REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VIACOM INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 04-2980402
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (IRS EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
OR ORGANIZATION) CODE NUMBER)
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
PHILIPPE P. DAUMAN, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL,
CHIEF ADMINISTRATIVE OFFICER AND SECRETARY
VIACOM INTERNATIONAL INC.
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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COPIES TO:
STEPHEN T. GIOVE, ESQ.
CREIGHTON O'M. CONDON, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective and the other
conditions to the commencement of the Exchange Offer described herein have been
satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED AMOUNT OF
AMOUNT MAXIMUM MAXIMUM REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE FEE
TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE/(1)/
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Class A Common Stock, $100.00 par value per share......... 5,000,000 shares N.A. $441,918,750 $171,025
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Series A Senior Cumulative Exchangeable Preferred Stock, 5,000,000 shares N.A. N.A. N.A.
$100.00 par value per share/(2)/..........................
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(1) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been calculated in accordance with Rule 457(f) under
the Securities Act, as amended, based on the market value of the shares of
Viacom Class A Common Stock and Class B Common Stock to be received in the
exchange for the shares of the registrant's securities registered pursuant
hereto ($48 3/4, which is the average of the averages of the high and low
prices per share of Viacom Class A Common Stock and Class B Common Stock on
the American Stock Exchange, Inc. on November 16, 1995).
(2) Represents shares of Series A Senior Cumulative Exchangeable Preferred
Stock underlying the Registrant's Class A Common Stock, all of which will
be issuable to holders of Class A Common Stock automatically, and without
any further consideration, upon the subscription by a third party for
shares of the registrant's Class B Common Stock.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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VIACOM INTERNATIONAL INC.
Cross Reference Sheet pursuant to Rule 404(a) of the Securities Act of 1933
and Item 501(b) of Regulation S-K, showing the location or heading in the
Offering Circular - Prospectus of the information required by Part I of Form S-
4.
S-4 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
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A. Information About the Transaction
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page of Prospectus; Available
Information; Incorporation of Certain Documents
by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information..................... Summary; Unaudited Pro Forma Condensed
Combined Financial Statements of VII Cable;
Selected Combined Historical Financial Data of
VII Cable; Market Prices, Trading and Dividend
Information; Risk Factors
4. Terms of the Transaction............................ Summary; The Transaction; The
Exchange Offer; Arrangements among Viacom,
Viacom International and TCI; Description of VII
Cable Capital Stock; Comparison of Rights of
Stockholders of Viacom and VII Cable;
Relationship between Viacom and VII Cable;
Relationship between VII Cable and TCI; Certain
Federal Income Tax Consequences
5. Pro Forma Financial Information..................... Unaudited Pro Forma Condensed Combined
Financial Statements of VII Cable
6. Material Contacts with the Company Being
Acquired.......................................... Management; Arrangements among Viacom,
Viacom International, TCI and TCI Cable;
Relationship between Viacom and VII Cable;
Relationship between VII Cable and TCI after the
Exchange Offer
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to Be
Underwriters...................................... Not Applicable
8. Interests of Named Experts and
Counsel........................................... Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................................... Not Applicable
S-4 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------------------- --------------------------------------------------
B. Information About the Registrant
10. Information with Respect to S-3 Registrants........ Not Applicable
11. Incorporation of Certain Information by
Reference........................................ Not Applicable
12. Information with Respect to S-2 or S-3
Registrants...................................... Not Applicable
13. Incorporation of Certain Information by
Reference........................................ Not Applicable
14. Information with Respect to Registrants Other
than S-2 or S-3 Registrants...................... Summary; Market Prices, Trading and Dividend
Information; Selected Combined Historical
Financial Data of VII Cable; Management's
Discussion and Analysis of Financial Condition
and Results of Operations of VII Cable; Business
of VII Cable; Description of Certain Indebtedness
of VII Cable; Financial Statements of VII Cable
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies.......... Available Information; Incorporation of Certain
Documents by Reference; Summary; Selected
Consolidated Historical Financial Data of Viacom
16. Information with Respect to S-2 or S-3
Companies........................................ Not Applicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies........................ Not Applicable
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited............... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited in an
Exchange Offer................................... The Transaction; Business of VII Cable;
Management; Risk Factors; Security Ownership
of VII Cable Common Stock; Security Ownership
of Certain Beneficial Owners and Management of
Viacom Common Stock; Arrangements among
Viacom, Viacom International and TCI;
Description of Certain Indebtedness of VII Cable;
Relationship between Viacom and VII Cable
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
OFFERING CIRCULAR - PROSPECTUS (SUBJECT TO COMPLETION, DATED )
- ------------------------------
VIACOM INC.
OFFERING CIRCULAR
VIACOM INTERNATIONAL INC.
(TO BE RENAMED TCI PACIFIC COMMUNICATIONS, INC.)
PROSPECTUS
OFFER TO EXCHANGE NOT MORE THAN NOR LESS THAN OF A SHARE OF CLASS
A COMMON STOCK, $100.00 PAR VALUE PER SHARE, OF VIACOM
INTERNATIONAL INC. FOR EACH SHARE OF CLASS A COMMON
STOCK, $0.01 PAR VALUE PER SHARE, OR CLASS B
COMMON STOCK, $0.01 PAR VALUE
PER SHARE, OF VIACOM INC.
________________
EACH SHARE OF CLASS A COMMON STOCK OF VIACOM INTERNATIONAL INC. WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF % SERIES A SENIOR
CUMULATIVE EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE
PER SHARE, OF VIACOM INTERNATIONAL INC. UPON THE PURCHASE
OF 100 SHARES OF CLASS B COMMON STOCK, $0.01 PAR VALUE
PER SHARE, OF VIACOM INTERNATIONAL INC. BY A
SUBSIDIARY OF TELE-COMMUNICATIONS, INC.
________________
UNLESS PREVIOUSLY REDEEMED, EACH SHARE OF SERIES A SENIOR CUMULATIVE
EXCHANGEABLE PREFERRED STOCK,$100.00 PAR VALUE PER SHARE, OF VIACOM
INTERNATIONAL INC. IS EXCHANGEABLE AT THE OPTION OF THE HOLDER AFTER
THE FIFTH ANNIVERSARY OF THE DATE OF ISSUANCE FOR A NUMBER OF SHARES
OF SERIES A TCI GROUP COMMON STOCK, $1.00 PAR VALUE PER SHARE, OF
TELE-COMMUNICATIONS, INC. AT THE EXCHANGE RATE DESCRIBED HEREIN,
WHICH WILL BE ANNOUNCED ON THE SECOND BUSINESS DAY PRIOR TO THE
EXPIRATION OF THE EXCHANGE OFFER. DIVIDENDS AND PAYMENTS
UPON OPTIONAL OR MANDATORY REDEMPTION OF SHARES OF %
SERIES A SENIOR CUMULATIVE EXCHANGEABLE PREFERRED
STOCK, $100.00 PAR VALUE PER SHARE, MAY BE PAID IN
SHARES OF SERIES A TCI GROUP COMMON STOCK, $1.00
PAR VALUE PER SHARE, OF TELE-COMMUNICATIONS INC.
AS PROVIDED HEREIN.
________________
THE EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME ON , 199 ,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
________________
Viacom Inc., a Delaware corporation ("Viacom"), is offering hereby to the
holders of shares of (i) Class A Common Stock, $0.01 par value per share of
Viacom ("Viacom Class A Common Stock"), and/or (ii) Class B Common Stock, $0.01
par value per share of Viacom ("Viacom Class B Common Stock," and collectively
with Viacom Class A Common Stock, "Viacom Common Stock"), the opportunity to
exchange all or a portion of their shares of Viacom Common Stock for shares of
Class A Common Stock of VII Cable (as defined herein), $100.00 par value per
share ("VII Cable Class A Common Stock"), at an exchange ratio (the "Exchange
Ratio"), specified by tendering stockholders, not greater than
nor less than of a share of VII Cable Class A Common
Stock for each share of Viacom Class A Common Stock or Viacom Class B Common
Stock tendered and exchanged, upon the terms and subject to the conditions set
forth herein and in the related Letter of Transmittal (which together constitute
the "Exchange Offer").
(continued on following page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR - PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________________
The Dealer Manager for the Exchange Offer is:
WASSERSTEIN PERELLA & CO., INC.
THE DATE OF THIS OFFERING CIRCULAR - PROSPECTUS IS , 199 .
(Cover continued from previous page)
Each share of Viacom Common Stock accepted by Viacom in accordance with the
Exchange Offer shall be exchanged for that number of fully paid and
nonassessable shares of VII Cable Class A Common Stock equal to the smallest
Exchange Ratio sufficient to satisfy the Minimum Condition (as defined herein).
The Exchange Offer is subject to a number of conditions, including the
Minimum Condition, among others. See "Arrangements Among Viacom, Viacom
International, TCI and TCI Cable--Terms of the Parents Agreement--Conditions
Precedent."
NONE OF VIACOM, VIACOM INTERNATIONAL INC. ("VIACOM INTERNATIONAL"), THE
BOARD OF DIRECTORS OF VIACOM NOR THE BOARD OF DIRECTORS OF VIACOM INTERNATIONAL
MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER OF VIACOM WHETHER TO TENDER OR
REFRAIN FROM TENDERING SHARES OF VIACOM COMMON STOCK PURSUANT TO THE EXCHANGE
OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER SHARES OF
VIACOM COMMON STOCK PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES
TO TENDER AND AT WHAT EXCHANGE RATIO TO TENDER SUCH SHARES AFTER READING THIS
OFFERING CIRCULAR - PROSPECTUS AND CONSULTING WITH ITS ADVISORS BASED ON ITS OWN
FINANCIAL POSITION AND REQUIREMENTS. THIS OFFERING CIRCULAR - PROSPECTUS
RELATES TO ALL SHARES OF VII CABLE CLASS A COMMON STOCK AND TO ALL SHARES OF
% SERIES A SENIOR CUMULATIVE EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE PER
SHARE, OF VII CABLE ("VII CABLE PREFERRED STOCK") TO BE DISTRIBUTED PURSUANT TO
THE EXCHANGE OFFER.
SEE "RISK FACTORS" BEGINNING ON PAGE 60 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
Application will be made for quotation of the shares of VII Cable Preferred
Stock on the Nasdaq National Market System ("Nasdaq") under the symbol "
." On July 24, 1995, the last trading day prior to the announcement of the
Transaction (as defined herein), the closing sale prices per share of Viacom
Class A Common Stock and Viacom Class B Common Stock on the American Stock
Exchange, Inc. ("AMEX") were $50 1/4 and $50, respectively. Effective August 3,
1995, Tele-Communications, Inc. ("TCI") amended its Restated Certificate of
Incorporation to, among other things, redesignate its Class A Common Stock, par
value $1.00 per share ("TCI Class A Common Stock"), as Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share ("TCI Stock"). On
July 24, 1995, the closing sale price per share of the TCI Class A Common Stock
on Nasdaq was $23-13/16. On November 16, 1995, the closing sales price per
share of Viacom Class A Common Stock and Viacom Class B Common Stock on AMEX
were $48 7/8 and $49 1/4, respectively, and the closing sale price per share of
TCI Stock on Nasdaq was $18 3/8 per share.
In those jurisdictions where securities, blue sky or other laws require the
Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer
shall be deemed to be made on behalf of Viacom by Wasserstein Perella & Co.,
Inc., as Dealer Manager, or one or more registered brokers or dealers licensed
under the laws of such jurisdiction.
(End of Cover Page)
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR -
PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE BY THIS OFFERING
CIRCULAR - PROSPECTUS OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIACOM OR VIACOM INTERNATIONAL. THIS OFFERING CIRCULAR -
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES HEREBY OR THEREBY OFFERED IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR - PROSPECTUS NOR
THE EXCHANGE OF SECURITIES PURSUANT TO THIS OFFERING CIRCULAR - PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF VIACOM OR VIACOM INTERNATIONAL SINCE SUCH DATE
OR, IN THE CASE OF INFORMATION INCORPORATED HEREIN BY REFERENCE, THE DATE OF
FILING OF SUCH INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION").
UNTIL 40 DAYS AFTER THE DATE OF THIS OFFERING CIRCULAR - PROSPECTUS, ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
________________
AVAILABLE INFORMATION
Viacom International has filed a Registration Statement on Form S-4 under
the Securities Act of 1933, as amended (the "Securities Act"), with the
Commission with respect to the VII Cable Class A Common Stock and VII Cable
Preferred Stock offered hereby (together with any amendments thereto, the
"Registration Statement"). Viacom has filed a Schedule 13E-4 Issuer Tender
Offer Statement (together with any amendments thereto, the "Schedule 13E-4")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
the Commission with respect to the Exchange Offer. This Offering Circular -
Prospectus does not contain all the information set forth or incorporated by
reference in the Registration Statement, the Schedule 13E-4 and their respective
exhibits, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information, reference is made
to the Registration Statement and the Schedule 13E-4 and the exhibits filed or
incorporated as a part thereof, which are on file at the offices of the
Commission and may be inspected and copied as set forth below.
Viacom is currently subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. The Registration Statement, Schedule
13E-4, reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and should
be available at the Commission's Regional Offices at Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material also
can be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. In
addition, material filed by Viacom can be inspected at the offices of the AMEX,
86 Trinity Place, New York, New York 10006. As of March 1, 1995, Viacom
International was no longer required to file reports, proxy statements or other
information with the Commission pursuant to the requirements of the Exchange
Act. Instead, information with respect to Viacom International since such date
has been provided, to the extent required, in filings made by Viacom. Absent an
available exemption, following consummation of the Transaction (as defined
herein), VII Cable will be required to file reports, proxy statements and other
information with the Commission pursuant to the requirements of the Exchange
Act.
i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Viacom (File No.
1-9553) and Viacom International (File No. 1-9554) pursuant to the Exchange Act
are incorporated by reference in this Offering Circular - Prospectus:
1. Viacom's Annual Report on Form 10-K for the year ended December 31,
1994;
2. Viacom's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1995, June 30, 1995 and September 30, 1995; and
3. Viacom's Current Reports on Form 8-K filed January 24, 1995, March 15,
1995, April 14, 1995, May 8, 1995, May 25, 1995, June 29, 1995, July
26, 1995 and September 29, 1995.
All documents and reports filed by Viacom, if any, pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Offering
Circular - Prospectus and prior to the termination of the Exchange Offer shall
be deemed to be incorporated herein by reference and made a part of this
Offering Circular - Prospectus from the dates of filing of such documents or
reports. Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Offering Circular - Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Offering Circular - Prospectus.
THIS OFFERING CIRCULAR - PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER OF SHARES OF VIACOM COMMON STOCK, TO WHOM A COPY
OF THIS OFFERING CIRCULAR - PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO VIACOM INC., 1515 BROADWAY, NEW YORK, NEW YORK 10036, ATTENTION:
JOHN H. BURKE (TELEPHONE NUMBER (212) 258-6000). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE FIVE BUSINESS DAYS PRIOR
TO THE EXPIRATION DATE (AS DEFINED HEREIN). REQUESTS MAY ALSO BE MADE TO THE
INFORMATION AGENT, GEORGESON & COMPANY INC., TELEPHONE NUMBER (800) 223-6064.
ii
TCI PROSPECTUS - EXPLANATORY NOTE
TCI has filed with the Commission a registration statement (the "TCI
Registration Statement"), together with a related prospectus (the "TCI
Prospectus"), with respect to the TCI Common Stock which may be issued as
dividends on, or upon exchange or optional or mandatory redemption of, the VII
Cable Preferred Stock. For the convenience of holders of Viacom Common Stock, a
copy of the TCI Prospectus has been mailed to each registered holder of Viacom
Common Stock together with this Offering Circular - Prospectus.
THIS OFFERING CIRCULAR - PROSPECTUS RELATES ONLY TO THE VII CABLE CLASS A
COMMON STOCK OFFERED HEREBY AND THE UNDERLYING VII CABLE PREFERRED STOCK AND
DOES NOT RELATE TO THE TCI COMMON STOCK OR OTHER SECURITIES OF TCI. TCI FILES
PERIODIC AND OTHER REPORTS AND PROXY STATEMENTS WITH THE COMMISSION. VIACOM
STOCKHOLDERS ARE DIRECTED TO SUCH PUBLICLY AVAILABLE DOCUMENTS AS WELL AS TO THE
TCI PROSPECTUS FOR INFORMATION CONCERNING TCI AND THE TCI STOCK (AS DEFINED
HEREIN). NEITHER VIACOM NOR VIACOM INTERNATIONAL HAS PARTICIPATED IN THE
PREPARATION OF SUCH DOCUMENT OR MADE ANY DUE DILIGENCE INQUIRY WITH RESPECT TO
TCI. NEITHER VIACOM NOR VIACOM INTERNATIONAL MAKES ANY REPRESENTATION THAT SUCH
TCI PROSPECTUS IS ACCURATE OR COMPLETE. THE TCI PROSPECTUS IS BEING PROVIDED TO
VIACOM STOCKHOLDERS SOLELY FOR THEIR CONVENIENCE. VIACOM AND VIACOM
INTERNATIONAL DISCLAIM ANY AND ALL LIABILITY FOR ANY UNTRUE STATEMENT OF A
MATERIAL FACT IN THE TCI PROSPECTUS OR OMISSION TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS THEREIN NOT MISLEADING, IN LIGHT OF
THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE.
iii
TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION..................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... ii
TCI PROSPECTUS - EXPLANATORY NOTE......................................... iii
OFFERING CIRCULAR - PROSPECTUS SUMMARY..................................... 1
THE TRANSACTION........................................................... 16
General................................................................ 16
Purpose and Effects of the Transaction................................. 17
No Appraisal Rights.................................................... 18
Regulatory Approvals................................................... 18
Anticipated Accounting Treatment....................................... 18
THE EXCHANGE OFFER........................................................ 19
Terms of the Exchange Offer............................................ 19
Exchange of Shares of Viacom Common
Stock................................................................. 20
Procedures for Tendering Shares of
Viacom Common Stock................................................... 22
Guaranteed Delivery Procedure.......................................... 24
Withdrawal Rights...................................................... 25
Extension of Tender Period; Termination;
Amendment............................................................. 25
Conditions to Consummation of the
Exchange Offer........................................................ 27
Fees and Expenses...................................................... 28
Miscellaneous.......................................................... 29
MARKET PRICES, TRADING AND DIVIDEND INFORMATION........................... 30
Viacom Common Stock.................................................... 30
VII Cable Class A Common Stock and VII
Cable Preferred Stock................................................. 30
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS VII CABLE................................ 32
SELECTED COMBINED HISTORICAL
FINANCIAL DATA OF VII CABLE............................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF VII CABLE....................... 39
BUSINESS OF VII CABLE..................................................... 45
The Company............................................................ 45
VII Cable's Systems.................................................... 45
Franchises............................................................. 46
Subscriber Services and Rates.......................................... 47
Programming............................................................ 48
Competition............................................................ 48
Regulation............................................................. 51
Federal Regulation..................................................... 51
State and Local Regulation............................................. 55
Properties............................................................. 55
Employees.............................................................. 55
Legal Proceedings...................................................... 55
MANAGEMENT................................................................ 56
Management Biographies................................................. 56
Board of Directors..................................................... 57
Compensation of the Board of Directors................................. 57
Indemnification........................................................ 57
Compensation of Executive Officers..................................... 58
RISK FACTORS.............................................................. 59
Total Indebtedness and Cash Flow of VII
Cable................................................................. 59
Controlling Stockholder................................................ 59
Potential Conflicts of Interest........................................ 59
Dependence on Additional Capital....................................... 60
Rapid Technological Changes............................................ 60
Market Uncertainties with Respect to VII
Cable Preferred Stock................................................. 60
Total Indebtedness of Viacom........................................... 61
Regulation and Competition in the Cable
Television Industry................................................... 61
Tax Treatment of the Transaction....................................... 62
SECURITY OWNERSHIP OF VII CABLE
COMMON STOCK........................................................... 63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF VIACOM COMMON STOCK..................................... 63
ARRANGEMENTS AMONG VIACOM, VIACOM INTERNATIONAL, TCI AND TCI CABLE........ 65
Terms of the Parents Agreement......................................... 65
Terms of the Implementation Agreement.................................. 68
Terms of the Subscription Agreement.................................... 73
Terms of Certain Ancillary Agreements.................................. 79
iv
Page
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DESCRIPTION OF CERTAIN INDEBTEDNESS
OF VII CABLE............................................................. 81
DESCRIPTION OF VII CABLE CAPITAL STOCK.................................... 81
General................................................................ 81
Common Stock -- General................................................ 81
VII Cable Class A Common Stock......................................... 82
VII Cable Class B Common Stock......................................... 82
VII Cable Preferred Stock.............................................. 82
COMPARISON OF RIGHTS OF STOCKHOLDERS OF VIACOM AND
VII CABLE................................................................ 93
RELATIONSHIP BETWEEN VIACOM AND VII CABLE................................. 94
RELATIONSHIP BETWEEN VII CABLE AND
TCI AFTER THE EXCHANGE OFFER............................................. 95
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES............................................................. 96
The Transaction........................................................ 96
Ownership and Disposition of VII Cable
Preferred Stock....................................................... 96
LEGAL MATTERS............................................................. 98
EXPERTS................................................................... 98
INDEX TO COMBINED FINANCIAL STATEMENTS.................................... F-1
v
INDEX OF DEFINED TERMS
"Adjustment Amounts"......................... 32
"affiliates"................................. 31
"Affiliate".................................. 92
"Agent's Message"............................ 23
"Aggregate Loan Amount"...................... 27
"AMEX"....................................... cover
"Ancillary Agreements"....................... 80
"Anticipated Commencement Date".............. 73
"Applicable Period".......................... 80
"Approved Capital Expenditure Plan".......... 76
"ASCAP"...................................... 53
"Asset Value"................................ 70
"Assumption of Liabilities".................. 68
"Average Market Price"....................... 84
"AVR Partnership"............................ 70
"Basic Subscriber Rate"...................... 74
"Basic Subscribers".......................... 69
"benchmark".................................. 43
"Benchmark Regulations"...................... 43
"Bill of Sale"............................... 68
"BMI"........................................ 53
"Book-Entry Transfer Facilities"............. 23
"Book Entry Transfer Facility"............... 23
"business day"............................... 26
"1984 Cable Act"............................. 43
"1992 Cable Act"............................. 40
"Cable Business"............................. 1
"Cable Division Subsidiary".................. 65
"Cable Division Subsidiaries"................ 70
"1996 Capital Expenditure Plan".............. 76
"Cash Collateral Account".................... 73
"Cash Equivalent Amount"..................... 10
"change in control".......................... 58
"Channel Occupancy Rules".................... 52
"Code"....................................... 62
"Commission"................................. i
"Commitments to Lend"........................ 73
"Communications Act"......................... 43
"complete termination"....................... 97
"Consented Subscribers"...................... 67
"Conversion"................................. 3
"Conveyance"................................. 3
"Conveyance of Assets"....................... 68
"Copyright Act".............................. 48
"cost-of-service"............................ 43
"Credit Agreement"........................... 42
"Dayton"..................................... 42
"DBS"........................................ 42
"de minimis amount".......................... 97
"DGCL"....................................... 93
"DirecTV".................................... 49
"Distributions".............................. 3
"Dividend Payment Date"...................... 83
"drop cable"................................. 55
"DTC"........................................ 23
"dutch auction".............................. 6
"EBITDA"..................................... 39
"effective competition"...................... 52
"Eligible Institution"....................... 23
"enhanced"................................... 54
"Estimated Asset Value"...................... 69
"Estimated Exchange Date Basic Subscribers".. 67
"Estimated Net Asset Value".................. 70
"Exchange Act"............................... i
"Exchange Agent"............................. 8
"Exchange Date".............................. 21
"Exchange Offer"............................. cover
"Exchange Rate".............................. 9
"Exchange Ratio"............................. cover
"Exchange Time".............................. 21
"Expiration Date"............................ 7
"Expiration Time"............................ 7
"external"................................... 43
"Extraordinary Cash Distributions"........... 87
"FCC"........................................ 6
"Final Exchange Ratio"....................... 6
"First Distribution"......................... 1
"Franchise Area"............................. 71
"going forward".............................. 51
"House Bill"................................. 52
"HSR Act".................................... 5
"Implementation Agreement"................... 2
"Inconsistent Terms"......................... 65
"Information Agent".......................... 9
"initial permitted rate"..................... 43
"Initial Redemption Date".................... 88
"IRS"........................................ 6
"Junior Stock"............................... 84
"Lenders".................................... 73
"Letter Agreement"........................... 80
"Limited Service"............................ 47
"Liquidation Preference"..................... 83
"Loan"....................................... 2
"Loan Documentation"......................... 73
"Loan Proceeds".............................. 2
"local"...................................... 53
"Mandatory Redemption Date".................. 88
"Mandatory Redemption Price"................. 88
"Minimum Condition".......................... 7
"MLDS"....................................... 49
"MMDS"....................................... 42
"MSTC"....................................... 23
"NAI"........................................ 2
"Nasdaq"..................................... cover
"Negotiation Period"......................... 66
"Net Asset Value"............................ 70
"Non-Cable Businesses"....................... 1
"not essentially equivalent"................. 97
"November 1994 Regulations".................. 44
"NPTs"....................................... 44
"NVOD"....................................... 49
"Offer Period"............................... 66
"Offered Business"........................... 66
"Optional Redemption Date"................... 88
"Optional Redemption Price".................. 88
"Paramount".................................. 98
vi
"Parents Agreement".......................... 2
"Parity Stock"............................... 11
"Parity Subsidiary Equity Interest".......... 85
"Par Value".................................. 82
"passed by cable"............................ 45
"PCI Group".................................. 65
"PCI Subsidiaries"........................... 65
"PEG"........................................ 47
"PHILADEP"................................... 23
"1995 Plan".................................. 76
"Preferred Stock"............................ 81
"Preferred Stock Directors".................. 91
"Price Notice"............................... 66
"PrimeStar".................................. 49
"Recapitalization"........................... 3
"Record Date"................................ 20
"Redemption Date"............................ 89
"Redemption Notice".......................... 89
"Redemption Price"........................... 88
"Registration Statement"..................... i
"Refund"..................................... 80
"Refund Amount".............................. 80
"Retransmission Consent"..................... 48
"Reviewing Party"............................ 57
"Ruling Letter".............................. 6
"Satellite Value Package".................... 47
"Schedule 13E-4"............................. i
"Second Distribution"........................ 3
"section 306 stock".......................... 6
"Securities Act"............................. i
"Senate Bill"................................ 52
"Senior Stock"............................... 11
"Series A Senior Cumulated Exchangeable
Preferred Stock"............................ 81
"Services Agreement"......................... 95
"Settlement Agreements"...................... 80
"SFAS"....................................... 41
"SMATV"...................................... 42
"SNI"........................................ 80
"Soliciting Dealers"......................... 28
"Specified Party"............................ 71
"SSI"........................................ 80
"Stock Dividend Amount"...................... 83
"Stock Issuance"............................. 3
"Subscription Agreement"..................... 2
"Subscription Payment"....................... 3
"Subsidiary"................................. 85
"Subsidiary Borrowers"....................... 42
"Subsidiary Equity Interest.................. 85
"substantially disproportionate"............. 97
"Tax Indemnity Agreement".................... 80
"TCG San Francisco Partnership".............. 70
"TCG Seattle Partnership".................... 70
"TCI"........................................ cover
"TCI Cable".................................. 2
"TCI Class A Common Stock"................... cover
"TCI Pacific Communications Inc."............ 3
"TCI Pacific Telecommunications Inc."........ 2
"TCI Prospectus"............................. iii
"TCI Registration Statement"................. iii
"TCI Stock".................................. cover
"TCI Stock Exchange Date".................... 86
"TCOMA"...................................... 12
"telcos"..................................... 49
"Telecom Amount"............................. 69
"Telecom Capital Expenditure Amount"......... 76
"Telecom Partnership Agreements"............. 76
"Telecom Partnerships"....................... 75
"through to the viewer"...................... 53
"Tiebreaker Investment Bank"................. 68
"Trading Date"............................... 83
"Transaction"................................ 3
"Transaction Agreements"..................... 2
"Transfer Agent"............................. 92
"transitional rate".......................... 43
"TVRO"....................................... 42
"USSB"....................................... 49
"VDT"........................................ 50
"VIA"........................................ 30
"VIA B"...................................... 30
"Viacom"..................................... cover
"Viacom Class A Common Stock"................ cover
"Viacom Class B Common Stock"................ cover
"Viacom Common Stock"........................ cover
"Viacom Form 8-K"............................ 99
"Viacom Group"............................... 62
"Viacom International"....................... cover
"Viacom Services"............................ 2
"Viacom Stock Fund Account".................. 23
"Video Programming Ban"...................... 54
"VII Cable".................................. 2
"VII Cable Board"............................ 57
"VII Cable Carve-Out Financial Statements"... 13
"VII Cable Class A Common Stock"............. cover
"VII Cable Class B Common Stock"............. 3
"VII Cable Preferred Stock".................. cover
"VII Cable Pro Forma Events"................. 13
"VIP"........................................ 23
"VIP Participants"........................... 23
"Wisconsin cable system"..................... 41
"Withdrawal Rights".......................... 8
vii
OFFERING CIRCULAR - PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Offering Circular -Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information included or
incorporated by reference in this Offering Circular - Prospectus and in the
exhibits to the Registration Statement. Capitalized terms used but not defined
in this summary have the meanings assigned to them elsewhere in this Offering
Circular - Prospectus. See "Index to Defined Terms." Stockholders are urged to
read this Offering Circular - Prospectus. For information concerning TCI and TCI
Common Stock, stockholders are directed to the accompanying TCI Prospectus. See
"Explanatory Note--TCI Prospectus."
