNS Holdings, L.P. STT Video Partners, L.P. [lp] TCI-TVGOS, Inc. DE TCI CM Holdings, Inc. DE(NY)
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION TCI Educational Technologies, Inc. DE TCI Faroudja, Inc. (inactive) CO TCI Game Technology Holdings, Inc. CO TCI GameCo Holdings, Inc. CO TCI GameCo Ventures, Inc. CO TCI GCI, Inc. CO TCI Health, Inc. CO TCI Interactive Media Group, Inc. CO TCI Java, Inc. CO TCI Magma Holdings, Inc. CO TCI MCNS Holdings, Inc. CO TCI MicroUnity Holdings, Inc. CO TCI Netscape Holdings, Inc. CO TCI Online Services, Inc. CO TCI Programming Holding Company III CO TCI Technology Ventures, Inc. CO TCI Technology, Inc. CO TCI TSX, Inc. DE TCID - WW, Inc. DE TCID Games, Inc. CO TCID Virtual I/O, Inc. CO UCT Investments (Colorado), Inc. CO VVF, Inc. CO CO CO CO
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STATE OR JURISDICATION SUBSIDIARY OF INCORPORATION TRADE NAMES OR ORGANIZATION DE TCI Media Services DE WA WA CA WA WA CA WA WA DE CA CA WA WA WA OR DE CA TX TX TX DE DE CA WA WA CA CA NY CA CA DE
26 of 26 EX-23.1 13 CONSENT OF KPMG 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Tele-Communications, Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 33-56271, 33-57177, 33-57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333-16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our reports dated March 24, 1997, relating to the consolidated balance sheets of Tele-Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and all related schedules, which reports appear in the December 31, 1996 annual report on Form 10-K of Tele-Communications, Inc. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Denver, Colorado March 27, 1997 EX-23.2 14 CONSENT OF KPMG 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Tele-Communications, Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 33-56271, 33-57177, 33-57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333-16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our report dated March 24, 1997, relating to the combined balance sheets of TCI Group as of December 31, 1996 and 1995, and the related combined statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Tele-Communications, Inc. Our report covering the combined financial statements refers to the effects of not consolidating TCI Group's interest in Liberty Media Group for all periods that TCI Group has an interest in Liberty Media Group. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Denver, Colorado March 27, 1997 EX-23.3 15 CONSENT OF KPMG 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Tele-Communications, Inc.: We consent to the incorporation by reference in the Registration Statements (Nos. 33-56271, 33-57177, 33-57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333-16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our report dated March 24, 1997, relating to the combined balance sheets of Liberty Media Group as of December 31, 1996 and 1995, and the related combined statements of operations, equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Tele-Communications, Inc. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Denver, Colorado March 27, 1997 EX-23.4 16 CONSENT OF KPMG 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Telewest Communications plc We consent to the incorporation by reference in the Registration Statements (Nos. 33-56271, 33-57177, 33-57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333-16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our report dated March 11, 1997, relating to the consolidated balance sheet of Telewest Communications plc and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Tele-Communications, Inc. /s/ KPMG Audit Plc KPMG Audit Plc Chartered Accountants Registered Auditors London, England March 27, 1997 EX-23.5 17 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.5 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements (Nos. 33-56271, 33-57177, 33-57399, 33-57409, 33-57469, 33-59121, 33-63139, 33-64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33- 54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333-16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our report dated March 14, 1997 on the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries (which expresses an unqualified opinion and includes an explanatory paragraph referring to the developmental stage of Sprint Spectrum Holding Company, L.P. and subsidiaries) for each of the two years in the period ended December 31, 1996, for the period from October 24, 1994 (date of inception) to December 31, 1994 and for the cumulative period from October 24, 1994 (date of inception) to December 31, 1996 appearing in the Annual Report on Form 10-K of Tele-Communications, Inc. for the year ended December 31, 1996. /s/ DELOITTE & TOUCHE LLP Kansas City, Missouri March 24, 1997 EX-23.6 18 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements (Nos. 33-56271, 33-57177, 33- 57399, 33-57409, 33-57469, 33-59121, 33-63139, 33- 64127, 33-65479, 33-65493, 33-65497, 333-00265, 333-00717, 333-00765, 333-00835, 333-06723, 333-07615 and 333-19813) on Form S-3, the Prospectus constituting part of the Registration Statement (No. 33-65311) on Form S-4, and the Registration Statements (Nos. 33-44543, 33-54263, 33-57635, 33-60839, 33-60843, 33-64827, 33-64829, 33-64831, 33-65483, 33-65485, 33-65487, 333-06177, 333-06179, 333- 16025 and 333-16027) on Form S-8 of Tele-Communications, Inc. of our report dated March 7, 1997 on the financial statements of American PCS, L.P. (A Delaware Limited Partnership) as of and for the year ended December 31, 1996 referred to in the consolidated financial statements of Sprint Spectrum Holding Company, L.P. and subsidiaries, which appear in the Annual Report on Form 10-K of Tele-Communications, Inc. for the year ended December 31, 1996. /s/ PRICE WATERHOUSE LLP PRICE WATERHOUSE LLP Washington, DC March 25, 1997 EX-27 19 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN TELE-COMMUNICATIONS, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. PRIMARY AND DILUTED EARNINGS PER SHARE REPRESENT EARNINGS PER SHARE OF THE COMPANY'S TCI GROUP STOCK. SEE THE COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 394 0 448 0 0 0 11,696 4,168 30,244 0 14,926 658 0 1,030 3,223 30,244 984 8,022 605 2,917 1,616 0 1,096 540 262 278 0 0 0 278 (1.22) (1.22)
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