VIACOM INC.
Viacom Inc. (together with its subsidiaries and divisions, unless the
context otherwise requires, "Viacom") is a diversified entertainment and
publishing company with operations in five segments: (i) Networks and
Broadcasting, (ii) Entertainment, (iii) Video and Music/Theme Parks, (iv)
Publishing and (v) Cable Television. Through the Networks and Broadcasting
segment, Viacom operates MTV: MUSIC TELEVISION/(R)/, SHOWTIME/(R)/,
NICKELODEON/(R)//NICK AT NITE/(R)/ and VH1 MUSIC FIRST/TM/, among other program
services, and 12 broadcast television and 12 radio stations. Through the
Entertainment segment, which includes PARAMOUNT PICTURES/TM/, Viacom produces
and distributes theatrical motion pictures and television programming. Through
the Video and Music/Theme Parks segment, which includes the BLOCKBUSTER/(R)/
family of businesses and PARAMOUNT PARKS/TM/, Viacom is the leading worldwide
owner, operator and franchisor of videocassette rental and sales stores and a
leading owner and operator of music stores in the U.S. In addition, PARAMOUNT
PARKS/TM/ owns and operates five theme parks located in the U.S. and Canada.
Through the Publishing segment, which includes SIMON & SCHUSTER/(R)/, MACMILLAN
PUBLISHING USA/TM/ and PRENTICE HALL/(R)/, Viacom publishes and distributes
educational, consumer, business, technical and professional books, and audio-
video software products. Through the Cable Television segment, Viacom operates
cable television systems serving approximately 1.2 million customers. Upon
completion of the Transaction, Viacom will no longer own the operations which
comprise its Cable Television segment. Viacom's principal offices are located at
1515 Broadway, New York, New York 10036 and its telephone number is (212) 258-
6000.
VIACOM INTERNATIONAL INC. (PRIOR TO THE FIRST DISTRIBUTION)
As of the date of this Offering Circular - Prospectus, Viacom International
is a wholly owned subsidiary of Viacom through which Viacom conducts its
Networks and Broadcasting, Entertainment, Theme Parks, Publishing and Cable
Television operations. The Cable Television operations and the operations other
than Cable Television are hereinafter referred to as the "Cable Business" and
the "Non-Cable Businesses," respectively. Prior to the consummation of the
Exchange Offer, Viacom International will transfer the Non-Cable Businesses to
Viacom International Services Inc. ("Viacom Services"), a wholly owned
subsidiary of Viacom International, and thereafter distribute the stock of
Viacom Services to Viacom (the "First Distribution"). After giving effect to the
First Distribution, Viacom Services will own and operate all of the Non-Cable
Businesses and Viacom International will be solely engaged in the Cable
Business. Viacom International's principal offices are at 1515 Broadway, New
York, New York 10036 and its telephone number is (212) 258-6000.
VII CABLE
VII Cable currently owns and operates cable television systems in five
geographic regions, including the San Francisco and Northern California area,
Salem, Oregon, the Seattle, Washington and the Greater Puget Sound area,
Nashville, Tennessee and Dayton, Ohio. As of September 30, 1995, VII Cable was
approximately the tenth largest multiple cable television system operator in the
United States, with approximately 1.2 million basic subscribers. VII Cable's
principal offices are currently located at 5924 Stoneridge Drive, Pleasanton,
California 94566 and its telephone number is (510) 463-0870. For a further
description of VII Cable, see "Business of VII
Cable." Upon the consummation of the Transaction, VII Cable will be renamed as
"TCI Pacific Communications, Inc."
As used in this Offering Circular - Prospectus, all references to "Viacom
International" are to the assets and operations of the Cable Business and Non-
Cable Businesses of Viacom International for all periods ending on or before the
First Distribution, and all references to "VII Cable" are (i) to the assets,
operations and management of the Cable Business of Viacom International for all
periods ending on or before the First Distribution and (ii) to the assets and
operations of Viacom International (renamed "TCI Pacific Communications, Inc.")
immediately following the completion of the Transaction, which at that time will
consist almost entirely of the assets and liabilities of the Cable Business (as
discussed with greater detail below) and the liability represented by the Loan.
See "The Transaction--General."
THE TRANSACTION
General........... Viacom has determined to implement the steps summarized
below in order to offer to holders of shares of Viacom
Common Stock the opportunity to acquire direct ownership of
the Cable Business. All such steps are being undertaken
pursuant to the terms and conditions of (i) a Parents
Agreement among Viacom, TCI and TCI Communications, Inc.
("TCI Cable"), dated as of July 24, 1995 (the "Parents
Agreement"), (ii) an Implementation Agreement between Viacom
International and Viacom Services, dated as of July 24, 1995
(the "Implementation Agreement"), (iii) a Subscription
Agreement among Viacom International, TCI and TCI Cable
dated as of July 24, 1995 (the "Subscription Agreement") and
(iv) certain Ancillary Agreements (as defined herein)
(collectively, the "Transaction Agreements"). For a
description of the Transaction Agreements, see "Arrangements
Among Viacom, Viacom International, TCI and TCI Cable."
Viacom is offering hereby to the holders of shares of Viacom
Common Stock the opportunity to exchange all or a portion of
their shares of Viacom Common Stock for shares of VII Cable
Class A Common Stock. The total number of shares of VII
Cable Class A Common Stock exchangeable in the Exchange
Offer ( shares) has been determined as the quotient
obtained by dividing (x) the excess of the Estimated Asset
Value of VII Cable (as defined in the Implementation
Agreement) over the Loan Proceeds (as defined herein) by (y)
$100 (the par value of VII Cable Class A Common Stock). The
Exchange Offer will be subject to a number of conditions,
including the Minimum Condition. National Amusements, Inc.
("NAI"), a closely held corporation that owns approximately
61% of the outstanding Viacom Class A Common Stock and
approximately 25% of the outstanding Viacom Common Stock,
has advised Viacom that it will not participate in the
Exchange Offer.
Prior to expiration of the Exchange Offer, Viacom
International will borrow $1.7 billion (the "Loan
Proceeds"). The facilities pursuant to which Viacom
International will borrow the Loan Proceeds are hereinafter
referred to as the "Loan." See "Arrangements Among Viacom,
Viacom International, TCI and TCI Cable--The
2
Subscription Agreement--Certain Borrowings" and "Description
of Certain Indebtedness of VII Cable."
On the date the Exchange Offer is consummated, Viacom
International will convey to Viacom Services ownership of
the assets relating to the Non-Cable Businesses, the Loan
Proceeds and certain nonmaterial assets (as described
herein) and Viacom Services will assume substantially all of
Viacom International's liabilities (including its existing
public debt, bank debt and the existing intercompany debt
owed by Viacom International to Viacom), other than Viacom
International's repayment and other obligations under the
Loan and liabilities relating to the Cable Business other
than certain nonmaterial specified liabilities (the
"Conveyance"). Viacom International will then distribute
100% of the stock of Viacom Services to Viacom in the First
Distribution, and Viacom International will be
recapitalized, with all of the existing common stock being
reclassified into new VII Cable Class A Common Stock (the
"Recapitalization"). Upon consummation of the Exchange
Offer, 100% of the outstanding shares of VII Cable Class A
Common Stock will be exchanged for the shares of Viacom
Common Stock properly tendered at or below the Final
Exchange Ratio (as defined herein) and not withdrawn or
deemed withdrawn in the Exchange Offer (the "Second
Distribution" and, collectively with the First Distribution,
the "Distributions"). VII Cable will thereupon cease to be
a subsidiary of Viacom.
Immediately following the consummation of the Exchange
Offer, VII Cable has agreed to issue and TCI Cable has
agreed to acquire (the "Stock Issuance") 100 shares of Class
B Common Stock, $.01 par value per share, of VII Cable ("VII
Cable Class B Common Stock"), in exchange for a capital
contribution of $350 million (the "Subscription Payment").
Under the anticipated terms and conditions of the Loan, VII
Cable will be obligated to use such capital contribution to
reduce the amount outstanding under the Loan. Furthermore,
as a result of such issuance, each share of VII Cable Class
A Common Stock distributed to Viacom stockholders pursuant
to the Exchange Offer will automatically convert into one
share of VII Cable Preferred Stock (the "Conversion," and,
together with the Conveyance, the Distributions and the
Stock Issuance, the "Transaction"). See "Description of VII
Cable Capital Stock--VII Cable Preferred Stock." Upon
consummation of the Stock Issuance, TCI Cable will own all
of the Common Stock of VII Cable, and VII Cable will be
renamed as "TCI Pacific Communications, Inc."
If insufficient tenders are made by Viacom stockholders in
the Exchange Offer to permit the Minimum Condition to be
satisfied, Viacom has the right to extend the Exchange Offer
for not less than 10 nor more than 15 business days and,
during such extension, TCI and Viacom have agreed to
negotiate in good faith to determine mutually acceptable
changes to the terms and conditions for the VII Cable
Preferred Stock (including without limitation the Exchange
Rate (as defined herein) and the dividend yield on the VII
Cable
3
Preferred Stock) and the Exchange Offer (including without
limitation the duration of any extension and the maximum
Exchange Ratio) described herein that each believes in good
faith will cause the Minimum Condition to be fulfilled and
that would cause the VII Cable Preferred Stock to trade at a
price equal to its $100 par value per share immediately
following the consummation of the Exchange Offer and the
Stock Issuance. In the event the Minimum Condition is not
thereafter met, TCI and Viacom will each have the right to
terminate the Transaction.
Upon the closing of the Transaction, assuming the partial
repayment of the Loan with the proceeds of the Subscription
Payment, VII Cable will have an aggregate capitalization
consisting of (i) approximately $1.35 billion of borrowings
under the Loan, (ii) VII Cable Preferred Stock with an
estimated aggregate par value of approximately $500 million
and (iii) $350 million of paid-in capital for the VII Cable
Class B Common Stock (representing the Subscription
Payment), and will have no shares of VII Cable Class A
Common Stock outstanding (such shares having been converted
into the VII Cable Preferred Stock). See "Unaudited Pro
Forma Condensed Combined Financial Statements of VII Cable."
Purpose and
Effects of the
Transaction....... The Transaction will reduce Viacom's overall level of
indebtedness, which will enhance Viacom's prospects for an
increase in the rating of its long-term senior unsecured
debt to investment grade, thereby lowering Viacom's
financing costs and enhancing the terms on which Viacom can
access the capital markets. The Transaction will enable
Viacom to utilize its investment capital to invest in the
growth of its core, content-driven entertainment and
publishing businesses rather than in the further development
of its cable television business. The Transaction will
eliminate perceived conflicts and permit Viacom to further
its position on regulatory matters consistent with Viacom's
focus on its programming businesses. Upon the consummation
of the Transaction, certain rules under current federal
telecommunications law which impose restrictions on cable
programmers affiliated with cable system operators would no
longer apply to Viacom. Viacom believes that all of the
foregoing will result in improved deployment of its assets
that will enhance value for its stockholders. This enhanced
value has been evidenced by the decline in the number of
shares of Viacom Class B Common Stock that were issued in
satisfaction of Viacom's Variable Common Rights in September
1995.
The Exchange Offer will also provide Viacom stockholders
with an opportunity to adjust, on a tax-free basis, their
investment between the Cable Business and Viacom's Non-Cable
Businesses. See "Certain Federal Income Tax Consequences."
To the extent that a holder exchanges its Viacom Common
Stock pursuant to the Exchange Offer, such holder will no
longer participate in any increase in the value of such
Viacom Common Stock.
4
Holders of shares of Viacom Common Stock will be
affected by the Transaction regardless of whether such
holders tender their shares of Viacom Common Stock for
exchange pursuant to the Exchange Offer. Holders of shares
of Viacom Common Stock who tender all of their shares for
exchange pursuant to the Exchange Offer will, if all such
shares are accepted for exchange, no longer have an
ownership interest in Viacom. Holders of shares of Viacom
Common Stock who tender all of their shares for exchange
pursuant to the Exchange Offer and who become subject to
proration because more shares of Viacom Common Stock are
tendered for exchange than are necessary to satisfy the
Minimum Condition will have a diminished ownership interest
in Viacom. Holders of shares of Viacom Common Stock who do
not tender any of their shares for exchange pursuant to the
Exchange Offer will not receive shares of VII Cable Class A
Common Stock as a result of the Exchange Offer and will
continue to have an ownership interest in Viacom, which
ownership interest will have increased on a percentage basis
as a result of the Exchange Offer, but will no longer have
any interest in the Cable Business.
NONE OF VIACOM, VIACOM INTERNATIONAL, THE BOARD OF DIRECTORS
OF VIACOM NOR THE BOARD OF DIRECTORS OF VIACOM INTERNATIONAL
MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER OF VIACOM
WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF VIACOM
COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH
STOCKHOLDER OF VIACOM MUST MAKE ITS OWN DECISION WHETHER TO
TENDER SHARES OF VIACOM COMMON STOCK PURSUANT TO THE
EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER AND AT
WHAT EXCHANGE RATIO TO TENDER SUCH SHARES AFTER READING THIS
OFFERING CIRCULAR - PROSPECTUS AND CONSULTING WITH ITS
ADVISORS BASED ON ITS OWN FINANCIAL POSITION AND
REQUIREMENTS.
No Appraisal
Rights............ No appraisal rights are available to Viacom
stockholders in connection with the Transaction.
Regulatory
Approvals......... No filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") are required in
connection with the Exchange Offer generally. Viacom and
TCI have to date made filings under the HSR Act with respect
to the Stock Issuance. The waiting period with respect to
each of these filings terminated in September 1995. To the
extent that certain stockholders of Viacom decide to
participate in the Exchange Offer and thereby acquire a
number of shares of VII Cable Class A Common Stock that
exceeds any threshold stated in the regulations under the
HSR Act, and if an exemption under those regulations does
not apply, such stockholders and Viacom would be required to
make filings under the HSR Act, and the waiting period under
the HSR Act would have to expire or be terminated before any
exchange of shares with those particular stockholders could
be effected.
Approvals must be obtained from certain local franchise
authorities having rights of approval over changes of
control with respect to the
5
change of control of the VII Cable subsidiaries operating
cable systems in such authorities' jurisdictions. In
addition, the Federal Communications Commission ("FCC") must
approve the change of control of the (i) entities licensed
to operate the wireless communications systems used in VII
Cable's business and (ii) entities licensed to operate the
wireless communications systems used in the Non-Cable
Businesses. See "Arrangements Among Viacom, Viacom
International, TCI and TCI Cable--Terms of the
Implementation Agreement--Consents and Approvals."
Viacom and Viacom International do not believe that any
other material federal or state regulatory approvals will be
necessary to consummate the Transaction.
Certain Federal
Income Tax
Consequences of
the Transaction... On , 199 , Viacom has received an
advance private letter ruling (the "Ruling Letter") from the
Internal Revenue Service (the "IRS") to the effect that the
Transaction will qualify as a distribution that is tax-free
to Viacom's stockholders (except with respect to cash
received in lieu of fractional shares) and, in general, is
tax-free to Viacom. The VII Cable Preferred Stock may be
"section 306 stock" for federal income tax purposes, with
the result that all or a portion of the proceeds received by
a stockholder from the sale, exchange or redemption of such
shares will be taxable as ordinary income, and a stockholder
may not recognize any loss from such sale, exchange or
redemption. For a more complete discussion of the U.S.
federal income tax consequences of the Transaction to
holders of Viacom Common Stock, see "Certain Federal Income
Tax Consequences." Each stockholder should consult its tax
advisor as to the particular consequences of the Transaction
to such stockholder.
THE EXCHANGE OFFER
Terms of the
Exchange Offer.... Upon the terms and subject to the conditions of
the Exchange Offer, Viacom is offering hereby to exchange
all of the outstanding shares of VII Cable Class A Common
Stock for shares of Viacom Common Stock at an Exchange Ratio
not greater than nor less than of a
share of VII Cable Class A Common Stock for each share of
Viacom Common Stock tendered. The Exchange Offer will be
conducted as a "dutch auction" in which each holder of
Viacom Common Stock will be able to specify a fraction, not
greater than nor less than , of a share of
VII Cable Class A Common Stock that such holder is willing
to receive in exchange for a share of Viacom Common Stock.
The Exchange Ratio selected by Viacom will be the smallest
Exchange Ratio that will enable Viacom to exchange all of
the outstanding shares of VII Cable Class A Common Stock for
Viacom Common Stock pursuant to the Exchange Offer (the
"Final Exchange Ratio"). All shares of Viacom Common Stock
properly tendered and not withdrawn or deemed withdrawn at
Exchange Ratios at or below the Final Exchange Ratio will be
6
exchanged at the Final Exchange Ratio, on the terms and
subject to the conditions of the Exchange Offer, including
the proration provisions described herein. If more shares
of Viacom Common Stock are validly tendered at or below the
Final Exchange Ratio, and not properly withdrawn, than are
necessary to satisfy the Minimum Condition, then Viacom will
accept all of such shares on a pro rata basis as described
herein in exchange for the shares of VII Cable Class A
Common Stock. The Exchange Offer, proration period and
withdrawal rights will expire at the Expiration Time on the
Expiration Date (as such terms are defined herein). To be
eligible to receive VII Cable Class A Common Stock pursuant
to the Exchange Offer, a holder of Viacom Common Stock must
validly tender and not properly withdraw Viacom Common Stock
on or prior to the Expiration Time on the Expiration Date.
See "The Exchange Offer--Terms of the Exchange Offer."
Expiration Date... The Exchange Offer will expire at 12:00 Midnight, New
York City time (the "Expiration Time"), on , 1996
(the "Expiration Date"), unless extended, in which case the
terms "Expiration Time" and "Expiration Date" shall mean the
last time and date to which the Exchange Offer is extended.
See "The Exchange Offer--Extension of Tender Period;
Termination; Amendment."
Conditions of the
Exchange Offer... The Exchange Offer is conditioned upon, among other
things, there being validly tendered and not properly
withdrawn prior to the expiration of the Exchange Offer a
number of shares of Viacom Common Stock which, when
multiplied by the Final Exchange Ratio, equals all of the
outstanding shares of VII Cable Class A Common Stock (the
"Minimum Condition"); the Exchange Offer is also subject to
other terms and conditions. See "The Exchange Offer--
Certain Conditions of the Exchange Offer."
Procedures for
Tendering........ To be tendered properly, certificates for shares of
Viacom Common Stock, together with a properly completed and
duly executed Letter of Transmittal (or manually signed
facsimile thereof) or an Agent's Message in the case of a
book-entry transfer of shares, and any other documents
required by the Letter of Transmittal must be received by
the Exchange Agent at one of the addresses set forth on the
back cover of this Offering Circular - Prospectus prior to
the Expiration Time on the Expiration Date, or stockholders
must comply with the specific procedures for guaranteed
delivery described herein. Certain financial institutions
may also effect tenders by book-entry transfer through a
Book-Entry Transfer Facility (as defined herein). Holders
of Viacom Common Stock having shares registered in the name
of a broker, dealer, commercial bank, trust company or
nominee are urged to contact such person promptly if they
wish to tender any shares of Viacom Common Stock pursuant to
the Exchange Offer. See "The Exchange Offer--Procedures for
Tendering Shares of Viacom Common Stock" and "--Guaranteed
Delivery Procedure."
7
Proration......... If more shares of Viacom Common Stock have been validly
tendered for exchange at or below the Final Exchange Ratio,
and not properly withdrawn, on or prior to the Expiration
Date than are necessary to satisfy the Minimum Condition,
subject to the terms and conditions of the Exchange Offer,
Viacom will accept such shares on a pro rata basis. See
"The Exchange Offer--Terms of the Exchange Offer."
Withdrawal
Rights........... Subject to the conditions set forth herein, tenders of
shares of Viacom Common Stock may be withdrawn, at any time
on or prior to the Expiration Time on the Expiration Date
and, unless theretofore accepted for exchange as provided in
this Offering Circular--Prospectus, may also be withdrawn at
any time after the expiration of 40 business days from the
commencement of the Exchange Offer. See "The Exchange
Offer--Withdrawal Rights."
No Fractional
Shares........... No fractional shares of VII Cable Class A Common Stock
or VII Cable Preferred Stock, as the case may be, will be
distributed. The Exchange Agent, acting as agent for Viacom
stockholders otherwise entitled to receive fractional
shares, will aggregate all fractional shares and sell them
for the accounts of such stockholders. Such proceeds as may
be realized by the Exchange Agent upon the sale of such
fractional shares will be distributed, net of commissions,
to such stockholders on a pro rata basis. See "The Exchange
Offer-- Terms of the Exchange Offer."
Delivery of and
Market for VII
Cable Preferred
Stock............ Upon consummation of the Stock Issuance, each
share of VII Cable Class A Common Stock will automatically
convert into one share of VII Cable Preferred Stock, and
shares of VII Cable Preferred Stock and cash in lieu of
fractional shares will be delivered as soon as practicable
after acceptance of Viacom Common Stock for exchange.
Accordingly, holders of shares of Viacom Common Stock
electing to tender such shares in the Exchange Offer should
not expect to take physical delivery of shares of VII Cable
Class A Common Stock which they will have the right to
receive in exchange for shares of Viacom Common Stock after
the consummation of the Stock Issuance. See "The Exchange
Offer--Exchange of Shares of Viacom Common Stock."
Application will be made for quotation of the VII Cable
Preferred Stock on Nasdaq under the symbol " ." No
current public trading market for VII Cable Class A Common
Stock or VII Cable Preferred Stock exists and there can be
no assurance that an active trading market for the VII Cable
Preferred Stock will be established or maintained after the
consummation of the Exchange Offer. See "Risk Factors--
Market Uncertainties with respect to VII Cable Preferred
Stock"; and "Market Prices, Trading and Dividend
Information--VII Cable Class A Common Stock and VII Cable
Preferred Stock."
Exchange Agent.... is serving as the Exchange Agent in
connection with the Exchange Offer. Its telephone number
is .
8
Information
Agent............. Georgeson & Company Inc. is serving as the Information
Agent in connection with the Exchange Offer. Its telephone
number is (800) 223-2064.
TERMS OF THE %
SERIES A SENIOR
CUMULATIVE
EXCHANGEABLE
PREFERRED
STOCK............. Each share of VII Cable Class A Common Stock will
automatically convert into one share of VII Cable Preferred
Stock upon the Stock Issuance, which is expected to occur
immediately after the consummation of the Exchange Offer.
Dividends......... Dividends on the VII Cable Preferred Stock will accrue
and be cumulative from the date of issuance at a rate per
annum of %, payable quarterly when, as and if declared by
the VII Cable Board (as defined herein). The dividend rate
was determined by two investment banking firms as the rate
that, in the opinion of such firms, will cause the VII Cable
Preferred Stock to trade initially at a liquidation
preference of $100 per share immediately after the
consummation of the Exchange Offer and the Stock Issuance.
VII Cable may elect to make dividend payments (i) in cash,
(ii) by delivery of shares of TCI Stock or (iii) in any
combination of the foregoing forms of consideration elected
by VII Cable. If the VII Cable Board determines to pay a
dividend and VII Cable is prohibited from paying cash
dividends pursuant to the Loan or if VII Cable otherwise
decides to pay dividends in TCI Stock, TCI Cable has agreed
to make available to VII Cable (i) funds in the form of an
equity contribution or a subordinated loan or (ii)
sufficient shares of TCI Stock, in each case to pay such
dividends in cash, TCI Stock or a combination thereof, with
respect to any dividend payment. See "Description of VII
Cable Preferred Stock--Dividends."
Liquidation
Preference........ Upon any voluntary or involuntary liquidation,
dissolution or winding up of VII Cable, holders of VII Cable
Preferred Stock will be entitled to be paid $100 per share,
plus accumulated and unpaid dividends, out of VII Cable
assets available for distribution.
Exchange
Privilege......... Commencing after the fifth anniversary of the date of
issuance, the VII Cable Preferred Stock will be
exchangeable, in whole or in part, at the option of the
holders of VII Cable Preferred Stock (unless earlier
redeemed), into TCI Stock, at the Exchange Rate (as defined
herein), subject to adjustment in certain events. The
initial exchange rate (the "Exchange Rate") will be obtained
by dividing (i) $80 by (ii) the weighted average of the
sales prices for all trades of shares of TCI Stock as
reported on Nasdaq on each of the twenty full consecutive
trading days ending on the second business day prior to the
Expiration Date, including any extension thereof. Pursuant
to the Subscription Agreement, TCI is required to reserve
sufficient shares of TCI Stock to effect such exchange of
the VII Cable Preferred Stock. See "Description of the VII
Cable Preferred Stock--Exchange Privilege."
VIACOM WILL ANNOUNCE THE INITIAL EXCHANGE RATE FOR THE
EXCHANGE OF SHARES OF VII CABLE PREFERRED STOCK INTO SHARES
OF TCI STOCK BY 5:00 P.M., NEW YORK CITY TIME, ON THE SECOND
BUSINESS DAY
9
PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. VIACOM
INTERNATIONAL WILL MAKE SUCH ANNOUNCEMENT BY ISSUING A PRESS
RELEASE TO THE DOW JONES NEWS SERVICE. AFTER THAT TIME,
HOLDERS OF SHARES OF VIACOM COMMON STOCK WILL ALSO BE ABLE
TO OBTAIN THE INITIAL EXCHANGE RATE FROM THE INFORMATION
AGENT OR THE DEALER MANAGER FOR THE EXCHANGE OFFER AT THEIR
RESPECTIVE TELEPHONE NUMBERS APPEARING ON THE BACK COVER OF
THIS OFFERING CIRCULAR - PROSPECTUS.
Optional
Redemption........ The VII Cable Preferred Stock is not redeemable prior to 15
days after the fifth anniversary of the date of issuance. At
any time and from time to time on or after that date, VII
Cable may redeem any or all of the outstanding shares of VII
Cable Preferred Stock, initially at a redemption price of $
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. VII Cable may elect to
make any optional redemption payment (i) in cash, (ii) by
delivery of TCI Stock or (iii) by any combination of the
foregoing forms of consideration elected by VII Cable. See
"Description of the VII Cable Preferred Stock--Redemption--
Optional Redemption."
Mandatory
Redemption........ The VII Cable Preferred Stock is subject to mandatory
redemption by VII Cable on the tenth anniversary of the date
of issuance, at a redemption price of $100 per share, plus
accrued and unpaid dividends to the date of redemption. VII
Cable may elect to make any mandatory redemption payment (i)
in cash, (ii) by delivery of TCI Stock or (iii) by any
combination of the foregoing forms of consideration elected
by VII Cable. See "Description of the VII Cable Preferred
Stock--Redemption--Mandatory Redemption."
VII Cable May Make
Dividend and
Redemption Payments
with TCI Stock.... VII Cable may elect to make dividend payments and
redemption payments (optional or mandatory) to holders of
VII Cable Preferred Stock (i) in cash, (ii) by delivery of
TCI Stock or (iii) by any combination of the foregoing forms
of consideration elected by VII Cable. If VII Cable elects
to make any such payment (or a designated portion thereof)
through the delivery of shares of TCI Stock, each holder
will receive a number of shares of TCI Stock determined by
dividing the amount of such payment (or designated portion
thereof) by the Cash Equivalent Amount. The "Cash
Equivalent Amount" means an amount equal to 95% of the
average of the closing sale prices for a share of TCI Stock
on Nasdaq for the 10 consecutive trading days ending on the
third business day prior to (i) in the case of dividends,
the related record date and (ii) in the case of a
redemption, the date of such redemption. The market price
of the shares of TCI Stock may vary between the date of such
determination and the subsequent delivery of such shares to
a holder of VII Cable Preferred Stock.
10
In the case of a dividend or redemption payment that is
made through delivery of shares of TCI Stock, if the average
closing price upon which the Cash Equivalent Amount is
determined is more than 5.26% higher than the market value
of such shares on the dividend payment date or the
redemption date and the holder sells such shares of TCI
Stock at such lower price, (x) in the case of such dividend,
the holder's actual dividend yield for the dividend period
in respect of which such dividend was paid would be lower
than the stated dividend yield on the VII Cable Preferred
Stock (for such period) and (y) in the case of such
redemption, the actual sales proceeds received by such
holder would be lower than the stated redemption price for
the VII Cable Preferred Stock. In addition, in connection
with any such sale the holder is likely to incur commissions
and other transaction costs.
Voting Rights..... If at any time accrued dividends on the VII Cable
Preferred Stock are in arrears and unpaid in an amount equal
to six or more quarterly dividend periods (whether or not
consecutive), holders of the VII Cable Preferred Stock will
have the right to elect two additional directors to VII
Cable's Board of Directors, voting as a separate class with
the holders of any Parity Stock (as defined herein) upon
which like voting rights have been conferred and are vested,
until such dividend arrearage is eliminated. The holders of
VII Cable Preferred Stock will have no other voting rights,
except that the affirmative vote of at least 66 2/3% of the
VII Cable Preferred Stock (voting separately as a class)
will be required, subject to certain exceptions, before (i)
VII Cable may amend, alter or repeal any provision of VII
Cable's Restated Certificate of Incorporation which would
adversely affect the powers, preferences or rights of the
holders of the VII Cable Preferred Stock, (ii) VII Cable or
the VII Cable Board may authorize the creation or issue of
any class or series of preferred stock of VII Cable that
ranks senior to the VII Cable Preferred Stock as to dividend
payments, payments on redemption or payments of amounts
distributable upon the dissolution, liquidation or winding
up of the Company ("Senior Stock") or (iii) VII Cable may
effect a reclassification of the VII Cable Preferred Stock.
See "Description of the VII Cable Preferred Stock--Voting
Rights."
Ranking........... The VII Cable Preferred Stock will rank senior to any
class or series of common stock of VII Cable. Immediately
following the consummation of the Transaction, the only
class or series of preferred stock outstanding of VII Cable
will be the VII Cable Preferred Stock, and all of the
authorized shares of the VII Cable preferred stock will be
issued in connection with the Exchange Offer.
11
Registration and
Listing of
TCI Stock......... The TCI Stock is listed on Nasdaq under the symbol "TCOMA."
Shares of TCI Stock delivered upon the exchange of VII Cable
Preferred Stock will be, and the delivery of such shares as
dividend or redemption payments in respect of VII Cable
Preferred Stock will be conditioned upon such shares being,
eligible for trading on Nasdaq and exempt from (or
registered under) the Securities Act and applicable state
securities laws. Trading in such shares by affiliates of VII
Cable and TCI will be subject to the restrictions of Rule
144.
12
SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION
VII CABLE
(IN MILLIONS)
The following table sets forth certain summary historical combined
financial data of VII Cable and has been derived from and should be read in
conjunction with the audited combined financial statements of VII Cable for the
three years ended December 31, 1994, including the notes thereto, and the
unaudited interim combined financial statements of VII Cable, including the
notes thereto, appearing elsewhere in this Offering Circular - Prospectus
(collectively, the "VII Cable Carve-Out Financial Statements"). Unaudited
interim data for the nine-month period ended September 30, 1995 and 1994
reflect, in the opinion of management of VII Cable, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of such data. Results of operations for the nine months ended
September 30, 1995 are not necessarily indicative of results which may be
expected for any other interim or annual period. The VII Cable Carve-Out
Financial Statements reflect the carve-out historical results of operations and
financial position of the cable television distribution business of Viacom
International during the periods presented and are not necessarily indicative of
results of operations or financial position that would have occurred if VII
Cable had been a separate stand-alone entity during the periods presented or of
future results of operations or financial position of VII Cable.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
RESULTS OF OPERATIONS DATA:
Revenues.......................................... $328.6 $303.6 $ 404.5 $414.8 $410.1 $378.0 $330.5
Earnings from operations.......................... 59.8 42.7 57.4 83.8 97.5 82.2 55.9
Earnings (loss) before taxes...................... 54.1 20.2 26.4 128.1 53.1 15.0 (10.0)
Net earnings (loss) before cumulative effect of
change in accounting principle............... 27.8 6.7 9.1 83.9 25.8 (.2) (15.3)
Net earnings (loss)............................... 27.8 6.7 9.1 97.4 25.8 (.2) (15.3)
RATIO OF EARNINGS TO FIXED
CHARGES/(A)/..................................... 2.3x N/A 1.7x 4.6x 2.0x 1.2x (b)
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS/(A)/............................. 2.3x N/A 1.7x 4.6x 2.0x 1.2x (b)
AT SEPTEMBER 30, AT DECEMBER 31,
------------------ --------------------------------------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets...................................... $1,053.9 $1,040.4 $966.2 $964.7 $976.0 $992.7
Total debt........................................ 57.0 57.0 57.0 106.0 106.1 106.1
Viacom equity investment.......................... 842.7 823.9 765.5 753.9 767.7 788.1
- -----------------------------
(a) For purposes of computing the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
earnings represent income from operations before fixed charges and taxes,
and fixed charges represent interest on indebtedness, amortization of debt
discount and such portion of rental expense which is deemed to be
representative of the interest factor.
(b) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover fixed charges and combined fixed charges and
preferred stock dividends for the year ended December 31, 1990 would have
been $8.7 million.
13
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
VII CABLE
(IN MILLIONS)
The following summary unaudited pro forma combined financial data of VII
Cable as of and for the nine months ended September 30, 1995 and as of and for
the twelve months ended December 31, 1994 give effect to (i) the Loan, (ii) the
Conveyance, (iii) the Recapitalization, (iv) the Exchange Offer, (v) the
Distributions, (vi) the Conversion, (vii) the Stock Issuance (collectively, the
"VII Cable Pro Forma Events") as if such events occurred at the beginning of the
earliest period presented for results of operations data. The summary unaudited
pro forma combined statement of operations data for the nine months ended
September 30, 1995 and the year ended December 31, 1994 were based upon the
statements of operations of VII Cable for the nine months ended September 30,
1995 and year ended December 31, 1994, respectively. The summary unaudited pro
forma combined balance sheet data give effect to the VII Cable Pro Forma Events
as if they had occurred on September 30, 1995. The summary unaudited pro forma
combined financial data of VII Cable were derived from, and should be read in
conjunction with, the unaudited pro forma condensed combined financial
statements of VII Cable and the notes thereto appearing elsewhere in this
Offering Circular -Prospectus. See "Unaudited Pro Forma Condensed Combined
Financial Statements of VII Cable." The unaudited pro forma data are not
necessarily indicative of the combined results of operations or financial
position that would have occurred if the VII Cable Pro Forma Events occurred at
the beginning of the earliest period presented nor are they necessarily
indicative of future results of operations or financial position.
NINE MONTHS ENDED
SEPTEMBER 30, 1995 YEAR ENDED DECEMBER 31, 1994
-------------------------- ----------------------------
HISTORICAL PRO FORMA/(A)/ HISTORICAL PRO FORMA/(A)/
---------- -------------- ---------- ----------------
RESULTS OF OPERATIONS DATA:
Revenues............................. $ 328.6 $ 326.7 $404.5 $407.6
Earnings from operations............. 59.8 33.6 57.4 28.6
Earnings (loss) before taxes......... 54.1 (39.6) 26.4 (70.7)
Net earnings (loss).................. 27.8 (41.0) 9.1 (65.5)
Net earnings (loss) attributable to N/A (57.9) N/A (88.0)
common stock........................
Ratio of earnings to fixed charges... 2.3x (b) 1.7x (b)
Ratio of earnings to combined 1.7x (c)
fixed charges and preferred
stock dividends................... 2.3x (c)
AT SEPTEMBER 30, 1995
--------------------------
HISTORICAL PRO FORMA/(A)/
---------- --------------
BALANCE SHEET DATA:
Total assets......................... $1,053.9 $2,311.1
Total debt........................... 57.0 1,350.0
Series A Preferred Stock............. -- 500.0
Class B Common Stock................. -- 350.0
Viacom equity investment............. 842.7 --
- -------------------------------------
(a) Gives pro forma effect to the VII Cable Pro Forma Events as if such events
had occurred at the beginning of the earliest period presented for results
of operations data and on September 30, 1995 for balance sheet data.
(b) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover fixed charges on a pro forma combined basis for
the nine months ended September 30, 1995 and the year ended December 31,
1994 would have been $40.3 million and $67.9 million, respectively.
(c) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover combined fixed charges and preferred stock
dividends on a pro forma combined basis for the nine months ended September
30, 1995 and the year ended December 31, 1994 would have been $66.3 million
and $102.5 million, respectively.
14
COMPARATIVE PER SHARE DATA
The following table presents historical and equivalent per share data for
Viacom giving effect to the consummation of the Exchange Offer assuming 10
million shares of Viacom Common Stock are exchanged at an assumed Exchange Ratio
of 0.5 shares of VII Cable Class A Common Stock for each share of Viacom Common
Stock (based on a per share price of $50). The table should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 1994 and the unaudited financial information as
of and for the nine months ended September 30, 1995 of Viacom incorporated by
reference in this Offering Circular - Prospectus.
NINE MONTHS ENDED SEPTEMBER 30, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------------ ----------------------------
HISTORICAL EQUIVALENT HISTORICAL EQUIVALENT
---------- ---------- ---------- ----------
Per Share of Viacom Common Stock:
Net income from continuing
operations..................... $ .44 $ .45 $ .25 $ .26
Dividends........................ -- -- -- --
Book Value....................... $32.67 $33.59 $32.87 $33.82
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth (i) the ratio of earnings to fixed charges
for Viacom for the nine-month periods ended September 30, 1995 and September 30,
1994 and each year in the five-year period ended December 31, 1994 and (ii) the
ratio of earnings to combined fixed charges and preferred stock dividends for
Viacom for the nine-month periods ended September 30, 1995 and September 30,
1994 and each applicable year in the five-year period ended December 31, 1994.
For purposes of computing the following ratios, earnings represent income from
operations before fixed charges and taxes, and fixed charges represent interest
on indebtedness, amortization of debt discount and such portion of rental
expense which is deemed to be representative of the interest factor. The ratios
set forth below should be read in conjunction with the financial statements of
Viacom incorporated in this Offering Circular-Prospectus.
Nine Months Ended
September 30, Year Ended December 31,
----------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges 1.8x 1.6x 1.7x 2.8x 1.8x 1.0x (a)
Ratio of Earnings to Combined Fixed Charges 1.6x 1.5x 1.1x 2.5x (b) (b) (b)
and Preferred Stock Dividends
- -----------
(a) Earnings of Viacom were insufficient to cover fixed charges for the year
ended December 31, 1990. The additional amount of earnings required to cover
fixed charges of Viacom for the year ended December 31, 1990 would have been
$66.2 million.
(b) Viacom did not have any preferred stock outstanding from 1990 to October
1993.
15
THE TRANSACTION
GENERAL
As of the date of this Offering Circular - Prospectus, Viacom International
is a wholly owned subsidiary of Viacom through which Viacom conducts its
Networks and Broadcasting, Entertainment, Theme Parks, Publishing and Cable
Business operations. Viacom has determined to implement the steps summarized
below in order to offer to holders of shares of Viacom Common Stock the
opportunity to acquire direct ownership of the Cable Business. All such steps
are being undertaken pursuant to the terms and conditions of the Parents
Agreement, the Implementation Agreement, the Subscription Agreement and the
Ancillary Agreements. For a description of each of those agreements, see
"Arrangements Among Viacom, Viacom International, TCI and TCI Cable."
Viacom is offering hereby to the holders of shares of Viacom Common Stock
the opportunity to exchange all or a portion of their shares of Viacom Common
Stock for shares of VII Cable Class A Common Stock. The total number of shares
of VII Cable Class A Common Stock exchangeable in the Exchange Offer
( shares) has been determined as the quotient obtained by dividing (x)
the excess of the Estimated Asset Value over the Loan Proceeds by (y) $100 (the
par value of VII Cable Class A Common Stock). The Exchange Offer will be
subject to a number of conditions, including the Minimum Condition.
NAI, a closely held corporation that owns approximately 61% of the
outstanding Viacom Class A Common Stock and approximately 25% of the
outstanding Viacom Common Stock, will not participate in the Exchange Offer.
Prior to expiration of the Exchange Offer, Viacom International will
borrow the Loan Proceeds. For a description of the terms of the Loan, see
"Description of Certain Indebtedness of VII Cable."
On the date the Exchange Offer is consummated, Viacom International will
convey to Viacom Services ownership of the assets relating to the Non-Cable
Businesses, the Loan Proceeds and certain nonmaterial assets (including certain
equity investments and marketable securities) which have historically been
reported as part of Viacom's Cable Television segment and which from and after
the First Distribution are deemed included in the definition of Non-Cable
Businesses and Viacom Services will assume substantially all of Viacom
International's liabilities (including its existing public debt, bank debt and
the existing intercompany debt owed by Viacom International to Viacom), other
than Viacom International's repayment and other obligations under the Loan and
liabilities relating to the Cable Business other than certain nonmaterial
specified liabilities. Next, Viacom International will distribute 100% of the
stock of Viacom Services to Viacom, and Viacom International will be
recapitalized, with all of the existing common stock being reclassified into
new VII Cable Class A Common Stock. Upon consummation of the Exchange Offer,
100% of the outstanding shares of VII Cable Class A Common Stock will be
exchanged at the Final Exchange Ratio for the shares of Viacom Common Stock
properly tendered and not withdrawn or deemed withdrawn in the Exchange Offer
at exchange ratios at or below the Final Exchange Ratio. VII Cable will
thereupon cease to be a subsidiary of Viacom.
Immediately following the consummation of the Exchange Offer, VII Cable
has agreed to issue and TCI Cable has agreed to acquire 100 shares of VII Cable
Class B Common Stock in consideration of the payment of the Subscription
Payment. Under the anticipated terms and conditions of the Loan, VII Cable will
be obligated to use such capital contribution to reduce VII Cable's obligations
under the Loan. Furthermore, as a result of such issuance, each share of VII
Cable Class A Common Stock distributed to Viacom stockholders pursuant to the
Exchange Offer will automatically convert into one share of VII Cable Preferred
Stock. See "Description of VII Cable Capital Stock--VII Cable Preferred Stock."
Upon the consummation of the Stock Issuance, VII Cable will be renamed "TCI
Pacific Communications, Inc."
If insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Minimum Condition to be satisfied, Viacom has the right to
extend the Exchange Offer not less than 10 nor more than 15
16
business days. During such extension, TCI and Viacom have agreed to negotiate in
good faith to determine mutually acceptable changes to the terms and conditions
for the VII Cable Preferred Stock (including without limitation the Exchange
Rate and the dividend yield on the VII Cable Preferred Stock) and the Exchange
Offer (including without limitation the duration of any extension and the
maximum Exchange Ratio) that each believes in good faith will cause the Minimum
Condition to be fulfilled and that would cause the VII Cable Preferred Stock to
trade at a price equal to its $100 par value per share immediately following the
consummation of the Exchange Offer and the Stock Issuance. In the event the
Minimum Condition is not thereafter met, TCI and Viacom will each have the right
to terminate the Transaction.
Upon the closing of the Transaction, assuming the partial repayment of the
Loan with the proceeds of the Subscription Payment, VII Cable will have an
aggregate capitalization consisting of (i) approximately $1.35 billion of
borrowings under the Loan, (ii) VII Cable Preferred Stock with an estimated
aggregate par value of approximately $500 million and (iii) $350 million of
paid-in capital for the VII Cable Class B Common Stock (representing the
Subscription Payment), and will have no shares of VII Cable Class A Common Stock
outstanding (such shares having been converted into the VII Cable Preferred
Stock). See "Unaudited Pro Forma Condensed Combined Financial Statements of VII
Cable."
PURPOSE AND EFFECTS OF THE TRANSACTION
The Transaction will reduce Viacom's overall level of indebtedness, which
Viacom expects will enhance Viacom's prospects for an increase in the rating of
its long-term senior unsecured debt to investment grade, thereby lowering
Viacom's financing costs and enhancing the terms on which Viacom can access the
capital markets. The Transaction will enable Viacom to utilize its investment
capital to invest in the growth of its core, content-driven entertainment and
publishing businesses rather than in the further development of its cable
television business. The Transaction will eliminate perceived conflicts and
permit Viacom to further its position on regulatory matters consistent with
Viacom's focus on its programming businesses. Upon the consummation of the
Transaction, certain rules under current federal telecommunications law which
impose restrictions on cable programmers affiliated with cable system operators
would no longer apply to Viacom. Viacom believes that all of the foregoing will
result in improved deployment of its assets that will enhance value for its
stockholders. This enhanced value has been evidenced by the decline in the
number of shares of Viacom Class B Common Stock that were issued in satisfaction
of Viacom's Variable Common Rights in September 1995.
The Exchange Offer will also provide Viacom stockholders with an
opportunity to adjust, on a tax-free basis, their investment between the Cable
Business and Viacom's Non-Cable Businesses. See "Certain Federal Income Tax
Consequences." To the extent that a holder exchanges its Viacom Common Stock
pursuant to the Exchange Offer, such holder will no longer participate in any
increase in the value of such Viacom Common Stock.
Holders of shares of Viacom Common Stock will be affected by the
Transaction regardless of whether such holders tender their shares of Viacom
Common Stock for exchange pursuant to the Exchange Offer. Holders of shares of
Viacom Common Stock who tender all of their shares for exchange pursuant to the
Exchange Offer will, if all such shares are accepted for exchange, no longer
have an ownership interest in Viacom. Holders of shares of Viacom Common Stock
who tender all of their shares for exchange and who become subject to proration
because more shares of Viacom Common Stock are tendered for exchange than are
necessary to satisfy the Minimum Condition will have a diminished ownership
interest in Viacom. Holders of shares of Viacom Common Stock who do not tender
any of their shares for exchange pursuant to the Exchange Offer will not receive
shares of VII Cable Class A Common Stock as a result of the Exchange Offer and
will continue to have an ownership interest in Viacom, which ownership interest
will have increased on a percentage basis as a result of the Exchange Offer, but
will no longer hold an interest in the Cable Business.
NONE OF VIACOM, VIACOM INTERNATIONAL, THE BOARD OF DIRECTORS OF VIACOM NOR
THE BOARD OF DIRECTORS OF VIACOM INTERNATIONAL MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER OF VIACOM WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF
VIACOM COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH
17
STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER SHARES OF VIACOM COMMON
STOCK PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER AND
AT WHAT EXCHANGE RATIO TO TENDER SUCH SHARES, AFTER READING THIS OFFERING
CIRCULAR - PROSPECTUS AND CONSULTING WITH ITS ADVISORS BASED ON ITS OWN
FINANCIAL POSITION AND REQUIREMENTS.
NO APPRAISAL RIGHTS
No appraisal rights are available to Viacom stockholders in connection with
the Transaction.
REGULATORY APPROVALS
No filings under the HSR Act are required in connection with the Exchange
Offer generally. Viacom and TCI have to date made filings under the HSR Act with
respect to the Stock Issuance. The waiting period with respect to each of these
filings terminated in September 1995. To the extent that certain stockholders of
Viacom decide to participate in the Exchange Offer and thereby acquire a number
of shares of VII Cable Class A Common Stock that exceeds any threshold stated in
the regulations under the HSR Act, and if an exemption under those regulations
does not apply, such stockholders and Viacom would be required to make filings
under the HSR Act, and the waiting period under the HSR Act would have to expire
or be terminated before any exchanges of shares with those particular
stockholders could be effected.
Approvals must be obtained from certain local franchise authorities having
rights of approval over changes of control with respect to the change of control
of the VII Cable subsidiaries operating cable systems in such authorities'
jurisdictions. In addition, the FCC must approve the change of control of the
(i) entities licensed to operate the wireless communications systems used in VII
Cable's business and (ii) entities licensed to operate the wireless
communications systems used in the Non-Cable Businesses. See "Arrangements Among
Viacom, Viacom International, TCI and TCI Cable--Terms of the Implementation
Agreement--Consents and Approvals."
Viacom and Viacom International do not believe that any other material
federal or state regulatory approvals will be necessary to consummate the
Transaction.
ANTICIPATED ACCOUNTING TREATMENT
Following completion of the Conveyance, the First Distribution, the
Recapitalization and the Second Distribution, the assets and liabilities and
results of operations of VII Cable will cease to be consolidated with the assets
and liabilities and results of operations of Viacom. It is expected that the
transactions contemplated by the Subscription Agreement will be accounted for
under the purchase method of accounting in accordance with generally accepted
accounting principles. Accordingly, the cost to acquire VII Cable will be
allocated, by TCI, to the assets and liabilities acquired based on their fair
values, with any excess being treated as intangible assets.
18
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Exchange
Offer, Viacom is offering hereby to exchange all of the outstanding shares of
VII Cable Class A Common Stock for shares of Viacom Common Stock that are
validly tendered by the Expiration Time on the Expiration Date and not deemed
withdrawn, as set forth below under "--Withdrawal Rights," at an Exchange Ratio
(determined in the manner set forth below) not greater than nor less
than of a share of VII Cable Class A Common Stock for each share of
Viacom Common Stock tendered. The term "Expiration Time" shall mean 12:00
Midnight, New York City time, and the term "Expiration Date" shall mean
, 1996, unless the period of time during which the Exchange Offer is
open shall have been extended in accordance with applicable law and the Parents
Agreement, in which event the terms "Expiration Time" and "Expiration Date"
shall mean the latest time and date at which the Exchange Offer, as so extended,
shall expire. See "--Extension of Tender Period; Termination; Amendment." If the
Exchange Offer is oversubscribed, shares of Viacom Common Stock tendered at or
below the Final Exchange Ratio will be subject to proration. The proration
period will also expire at the Expiration Time on the Expiration Date.
The Exchange Offer will be conducted as a "dutch auction" in which holders
of Viacom Common Stock will be able to specify a fraction, not greater than
nor less than , of a share of VII Cable Class A Common Stock that such
holders are willing to receive in exchange for a share of Viacom Common Stock.
The minimum and maximum Exchange Ratios of VII Cable Class A Common Stock for
each share of Viacom Common Stock exchanged were established by Viacom, pursuant
to its obligations under the Parents Agreement. The maximum Exchange Ratio was
set at a level equal to 112.5% of the weighted averages for all trades of shares
of Viacom Class B Common Stock, as reported by the ADP Financial Information
Services reporting service, during the twenty trading day period ended the date
prior to the commencement of the Exchange Offer, divided by $100.00, and the
minimum Exchange Ratio was set at a level equal to the maximum Exchange Ratio
divided by 1.125. Viacom will, upon the terms and subject to the conditions of
the Exchange Offer, determine the Final Exchange Ratio, taking into account the
number of shares of Viacom Common Stock tendered and the fraction of a share of
VII Cable Class A Common Stock specified by tendering stockholders. Viacom will
select as the Final Exchange Ratio the lowest Exchange Ratio that will allow it
to exchange all of the outstanding shares of VII Cable Class A Common Stock.
The Exchange Offer is conditioned upon there being validly tendered and not
properly withdrawn prior to the Expiration Time on the Expiration Date a number
of shares of Viacom Common Stock which, when multiplied by the Final Exchange
Ratio, equals all of the outstanding shares of VII Cable Class A Common Stock.
The Exchange Offer is also subject to certain other conditions. See "--Certain
Conditions of the Exchange Offer." Upon the terms and subject to the conditions
of the Exchange Offer, if more shares of Viacom Common Stock are validly
tendered for exchange at or below the Final Exchange Ratio than are necessary to
satisfy the Minimum Condition and are not properly withdrawn prior to the
Expiration Date, Viacom will exchange shares of VII Cable Class A Common Stock
for shares of Viacom Common Stock on a pro rata basis (with appropriate
adjustments to avoid purchases of fractional shares of Viacom Common Stock).
Shares of Viacom Common Stock not exchanged for shares of VII Cable Class A
Common Stock because of proration will be returned.
The Exchange Offer, proration period and withdrawal rights will expire at
12:00 Midnight, New York City time, on , 1996, unless the Exchange Offer
is extended.
Viacom does not expect that it would be able to announce the final
proration factor or to commence delivery of any shares of VII Cable Class A
Common Stock exchanged pursuant to the Exchange Offer until approximately seven
AMEX trading days after the Expiration Date. This delay results from the
difficulty in determining the number of shares of Viacom Common Stock validly
tendered for exchange (including shares of Viacom Common Stock tendered for
exchange pursuant to the guaranteed delivery procedure described in "--
Guaranteed Delivery Procedure" below) and not properly withdrawn prior to the
Expiration Date.
19
Preliminary results of proration will be announced by press release as promptly
as practicable after the Expiration Date. Holders of shares of Viacom Common
Stock may obtain such preliminary information from the Information Agent and may
also be able to obtain such information from their brokers.
No fractional shares of VII Cable Class A Common Stock or VII Cable
Preferred Stock, as the case may be, will be distributed. The Exchange Agent,
acting as agent for Viacom stockholders otherwise entitled to receive fractional
shares, will aggregate all fractional shares and sell them for the accounts of
such stockholders. Such proceeds as may be realized by the Exchange Agent upon
the sale of such fractional shares will be distributed, net of commissions, to
such stockholders on a pro rata basis. Any such cash payments will be made
through the Exchange Agent if the related shares of Viacom Common Stock are
tendered to the Exchange Agent or, if such shares of Viacom Common Stock are
tendered through a Book-Entry Transfer Facility (as defined herein), through
such Book-Entry Transfer Facility. NONE OF THE EXCHANGE AGENT, VIACOM, VIACOM
INTERNATIONAL OR VII CABLE WILL GUARANTEE ANY MINIMUM PROCEEDS FROM THE SALE OF
SHARES OF VII CABLE CLASS A COMMON STOCK OR, FOLLOWING THE CONVERSION, VII CABLE
PREFERRED STOCK, AND NO INTEREST WILL BE PAID ON ANY SUCH PROCEEDS.
The Exchange Offer is subject to certain conditions set forth in "--Certain
Conditions of the Exchange Offer" below, including the Minimum Condition. If any
such conditions are not satisfied, Viacom may, subject to certain provisions of
the Parents Agreement, (w) terminate the Exchange Offer and as promptly as
practicable return all tendered shares of Viacom Common Stock to tendering
stockholders, (x) extend the Exchange Offer and, subject to the withdrawal
rights described in "--Withdrawal Rights" below, retain all such shares of
Viacom Common Stock until the expiration of the Exchange Offer as so extended,
(y) waive any such condition and, subject to any requirement to extend the
period of time during which the Exchange Offer is open, exchange all shares of
Viacom Common Stock validly tendered for exchange by the Expiration Date and not
properly withdrawn or (z) delay acceptance for exchange of any shares of Viacom
Common Stock until satisfaction or waiver of all such conditions to the Exchange
Offer. Viacom's right to delay acceptance for exchange of, or exchange for,
shares of Viacom Common Stock tendered for exchange pursuant to the Exchange
Offer is subject to the provisions of applicable law, including, to the extent
applicable, Rule 13e-4(f)(5) promulgated under the Exchange Act, which requires
that Viacom pay the consideration offered or return the shares of Viacom Common
Stock deposited by or on behalf of Viacom stockholders promptly after the
termination or withdrawal of the Exchange Offer. For a description of Viacom's
right to extend the period of time during which the Exchange Offer is open and
to amend, delay or terminate the Exchange Offer and of the provisions of the
Parents Agreement applicable thereto, see "--Extension of Tender Period;
Termination; Amendment" below.
This Offering Circular - Prospectus and the Letter of Transmittal are being
sent to persons who were holders of record of Viacom Common Stock at the close
of business on ["record date" for Exchange Offer], 1996 (the "Record Date"). As
of the Record Date, there were shares of Viacom Class A Common Stock and
shares of Viacom Class B Common Stock outstanding. This Offering
Circular -Prospectus and related Letter of Transmittal also will be furnished to
brokers, banks and similar persons whose names or the names of whose nominees
appear on the Viacom stockholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing for subsequent
transmittal to beneficial owners of shares of Viacom Common Stock.
EXCHANGE OF SHARES OF VIACOM COMMON STOCK
Upon the terms (including, without limitation, the proration provisions of
the Exchange Offer) and subject to the satisfaction or waiver of the conditions
of the Exchange Offer, Viacom will accept for exchange, and shares of VII Cable
Class A Common Stock will be exchanged for, shares of Viacom Common Stock that
have been validly tendered and not properly withdrawn by the Expiration Time on
the Expiration Date. In addition, Viacom reserves the right, in its sole
discretion (subject to Rule 13e-4(f)(5) under the Exchange Act), to delay the
acceptance for exchange or delay exchange of any shares of Viacom Common Stock
in order to comply in whole or in part with any applicable law. For a
description of Viacom's right to terminate the Exchange Offer and not accept for
exchange or exchange any shares of Viacom Common Stock or to delay
20
acceptance for exchange or exchange any shares of Viacom Common Stock, see "--
Extension of Tender Period; Termination; Amendment" below.
Assuming consummation of the Stock Issuance, each share of VII Cable Class
A Common Stock issued in connection with the Exchange Offer will automatically
convert into a share of VII Cable Preferred Stock, and shares of VII Cable
Preferred Stock and cash in lieu of fractional shares will be delivered as soon
as possible after acceptance of Viacom Common Stock for exchange. Accordingly,
holders of shares of Viacom Common Stock electing to tender such shares in the
Exchange Offer should not expect to take physical delivery of shares of VII
Cable Class A Common Stock which they receive in exchange after the consummation
of the Stock Issuance.
For purposes of the Exchange Offer, Viacom shall be deemed, subject to the
proration provisions of the Exchange Offer, to have accepted for exchange and
exchanged shares of Viacom Common Stock validly tendered for exchange when, as
and if Viacom gives oral or written notice to the Exchange Agent of its
acceptance of the tenders of such shares of Viacom Common Stock for exchange.
Exchange of shares of Viacom Common Stock accepted for exchange pursuant to the
Exchange Offer will be made on the first business day following announcement by
Viacom of the final proration factor (which first business day in no event shall
be more than ten business days after the Expiration Date and which first
business day shall be hereinafter referred to as the "Exchange Time") by deposit
of tendered shares of Viacom Common Stock with the Exchange Agent, which will
act as agent for the tendering stockholders for the purpose of receiving shares
of VII Cable Class A Common Stock and VII Cable Preferred Stock and transmitting
such shares to tendering stockholders. (The date on which the Exchange Time
occurs is hereinafter referred to as the "Exchange Date.") In all cases,
tendered shares of Viacom Common Stock accepted for exchange pursuant to the
Exchange Offer will be exchanged only after timely receipt by the Exchange Agent
of (i) certificates for such shares of Viacom Common Stock (or of a confirmation
of a book-entry transfer of such shares of Viacom Common Stock into the Exchange
Agent's account at one of the Book-Entry Transfer Facilities), and (ii) a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) or an Agent's Message (as defined herein) in connection with
a book-entry transfer of shares, together with any other documents required by
the Letter of Transmittal. For a description of the procedures for tendering
shares of Viacom Common Stock pursuant to the Exchange Offer, see "--Procedures
for Tendering Shares of Viacom Common Stock" below. Under no circumstances will
interest be paid by Viacom pursuant to the Exchange Offer, regardless of any
delay in making such exchange.
The exchange of shares of VII Cable Class A Common Stock for shares of
Viacom Common Stock may be delayed in the event of difficulty in determining the
number of shares of Viacom Common Stock validly tendered or if proration is
required. See "--Terms of the Exchange Offer" above. In addition, if certain
events occur, Viacom may not be obligated to exchange shares of VII Cable Class
A Common Stock for shares of Viacom Common Stock pursuant to the Exchange Offer.
See "--Certain Conditions of the Exchange Offer" below. As provided in Rules
13e-4(f)(4) and (8)(ii) under the Exchange Act, Viacom will exchange the same
number of shares of VII Cable Class A Common Stock for each share of Viacom
Common Stock accepted for exchange pursuant to the Exchange Offer.
If any tendered shares of Viacom Common Stock are not exchanged pursuant to
the Exchange Offer for any reason, or if certificates are submitted for more
shares of Viacom Common Stock than are (i) tendered for exchange or (ii)
accepted for exchange due to the proration provisions, certificates for such
unexchanged or untendered shares of Viacom Common Stock will be returned (or, in
the case of shares of Viacom Common Stock tendered by book-entry transfer, such
shares of Viacom Common Stock will be credited to an account maintained at one
of the Book-Entry Transfer Facilities (as defined herein)), without expense to
the tendering stockholder, as promptly as practicable following the expiration
or termination of the Exchange Offer.
Viacom will pay all stock transfer taxes, if any, payable on the transfer
to it of shares of Viacom Common Stock and the transfer to tendering
stockholders of shares of VII Cable Class A Common Stock or VII Cable Preferred
Stock, as the case may be, pursuant to the Exchange Offer. If, however, the
exchange of shares is to be made to, or (in the circumstances permitted by the
Exchange Offer) if shares of Viacom
21
Common Stock that are not tendered or not accepted for exchange are to be
registered in the name of or delivered to any person other than the registered
owner, or if tendered certificates are registered in the name of any person
other than the person signing the Letter of Transmittal, the amount of all stock
transfer taxes, if any (whether imposed on the registered owner or such other
person), payable on account of the transfer to such person must be paid by the
tendering stockholder unless evidence satisfactory to Viacom of the payment of
such taxes or exemption therefrom is submitted.
PROCEDURES FOR TENDERING SHARES OF VIACOM COMMON STOCK
To tender shares of Viacom Common Stock pursuant to the Exchange Offer,
either (i) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) with any required signature guarantees, or an
Agent's Message (as defined herein) in the case of a book-entry transfer of
shares, and any other documents required by the Letter of Transmittal must be
received by the Exchange Agent at one of its addresses set forth on the back
cover of this Offering Circular - Prospectus prior to the Expiration Time on the
Expiration Date, and either (a) certificates for the shares of Viacom Common
Stock to be tendered must be transmitted to and received by the Exchange Agent
at one of such addresses prior to such time or (b) such shares of Viacom Common
Stock must be delivered pursuant to the procedures for book-entry transfer
described below (and a confirmation of such delivery received by the Exchange
Agent), in each case by the Expiration Date, or (ii) the guaranteed delivery
procedure described below must be complied with.
As specified in Instruction 3 of the Letter of Transmittal, each
stockholder desiring to tender shares of Viacom Common Stock pursuant to the
Exchange Offer must properly indicate in the section captioned "Exchange Ratio
At Which Shares Are Being Tendered" of the Letter of Transmittal the Exchange
Ratio (in multiples of 0.01) at which such stockholder's shares of Viacom Common
Stock are being tendered. STOCKHOLDERS DESIRING TO TENDER SHARES AT MORE THAN
ONE EXCHANGE RATIO MUST COMPLETE SEPARATE LETTERS OF TRANSMITTAL FOR EACH
EXCHANGE RATIO AT WHICH SUCH STOCKHOLDER IS TENDERING SHARES, EXCEPT THAT THE
SAME SHARES CANNOT BE TENDERED (UNLESS PROPERLY WITHDRAWN PREVIOUSLY IN
ACCORDANCE WITH THE TERMS OF THE OFFER) AT MORE THAN ONE EXCHANGE RATIO. IN
ORDER TO TENDER SHARES PROPERLY, ONE AND ONLY ONE EXCHANGE RATIO MUST BE
INDICATED IN THE APPROPRIATE SECTION ON EACH LETTER OF TRANSMITTAL.
LETTERS OF TRANSMITTAL AND CERTIFICATES FOR SHARES OF VIACOM COMMON STOCK
SHOULD NOT BE SENT TO VIACOM, VIACOM INTERNATIONAL OR THE INFORMATION AGENT.
DELIVERY OF ANY OF THE AFOREMENTIONED REQUIRED DOCUMENTS TO ANY ADDRESS OTHER
THAN AS SET FORTH HEREIN WILL NOT CONSTITUTE VALID DELIVERY THEREOF.
It is a violation of Rule 14e-4 promulgated under the Exchange Act for a
person to tender shares of Viacom Common Stock for such person's own account
unless the person so tendering (i) owns such shares of Viacom Common Stock or
(ii) owns other securities convertible into or exchangeable for such shares of
Viacom Common Stock or owns an option, warrant or right to purchase such shares
of Viacom Common Stock and intends to acquire shares of Viacom Common Stock for
tender by conversion or exchange of such securities or by exercise of such
option, warrant or right. Rule 14e-4 provides a similar restriction applicable
to the tender or guarantee of a tender on behalf of another person.
A tender of shares of Viacom Common Stock made pursuant to any method of
delivery set forth herein will constitute a binding agreement between the
tendering stockholder and Viacom upon the terms and subject to the conditions of
the Exchange Offer, including the tendering stockholder's representation that
(i) such stockholder owns the shares of Viacom Common Stock being tendered
within the meaning of Rule 14e-4 promulgated under the Exchange Act and (ii) the
tender of such shares of Viacom Common Stock complies with Rule 14e-4.
22
The Exchange Agent will establish accounts with respect to shares of Viacom
Common Stock at The Depository Trust Company ("DTC"), the Midwest Securities
Trust Company ("MSTC") and the Philadelphia Depository Trust Company
("PHILADEP," and together with DTC and MSTC, the "Book-Entry Transfer
Facilities" and each alone, a "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of this Offering
Circular - Prospectus, and any financial institution that is a participant in
the system of any Book-Entry Transfer Facility may make delivery of shares of
Viacom Common Stock by causing such Book-Entry Transfer Facility to transfer
such shares of Viacom Common Stock into the Exchange Agent's account in
accordance with the procedures of such Book-Entry Transfer Facility. Although
delivery of shares of Viacom Common Stock may be effected through book-entry
transfer to the Exchange Agent's account at DTC, MSTC or PHILADEP, a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other required documents, or an Agent's Message (as defined
herein) must, in any case, be transmitted to and received or confirmed by the
Exchange Agent at one of its addresses set forth on the back cover of this
Offering Circular - Prospectus on or prior to 12:00 Midnight on the Expiration
Date, or the guaranteed delivery procedure described below must be complied
with. "Agent's Message" means a message transmitted through electronic means by
a Book-Entry Transfer Facility to and received by the Exchange Agent and forming
a part of a book-entry confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgement from the participant in such
Book-Entry Transfer Facility tendering the shares that such participant has
received and agrees to be bound by the Letter of Transmittal. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT AS REQUIRED HEREBY.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined herein) unless the shares of Viacom Common Stock
tendered pursuant to the Letter of Transmittal are tendered (i) by the
registered holder of the shares of Viacom Common Stock tendered therewith and
such holder has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. An "Eligible Institution" means a
participant in the Security Transfer Agents Medallion Program or the New York
Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program. A verification by a notary public alone is not acceptable. If
a certificate representing shares of Viacom Common Stock is registered in the
name of a person other than the signer of a Letter of Transmittal, or if
delivery of shares of VII Cable Class A Common Stock is to be made or shares of
Viacom Common Stock not tendered or not accepted for exchange are to be returned
to a person other than the registered owner, the certificate must be endorsed or
accompanied by an appropriate stock power, and the signature on such certificate
or stock power must appear exactly as the name of the registered owner appears
on the certificate with the signature on the certificate or stock power
guaranteed by an Eligible Institution.
If the Letter of Transmittal or Notice of Guaranteed Delivery or any
certificates or stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by Viacom, proper evidence satisfactory to Viacom of
their authority so to act must be submitted.
If any certificate representing shares of Viacom Common Stock has been
mutilated, destroyed, lost or stolen, the stockholder must (i) furnish to the
Exchange Agent evidence, satisfactory to it in its discretion, of the ownership
of and the destruction, loss or theft of such certificate, (ii) furnish to the
Exchange Agent indemnity, satisfactory to it in its discretion and (iii) comply
with such other reasonable regulations as the Exchange Agent may prescribe.
Shares held by Savings Plans. Participants or, as applicable, beneficiaries
("VIP participants") under the Viacom Investment Plan (the "VIP") may direct the
Trustee of the VIP to tender shares of Viacom Common Stock credited to their
matching accounts or to their investment accounts in the Viacom Common Stock
fund (the "Viacom Stock Fund Account"). The Trustee will make available to such
VIP participants all documents furnished to stockholders generally in connection
with the Exchange Offer. Each such VIP participant will also receive a form upon
which the VIP participant may instruct the Trustee regarding the Exchange Offer.
Each
23
VIP participant may direct that all, some or none of the shares credited to the
VIP participant's Viacom Stock Fund Account and/or matching account be tendered
and shall specify the Exchange Ratio at which such shares are to be tendered.
VIP PARTICIPANTS MAY NOT USE THE LETTER OF TRANSMITTAL BUT MUST USE THE SEPARATE
FORM SENT TO THEM.
Under the Employee Retirement Income Security Act of 1974, as amended,
Viacom will be prohibited from accepting for exchange any shares from the VIP if
the Final Exchange Ratio multiplied by 100 is an amount less than the prevailing
market price of the shares on the date the shares are accepted for exchange
pursuant to the Exchange Offer.
GUARANTEED DELIVERY PROCEDURE
If a stockholder desires to tender shares of Viacom Common Stock pursuant
to the Exchange Offer and cannot deliver such shares of Viacom Common Stock and
all other required documents to the Exchange Agent prior to the Expiration Time
on the Expiration Date, such shares of Viacom Common Stock may nevertheless be
tendered if all of the following conditions are met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by Viacom setting forth the
name and address of the holder and the number of shares of Viacom Common
Stock tendered, stating that the tender is being made thereby and
guaranteeing that, within three AMEX trading days after the date of the
Notice of Guaranteed Delivery, the certificate(s) representing the shares
of Viacom Common Stock accompanied by all other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent, is received by the Exchange Agent (as provided below)
by the Expiration Date; and
(iii) the certificate(s) for such shares of Viacom Common Stock (or a
confirmation of a book-entry transfer of such shares of Viacom Common Stock
into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities), together with a properly completed and duly executed Letter of
Transmittal (or a manually signed facsimile thereof) and any required
signature guarantees, or an Agent's Message in connection with a book-entry
transfer, and any other documents required by the Letter of Transmittal,
are received by the Exchange Agent within three AMEX trading days after the
date of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, telegram,
facsimile transmission or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such Notice.
THE METHOD OF DELIVERY OF SHARES OF VIACOM COMMON STOCK AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF
CERTIFICATES REPRESENTING SHARES OF VIACOM COMMON STOCK ARE SENT BY MAIL, IT IS
RECOMMENDED THAT TENDERING STOCKHOLDERS USE PROPERLY INSURED, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, AND ALLOW SUFFICIENT TIME TO ENSURE TIMELY
RECEIPT.
All questions as to the form of documents (including notices of withdrawal)
and the validity, form, eligibility (including time of receipt) and acceptance
for exchange of any tender of shares of Viacom Common Stock will be determined
by Viacom in its sole discretion, which determination will be final and binding
on all tendering stockholders. Viacom reserves the absolute right to reject any
or all tenders of shares of Viacom Common Stock determined by it not to be in
proper form or the acceptance for exchange of shares of Viacom Common Stock
which may, in the opinion of Viacom counsel, be unlawful. Viacom also reserves
the absolute right to waive any defect or irregularity in any tender of shares
of Viacom Common Stock. None of Viacom, the Exchange Agent, the Information
Agent or any other person will be under any duty to give notification of any
defect or irregularity in tenders or notices of withdrawal or incur any
liability for failure to give any such notification.
24
* * *
The Exchange Offer, proration period and withdrawal rights will expire at
12:00 Midnight, New York City time, on , 1996, unless the Exchange Offer
is extended.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, any tender of shares of Viacom Common
Stock made pursuant to the Exchange Offer is irrevocable. Tenders of shares of
Viacom Common Stock may be withdrawn at any time on or prior to the Expiration
Time on the Expiration Date and, unless theretofore accepted for exchange as
provided in this Offering Circular - Prospectus, may also be withdrawn after the
expiration of 40 business days from the commencement of the Exchange Offer. If
Viacom (i) extends the period of time during which the Exchange Offer is open,
(ii) is delayed in its acceptance of shares of Viacom Common Stock for exchange
or (iii) is unable to accept shares of Viacom Common Stock for exchange pursuant
to the Exchange Offer for any reason, then, without prejudice to Viacom's rights
under the Exchange Offer, the Exchange Agent may, on behalf of Viacom, retain
all shares of Viacom Common Stock tendered, and such shares of Viacom Common
Stock may not be withdrawn except as otherwise provided herein, subject to Rule
13e-4(f)(5) under the Exchange Act, which provides that the person making an
issuer exchange offer shall either pay the consideration offered or return
tendered securities promptly after the termination or withdrawal of the offer.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at one of its addresses
set forth on the back cover of this Offering Circular Prospectus and must
specify the name of the person who tendered the shares of Viacom Common Stock to
be withdrawn and the number of shares of Viacom Common Stock to be withdrawn
precisely as they appear in the Letter of Transmittal. If the shares of Viacom
Common Stock to be withdrawn have been delivered to the Exchange Agent, a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution must
be submitted prior to the release of such shares of Viacom Common Stock (except
that such signature guarantee requirement is not applicable in the case of
shares of Viacom Common Stock tendered by an Eligible Institution). In addition,
such notice must specify, in the case of shares of Viacom Common Stock tendered
by delivery of certificates, the name of the registered holder (if different
from that of the tendering stockholder) and the serial numbers shown on the
particular certificates evidencing the shares of Viacom Common Stock to be
withdrawn or, in the case of shares of Viacom Common Stock tendered by book-
entry transfer, the name and number of the account at the Book-Entry Transfer
Facility from which the shares were transferred. Withdrawals may not be
rescinded, and shares of Viacom Common Stock withdrawn will thereafter be deemed
not validly tendered for purposes of the Exchange Offer. However, withdrawn
shares of Viacom Common Stock may be retendered by again following one of the
procedures described above in "--Procedures for Tendering Shares of Viacom
Common Stock" at any time prior to the Expiration Date.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by Viacom, in its sole discretion,
which determination shall be final and binding. None of Viacom, the Exchange
Agent, the Information Agent or any other person will be under any duty to give
notification of any defect or irregularity in any notice of withdrawal or incur
any liability for failure to give any such notification.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
Subject to the immediately following sentence, Viacom expressly reserves
the right, at any time or from time to time, in its sole discretion and
regardless of whether any of the conditions specified in "--Certain Conditions
of the Exchange Offer" below shall have been satisfied, (i) to extend the period
of time during which the Exchange Offer is open by giving oral or written notice
of such extension to the Exchange Agent and by making a public announcement of
such extension or (ii) to amend the Exchange Offer in any respect by making a
public announcement of such amendment. If insufficient tenders are made by
Viacom stockholders in the Exchange Offer to permit the Minimum Condition to be
satisfied, Viacom has the right to extend the Exchange Offer for not less than
10 nor more than 15 business days. During such extension, TCI and Viacom have
25
agreed to negotiate in good faith to determine mutually acceptable changes to
terms and conditions for the VII Cable Preferred Stock (including without
limitation the Exchange Rate and the dividend yield on the VII Cable Preferred
Stock) and the Exchange Offer (including without limitation the duration of any
extension and the maximum Exchange Ratio) that each believes in good faith will
cause the Minimum Condition to be fulfilled and that would cause the VII Cable
Preferred Stock to trade at a price equal to its $100 par value per share
immediately following the consummation of the Exchange Offer and the Stock
Issuance. There can be no assurance that Viacom will exercise its right to
extend or amend the Exchange Offer.
Subject to the foregoing paragraph, if Viacom materially changes the terms
of the Exchange Offer or the information concerning the Exchange Offer, Viacom
will extend the Exchange Offer to the extent required by the Exchange Act.
Certain rules promulgated under the Exchange Act provide that the minimum period
during which an offer must remain open following material changes in the terms
of the offer or information concerning the offer (other than a change in price,
change in the dealer's soliciting fee or a change in percentage of securities
sought) will depend on the facts and circumstances, including the relative
materiality of such terms or information. The Commission has stated that, as a
general rule, it is of the view that an offer should remain open for a minimum
of five business days from the date that notice of such material change is first
published, sent or given, and that if material changes are made with respect to
information that approaches the significance of price and share levels, a
minimum of ten business days may be required to allow adequate dissemination and
investor response. Subject to the foregoing paragraph, if (i) Viacom increases
or decreases (x) the number of shares of VII Cable Class A Common Stock offered
in exchange for shares of Viacom Common Stock pursuant to the Exchange Offer,
(y) the number of shares of Viacom Common Stock eligible for exchange or (z) the
Minimum Condition, and (ii) the Exchange Offer is scheduled to expire at any
time earlier than the expiration of a period ending on the tenth business day
from and including the date that notice of such increase or decrease is first
published, sent or given, the Exchange Offer will be extended until the
expiration of such period of ten business days. The term "business day" shall
mean any day other than Saturday, Sunday or a federal holiday and shall consist
of the time period from 12:01 a.m. through 12:00 Midnight, New York City time.
Viacom also reserves the right, in its sole discretion, in the event any of
the conditions specified in "--Certain Conditions of the Exchange Offer" below
shall not have been satisfied and so long as shares of Viacom Common Stock have
not theretofore been accepted for exchange, to delay (except as otherwise
required by applicable law) acceptance for exchange of or exchange for any
shares of Viacom Common Stock or to terminate the Exchange Offer and not accept
for exchange of or exchange for any shares of Viacom Common Stock.
If Viacom (i) extends the period of time during which the Exchange Offer is
open, (ii) is delayed in accepting for exchange of or exchange for any shares of
Viacom Common Stock or (iii) is unable to accept for exchange of or exchange for
any shares of Viacom Common Stock pursuant to the Exchange Offer for any reason,
then, without prejudice to Viacom rights under the Exchange Offer, the Exchange
Agent may, on behalf of Viacom, retain all shares of Viacom Common Stock
tendered and such shares of Viacom Common Stock may not be withdrawn except as
otherwise provided in "--Withdrawal Rights" above. The reservation by Viacom of
the right to delay acceptance for exchange of or exchange for any shares of
Viacom Common Stock is subject to applicable law, which requires that Viacom pay
the consideration offered or return the shares of Viacom Common Stock deposited
by or on behalf of stockholders promptly after the termination or withdrawal of
the Exchange Offer.
Any extension, termination or amendment of the Exchange Offer will be
followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which Viacom may choose to make any public announcement,
Viacom will have no obligation (except as otherwise required by applicable law)
to publish, advertise or otherwise communicate any such public announcement
other than by making a release to the Dow Jones News Service. In the case of an
extension of the Exchange Offer, Commission regulations require a public
announcement of such extension no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
26
CONDITIONS TO CONSUMMATION OF THE EXCHANGE OFFER
The conditions to the obligations of Viacom to commence the Exchange Offer
were satisfied or waived on , 199 . See "Arrangements Among Viacom,
Viacom International, TCI and TCI Cable--Terms of the Parents Agreement--
Conditions Precedent." In addition, there are conditions to Viacom's
obligations to consummate the Exchange Offer. Notwithstanding any other
provisions of the Exchange Offer and without prejudice to Viacom's other rights
under the Exchange Offer, Viacom shall not be required to accept for exchange of
or, subject to any applicable rules and regulations of the Commission, including
Rule 14e-1(c) under the Exchange Act relating to Viacom's obligation to exchange
or return tendered shares of Viacom Common Stock promptly after termination or
withdrawal of the Exchange Offer, exchange for any shares of Viacom Common
Stock, and may terminate the Exchange Offer as provided in "--Extension of
Tender Period; Termination; Amendment" above, if prior to the acceptance for
exchange of any shares of Viacom Common Stock, any of the following conditions
exist:
(a) the Minimum Condition to the Exchange Offer shall not have been
satisfied;
(b) all conditions of Viacom International, TCI and TCI Cable to
consummate the closing under the Subscription Agreement shall not have been
satisfied or waived (other than the acceptance for exchange of shares by
Viacom in this Exchange Offer);
(c) Viacom International shall not have received loans in an aggregate
principal amount at least equal to $1.7 billion (the "Aggregate Loan
Amount"), to the satisfaction of Viacom International, or the Aggregate
Loan Amount shall not be available for transfer as a contribution to Viacom
Services without condition prior to the Exchange Time as contemplated in
the Implementation Agreement;
(d) (i) any action, proceeding or litigation seeking to enjoin, make
illegal or materially delay consummation of the Exchange Offer or otherwise
relating in any manner to the Exchange Offer shall have been instituted
before any court or other regulatory or administrative authority; or (ii)
any order, stay, judgment or decree shall have been issued by any court,
government, governmental authority or other regulatory or administrative
authority and be in effect, or any statute, rule, regulation, governmental
order or injunction shall have been proposed, enacted, enforced or deemed
applicable to the Exchange Offer, any of which would or might restrain,
prohibit or delay consummation of the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to Viacom;
(e) there shall have occurred (and the adverse effect of such
occurrence shall, in the reasonable judgment of Viacom, be continuing) (i)
any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the over-the-counter
market in the United States, (ii) any extraordinary or material adverse
change in United States financial markets generally, including, without
limitation, a decline of at least 25% in either the Dow Jones average of
industrial stocks or the Standard & Poor's 500 index from July 24, 1995,
(iii) a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States, (iv) any limitation (whether or
not mandatory) by any governmental entity, on, or any other event that
would reasonably be expected to materially adversely affect, the extension
of credit by banks or other lending institutions, (v) a commencement of a
war or armed hostilities or other national or international calamity
directly or indirectly involving the United States, which would reasonably
be expected to affect materially and adversely (or to delay materially) the
consummation of the Exchange Offer or (vi) in the case of any of the
foregoing existing at the time of commencement of the Exchange Offer, a
material acceleration or worsening thereof; or
(f) any of the Parents Agreement, the Implementation Agreement or the
Subscription Agreement shall have been terminated in accordance with its
terms;
27
which in the reasonable judgment of Viacom in any such case, and regardless of
the circumstances, makes it inadvisable to proceed with the Exchange Offer or
with such acceptance for exchange of shares.
The foregoing conditions are for the sole benefit of Viacom and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances giving rise to such conditions or may be waived
by Viacom in whole or in part at any time and from time to time in its sole
discretion. Any determination by Viacom concerning the conditions described
above will be final and binding upon all parties.
The failure by Viacom at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to time.
In addition, Viacom will not accept any shares of Viacom Common Stock
tendered, and no shares of VII Cable Class A Common Stock will be exchanged for
any shares of Viacom Common Stock, at any time at which there shall be a stop
order issued by the Commission which shall remain in effect with respect to the
Registration Statement.
FEES AND EXPENSES
Wasserstein Perella & Co., Inc. is acting as Dealer Manager in connection
with the Exchange Offer. The Dealer Manager will, among other things,
coordinate all aspects of marketing of the Exchange Offer through the conduct of
informational meetings, the direct solicitation of certain identified
stockholders and the management of a selected group of dealers (the "Soliciting
Dealers") that will solicit shares of Viacom Common Stock pursuant to the
Exchange Offer. Viacom has agreed to pay Wasserstein Perella & Co., Inc. as
compensation for their services as Dealer Manager, a fee of $ plus
reasonable out of pocket financial expenses. Wasserstein Perella & Co., Inc.
from time to time has provided and continues to provide financial advisory and
financing services to Viacom and has received customary fees for the rendering
of these services. In particular Wasserstein Perella & Co., Inc. has provided
financial advisory services in connection with the Transaction. Upon
consummation of the Transaction, Wasserstein Perella & Co., Inc. will receive
its customary fee for services rendered in connection with the Transaction in
addition to its fee as Dealer Manager. Viacom will pay each Soliciting Dealer
only in the event such Soliciting Dealer is so designated by a tendering
stockholder of Viacom Common Stock on the Letter of Transmittal a fee equal to $
in respect of each share of VII Cable Class A Common Stock issued to such
stockholder pursuant to the Exchange Offer, up to a maximum of shares of
VII Cable Class A Common Stock distributed to such stockholder. Viacom has
agreed to indemnify the Dealer Manager and the Soliciting Dealers against
certain liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Dealer Manager or the Soliciting Dealers may be
required to make in respect thereof.
Viacom has retained Georgeson & Company Inc. to act as the Information
Agent and to act as the Exchange Agent in connection with the
Exchange Offer. The Information Agent may contact holders of shares of Viacom
Common Stock by mail, telephone, facsimile transmission and personal interviews
and may request brokers, dealers and other nominee stockholders to forward
materials relating to the Exchange Offer to beneficial owners. The Information
Agent and the Exchange Agent each will receive reasonable and customary
compensation for their respective services, will be reimbursed for certain
reasonable out-of-pocket expenses and will be indemnified against certain
liabilities in connection with their services, including certain liabilities
under the federal securities laws. Neither the Information Agent nor the
Exchange Agent has been retained to make solicitations or recommendations in
their respective roles as Information Agent and Exchange Agent, and the fees to
be paid to them will not be based on the number of shares of Viacom Common Stock
tendered pursuant to the Exchange Offer; however, the Exchange Agent will be
compensated in part on the basis of the number of Letters of Transmittal
received and the number of stock certificates distributed pursuant to the
Exchange Offer.
Viacom will not pay any fees or commissions to any broker or dealer or any
other person (other than the Dealer Manager, the Soliciting Dealers, the
Information Agent, and the Exchange Agent) for soliciting tenders of shares of
Viacom Common Stock pursuant to the Exchange Offer. Brokers, dealers,
commercial
28
banks and trust companies will, upon request, be reimbursed by Viacom for
reasonable and necessary costs and expenses incurred by them in forwarding
materials to their customers.
MISCELLANEOUS
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Viacom Common Stock in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. Viacom is not aware of any
jurisdiction where the making of the Exchange Offer or the acceptance thereof
would not be in compliance with applicable law. If Viacom becomes aware of any
jurisdiction where the making of the Exchange Offer or acceptance thereof would
not be in compliance with any valid applicable law, Viacom will make a good
faith effort to comply with such law. If, after such good faith effort, Viacom
cannot comply with such law, the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, holders of shares of Viacom Common
Stock in any such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR -
PROSPECTUS OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY VIACOM OR VIACOM INTERNATIONAL. SEE ALSO "TCI PROSPECTUS--EXPLANATORY NOTE."
29
MARKET PRICES, TRADING AND DIVIDEND INFORMATION
VIACOM COMMON STOCK
Viacom Class A Common Stock and Viacom Class B Common Stock are listed and
traded on the AMEX under the symbols "VIA" and "VIA B," respectively.
The following table sets forth, for the calendar periods indicated, the per
share range of high and low sales prices for Viacom Class A Common Stock and
Viacom Class B Common Stock, as reported on the AMEX Composite Tape.
Viacom Class A Viacom Class B
Common Stock Common Stock
------------------ ------------------
High Low High Low
------- ------- ------- -------
1993
1st Quarter.......................... $46 1/2 $37 1/2 $44 1/8 $35 1/4
2nd Quarter.......................... $52 5/8 $37 1/8 $49 1/2 $36
3rd Quarter.......................... $67 1/2 $50 1/2 $61 1/4 $45 3/4
4th Quarter.......................... $66 1/2 $47 $60 1/2 $40 3/8
1994
1st Quarter.......................... $49 3/4 $28 1/2 $45 $23 3/4
2nd Quarter.......................... $34 1/4 $24 1/2 $32 1/2 $21 3/4
3rd Quarter.......................... $41 3/4 $33 7/8 $39 3/4 $30 1/4
4th Quarter.......................... $42 1/8 $38 $41 $37 1/8
1995
1st Quarter.......................... $48 1/4 $41 1/8 $47 3/8 $40 1/4
2nd Quarter.......................... $49 1/2 $41 $48 5/8 $40 3/4
3rd Quarter.......................... $54 1/8 $44 3/4 $54 1/4 $44 5/8
4th Quarter (through Nov. 16, 1995).. $50 5/8 $45 1/2 $50 3/4 $45
-------------------------------------
The number of holders of record of Viacom Class A Common Stock and Viacom
Class B Common Stock as of November 16, 1995 was 14,012 and 25,137,
respectively.
On July 24, 1995 (the last trading day prior to announcement of the
Transaction), the closing sales prices per share of Viacom Class A Common Stock
and Viacom Class B Common Stock as reported on the AMEX Composite Tape were $50
1/4 and $50, respectively. On November 16, 1996, the last reported sales prices
per share of Viacom Class A Common Stock and Viacom Class B Common Stock as
reported on the AMEX Composite Tape were $48 7/8 and $49 1/4, respectively.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR SHARES OF VIACOM
COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET PRICE OF VIACOM
COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE EXCHANGE OFFER IS
CONSUMMATED.
Viacom has not declared cash dividends on its common equity and has no
present intention of so doing.
VII CABLE CLASS A COMMON STOCK AND VII CABLE PREFERRED STOCK
Application has been made for quotation of the VII Cable Preferred Stock on
Nasdaq under the symbol " ."
No current public trading market for either the VII Cable Class A Common
Stock or the VII Cable Preferred Stock exists. The extent of any market for the
VII Cable Class A Common Stock and the VII Cable Preferred Stock and the prices
at which these securities may trade prior to or after the expiration of the
30
Exchange Offer cannot be predicted. No assurance can be given that an active
trading market for the VII Cable Preferred Stock will be established or
maintained after the consummation of the Exchange Offer. The prices at which the
VII Cable Preferred Stock trades will be determined by the marketplace and could
be subject to significant fluctuations. See "Risk Factors--Market Uncertainties
with Respect to VII Cable Preferred Stock."
Shares received by Viacom stockholders in the Exchange Offer will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of VII Cable under the Securities Act. Persons who may be deemed to
be affiliates of VII Cable after the expiration of the Exchange Offer generally
include individuals or entities that control, are controlled by or are under
common control with VII Cable, and will include the directors and principal
executive officers of VII Cable as well as any principal stockholder of VII
Cable. Persons who are affiliates of VII Cable will be permitted to sell their
shares of VII Cable Preferred Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by Rule 144
thereunder.
31
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
VII CABLE
The following unaudited pro forma condensed combined financial statements
of VII Cable as of and for the nine months ended September 30, 1995 and as of
and for the twelve months ended December 31, 1994 give effect to the VII Cable
Pro Forma Events as if such events occurred at the beginning of the earliest
period presented for results of operations data. The unaudited pro forma
condensed combined statements of operations for the nine months ended September
30, 1995 and the year ended December 31, 1994 are based upon the statements of
operations of VII Cable for the nine months ended September 30, 1995 and year
ended December 31, 1994, respectively. The unaudited pro forma condensed
combined balance sheet gives effect to the VII Cable Pro Forma Events as if they
had occurred on September 30, 1995. The unaudited pro forma condensed combined
financial statements of VII Cable were derived from, and should be read in
conjunction with, the VII Cable Carve-Out Financial Statements appearing
elsewhere in this Offering Circular - Prospectus.
The unaudited pro forma data are not necessarily indicative of the combined
results of operations or financial position that would have occurred if the VII
Cable Pro Forma Events had been in effect at the beginning of the earliest
period presented nor are they necessarily indicative of future results of
operations or financial position. The pro forma adjustments are based upon
available information and certain assumptions set forth herein, including in the
notes to the unaudited pro forma condensed combined financial statements.
It is expected that the transactions contemplated by the Subscription
Agreement will be accounted for under the purchase method of accounting.
Accordingly, the cost to acquire VII Cable estimated at approximately $2.2
billion (reflecting the Loan Proceeds and the estimated aggregate par value of
the VII Cable Preferred Stock) will be allocated to the assets and liabilities
acquired according to their respective fair values, with any excess being
treated as intangible assets. The valuations and other studies which will
provide the basis for the allocation of the excess purchase price over net
assets acquired have not yet been performed. Accordingly, the purchase
accounting adjustments made in connection with the development of the unaudited
pro forma condensed combined financial statements are preliminary and have been
made solely for the purposes of developing such unaudited pro forma condensed
combined financial statements. The approximate $1.3 billion pro forma excess of
unallocated acquisition costs as of September 30, 1995 is being amortized over
40 years at a rate of $32.6 million per year.
The Estimated Asset Value of VII Cable (as defined in the Implementation
Agreement) is anticipated to be approximately $2.2 billion. The Estimated Asset
Value is subject to change as a result of several factors including the Capital
Expenditure Amount, the Inventory Amount, the Telecom Amount, the Working
Capital, the Fixed Amount and the amount of Loan Proceeds actually transferred
to New VII (each as defined in the Implementation Agreement) (collectively, the
"Adjustment Amounts"). A change in the Estimated Asset Value will result in
corresponding changes in the pro forma amounts of intangible assets, the related
amortization thereof, the aggregate par value of the VII Cable Preferred Stock
and the related dividends thereon. An increase in the Estimated Asset Value of
$10 million will result in an increase to annual amortization expense of $0.25
million and an increase in annual VII Cable Preferred Stock dividend
requirements of $0.45 million based upon an estimated useful life of 40 years
and an annual dividend rate of 4.5%.
It is expected that after the consummation of the transaction contemplated
by the Subscription Agreement, an appraisal of the significant assets,
liabilities and business operations of VII Cable will be completed. On the
basis of this information, a final allocation of the excess purchase price will
be made.
The future financial position of VII Cable will reflect increased
intangibles, increased long-term debt and decreased common stockholders' equity
resulting from the Conveyance and the Conversion. The future results of
operations of VII Cable will reflect increased amortization of franchise costs,
increased interest
32
expense and VII Cable Preferred Stock dividend requirements. The following
unaudited pro forma condensed combined statement of operations does not reflect
potential cost savings attributable to (i) economies of scale which may be
realized in connection with purchases of programming and equipment or (ii)
consolidation of certain operating and administrative functions including the
elimination of duplicative facilities and personnel.
33
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
VII CABLE
(IN MILLIONS)
SEPTEMBER 30, 1995
---------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- ---------
ASSETS
Cash..................................................... $ 2.3 $ 1,700.0/(1)/ $ 2.3
(1,700.0)/(2)/
Other current assets..................................... 17.9 0.8/(2)/ 18.7
-------- ---------- --------
Total current assets.................................. 20.2 0.8 21.0
Property and equipment, net.............................. 403.6 (3.3)/(2)/ 400.3
Intangible assets, at amortized cost..................... 565.7 1,303.6/(5)/ 1,869.3
Other assets............................................. 64.4 (43.9)/(2)/ 20.5
-------- ---------- --------
$1,053.9 $ 1,257.2 $2,311.1
======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities...................................... $ 82.9 $ (30.5)/(2)/ $ 52.4
Long-term debt........................................... 57.0 1,700.0/(1)/ 1,350.0
(57.0)/(2)/
(350.0)/(3)/
Other liabilities........................................ 71.3 (12.6)/(2)/ 58.7
__% Series A Preferred Stock (mandatory redemption)...... -- 500.0/(4)/ 500.0
Stockholders' Equity:
Class B Common Stock.................................. -- 350.0/(3)/ 350.0
Viacom equity investment.............................. 842.7 (842.7)/(5)/ --
-------- ---------- --------
$1,053.9 $ 1,257.2 $2,311.1
======== ========== ========
See notes to unaudited pro forma condensed combined financial statements.
34
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
VII CABLE
(IN MILLIONS)
Nine Months Ended Year Ended
September 30, 1995 December 31, 1994
-------------------------------------- -------------------------------------
Pro Forma Pro Pro Forma Pro
Historical Adjustments Forma Historical Adjustments Forma
---------- ----------- ----- ---------- ----------- -----
Revenues................................. $328.6 ($1.9)/(2)/ $326.7 $404.5 $3.1/(2)/ $407.6
Expenses:
Operating............................... 142.1 142.1 170.8 - 170.8
Selling, general and 65.6 65.6 99.9 - 99.9
administrative......................
Depreciation and amortization........... 61.1 24.3/(6a)/ 85.4 76.4 31.9/(2)(6a) 108.3
----- ------- ------- ------ ------ -------
Total Expenses....................... 268.8 24.3 293.1 347.1 31.9 379.0
----- ------- ------- ------ ------ -------
Earnings from operations................. 59.8 (26.2) 33.6 57.4 (28.8) 28.6
Other income (expense):
Interest expense........................ (37.9) (40.6)/(6b)/ (78.5) (38.0) (66.6)/(6b)/ (104.6)
Other items, net........................ 32.2 ( 26.9)/(2)/ 5.3 7.0 (1.7)/(2)/ 5.3
----- ------- ------- ------ ------ -------
Total other income (expense)......... (5.7) ( 67.5) (73.2) (31.0) (68.3) (99.3)
----- ------- ------- ------ ------ -------
Earnings from operations before 54.1 (93.7) (39.6) 26.4 (97.1) (70.7)
income taxes...........................
Benefit (provision) for income (25.9) 25.3/(6c)/ (0.6) (17.7) 22.8/(6c)/ 5.1
taxes...................................
Equity in earnings (loss) of affiliated
companies, net of tax................... (0.4) (0.4)/(2)/ ( 0.8) 0.4 ( 0.3)/(2)/ 0.1
----- ------- ------- ------ ------ -------
Net earnings............................. 27.8 (68.8) (41.0) 9.1 (74.6) (65.5)
Preferred stock dividend
requirement............................. -- ( 16.9)/(6d)/ (16.9) -- (22.5)/(6d)/ (22.5)
----- ------- ------- ------ ------ -------
Net earnings attributable to $27.8 ($ 85.7) ($ 57.9) $ 9.1 ($97.1) ($ 88.0)
common stock............................ ===== ======= ======= ====== ====== =======
See notes to unaudited pro forma condensed combined financial statements.
35
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
VII CABLE
1. Reflects the borrowing of the Loan Proceeds ($1.7 billion) under the Loan.
2. Reflects the conveyance to Viacom Services of the Loan Proceeds, existing
bank debt of $57 million and certain other nonmaterial assets, liabilities
and related results of operations of VII Cable.
3. Reflects the assumed reduction of debt with the proceeds of TCI Cable's
capital contribution of $350 million and the corresponding issuance to TCI
Cable of 100 shares of VII Cable Class B Common Stock immediately following
the consummation of the Exchange Offer.
4. Assumes the shares of VII Cable Class A Common Stock to be issued as part
of the Exchange Offer are converted into shares of VII Cable Preferred
Stock at the time of TCI Cable's capital contribution as described in Note
3. Solely for the purposes of this presentation the shares of VII Cable
Preferred Stock are assumed to pay dividends at a rate of 4.5% per annum.
The assumed dividend rate is based upon the actual rate for a market
comparable preferred security recently issued by TCI Cable.
5. The unallocated excess of the Loan and the estimated aggregate par value of
the VII Cable Preferred Stock over the adjusted net assets of VII Cable is
summarized below (in millions):
Loan............................................ $1,700.0
VII Cable Preferred Stock(a).................... 500.0
--------
2,200.0
VII Cable net assets............................ (842.7)
Net liabilities conveyed to Viacom Services(c).. (53.7)
--------
$1,303.6
========
(a) Solely for the purposes of this presentation the amount of VII
Cable Preferred Stock indicated above is equal to the value of
Viacom Common Stock retired based upon the assumptions that (i)
the Final Exchange Ratio is 0.5 shares of VII Cable Class A
Common Stock for each share of Viacom Common Stock based on a
per share price of $50 and (ii) the number of shares of Viacom
Common Stock exchanged is 10 million.
(b) Represents VII Cable's existing bank debt of $57 million and
certain equity investments, marketable securities and other
nonmaterial assets and liabilities conveyed to Viacom Services
in accordance with the Implementation Agreement.
6. Other pro forma adjustments relating to the Transaction are as follows:
a. An increase in annual amortization expense of $32.6 million resulting
from the increase in intangibles as described in Note 5.
b. Additional interest expense resulting from the incremental borrowings
described in Note 1. Solely for the purposes of this presentation
Viacom has assumed an interest rate of 7.75% based upon the
anticipated terms of the Loan. A change in the assumed interest rate
of 1/8% will result in a change in interest expense of $1.7 million on
an annual basis.
c. Reflects the income tax effects of certain pro forma adjustments
calculated at the statutory tax rate in effect during the periods
presented. The effective income tax rate on a pro forma
36
basis is adversely affected by amortization of excess acquisition
costs, which are assumed to be not deductible for tax purposes.
d. Reflects an assumed 4.5% cumulative annual dividend on the $500
million of VII Cable Preferred Stock. (See Note 4 above)
37
SELECTED COMBINED HISTORICAL FINANCIAL DATA
VII CABLE
(IN MILLIONS)
The following table sets forth certain selected historical combined financial
data of VII Cable and has been derived from and should be read in conjunction
with the VII Cable Carve-Out Financial Statements for the three years ended
December 31, 1994. See Notes 1 and 6 to the Notes to Combined Financial
Statements of VII Cable included elsewhere in this Offering Circular -
Prospectus. Unaudited interim data as of and for the nine-month periods ended
September 30, 1995 and 1994 reflect, in the opinion of management of VII Cable,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of such data. Results of operations for the
nine months ended September 30, 1995 are not necessarily indicative of results
which may be expected for any other interim or annual period. The VII Cable
Carve-Out Financial Statements reflect the carve-out historical results of
operations and financial position of VII Cable during the periods presented and
are not necessarily indicative of results of operations or financial position
that would have occurred if VII Cable had been a separate stand-alone entity
during the periods presented or of future results of operations or financial
position of VII Cable.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ -------- ------ ------ ------- -------
RESULTS OF OPERATIONS DATA:
Revenues....................................... $328.6 $303.6 $ 404.5 $414.8 $410.1 $378.0 $330.5
Earnings from operations....................... 59.8 42.7 57.4 83.8 97.5 82.2 55.9
Earnings (loss) before taxes................... 54.1 20.2 26.4 128.1 53.1 15.0 (10.0)
Net earnings (loss) before cumulative effect
of change in accounting principle............. 27.8 6.7 9.1 83.9 25.8 (.2) (15.3)
Net earnings (loss)............................ 27.8 6.7 9.1 97.4 25.8 (.2) (15.3)
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------------
1995 1994 1993 1992 1991 1990
---------------- -------- ------ ------ ------ ------
BALANCE SHEET DATA:
Total assets................................... $1,053.9 $1,040.4 $966.2 $964.7 $976.0 $992.7
Total debt..................................... 57.0 57.0 57.0 106.0 106.1 106.1
Viacom equity investment....................... 842.7 823.9 765.5 753.9 767.7 788.1
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VII CABLE
GENERAL
VII Cable owns and operates cable television systems in five geographic
regions in the United States. Substantially all of VII Cable's revenues are
earned from subscriber fees for primary (i.e., non-premium) and premium
subscription services, the rental of converters and remote control devices, and
installation fees. Additional revenues are derived from the sale of
advertising, pay-per-view programming fees, payments received from revenue-
sharing arrangements in respect of products sold through home shopping services,
and the leasing of fiber optic capacity in three of VII Cable's franchise areas
to partnerships (in which VII Cable has an equity interest) engaged in the
provision of competitive access telephone services.
Recent federal laws and regulations, including the decision to reregulate
certain aspects of the cable television distribution industry, have affected VII
Cable's ability to increase rates for certain subscriber services or restructure
its rates for certain services. These reregulation activities are designed to
reduce customer rates and limit future rate increases for non-premium program
services. Legislation pending in Congress would substantially amend the rate
regulation provisions under current federal law. For further discussion of
federal regulation of the cable television distribution industry, see "--Recent
Legislation" and "Business of VII Cable--Regulation--Federal Regulation."
The following discussion should be read in conjunction with VII Cable's pro
forma and historical financial statements, including the notes thereto, included
elsewhere in this Offering Circular - Prospectus. The historical financial
statements of VII Cable reflect the carve-out historical results of operations
and financial position of the cable television distribution business of Viacom
International. Such financial statements are not necessarily indicative of the
results that would have occurred if VII Cable had been a separate stand-alone
entity during the periods presented or of future results of operations or
financial condition of VII Cable.
The following comparisons of operating results include an analysis of earnings
from operations before interest, taxes, depreciation and amortization
("EBITDA"). While many in the financial community consider EBITDA to be an
important measure of comparative operating performance, it should be considered
in addition to, but not as a substitute for or superior to, earnings from
operations, net income, cash flow and other measures of financial performance.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. SEPTEMBER 30, 1994
Revenues increased to $113.0 million for the third quarter of 1995 from $100.1
million for the third quarter of 1994 (or 13%), primarily attributable to
increases in primary, premium and pay-per-view revenues. EBITDA increased to
$41.7 million for the third quarter of 1995 from $32.6 million for the third
quarter of 1994 (or 28%). Earnings from operations increased to $21.1 million
for the third quarter of 1995 from $13.4 million for the third quarter of 1994
(or 58%). The increase in revenues reflects a 10% and 4% increase in average
premium and primary customers, respectively, an 8% increase in primary rates,
partially offset by a 4% decrease in the average premium rate. Total revenues
per primary customer per month increased 9% to $32.43 for the third quarter of
1995 from $29.80 for the third quarter of 1994. The increase in EBITDA and
earnings from operations principally reflect the increase revenues.
Revenues increased to $328.6 million for the nine months ended September 30,
1995 from $303.6 million for the nine months ended September 30, 1994 (or 8%),
primarily attributable to an increase in primary, premium and pay-per-view
revenues. EBITDA increased to $120.8 million for the nine months ended
September 30, 1995 from $100.3 million for the nine months ended September 30,
1994 (or 20%). Earnings from operations increased to $59.8 million for the nine
months ended September 30, 1995 from $42.7 million for the nine months ended
September 30, 1994 (or 40%). The increase in revenues primarily reflects 17%
and
39
4% increases in average premium and primary customers, respectively, a 3%
increase in primary rates, partially offset by an 8% decrease in the average
premium rate. Total revenues per primary customer per month increased 4% to
$31.57 for the nine months ended September 30, 1995 from $30.33 for the nine
months ended September 30, 1994. The increase in EBITDA and earnings from
operations principally reflect the increased revenues.
It is anticipated that following the consummation of the Transaction, VII
Cable will reflect an increase in amortization expense of approximately $32.6
million per year due to the allocation of the purchase price to intangible
assets, increased interest expense of approximately $66.6 million per year and
preferred stock dividends of $22.5 million per year.
As of September 30, 1995, VII Cable serviced approximately 1,171,000 primary
customers subscribing to approximately 945,000 premium units, representing a 4%
and 5% increase, respectively, since September 30, 1994.
Interest expense
Interest expense increased 43% to $13.0 million for the third quarter of 1995
from $9.1 million for the third quarter of 1994. Interest expense increased 36%
to $37.9 million for the nine months ended September 30, 1995 from $28.0 million
for the nine months ended September 30, 1994. Interest expense reflects amounts
recorded by VII Cable on borrowings under a credit agreement and amounts
allocated by Viacom of $12.4 and $8.3 million for the quarters ended September
30, 1995 and September 30, 1994, respectively, and $36.3 and $26.3 million for
the nine months ended September 30, 1995 and September 30, 1994, respectively.
Viacom allocated interest expense to VII Cable based on a percentage of VII
Cable's average net assets to Viacom's average net assets. VII Cable's
allocated interest expense from Viacom may not be reflective of any interest
allocated by TCI subsequent to the Transaction. Interest expense is expected to
increase significantly following consummation of the Transaction as a result of
the borrowings under the Loan. See "Unaudited Pro forma Condensed Combined
Financial Statements of VII Cable."
Provision for income taxes
VII Cable has been included in the consolidated federal, state and local
income tax returns filed by Viacom. However, the income tax provision has been
prepared on a separate return basis as though VII Cable filed stand-alone income
tax returns.
The annual effective tax rates of 48% for 1995 and 67% for 1994 were both
adversely affected by the amortization of acquisition costs which are not
deductible for tax purposes.
1994 VS. 1993
Revenues decreased to $404.5 million for 1994 from $414.8 million for 1993 (or
2%). The decrease in revenues primarily reflects a 10% decrease in average
rates for primary services partially offset by a 3% increase in average primary
customers. EBITDA decreased to $133.8 million for 1994 from $157.2 million for
1993 (or 15%). Earnings from operations decreased to $57.4 million for 1994
from $83.8 million for 1993 (or 31%). Total revenues per primary customer per
month decreased 6% to $30.17 for 1994 from $31.94 for 1993. The revenue
variance reflects the effect of the FCC rate regulations pursuant to the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") governing rates in effect as of September 1, 1993 and as of May 15, 1994.
The decrease in EBITDA and earnings from operations principally reflect the
decreased revenues attributable to the above rate regulations and increased
programming, general and administrative expenses.
As of December 31, 1994, VII Cable served approximately 1,139,000 primary
customers subscribing to approximately 875,000 premium units, representing a 4%
and 22% increase, respectively, since December 31, 1993.
40
Interest expense
Interest expense increased 14% to $38.0 million for 1994 from $33.4 million
for 1993. Amounts allocated by Viacom were $35.7 million for 1994 and $31.2
million for 1993.
Other items, net
Other items, net in 1993 reflected a pre-tax gain of approximately $55 million
from the sale of the stock of Viacom Cablevision of Wisconsin, Inc. (the
"Wisconsin cable system") and a pre-tax gain of $17.4 million from sales of a
portion of an investment held at cost.
Provision for income taxes
The annual effective tax rates of 67% for 1994 and 35% for 1993 were both
adversely affected by the amortization of acquisition costs which are not
deductible for tax purposes. For 1993, the annual effective tax rate reflects a
9% tax benefit related to the sale of the Wisconsin cable system.
During the first quarter of 1993, VII Cable adopted Statement of Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," on a prospective
basis. As a result, VII Cable recognized an increase to earnings of $13.5
million in 1993 as the cumulative effect of a change in accounting principle.
1993 VS. 1992
Revenues increased to $414.8 million for 1993 from $410.1 million for 1992 (or
1%). EBITDA decreased to $157.2 million for 1993 from $164.7 million for 1992
(or 5%). Earnings from operations decreased to $83.8 million for 1993 from
$97.5 million for 1992 (or 14%).
On a comparable basis with the 1992 results (excluding the Wisconsin cable
system, which was sold effective January 1, 1993), revenues increased to $414.8
million for 1993 from $392.7 million for 1992 (or 6%), primarily attributable to
an increase in revenues from primary customers. EBITDA decreased to $157.2
million for 1993 from $158.2 million for 1992. Earnings from operations
decreased to $83.8 million for 1993 from $94.7 million for 1992 (or 12%). The
increase in revenues reflects a 4% increase in average rates for primary
services and a 2% increase in average primary customers. Total revenues per
primary customer per month increased 3% to $31.94 for 1993 from $30.97 for 1992.
The decrease in EBITDA reflects increased operating expenses (which included
non-recurring costs associated with the implementation of FCC rate regulations
during the period). The decrease in earnings from operations reflects increased
depreciation and amortization expense related to the step-up in basis of
property and equipment due to the implementation of SFAS 109.
As of December 31, 1993, VII Cable served approximately 1,094,000 primary
customers subscribing to approximately 718,000 premium units, representing a 2%
and 9% decrease, respectively, since December 31, 1992. Excluding the Wisconsin
cable system customers in 1993, primary customers increased 2% and premium units
decreased 5% since December 31, 1992.
Interest expense
Interest expense decreased 33% to $33.4 million for 1993 from $49.8 million
for 1992. Amounts allocated by Viacom were $31.2 million for 1993 and $44.6
million for 1992.
Provision for income taxes
The annual effective tax rates of 35% for 1993 and 53% for 1992 were both
adversely affected by the amortization of acquisition costs which were not
deductible for tax purposes.
41
LIQUIDITY AND CAPITAL RESOURCES
Immediately following the Consummation of the Stock Issuance, it is expected
that VII Cable will have borrowings of approximately $1.35 billion under the
Loan and approximately $500 million aggregate par value of VII Cable Preferred
Stock. See "Unaudited Pro forma Condensed Combined Financial Statements of VII
Cable." Additionally, VII Cable's business requires significant capital
expenditures to maintain, upgrade, rebuild and expand its cable television
systems. VII Cable's cash requirements have been funded by VII Cable's
operating activities and historically, as needed, through intercompany advances
from Viacom. VII Cable expects its future cash requirements (including capital
expenditures, capital contributions to joint ventures, commitments and payments
of principal and interest on the Loan and dividends payable on the VII Cable
Preferred Stock) to be funded by cash provided by operating activities and
intercompany advances, as required, from TCI.
VII Cable's partnerships are expected to require estimated cash contributions
of approximately $8 million to $10 million in 1995 and 1996. Planned capital
expenditures, including information systems costs, are estimated to be
approximately $130 million in 1995 and $150 million in 1996. Capital
expenditures are primarily related to additional construction and equipment
upgrades for the existing cable franchises.
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position or results of
operations.
VII Cable's current franchises expire on various dates through 2017. VII
Cable has never had a franchise revoked and, to date, all of VII Cable's
franchises have been renewed or extended at or prior to their scheduled
expirations. VII Cable has no reason to believe that its franchises will not be
renewed.
VII Cable's cable systems currently compete for viewers with, or face
potential competition from, other distribution systems which deliver programming
by microwave transmission (through multichannel multipoint distribution systems
("MMDS")) and satellite master antenna television ("SMATV") systems or directly
to subscribers via either direct broadcast satellite ("DBS") or TV-receive only
("TVRO") technology. See "Business of VII Cable--Competition."
In the ordinary course of business, VII Cable enters into long-term
affiliation agreements with programming services which require that VII Cable
continue to carry and pay for programming and meet certain performance
requirements.
In July 1994, Viacom International and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement") with certain banks. The Credit Agreement is an 8-year term
loan maturing on July 1, 2002. Viacom Cablevision of Dayton Inc. ("Dayton") is
a Subsidiary Borrower of $57 million under this facility, which amount of
indebtedness is included in the historical financial statements of VII Cable
included elsewhere in this Offering Circular - Prospectus. The Credit Agreement
provides that in the event that Dayton ceases to be a wholly owned subsidiary of
Viacom or Viacom International, the $57 million of borrowings shall become due
and payable. Under the Implementation Agreement, Viacom Services will assume
Dayton's obligation in respect of the $57 million of indebtedness under the
Credit Agreement.
VII Cable was in compliance with all debt covenants and had satisfied all
financial ratios and tests as of December 31, 1994 in respect of its $57 million
of borrowings under the Credit Agreement and expects to remain in compliance and
satisfy all such financial ratios and tests during 1995.
Net cash flow from operating activities increased 2% to $57.9 million for the
nine months ended September 30, 1995 from $56.9 million for the nine months
ended September 30, 1994, primarily reflecting increased earnings from
operations offset by increased interest expense. Investing activities primarily
reflect capital expenditures, VII Cable's investment in two partnerships (TCG
San Francisco and TCG Seattle) and in
42
1995 proceeds from the sale of marketable securities available-for-sale.
Financing activities reflect Viacom's funding of VII Cable's working capital
requirements, net of amounts allocated to VII Cable from Viacom, including
amounts for interest, certain administrative services and employee benefits.
Net cash flow from operating activities decreased 21% to $77.9 million in 1994
from $98.8 million in 1993, primarily reflecting decreased earnings from
operations. Investing activities principally reflect capital expenditures and
VII Cable's investment in two partnerships (TCG San Francisco and TCG Seattle)
in 1994, and proceeds from the sale of the Wisconsin cable system in 1993.
Financing activities reflect Viacom's funding of VII Cable's working capital
requirements, net of amounts allocated to VII Cable from Viacom. Financing
activities for 1992 also reflect the repayment of $49 million of bank debt in
connection with the sale of the Wisconsin cable system.
IMPACT OF INFLATION
The net impact of inflation on operations has not been material in the last
three years due to the relatively low rates of inflation during the period.
RECENTLY ISSUED ACCOUNTING REQUIREMENTS
In March of 1995, the Financial Accounting Standards Board issued SFAS 121,
effective for fiscal years beginning after December 15, 1995. SFAS 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 asset carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. VII Cable has not yet determined the financial statement impact of
the adoption of SFAS 121.
Effective January 1, 1994, VII Cable adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS 115, investments
classified as available-for-sale are carried at fair value and unrealized
holding gains and losses during the period are recorded as a component of
equity. The cumulative effect of the change in accounting principle is
recorded, net of tax, as a component of equity. Prior to the adoption of SFAS
115, marketable equity securities held by VII Cable were reported at the lower
of cost or market. During February 1995, VII Cable sold its marketable
securities available-for-sale, resulting in a pre-tax gain of $27 million.
RECENT LEGISLATION
On October 5, 1992, Congress enacted the 1992 Cable Act substantially amending
the regulatory framework under which cable television systems have operated
since the Communications Act of 1934 (the "Communications Act") was amended by
the Cable Communications Policy Act of 1984 (the "1984 Cable Act"). The FCC,
through its rules and regulations, began implementing the requirements of the
1992 Cable Act in 1993. Rate regulations adopted in 1993 and revised in 1994 by
the FCC (collectively, the "Benchmark Regulations") established a "benchmark"
formula used to set a cable operator's "initial permitted rate" or "transitional
rate" for regulated tiers of cable service. Cable systems whose rates exceeded
the applicable benchmark were required to reduce their rates either to the
benchmark or by 17% from those charged on September 30, 1992, whichever
reduction was less. These regulations also established the prices that an
operator may charge for subscriber equipment and installation services, based on
the operator's actual cost plus a permitted 11.25% margin of profit.
The FCC in 1994 also (1) adopted interim standards governing "cost-of-service"
proceedings pursuant to which a cable operator may attempt to prove that its
costs of providing regulated service justify initial permitted rates that are
higher than those produced under the benchmark approach, and (2) established a
regulatory scheme to adjust initial permitted rates on a going-forward basis for
inflation and certain "external" cost increases, which provided (among other
things) a pass-through of and 7.5% mark-up for increases in an operator's
programming expenses.
43
In November 1994, the FCC revised its "going forward" rules ("November 1994
Regulations") to increase the price which could be charged for new channels.
The new rules allow operators to pass through to subscribers the costs, plus a
$0.20 per channel mark-up, for channels added to regulated tiers other than
limited basic service, so long as the total increase does not exceed $1.50
through 1996. For 1997, the November 1994 Regulations allow an operator to
recover all product costs for such new channels, plus $0.20 per channel, up to a
ceiling allowing recovery of all product costs plus $1.20. In addition,
operators may launch new services as optional New Product Tiers ("NPTs") on an
unregulated basis, although the FCC may in the future determine to regulate
NPTs. In September 1995, the FCC again liberalized its cable rate rules. Among
other things, the new rules permit the recovery of significant upgrade costs on
a cost-of-service basis without subjecting all of the system's costs to a full
cost-of-service review. There are positive and negative effects to the new
rules. They will change how often rate changes can be made (once per year) but
allow for full recovery of costs. However, there is expected to be a delay
between the incurrence of cost increases and the collection of revenue.
The implementation of the Benchmark Regulations has had and is
expected to continue to have a negative effect on VII Cable's revenues and
earnings from operations. The reduction in revenues in 1994 was partially
offset by customer growth and subsequent permitted rate increases. On a going
forward basis, the November 1994 Regulations have mitigated and are expected to
continue to mitigate a portion of the adverse impact of the reduction in
revenues of VII Cable. See "Business of VII Cable--Subscriber Services and
Rates." Further, VII Cable has made cost-of-service filings in two systems.
While VII Cable cannot predict the outcome of these filings, it believes that
both cost-of-service proceedings justify rates in excess of those calculated
using the Benchmark Regulations. For further discussion of the impact of
federal rate regulation and of certain legislation pending in Congress on VII
Cable, see "Business of VII Cable--Regulation--Federal Regulation."
44
BUSINESS OF VII CABLE
THE COMPANY
VII Cable currently owns and operates cable television systems in five
geographic regions, including the San Francisco and Northern California area,
Salem, Oregon, the Seattle, Washington and greater Puget Sound area, Nashville,
Tennessee and Dayton, Ohio. As of September 30, 1995, VII Cable was
approximately the tenth largest multiple cable television system operator in the
United States, with approximately 1.2 million basic subscribers in five states.
VII CABLE'S SYSTEMS
The following tables set forth information relating to VII Cable's
systems as of September 30, 1995.
VII CABLE
AS OF SEPTEMBER 30, 1995
-----------------------------------------------------------------------------------------------------
APPROXIMATE
HOMES IN APPROXIMATE NUMBER OF MILES OF
FRANCHISE HOMES PASSED PRIMARY PRIMARY PREMIUM PREMIUM CABLE
AREA(1) BY CABLE(2) CUSTOMERS(3) PENETRATION(4) UNITS(5) PENETRATION(6) DISTRIBUTION
----------- ------------ ------------ -------------- -------- -------------- ------------
BAY AREA REGION
Marin(7).................. 81,000 77,700 62,700 81% 39,100 62% 646
Sonoma(7)................. 47,000 45,600 35,600 78% 23,000 65% 540
Napa...................... 33,000 32,600 24,000 74% 16,800 70% 321
East Bay/Castro Valley(7). 89,000 88,200 74,200 84% 70,700 95% 683
Pittsburg/Pinole(7)....... 74,000 73,500 55,200 75% 56,600 103% 566
San Francisco............. 357,000 339,300 176,400 52% 149,600 85% 711
--------- --------- --------- -- ------- --- ------
Total Bay Area Region.... 681,000 656,900 428,100 65% 355,800 83% 3,467
ORE-CAL REGION
Redding(7)................ 58,000 55,400 36,300 66% 21,500 59% 663
Oroville.................. 44,000 40,000 26,200 66% 12,200 47% 501
Salem..................... 78,000 75,400 47,300 63% 30,700 65% 629
--------- --------- --------- -- ------- --- ------
Total Ore-Cal Region..... 180,000 170,800 109,800 64% 64,400 59% 1,793
PUGET SOUND REGION(7)...... 641,000 620,500 435,800 70% 315,700 72% 6,388
MIDWEST REGION
Nashville(7).............. 271,000 238,500 143,500 60% 146,200 102% 2,347
Dayton(7)................. 98,000 94,200 53,300 57% 63,100 118% 634
--------- --------- --------- -- ------- --- ------
Total Midwest Region..... 369,000 332,700 196,800 59% 209,300 106% 2,981
TOTAL VII CABLE 1,871,000 1,780,900 1,170,500 66% 945,200 61% 14,629
========= ========= ========= == ======= === ======
(1) Homes in franchise area represents VII Cable's estimate based upon local
sources such as city directories, chambers of commerce, public utilities,
public officials and house counts.
(2) Homes are deemed "passed by cable" if such homes can be connected relatively
inexpensively and without any further extension of the trunk transmission
lines.
(3) Represents the number of homes connected, rather than the number of
television outlets connected within such homes.
(4) Represents primary customers as a percentage of homes passed by cable.
(5) The premium unit count is based on the total number of premium services
subscribed to by primary customers.
(6) Represents premium units as a percentage of primary customers.
(7) Other cable television companies, while not competing with VII Cable for
subscribers, have franchises serving parts of these areas in which VII Cable
also has franchises. For further discussion of competition, see "--
Competition."
45
The following table demonstrates the growth of VII Cable's systems during the
five-year period ended December 31, 1994 and the nine months ended September 30,
1995, adjusted to eliminate the impact of the disposition of the Milwaukee cable
system in January, 1993.
AT
SEPTEMBER 30, AT DECEMBER 31,
------------- ---------------
1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
Homes passed............. 1,780,900 1,757,700 1,729,900 1,697,500 1,658,100 1,165,200
Primary customers........ 1,170,500 1,139,100 1,094,100 1,069,100 1,041,700 1,013,700
Primary penetration...... 66% 65% 63% 63% 63% 63%
Premium units............ 945,200 875,200 718,100 752,700 744,700 697,700
Premium penetration...... 81% 77% 66% 70% 71% 69%
Average monthly
operating revenue per
primary customer....... $33.49 $31.90 $33.76 $32.28 $30.47 $27.63
Under the Subscription Agreement, it is contemplated that VII Cable will sell
or exchange the Dayton and Nashville systems on or after the day following the
Exchange Date. See "Arrangements Among Viacom, Viacom International, TCI and
TCI Cable--Terms of the Subscription Agreement."
VII Cable's operations require, as do all cable systems, a large investment
in physical assets consisting primarily of receiving apparatus, trunk lines,
feeder cable and drop lines connecting the distribution network to the premises
of customers, electronic amplification and distribution equipment, converters
located in customers' homes and other components. Significant expenditures are
also required for maintenance and replacement of and additions to such system
assets as a result of technological advances, ordinary wear and tear and changes
in regulatory requirements. System construction and operation and quality of
equipment used must conform with federal, state and local electrical and safety
codes and certain regulations of the FCC. Although management believes the
equipment used in the cable operations is in good operating condition, VII Cable
invests significant amounts each year to upgrade, rebuild and expand its cable
systems. During the last five years, VII Cable's capital expenditures were
approximately as follows: 1990: $46 million; 1991: $45 million; 1992: $55
million; 1993: $79 million; and 1994: $100 million. VII Cable expects that
its capital expenditures in 1995 will be approximately $130 million. Under the
Subscription Agreement, if the Subscription Agreement terminates without the
Exchange Offer having been consummated, TCI Cable will reimburse VII Cable for
certain capital expenditures made after January 20, 1995. See "Arrangements
Among Viacom, Viacom International, TCI and TCI Cable--Terms of the
Subscription Agreement."
In addition, VII Cable is analyzing potential business applications for its
broadband network, including telephony, the use of high-speed cable modems for
connection to on-line services, interactive video applications and video on
demand. These applications, either individually or in combination, will require
upgrading and rebuilding VII Cable's systems to replace or supplement coaxial
cable with fiber optic cable and incorporate two-way activation and digital
compression techniques. Significant additional capital expenditures will be
required in order to implement such technological advances.
FRANCHISES
As of December 31, 1994, VII Cable held franchises authorizing it to engage
in the delivery of multi-channel programming to subscribers located in its
franchise areas. These franchises, all of which are nonexclusive, generally
provide for the payment of fees to the issuing authority. Annual franchise fees
imposed on VII Cable's systems generally average 5.0% of gross revenues (as
defined in the relevant franchise
46
agreement). The 1984 Cable Act prohibits franchising authorities from imposing
annual franchise fees in excess of 5.0% of gross revenues. See "--Regulation--
State and Local Regulation."
The 1984 Cable Act guarantees cable operators due process rights in franchise
renewal proceedings and provides that franchises will be renewed unless the
cable operator fails to meet one or more of four enumerated statutory criteria.
VII Cable's current franchises expire on various dates through 2,017. VII Cable
has never had a franchise revoked and, to date, all of VII Cable's franchises
have been renewed or extended at or prior to their scheduled expirations. VII
Cable has no reason to believe that its franchises will not be renewed. See "--
Regulation--State and Local Regulation."
SUBSCRIBER SERVICES AND RATES
In all but two of its local franchise areas, VII Cable offers at least two
tiers of primary service: "Limited Service," which consists generally of local
and distant broadcast stations and all public, educational and governmental
("PEG") channels required by local franchise authorities; and the "Satellite
Value Package," which generally provides additional channels of advertiser-
supported program services and, where applicable, commercial leased access
channels required by federal law. In addition, VII Cable has introduced a third
tier of non-premium service which qualifies as a non-regulated NPT under FCC
regulations in a number of its systems. Each such tier consists of at least
five channels of advertiser-supported program services. VII Cable also offers
premium program services to its customers for an additional monthly fee. At
September 30, 1995, the Company's cable television systems had approximately
945,200 subscriptions to premium program services. In addition, VII Cable
offers, through certain of its addressable cable systems, individually priced,
stand-alone pay-per-view movies and events (some of which are also offered on
certain non-addressable systems).
The primary and premium program services and pay-per-view programming offered
to subscribers by VII Cable include programming supplied by Viacom (including
joint venture program services) as well as third-party programming. Viacom
programming is provided under affiliation agreements which will continue in
effect after the consummation of the Transaction. See "Relationship between
Viacom and VII Cable." For a discussion of future programming arrangements
between VII Cable and TCI and its affiliates, see "Relationship between VII
Cable and TCI."
The monthly service fees for Limited Service and the Satellite Value Package
constitute the major source of the systems' revenue and are regulated under the
1992 Cable Act. See "--Regulation--Federal Regulation." Rates charged to
subscribers vary from system to system. At September 30, 1995, VII Cable's
fixed monthly fees charged to customers for primary services ranged from $8.58
to $15.12 per month for Limited Service, from $19.83 to $27.19 for the
combination of Limited Service plus the Satellite Value Package and up to $12.95
per month for each premium service, in each case for all of an individual's
cable television connections, plus a charge for converter rental ranging from
$.10 to $3.93 per unit. An installation charge is levied in many cases, which
in the year ended December 31, 1994 constituted approximately 2% of total
revenues. Customers may discontinue service at will without additional charge
or downgrade service at a nominal charge. Although a number of jurisdictions in
which VII Cable is franchised have not, under the 1992 Cable Act, exercised
their authority to regulate the rates charged to subscribers for the Limited
Service tier, none of VII Cable's systems in those jurisdictions would be exempt
from such rate regulation should such jurisdictions exercise such authority in
the future. All of VII Cable's systems are subject to rate regulation by the
FCC with respect to rates charged to subscribers for the Satellite Value Package
tier of service under the 1992 Cable Act. The NPTs mentioned above are not rate
regulated at the present time, but the FCC has reserved the right to impose rate
regulation for NPTs in the future. See "--Regulation--Federal Regulation."
In addition to revenue derived from subscriber fees, VII Cable also sells
available advertising spots on advertiser-supported program services. Another
source of revenue is the sale of pay-per-view movies and events to VII Cable's
subscribers in systems where such service is offered. VII Cable also offers
home shopping services to its customers. All shopping services pay VII Cable a
share of revenue from sales of
47
products in a system's service area. In addition, VII Cable derives revenues
from the lease of certain fiber optic capacity in three of its franchise areas
to partnerships engaged in competitive access telephone services. VII Cable
through certain of its subsidiaries is a general partner in these partnerships
and TCI through certain of its subsidiaries is a general partner in two of such
partnerships. AVR of Tennessee, L.P. (in which an affiliate of TCI has an
interest) is a limited partner in the third partnership.
VII Cable markets its cable television services through a combination of
telemarketing, direct mail advertising, radio, television and local newspaper
advertising and door to door selling. In addition to marketing efforts to
attract new customers, VII Cable conducts periodic campaigns to encourage
existing customers to purchase additional levels of primary and premium
services. From time to time, VII Cable also engages in cooperative marketing
campaigns with other cable operators and cable programmers. Following the
consummation of the Transaction, VII Cable expects that in the ordinary course
of business it may conduct marketing campaigns in cooperation with cable
operators and programmers affiliated with TCI.
PROGRAMMING
VII Cable provides satellite-delivered cable programming to its subscribers
pursuant to contracts with programming suppliers generally providing for per-
subscriber license fees payable to such suppliers. Primary program services
offered to subscribers are licensed for a periodic fee payable to such suppliers
generally calculated on the basis of the number of primary subscribers. Premium
program services are licensed for a fee payable to such suppliers generally
calculated on the basis of the number of subscribers to the particular premium
service. VII Cable's programming contracts are generally for fixed periods of
time ranging from 3 to 7 years. The costs to VII Cable to provide cable
programming have increased in recent years and are expected to continue to
increase due to additional programming being provided to subscribers, increased
costs to produce or purchase cable programming, inflationary increases and other
factors. Rate regulations adopted by the FCC implementing the 1992 Cable Act
permit cable operators to pass through to subscribers increases in programming
expenses for regulated tiers and to increase rates to reflect an annual
inflation factor. In addition, cable operators may increase the charge to
subscribers for regulated tiers of service by a regulated per channel fee, plus
license fees, for each new channel added to a regulated tier, subject to certain
price caps.
Under the 1992 Cable Act, local broadcasting stations may require cable
television operators to negotiate a fee for the right to continue to retransmit
their local television signals ("Retransmission Consent") or, alternatively, may
demand carriage under the 1992 Cable Act's "Must-Carry" provisions. Under the
1992 Cable Act, agreements to carry television stations expire every three years
(the next expiration cycle is in October 1996), whereupon the station may either
renegotiate the terms for its Retransmission Consent with the cable system for
carriage or assert the station's "Must-Carry" right. Despite the statutory
three-year cycle, and in compliance with the 1992 Cable Act, VII Cable's current
retransmission agreements with television stations are generally terminable at
will by the stations upon prior notice. See "--Regulation--Federal Regulation--
Must Carry/Retransmission Consent."
Cable television systems are subject to the Copyright Act of 1976 (the
"Copyright Act") which provides a compulsory license for carriage of copyrighted
material on broadcast signals. See "--Regulation--Federal Regulation--
Compulsory Copyright."
COMPETITION
VII Cable's cable systems currently compete for viewers with, or face
potential competition from, other distribution systems which deliver programming
by microwave transmission (through MMDS) and SMATV systems or directly to
subscribers via either DBS or TVRO technology. Local multipoint distribution
systems ("MLDS"), a newly developed microwave technology which to date has been
deployed only on a trial basis, may be competitive with cable in the future.
The FCC has concluded a proceeding aimed at eliminating a
48
number of technological and regulatory limitations applicable to, and thereby
supporting the potential growth of, MMDS as a competitive video technology. The
nature and extent of competition from such alternative distribution systems
varies among and within cable systems and depends, in part, upon reliability,
programming and pricing. Digital compression (a technology which when deployed
will enable cable systems to increase the number of channels of programming
available to subscribers without necessitating as extensive a rebuild as would
otherwise be required) may allow cable systems to significantly increase the
number of channels of programming they deliver and thereby help cable systems
meet competition from these other distribution systems, particularly DBS (which
already incorporates digital compression techniques). SMATV, DBS and TVRO are
the alternative delivery technologies which currently offer competition to cable
television systems. In the future, greater competition can be expected from DBS
and, as described below, local telephone companies ("telcos").
These competing video technologies are described in greater detail below:
DBS. DBS services transmit signals by satellite to receiving
facilities located on customers' premises. Newly deployed high-powered,
digitally compressed, direct-to-home satellites now offer delivery of
programming (including near video on demand ("NVOD")) to subscribers
throughout the United States using relatively small roof-top or wall-
mounted antennas. Companies offering DBS services use digital compression
technology to increase satellite channel capacity and to provide a package
of movies and other program services competitive to those of cable
television systems. Two companies, United States Satellite Broadcasting,
Inc. ("USSB") and Hughes DirecTV ("DirecTV") are currently offering DBS
service using two high-powered satellites (with a third such satellite
expected to be placed in service in the near future). Primestar Partners,
L.P. ("Primestar"), in which TCI has an equity interest, is offering DBS
service using a medium-powered satellite. Two other companies are expected
to enter this marketplace in the near future. USSB and DirecTV together
offer more than 100 channels of service using digital compression
technology, Primestar currently offers approximately 80 channels of
programming and other DBS entities propose providing similar program
packages.
SMATV. SMATV systems distribute programming to condominiums,
apartment complexes and other multiple unit residential developments, often
on an exclusive basis. Due to the widespread availability of the
reasonably-priced earth stations through which SMATV systems operate, such
systems can offer improved reception of local television stations as well
as many of the same satellite-delivered services which are offered by
franchised cable television systems. Unlike a franchised cable television
system, SMATV systems generally require no local franchise approval in
order to operate, pay no franchise fees and may confine their operations to
small areas that are easy to serve and more likely to be profitable.
MMDS/MLDS. MMDS systems, also known as wireless cable, deliver (and,
when deployed, MLDS systems will deliver) programming services over
microwave channels licensed by the FCC which are received by subscribers
with special antennas. These systems are less capital intensive, are not
required to obtain local franchises or to pay franchise fees and are
subject to fewer regulatory requirements than cable television systems. To
date, the ability of MMDS systems to compete with cable television systems
has generally been limited by channel capacity, the lack of two-way
interactive capabilities and the need for unobstructed line-of-sight over-
the-air transmission. MLDS is expected substantially to overcome these
impediments, but thus far has only been deployed on a trial basis.
Additionally, the amount of spectrum to be made available for use by MLDS
has not yet been determined by the FCC, and consequently it is not possible
to predict the extent to which MLDS will be commercially exploited.
Certain telcos have recently acquired or have options to purchase MMDS
systems in furtherance of their strategy to position themselves to enter
into the video services business. In the event the telcos make substantial
additional capital investments in MMDS systems and related technology, MMDS
could be expected to become more widely available to subscribers and
therefore pose greater competition to cable television systems in the
future than they do currently.
49
The 1992 Cable Act prohibits a franchisor from granting exclusive
franchises and from unreasonably refusing to award additional competitive
franchises. Other cable operators have been franchised and may continue to
apply for franchises in certain areas served by VII Cable's cable systems. In
1986, the U.S. Supreme Court held that cable system operations implicate First
Amendment rights and that local franchising authorities may violate those rights
by establishing franchise requirements, unless there is a legitimate government
purpose. Since this decision, various federal district and appellate courts
have issued contradictory opinions with respect to the enforceability of
specific franchise requirements. Depending on the resolution of these cases,
competitive entry by other operators into VII Cable's franchise areas and VII
Cable's entry into other franchise areas could be more easily achieved.
Telco video services. The entry of the telcos into the cable television
business may provide additional competition to the cable industry. The
Communications Act's prohibitions against telcos engaging in the distribution of
video services within their local service areas have been held to be
unconstitutional in a series of federal district court decisions. Although
appellate court rulings upholding certain of these decisions are being appealed,
on March 17, 1995, the FCC issued a public notice announcing that, pending
disposition of these appeals, it will not enforce its cross-ownership rules in a
manner inconsistent with these decisions.
Pending the outcome of this litigation, the FCC has in the interim adopted
and is currently refining video dial tone ("VDT") regulations which allow
delivery of video programming by telcos over telephone lines in their local
service areas. The programming may be provided by unaffiliated third party
programmers or programmers owned by or affiliated with the applicable telco. In
the former case, the telco need not obtain a franchise nor comply with other
requirements of the Communications Act applicable to cable operators. In its
current proceeding, the FCC is considering which, if any, of the Communications
Act's requirements (including the obligation to obtain a franchise) should be
imposed on telcos operating a VDT system which delivers programming of an entity
affiliated with the telco. If the within-service-area telco-cable cross-
ownership prohibitions are ultimately held to be unconstitutional, telcos could
own within-service-area cable systems as traditional cable operators and would
not have to comply with the FCC's VDT rules, which impose certain common-carrier
requirements on telcos (i.e., use of the telco's facilities must be available to
all programmers and program packagers on a non-discriminatory, first-come first-
served basis). Certain telcos are already building such within-service-area
cable systems. The FCC has also decided to streamline the process by which it
previously reviewed telco proposals to build new communications facilities
(including cable television systems), thereby facilitating the direct provision
by telcos of cable television services.
Furthermore, both houses of Congress have passed bills which, if enacted,
would, among other things, permit telcos to enter the cable business either as
traditional cable operators subject to the Communications Act's requirements
applicable to cable operators or on a common carrier basis. This legislation
would, if enacted, also permit cable systems to provide local exchange telephone
service in competition with the telcos, by eliminating most of the state and
local barriers to entry into the telephone business which currently exist.
These bills, which deal with a variety of matters of telecommunications policy
and differ in certain significant respects, are being taken up for
reconciliation in the House/Senate Conference Committee. It is not possible to
predict the timing or the outcome of such proposed legislation. See "--
Regulation--Federal Regulation--Video Dialtone Regulations." In September 1995,
VII Cable filed an application with the California Public Utilities Commission
to provide telephone service in the greater San Francisco area. VII Cable has
announced its intention to commence offering such service on a limited trial
basis in the Castro Valley area in the first quarter of 1996. In addition, VII
Cable is a general partner in three partnerships providing commercial
competitive access telephone services which link business customers to long
distance carriers via private networks owned by the cable television company
partners and leased to the partnerships.
The FCC is currently considering allowing broadcasters to utilize
additional spectrum in new, digital transmission modes so that each currently
licensed broadcaster could, if the FCC proposals are adopted, broadcast several
additional channels of programming. Pending legislation would require the FCC
to permit broadcasters to utilize digitally transmitted signals for various
purposes including, if the FCC so determines, for additional channels of
programming. The aggregation of these additional broadcast signals in a given
market
50
could pose additional competition for cable systems once digital broadcast
transmissions are implemented. Broadcast signals are presently transmitted in
analog rather than digital form. Full conversion from analog to digital mode is
expected to occur within 10 to 15 years after the standards for digital
transmissions are formally adopted by the FCC (and potentially sooner). These
standards may be adopted by the FCC in 1996.
VII Cable views the future success of its cable television distribution
business as being dependent on supplying additional programming and new services
to its customers and increasing primary and premium subscriber penetrations.
REGULATION
VII Cable's business is subject to regulation by federal, state and local
governmental authorities. The rules, regulations, policies and procedures
affecting the cable television business are constantly subject to change. The
descriptions which follow are summaries and should be read in conjunction with
the texts of the statutes, rules and regulations described herein. The
descriptions do not purport to describe all present and proposed federal, state
and local statutes, rules and regulations affecting VII Cable's business.
FEDERAL REGULATION
1992 Cable Act. On October 5, 1992, Congress enacted the 1992 Cable Act,
substantially amending the regulatory framework under which cable television
systems have operated since the Communications Act was amended by the 1984 Cable
Act. The FCC, through its rules and regulations, began implementing the
requirements of the 1992 Cable Act in 1993. The following is a summary of
certain significant issues:
Rate Regulation. The Benchmark Regulations established a "benchmark"
formula used to set a cable operator's "initial permitted rate" or
"transitional rate" for regulated tiers of cable service. Cable systems
whose rates exceeded the applicable benchmark were required to reduce their
rates either to the benchmark or by 17% from those charged on September 30,
1992, whichever reduction was less. These regulations also established the
prices that an operator may charge for subscriber equipment and
installation services, based on the operator's actual cost plus a permitted
11.25% margin of profit.
The FCC in 1994 also (1) adopted interim standards governing "cost-of-
service" proceedings pursuant to which a cable operator may attempt to
prove that its costs of providing regulated service justify initial
permitted rates that are higher than those produced under the benchmark
approach, and (2) established a regulatory scheme to adjust initial
permitted rates on a going-forward basis for inflation and certain
"external" cost increases, which provided (among other things) a pass-
through of, and 7.5% mark-up for, increases in an operator's programming
expenses.
In the November 1994 Regulations, the FCC revised its "going forward"
rules to increase the price which could be charged for new channels. The
new rules allow operators to pass through to subscribers the costs, plus a
$0.20 per channel mark-up, for channels added to regulated tiers, other
than limited basic service, so long as the total increase does not exceed
$1.50 through 1996. For 1997, the November 1994 Regulations allow an
operator to recover all product costs for such new channels, plus $0.20 per
channel, up to a ceiling allowing recovery of all product costs plus $1.20.
In addition, operators may launch new services as optional NPTs on an
unregulated basis, although the FCC may in the future determine to regulate
NPTs. In September 1995, the FCC again liberalized its cable rate rules.
Among other things, the new rules permit the recovery of significant
upgrade costs on a cost-of-service basis without subjecting all of the
system's costs to a full cost-of-service review. There are positive and
negative effects to the new rules. They will change how often rate changes
can be made (once per year) but allow for full recovery of costs. However,
there is expected to be a delay between the incurrence of cost increases
and the collection of revenue.
51
The implementation of the Benchmark Regulations has had and is expected to
continue to have a negative effect on VII Cable's revenues and earnings
from operations. The reduction in revenues in 1994 was partially offset by
customer growth and subsequent permitted rate increases. On a going-
forward basis, the November 1994 Regulations have mitigated and are
expected to continue to mitigate a portion of the adverse impact of the
reduction in revenues of VII Cable. For example, VII Cable has launched
multi-channel NPTs in various systems. See "--Subscriber Services and
Rates." Further, VII Cable has made cost-of-service filings in two
systems. While VII Cable cannot predict the outcome of these filings, it
believes that both cost-of-service proceedings justify rates in excess of
those calculated using the Benchmark Regulations.
The 1992 Cable Act deregulated cable systems subject to "effective
competition" (as defined in such statute). Legislation passed by the
Senate on June 15, 1995 (the "Senate Bill") would, in addition, eliminate
rate regulation of (a) all regulated tiers (other than the basic tier)
except for those cable operators whose rates substantially exceed the
national average, and (b) all cable systems which are subject to telco
video competition. Legislation passed by the House on August 4, 1995 (the
"House Bill") would, in addition, eliminate rate regulation of (i) all
regulated tiers (other than the basic tier) within 15 months of the House
Bill's enactment into law (and immediately for smaller systems, as defined
in the House Bill), and (ii) all cable systems in areas in which a telco is
authorized to provide cable services. Additionally, the House Bill would
substantially raise the minimum number of subscriber complaints which must
be filed with the FCC during the 15-month interim period with respect to
matters within the FCC's jurisdiction concerning regulated tiers of
programming in order to commence a rate proceeding. The House Bill and
Senate Bill cover a variety of other issues affecting U.S.
telecommunications policy and diverge in their treatment of such issues.
Such differences are being taken up in the House/Senate Conference
Committee in an attempt to reconcile the Senate Bill and House Bill. VII
Cable is unable to predict the timing or outcome of any such proposed
legislation.
Carriage of Affiliated Programming. The FCC's implementing
regulations limit the number of channels on a cable system which may be
used to carry the programming of such system's affiliated (as defined by
FCC regulations) cable programmers. These regulations (the "Channel
Occupancy Rules") generally provide that no more than 40% of such a
system's channels can be used to carry the programming of the system's
affiliated cable programmers. These channel occupancy limits apply to up
to 75 channels of a given system. To the extent that TCI and its
affiliates supply VII Cable with programming services after the
consummation of the Transaction, the Channel Occupancy Rules will affect
the number of TCI-affiliated programming services that VII Cable's systems
distribute to their subscribers until such time as VII Cable increases
channel capacity on a system by system basis beyond 75 channels. However,
no program service currently carried by VII Cable's systems is anticipated
to be dropped because of the Channel Occupancy Rules. Viacom is unable to
predict the impact, if any, of the Channel Occupancy Rules on the
programming carried by VII Cable after the consummation of the Transaction.
Must Carry/Retransmission Consent. Local broadcasting stations may
require cable television operators to negotiate a fee for the right to
continue to retransmit their local television signals or, alternatively,
may demand carriage under the 1992 Cable Act's "Must-Carry" provisions.
See "--Programming." In addition, a cable system may not carry any
commercial non-satellite-delivered television station which is "distant" to
communities served by such system, certain satellite-delivered television
stations which are distant to those communities or any radio station
without obtaining the consent of such station for such retransmission;
however, such television and radio stations do not have Must Carry rights.
Stations having Retransmission Consent rights may require payment in
consideration for Retransmission Consent. VII Cable has negotiated
retransmission rights for a number of commercial local and distant
television stations which it carries. Some of these agreements are on an
interim basis and may be canceled by the stations. VII Cable also carries
a number of local stations pursuant to their exercise of their Must Carry
rights. Local non-commercial television stations have Must Carry rights,
but may not elect Retransmission Consent. The Must Carry rules were
challenged
52
by cable program services and cable system operators. In April 1993, a
District of Columbia three-judge federal district court upheld the rules
against a First Amendment attack. In June 1994, the U.S. Supreme Court
held that the rules were content-neutral rather than per se
unconstitutional, but vacated the federal district court's decision and
remanded the case back to the federal district court to determine whether
the Must Carry rules are drafted narrowly enough to satisfy constitutional
requirements applicable to legislative restrictions on cable operators'
First Amendment rights. The Must Carry rules remain in effect pending the
decision of the district court on remand.
Buy Through to Premium Services. Pursuant to the 1992 Cable Act, a
cable system may not require subscribers to purchase any tier of service
other than the basic service tier in order to obtain services offered by
the cable operator on a per channel (e.g., premium services) or pay-per-
view basis. A cable system which is not now fully addressable and which
cannot utilize other means to facilitate access to all of its programming
will have until October 2002 to comply with this provision through the
implementation of fully addressable technology. VII Cable's cable systems
have already substantially implemented compliance.
Compulsory Copyright. Cable television systems are subject to the
Copyright Act which provides a compulsory license for carriage of
copyrighted material on broadcast signals. Distant signals are licensed at
prescribed rates (the proceeds of which are divided among the various
copyright holders of the programs contained in such signals). No license
fee is payable to any copyright holder for retransmission of broadcast
signals which are "local" to the communities served by the cable system.
Various bills have been introduced into Congress from time to time that
would eliminate or modify the cable television compulsory license. Without
the compulsory license, VII Cable could incur additional costs for its
carriage of programming of certain broadcast stations and if some broadcast
stations are not carried, customer satisfaction with cable service could be
adversely affected until satisfactory replacement programming is found.
Copyrighted music performed in programming supplied to cable
television systems by premium program services and advertiser-supported
program services has generally been licensed by the networks through
private agreements with the American Society of Composers, Authors and
Publishers ("ASCAP") and Broadcast Music, Inc. ("BMI"), the two major
performing rights organizations in the United States. ASCAP and BMI offer
"through to the viewer" licenses to the program services which cover the
retransmission of the program services' programming by cable television
systems to their customers. However, the performing rights organizations
have claimed the right to receive royalties from cable systems for their
transmission of music contained in other programming. Cable systems have
not yet concluded negotiations with respect to these licensing fees.
ASCAP has instituted suit against two named cable operators and
unnamed operators as a class claiming that these cable systems are
violating copyright of musical compositions contained in programming
distributed by the systems on a pay-per-view basis.
Ownership Limitation. Pursuant to the 1992 Cable Act, the FCC has
imposed limits on the number of cable systems which a single cable operator
may own. In general, no cable operator may hold an attributable interest
in cable systems which pass more than 30% of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or
more (unless there is another single holder of more than 50% of the voting
stock), officerships, directorships and general partnership interests. The
FCC has stayed the effectiveness of these rules pending the outcome of the
appeal of a federal district court decision holding this ownership
limitation provision of the 1992 Cable Act unconstitutional.
Judicial challenges have been filed regarding other provisions of the 1992
Cable Act, including the provisions relating to rate regulation, Must
Carry/Retransmission Consent, and the mandated availability of cable channels
for leased access and PEG programming and the treatment of indecent programming
distributed
53
by cable systems on public and leased-access channels. If enacted, the House
and Senate Bills may affect the status of the rate regulation lawsuits. See
"Regulation--Federal Regulation."
Video Dialtone Regulations. A series of federal district court decisions
has declared unconstitutional and enjoined enforcement of the Communications
Act's ban (the "Video Programming Ban") on the direct provision of video
programming by a telco in its local service area. The U.S. Courts of Appeals
for the Fourth and Ninth Circuits (in which VII Cable operates cable systems)
have affirmed the district court rulings brought before them on appeal. Prior
to these court rulings, the FCC had reinterpreted and liberalized the Video
Programming Ban in its 1992 "video dialtone" decision, authorizing a role for
telco participation in video distribution where such participation had
previously been prohibited. The FCC's VDT policy is being challenged in court
by cable interests as violating the Communications Act. It is also being
challenged in court by telephone interests as not being liberal enough. The
policy permits in-service-area delivery of video programming by a telco and
exempts telcos from the Communications Act's franchising requirements so long as
their facilities are capable of two-way video and are used for transmission of
video programming on a common carrier basis. Under the FCC's VDT policy, telcos
are also permitted to provide, on a non-common carrier basis, additional
"enhanced" services such as video gateways, video processing services, customer
premises equipment and billing and collection.
In January 1995, in response to the court rulings discussed above striking
down the Video Programming Ban, the FCC issued a Notice of Proposed Rulemaking
seeking to craft rules to govern telco provision of video programming directly
to subscribers in instances where the telco distributes over its VDT system
programming which it or one of its affiliates owns. The FCC's pending
proceeding addresses the extent to which regulations applicable to common
carriers and/or regulations applicable to cable operators should govern telcos
that provide video programming directly to subscribers over their own VDT
systems, including the necessity of a telco obtaining franchises and paying
franchise fees. The FCC has already approved several VDT construction
applications for market trials and/or limited commercial deployment and has
granted, in part, the first tariff filed to govern the rates and terms of a VDT
offering. In response to the court rulings noted above, the FCC's more recent
VDT authorizations have also allowed telcos to serve as program packagers on
their VDT platforms. Both the House Bill and Senate Bill contemplate a
relatively permissive framework for telco entry into the direct provision of
video services, essentially giving the telcos the option to choose between
operating as a traditional cable operator, subject to all of the cable
provisions of the Communications Act, or operating as a VDT system, in which
case a telco would be regulated as a common carrier, subject only to certain
cable provisions of the Communications Act.
At present, state and/or local laws do not prohibit cable television
companies from engaging in certain kinds of telephony business in many states,
but affirmative state approval must generally be obtained before a cable
operator can offer telephony services. Several states, including California and
Ohio (in which VII Cable operates), have recently reduced barriers to entry into
the telephone business, but substantial impediments still exist. Both the House
Bill and Senate Bill propose generally to eliminate state and local entry
barriers which currently either prohibit or restrict an entity's (including a
cable operator's) ability to offer telecommunications services (including
telephone exchange service) in competition with telcos and to interconnect on a
non-discriminatory basis with telcos and utilize certain telco facilities in
order to provide service in competition with a telco after the date of enactment
of such legislation. VII Cable cannot predict the outcome or impact of these
legislative and regulatory efforts although it can be anticipated that cable
operators could benefit from the elimination of barriers to the provision of
competitive telephone access. If the pending legislation does not become law,
and the U.S. Supreme Court affirms the lower court decisions holding the
Communications Act's Video Programming Ban unconstitutional, certain of the
telcos have stated their intention to enter the video programming business
immediately. In the event that the pending Senate and House Bills are not
enacted and the Video Programming Ban should ultimately be held to be
constitutional by the U.S. Supreme Court, the FCC's VDT policy will continue to
permit at least one method for the provision of video services by telcos in
their local service areas.
54
STATE AND LOCAL REGULATION
State and local regulation of cable is exercised primarily through the
franchising process under which a company enters into a franchise agreement with
the appropriate franchising authority and agrees to abide by applicable
ordinances. Local franchising authorities are also permitted to exercise rate
regulation authority over limited basic service within federal constraints and
to regulate customer service standards where permitted by state law. See "--
Federal Regulation."
In addition to the above, under the Communications Act, franchising
authorities may control only cable-related equipment and facilities requirements
and may not require the carriage of specific program services. However, federal
law (as implemented by FCC regulations) mandates the carriage of both commercial
television stations which elect to exercise their Must Carry rights and
noncommercial television broadcast stations if such stations are "local" to the
area in which a cable system is located. See "--Federal Regulation" and "--Must
Carry/Retransmission Consent."
PROPERTIES
A cable television system consists of three principal operating components.
The first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the headend
and extends throughout the system's service area, consists of microwave relays,
coaxial or fiber optic cables and associated electronic equipment placed on
utility poles or buried underground. The third component of the system is a
"drop cable," which extends from the distribution or trunk network into each
customer's home and connects the distribution system to the customer's
television set.
VII Cable leases premises in Pleasanton, California for its corporate
headquarters. Pursuant to the Implementation Agreement, the corporate
headquarters lease will be included in the Conveyance to Viacom Services. VII
Cable also owns and leases parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices in
California, Ohio, Oregon, Tennessee and Washington (the locations of VII Cable's
franchises). Viacom International believes that such premises are in good
condition and are suitable and adequate for its business operations.
EMPLOYEES
At December 31, 1994, VII Cable had 2,210 employees. VII Cable is a party
to a collective bargaining agreement dated August 2, 1994 with Teamsters Local
856 covering 50 employees in San Francisco, California. VII Cable considers
its relations with its employees to be good.
LEGAL PROCEEDINGS
VII Cable is a party to various legal proceedings that are ordinary and
incidental to its business. Management does not believe that any legal
proceedings currently pending will have a material adverse effect on the
consolidated financial position of VII Cable.
55
MANAGEMENT
The following table sets forth certain information regarding each person
who will serve as a director and executive officer of VII Cable immediately
following the Stock Issuance.
NAME AGE POSITION
- ---- --- --------
Bob Magness 71 Director
John C. Malone 54 Director
Donne F. Fisher 57 Director
Brendan R. Clouston 42 President and Director
Barry P. Marshall 49 Executive Vice President
Stephen M. Brett 55 Senior Vice President and Secretary
Bernard W. Schotters 50 Senior Vice President and Treasurer
Gary K. Bracken 56 Senior Vice President
There are no family relations, of first cousin or closer, among any of the
foregoing persons, by blood, marriage or adoption.
During the past five years, none of the foregoing persons has had any
involvement in a legal proceeding that would be material to an evaluation of his
ability or integrity.
MANAGEMENT BIOGRAPHIES
Bob Magness has served as Chairman of the Board and as a director of TCI
since June 1994 and of TCI Cable since 1968.
John C. Malone has served as Chief Executive Officer and President of TCI
since January 1994. He also served as Chief Executive Officer of TCI Cable from
March 1992 to October 1994 and President of TCI Cable from 1973 to October 1994.
Dr. Malone is a director of TCI, TCI Cable, Tele-Communications International,
Inc., Turner Broadcasting System, Inc., BET Holdings, Inc. and The Bank of New
York.
Donne F. Fisher has served as Executive Vice President and Treasurer of TCI
since January 1994. From 1970 through October 1994, Mr. Fisher held various
executive positions with TCI Cable, including Executive Vice President, Senior
Vice President and Treasurer. Mr. Fisher is a director of TCI, TCI Cable and
General Communication, Inc.
Brendan R. Clouston has served as Executive Vice President of TCI since
January 1994 and President and Chief Executive Officer of TCI Cable since
October 1994. From March 1992 to October 1994, he served as TCI Cable's
Executive Vice President and Chief Operating Officer, and from December 1991 to
March 1992, its Senior Vice President. Prior to joining TCI Cable in 1991, Mr.
Clouston held various executive positions with United Artists Entertainment
Company, including Executive Vice President and Chief Financial Officer.
56
Barry P. Marshall has served as TCI Cable's Executive Vice President and
Chief Operating Officer since October 1994. From March 1992 to January 1994, he
served as Executive Vice President and Chief Operating Officer of TCI Cable's
primary operating subsidiary, where he directly oversaw all of TCI Cable's
regional operating divisions. From 1986 to March 1992, Mr. Marshall was Vice
President and Chief Operating Officer of TCI Cable's largest regional operating
division.
Stephen M. Brett has served as Executive Vice President, General Counsel
and Secretary of TCI since January 1994. He has also served as Senior Vice
President and General Counsel of TCI Cable since December 1991. From August
1988 to December 1991, Mr. Brett was Executive Vice President-Legal and
Secretary of United Artists Entertainment Company and its predecessor, United
Artists Communications, Inc.
Bernard W. Schotters has served as Senior Vice President-Finance and
Treasurer of TCI Cable since December 1991. From 1981 to December 1991, he was
TCI Cable's Vice President-Finance and Treasurer. Mr. Schotters also serves as
Vice President and Treasurer of most of TCI's subsidiaries.
Gary K. Bracken has served as controller of TCI Cable since 1969 and as its
Senior Vice President since December 1991. He also serves as TCI Cable's chief
accounting officer, a position he has held since 1982.
BOARD OF DIRECTORS
Composition and Term. VII Cable's Restated Certificate of Incorporation
will provide for a Board of Directors (the "VII Cable Board") of not less than
three members, with the exact number of directors to be fixed by resolution of
the VII Cable Board. The VII Cable Board will initially consist of four
members, each of whom shall serve a one-year term or until his earlier death,
resignation or removal.
Committees. The VII Cable Board will have an Audit Committee consisting of
Messrs. Malone, Fisher and Clouston. The duties of the Audit Committee will be
to review and monitor VII Cable's financial reports and accounting practices to
ascertain that they are within acceptable limits of sound practice, to receive
and review audit reports submitted by VII Cable's independent auditors and by
its internal auditing staff and make such recommendations to the VII Cable Board
as may seem appropriate to the Committee to assure that the interests of VII
Cable are adequately protected and to review all related party transactions and
potential conflict-of-interest situations.
COMPENSATION OF THE BOARD OF DIRECTORS
VII Cable's directors will not be separately compensated by VII Cable for
serving on the VII Cable Board or any committee thereof.
INDEMNIFICATION
VII Cable will enter into indemnification agreements with each person who
will serve as a director of VII Cable immediately following the Stock Issuance.
The indemnification agreements will generally provide (i) for the prompt
indemnification to the fullest extent permitted by law against (a) any and all
expenses including attorneys' fees and all other costs paid or incurred in
connection with investigating, preparing to defend, defending or otherwise
participating in any threatened, pending or completed action, suit or proceeding
related to the fact that such indemnitee is or was a director, officer,
employee, agent or fiduciary of VII Cable or is or was serving at VII Cable's
request as a director, officer, employee, agent or fiduciary of another entity,
or by reason of anything done or not done by such indemnitee in any such
capacity and (b) any and all judgments, fines, penalties and amounts paid in
settlement of any claim, unless the "Reviewing Party" (defined as one or more
members of the VII Cable Board or appointee(s) of the VII Cable Board who are
not parties to
57
the particular claim, or independent legal counsel) determines that such
indemnification is not permitted under applicable law and (ii) for the prompt
advancement of expenses to an indemnitee as well as the reimbursement by such
indemnitee of such advancement to VII Cable if the Reviewing Party determines
that the indemnitee is not entitled to such indemnification under applicable
law. In addition, the indemnification agreements will provide (i) a mechanism
through which an indemnitee may seek court relief in the event the Reviewing
Party determines that the indemnitee would not be permitted to be indemnified
under applicable law (and would therefore not be entitled to indemnification or
expense advancement under the indemnification agreement) and (ii)
indemnification against all expenses (including attorneys' fees), and the
advancement thereof, if requested, incurred by the indemnitee in any action
brought by the indemnitee to enforce an indemnity claim or to collect an
advancement of expenses or to recover under a directors' and officers' liability
insurance policy, regardless of whether such action is ultimately successful or
not. Furthermore, the indemnification agreements will provide that after there
has been a "change in control" in VII Cable (as defined in the indemnification
agreements), other than a change in control approved by a majority of directors
who were directors prior to such change, then, with respect to all
determinations regarding rights to indemnification and the advancement of
expenses, VII Cable will seek legal advice as to the right of the indemnitee to
indemnification under applicable law only from independent legal counsel
selected by the indemnitee and approved by VII Cable.
The indemnification agreements will impose upon VII Cable the burden of
proving that an indemnitee is not entitled to indemnification in any particular
case and negate certain presumptions that may otherwise be drawn against an
indemnitee seeking indemnification in connection with the termination of actions
in certain circumstances. Indemnitees' rights under the indemnification
agreements are not exclusive of any other rights they may have under Delaware
law, the VII Cable Bylaws or otherwise. Although not requiring the maintenance
of directors' and officers' liability insurance, the indemnification agreements
require that indemnitees be provided with the maximum coverage available for any
VII Cable director or officer if there is such a policy.
COMPENSATION OF EXECUTIVE OFFICERS
Each of the persons who will serve as an executive officer of VII Cable
immediately following the Stock Issuance is expected to continue to serve as an
officer of TCI and/or TCI Cable. None of the executive officers of VII Cable is
expected to be separately compensated by VII Cable for serving in such capacity.
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RISK FACTORS
IN CONSIDERING WHETHER OR NOT TO TENDER SHARES OF VIACOM COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER, HOLDERS OF VIACOM COMMON STOCK SHOULD CONSIDER
CAREFULLY ALL OF THE INFORMATION SET FORTH OR INCORPORATED IN THIS OFFERING
CIRCULAR - PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING:
TOTAL INDEBTEDNESS AND CASH FLOW OF VII CABLE
After consummation of the Transaction, VII Cable will have debt which will
be substantial in relation to its stockholders' equity. See "Unaudited Pro
Forma Condensed Combined Financial Statements of VII Cable."
The amount of VII Cable's debt could have important consequences to holders
of shares of Viacom Common Stock who elect to tender shares in the Exchange
Offer, including: (i) limiting VII Cable's ability to obtain additional
financing to fund future working capital requirements, capital expenditures,
acquisitions or other general corporate requirements; (ii) requiring a
substantial portion of VII Cable's cash flow from operations to be dedicated to
debt service requirements, thereby reducing the funds available for operations
and future business opportunities; (iii) requiring all of the indebtedness
incurred under the Loan to be repaid prior to the time any payments for
mandatory redemption are required with respect to the VII Cable Preferred Stock;
and (iv) causing VII Cable to become more sensitive to adverse economic and
industry conditions. Although neither TCI nor TCI Cable is obligated to provide
additional capital or financial support to VII Cable after payment of the
Subscription Payment, based upon current levels of operations, anticipated
growth and intercompany advances, as required, from TCI, VII Cable expects to be
able to generate sufficient cash flow to make all of the principal and interest
payments when due on the Loan. No assurances can be given however, that VII
Cable will be able to repay such borrowings. See "Description of Certain
Indebtedness of VII Cable."
CONTROLLING STOCKHOLDER
Immediately after completion of the Transaction, TCI Cable will own all of
the outstanding common stock of VII Cable and TCI will own all of the
outstanding common stock of TCI Cable. Consequently, TCI will be in a position
to control the election of the of VII Cable Board as well as the direction and
future operations of VII Cable.
POTENTIAL CONFLICTS OF INTEREST
General. Following the consummation of the Transaction, it is expected
that TCI or its affiliates will enter into business transactions, agreements and
arrangements with VII Cable and its affiliates. These transactions, agreements
and arrangements are expected to be on terms which in the aggregate are not
materially different from those which could be obtained from unrelated third
parties through negotiations on an arm's length basis. See "Description of VII
Cable Capital Stock--VII Cable Preferred Stock--Certain Covenants--Transactions
with Affiliates."
Intercompany Agreements. Following the consummation of the Transaction,
TCI and its affiliates will enter into a number of intercompany agreements with
VII Cable and its affiliates covering the carriage of programming services, as
well as matters such as lending arrangements, tax sharing and the use of certain
trade names and service marks by VII Cable. It is anticipated that VII Cable
will purchase a portion of its programming from cable programmers in which TCI
or its affiliates (other than VII Cable) have an interest. In addition, it is
anticipated that TCI will provide certain administrative, financial, treasury,
accounting, tax, legal and other services to VII Cable and make available
certain of its employee benefit plans to officers and employees of VII Cable and
its affiliates. While these agreements and arrangements are expected to be on
terms which in the aggregate are not materially different from those which could
be obtained from unrelated third parties through negotiations on an arm's length
basis, conflicts could arise in the interpretation, extension
59
or renegotiation of the foregoing agreements. See "Relationship between VII
Cable and TCI after the Exchange Offer."
Business Opportunities. Following the consummation of the Transaction, TCI
and VII Cable, through their respective affiliates, will each own or have
interests in cable television systems. The presence of both companies in the
cable distribution industry could give rise to potential conflicts of interest
between them, including conflicts which may arise with respect to the
acquisition of cable franchises covering areas contiguous with service areas in
which TCI and VII Cable, through their respective affiliates, have franchises,
as well as in other instances in which TCI and VII Cable may both be pursuing
the same business opportunity.
DEPENDENCE ON ADDITIONAL CAPITAL
The ownership, development and operation of cable television systems
requires substantial capital investment. Significant capital expenditures are
also required to maintain, upgrade, rebuild and expand such systems. During the
five year period ended December 31, 1994, VII Cable's capital expenditures were
$325 million. VII Cable expects that its capital expenditures in 1995 will be
approximately $130 million. Of such amounts, approximately 56% have been
incurred in connection with the rebuilding of VII Cable's cable distribution
network. Additional capital expenditures will be required in order for VII
Cable to take advantage of technological advances such as fiber optics, two-way
communication and digital compression so as to enable it to offer such services
as high-capacity data transmission, telephony, interactive video, NVOD and video
on demand. VII Cable will therefore continue to need capital to fund such
capital expenditures and working capital requirements for the foreseeable
future. No assurance can be given that VII Cable will be able to obtain
additional financing on terms acceptable to it and in an amount sufficient to
meet such anticipated capital expenditure requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Liquidity and Capital Resources" and the historical and pro forma financial
statements, including the notes thereto, of VII Cable.
RAPID TECHNOLOGICAL CHANGES
The cable industry is subject to rapid and significant changes in
technology. While Viacom's Cable Business is in the process of rebuilding its
broadband network to be sufficiently flexible to permit the delivery to its
customers of a variety of existing television and telephony services, and
advanced, interactive and integrated entertainment, telecommunications and
information services as they become available in the future, the effect of any
future technological changes on the viability or competitiveness of VII Cable's
business cannot be predicted.
MARKET UNCERTAINTIES WITH RESPECT TO VII CABLE PREFERRED STOCK
Prior to the Exchange Offer, there has been no public market for the VII
Cable Preferred Stock. Although the VII Cable Preferred Stock has been approved
for quotation on Nasdaq, there can be no assurance that an active trading market
for the VII Cable Preferred Stock will be established or maintained after the
consummation of the Exchange Offer. The prices at which the VII Cable Preferred
Stock trades will be determined by the marketplace and could be subject to
significant fluctuations in response to many factors, including, among other
things, variations in quarterly operating results, changes in economic
conditions in the industries in which VII Cable participates and changes in
government regulations. In addition, the stock market often experiences
significant price fluctuations that are unrelated to the operating performance
of the specific companies whose stock is traded. Market fluctuations as well as
economic conditions may adversely affect the market price of VII Cable Preferred
Stock.
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TOTAL INDEBTEDNESS OF VIACOM
As of December 31, 1994 and September 30, 1995, Viacom had outstanding
total indebtedness of approximately $10.4 billion and $10.9 billion,
respectively, and at each such date 5% preferred stock with a liquidation
preference of $1.2 billion. Viacom's scheduled maturities of long-term debt,
through December 31, 1999 assuming full utilization of the outstanding credit
agreements (after giving effect to the reduction in commitments resulting from
the Transaction), are approximately $150 million (1997), $1 billion (1998) and
$1.5 billion (1999). Viacom's preferred stock dividend requirement is $60
million per year.
REGULATION AND COMPETITION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation on the
federal, state and local levels. Many aspects of such regulations are currently
the subject of judicial proceedings and administrative or legislative proposals.
The 1992 Cable Act amended the Communications Act and has significantly expanded
the scope of cable television regulation in effect immediately prior to the
enactment of the 1992 Cable Act. The FCC was required to complete a number of
rulemaking proceedings under the 1992 Cable Act, the majority of which,
including certain of those related to rate regulation, have been completed. A
number of provisions in the 1992 Cable Act relating to, among other things, rate
regulation, have had an adverse effect, potentially material, on the cable
television industry and on the Cable Business. In particular, pursuant to the
1992 Cable Act, the FCC adopted regulations that permit franchising authorities
to set rates for basic service and the provision of cable-related equipment. To
the extent that existing rates (which VII Cable has adjusted to comply with the
1992 Cable Act and the regulations thereunder) are found, upon review, to exceed
those permitted by the FCC regulations, franchising authorities may require
cable television systems to reduce those rates and provide refunds for up to a
one-year period. The FCC will also, upon a complaint by a customer or
franchising authority, determine whether rates for regulated non-basic service
tiers are unreasonable and, if so found, reduce such rates and provide refunds
from the date of such complaint.
The FCC's Cable Services Bureau has issued rulings with respect to the
rates which Viacom charged to subscribers for regulated non-basic Satellite
Value Package services from the date of complaint to July 14, 1994. Although
Viacom has adjusted its rates to conform with the FCC's rate standards, these
rulings required reductions in rates and refunds in most cases. Virtually every
case is now undergoing an internal appeal process at the FCC. The FCC has not
issued any rulings on the rates which have been in effect since July 15, 1994.
In addition, local franchising authorities have issued rate rulings in respect
of Viacom's Limited Service tier in a majority of jurisdictions. These rulings
have either been implemented or appealed to the FCC for the correction of
technical errors. It is possible that additional orders by the FCC or by local
franchising authorities will result in additional rate refunds for prior
periods. However, future rates will be subject to increase under the FCC's
recently revised rate rules, which generally permit operators to increase tier
rates to recover reasonably anticipated changes in cost and inflation to account
for past years' cost changes, recovering such costs with interest for time lost
as a result of regulatory delays. In addition, the House and Senate Bills
could, if enacted, substantially deregulate many of these rates. Under the
House Bill, all pending complaints at the FCC in respect of any given franchise
would be dismissed unless there were complaints outstanding at the enactment
date which represented 3% or more of the subscribers in such franchise area.
(Most of VII Cable's FCC cases were initiated by only one or a few complaints.)
In addition, within 15 months after enactment of the House Bill, services other
than the Limited Service tier would be deregulated. Under the Senate Bill, non-
premium services other than the Limited Service tier would be subject to
regulation only if the rates charged for such services in a given system
substantially exceed the national average. No assurance can be given as to
whether and in what form such proposed legislation will be enacted. See
"Business of VII Cable--Regulation --Federal Regulation."
Cable television companies operate under franchises granted by state,
county or local authorities which are subject to renewal and renegotiation from
time to time. The 1992 Cable Act prohibits franchising authorities from
granting exclusive cable television franchises and from unreasonably refusing to
award
61
additional competitive franchises; it also permits municipal authorities where
authorized locally to operate cable television systems in their communities
without a franchise. Therefore, there is a potential for competition with VII
Cable's cable television systems from these sources, as well as from other
distribution systems capable of delivering television programming to homes.
Recent court and administrative decisions have removed certain of the
restrictions that heretofore have limited entry into the cable television
business by potential competitors, such as MMDS delivery systems and telcos, and
the Senate and House Bills, if enacted, could result in the elimination of other
such restrictions. Viacom cannot predict the extent to which competition will
materialize from other cable television operators, other distribution systems
for delivering television programming to the home or other potential
competitors, or, if such competition materializes, the extent of its effect on
VII Cable. See "Business of VII Cable--Competition."
TAX TREATMENT OF THE TRANSACTION
On , 199 , Viacom received a Ruling Letter from the IRS
stating that, for U.S. federal income tax purposes, the Transaction will qualify
under Sections 355 and 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), as a distribution that is tax-free to Viacom's stockholders (except
with respect to cash received in lieu of fractional shares) and, in general,
tax-free to Viacom. Nevertheless, if Viacom, having obtained the Ruling Letter
from the IRS, consummates the Transaction and the Transaction is subsequently
held to be taxable, both Viacom and its stockholders could be subject to tax on
the Transaction (subject to the obligation of TCI and TCI Cable to indemnify
Viacom under certain circumstances pursuant to the Tax Indemnity Letter (as
defined herein)), which tax could be material. See "Certain Federal Income Tax
Consequences."
The Tax Indemnity Letter provides for indemnification on an after-tax basis
by TCI and TCI Cable, jointly and severally, of each member of the Viacom
consolidated group of companies in the event that any or all of the Ruling
Letter, following its issuance by the IRS, is withdrawn or otherwise not
followed by the IRS and the Transaction or any of the component steps of the
Transaction gives rise to federal, state or local income or franchise tax
liability as a result of any misstatements or omissions of material fact in
respect of certain representations made by TCI and TCI Cable with regard to VII
Cable and its subsidiaries. See "Arrangements Among Viacom, Viacom
International, TCI and TCI Cable--Terms of Certain Ancillary Agreements."
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SECURITY OWNERSHIP OF VII CABLE COMMON STOCK
Viacom International is currently a wholly owned subsidiary of Viacom.
After the consummation of the Transaction, Viacom will not own any interest in
VII Cable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF VIACOM COMMON STOCK
Set forth below, as of November 15, 1995 (and without giving effect to the
Transaction), is certain information concerning beneficial ownership of Viacom
Common Stock by (i) each director of Viacom, (ii) each of the executive officers
named below, (iii) all executive officers and directors of Viacom as a group,
and (iv) holders of 5% or more of the outstanding shares of Viacom Common Stock.
SHARES OF VIACOM COMMON STOCK BENEFICIALLY OWNED
NUMBER
TITLE OF OF EQUITY OPTION PERCENT
NAME EQUITY SECURITY SHARES SHARES(1) OF CLASS
- ---- --------------- ------------- ------------ ---------
George S. Abrams Class A Common --(2) -- --
Class B Common 200(2) 16,500 (6)
Steven R. Berrard Class A Common 58,393 141,239 (6)
Class B Common 461,221 1,100,170 (6)
3 Year Warrant 1,206 -- (6)
5 Year Warrant 723 -- (6)
Frank J. Biondi, Jr. Class A Common 453(3) 24,000 (6)
Class B Common 178,441(3) 294,000 (6)
Philippe P. Dauman Class A Common 1,060(3) -- (6)
Class B Common 8,445(3) 60,000 (6)
Thomas E. Dooley Class A Common 2,120(3) 4,000 (6)
Class B Common 2,233(3) 77,666 (6)
Edward D. Horowitz Class A Common 281(3) 4,000 (6)
Class B Common 807(3) 88,000 (6)
George D. Johnson, Jr. Class A Common 6,482(4) 68,706 (6)
Class B Common 49,298(4) 540,042 (6)
Ken Miller Class A Common --(2) -- --
Class B Common --(2) 16,500 (6)
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National Amusements, Inc. Class A Common 45,547,214(5) -- 61.0%
200 Elm Street Class B Common 46,565,414(5) -- 15.9%
Dedham, MA 02026
Brent D. Redstone -- -- -- --
Shari Redstone -- -- -- --
Sumner M. Redstone Class A Common 45,547,294(5) -- 61.0%
Class B Common 46,565,494(5) -- 15.9%
Frederic V. Salerno Class B Common -- 6,500 (6)
William Schwartz Class A Common --(2) -- --
Class B Common --(2) 16,500 (6)
Ivan Seidenberg -- -- -- --
Mark M. Weinstein Class A Common 392(3) 7,500 (6)
Class B Common 505(3) 91,500 (6)
All directors and Class A Common 74,840(3) 259,345 0.45%
executive officers as a Class B Common 714,978(3) 2,486,908 1.09%
group other than 3 Year Warrant 1,206 1,875 (6)
Mr. Sumner Redstone 5 Year Warrant 723 1,125 (6)
(22 persons)
- ----------------------
(1) Reflects shares subject to options to purchase such shares which on
November 15, 1995 were unexercised but were exercisable within a period of
60 days from that date. These shares are excluded from the column headed
"Number of Equity Shares."
(2) Messrs. Abrams, Miller and Schwartz participate in Viacom's Deferred
Compensation Plan in which their directors' fees are converted into stock
units. Messrs. Abrams, Miller and Schwartz have been credited with 4,362,
3,984 and 3,956 Class A Common Stock units, respectively, and 4,556, 4,158
and 4,127 Class B Common Stock units, respectively.
(3) Includes shares held through the Company's 401(k) plans.
(4) Does not include 158,833 shares of Class A Common Stock and 1,003,473
shares of Class B Common Stock transferred to irrevocable trusts, of which
Mr. Johnson and his wife are beneficiaries, for which Mr. Johnson
disclaims beneficial ownership. Also does not include 14,110 shares of
Class A Common Stock and 110,929 shares of Class B Common Stock held in
trusts for the benefit of Mr. Johnson's children for which Mr. Johnson
disclaims beneficial ownership.
(5) Except for 80 shares of each class of Common Stock owned directly by Mr.
Redstone, all shares are owned of record by NAI. Mr. Redstone is the
Chairman and the beneficial owner of the controlling interest in NAI and,
accordingly, beneficially owns all such shares.
(6) Less than 1%.
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ARRANGEMENTS AMONG VIACOM, VIACOM INTERNATIONAL, TCI AND TCI CABLE
The following is a summary of the material provisions of the Parents
Agreement, the Implementation Agreement and the Subscription Agreement, copies
of which are attached as exhibits to the Registration Statement and incorporated
herein by reference. The following summary does not purport to be complete and
is qualified in its entirety by reference to the full texts of such exhibits.
TERMS OF THE PARENTS AGREEMENT
TRANSACTIONS OCCURRING PRIOR TO THE EXCHANGE DATE
Under the Parents Agreement, Viacom has agreed to cause the
Recapitalization. Pursuant to the Recapitalization, VII Cable will amend and
restate its certificate of incorporation so as to, among other things, (i)
change the par value of its Class A Common Stock from $.01 to $100.00, (ii)
increase the number of authorized shares of Class A Common Stock to
shares (i.e., the total number of shares of VII Cable Class A Common Stock to be
issued to holders of Viacom Common Stock pursuant to the Exchange Offer), such
number of shares being equal to (x) the Estimated Asset Value of VII Cable minus
$1.7 billion, (y) divided by $100, and (iii) authorize 100 shares of Class B
Common Stock, $0.01 par value per share, and (iv) authorize a number of shares
of VII Cable Preferred Stock equal to the number of shares of VII Cable Class A
Common Stock authorized under (ii) above. The obligation of Viacom to cause VII
Cable to take such action is subject to, among other conditions, the condition
that Viacom shall have accepted shares of Viacom Common Stock for exchange in
the Exchange Offer.
THE EXCHANGE OFFER
The Parents Agreement requires Viacom to make the Exchange Offer (subject
to the terms and conditions set forth in "The Exchange Offer--Terms of the
Exchange Offer" and "--Certain Conditions of the Exchange Offer").
CERTAIN OTHER AGREEMENTS
Pursuant to the Parents Agreement, TCI and TCI Cable have agreed (i) to
execute and deliver the Subscription Agreement, (ii) that the documentation for
the Loan will not contain, and the Loan will not be made on, any terms or
conditions thereof that (x) are inconsistent with the terms of the Transaction
or the VII Cable Preferred Stock or (y) would require the grant of any security
interest in an asset of Viacom or any of its affiliates (other than (a) a grant
by Viacom International of a security interest in the Cash Collateral Account
(as defined in the Subscription Agreement) prior to the Exchange Time, (b) the
pledge by Viacom International or by certain cable division subsidiaries which
are identified in the Implementation Agreement (each, a "Cable Division
Subsidiary") of stock in a Cable Division Subsidiary that is effective upon the
release of all funds to Viacom International from the Cash Collateral Account or
(c) pursuant to certain provisions of the Implementation Agreement
(collectively, "Inconsistent Terms")), (iii) not to permit Viacom International
or any Cable Division Subsidiary to engage in any transaction on the Exchange
Date other than in the ordinary course of business and other than transactions
required to take place on the Exchange Date by the Parents Agreement,
Implementation Agreement or Subscription Agreement, and (iv) to acknowledge that
certain direct and indirect subsidiaries of Viacom International (the "PCI
Subsidiaries") which were formerly includable in the consolidated federal income
tax returns of the affiliated group of which Paramount Communications Inc. was
the common parent (the "PCI Group") intend to apply to the IRS for permission to
designate Paramount Pictures Corporation or another PCI Subsidiary as the agent
for the PCI Group pursuant to Treasury Regulation 1.1502-77(d) and to cooperate
in attempting to have such permission granted.
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TCI additionally has agreed not to consummate any transaction in which all
or a majority in value of its assets (as determined by TCI) are distributed
without fair consideration to its direct or indirect stockholders unless (x) the
transferee of such assets assumes or, if such assets represent principally an
equity interest in an entity, such entity assumes, by instrument reasonably
satisfactory to Viacom, TCI's obligations pursuant to the Transaction to which
TCI is a party and (y) the equity of such transferee or entity has a fair market
value immediately following such transaction of at least $1.5 billion.
Pursuant to the Parents Agreement, Viacom has agreed to cause Viacom
International and Viacom Services to execute and deliver the Implementation
Agreement to each other and to cause Viacom International to execute and deliver
to TCI and TCI Cable the Subscription Agreement.
Right of First Offer. Pursuant to the Parents Agreement, Viacom has
agreed that, in the event the Parents Agreement is terminated solely as a result
of the failure of the condition precedent relating to Viacom's satisfaction with
the treatment of the Transaction for federal income tax purposes, then if at any
time during the period commencing on the date of such termination and ending on
the date which is eighteen months after the date of such termination (the "Offer
Period") Viacom intends to sell all or substantially all of the Cable Business,
or all or substantially all of the Bay Area system or the Puget Sound system, or
all or substantially all of the stock of any subsidiary or subsidiaries the
assets of which consist primarily of all or substantially all of the Cable
Business, the Bay Area system or the Puget Sound system (in any such case, an
"Offered Business"), Viacom shall deliver to TCI a written notice to such
effect. If TCI notifies Viacom in writing of its desire to conduct negotiations
regarding such sale within five Business Days of its receipt of such notice from
Viacom, Viacom and TCI shall negotiate in good faith during the period ending on
the sixtieth day after the date of such notice by Viacom (the "Negotiation
Period") to reach an agreement for the sale of the Offered Business to TCI.
During the Negotiation Period, Viacom shall notify TCI of the amount, and
material terms, of the consideration Viacom would be willing to accept for a
sale of the Offered Business (a "Price Notice") on one or more occasions. If a
binding agreement for a sale of the Offered Business is not reached by the end
of the Negotiation Period, for a period of 120 days following the termination of
the Negotiation Period, Viacom may sell (or enter into a binding agreement to
sell) the Offered Business for an aggregate consideration equal to or greater
than the fair market value of the consideration set forth in the Price Notice
delivered by Viacom during the Negotiation Period reflecting the lowest fair
market value consideration, and, if such sale is consummated, TCI shall have no
further rights of first offer under the Parents Agreement. If (i) at the end of
such 120 day period, a binding agreement for a sale of the Offered Business has
not been reached or (ii) such a binding agreement has been reached and is
terminated prior to its consummation during the Offer Period, Viacom shall not,
for the remainder of the Offer Period, if any, sell or negotiate to sell any
Offered Business without complying with the procedures described above, as fully
set forth in the Parents Agreement.
REPRESENTATIONS AND WARRANTIES
The Parents Agreement contains various representations and warranties of
Viacom relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): corporate existence and power, corporate and governmental
authorization of the Parents Agreement and the Transaction, third-party
consents, the binding effect of the Parents Agreement, the absence of finders'
fees with respect to the Parents Agreement, the absence of violations of, among
other things, certificates of incorporation, bylaws and certain contracts and
laws and that the Exchange Offer shall be conducted in compliance with
applicable laws.
The Parents Agreement contains various representations and warranties of
TCI and TCI Cable relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): corporate existence and power, corporate and governmental
authorization of the Parents Agreement and the Transaction, third-party
consents, the binding effect of the
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Parents Agreement, and the absence of finders' fees with respect to the Parents
Agreement and the absence of violations of, among other things, certificates of
incorporation, bylaws and certain contracts and laws.
The representations and warranties contained in the Parents Agreement
shall terminate and be of no further force on and as of April 30, 1997.
CONDITIONS PRECEDENT
The obligations of Viacom to commence the Exchange Offer and to
recapitalize VII Cable are subject to the satisfaction or, where legally
permissible, waiver of various conditions, including the following: (i) any
applicable waiting period (and any extension thereof) under the HSR Act shall
have expired or been terminated without the commencement or threat of any
litigation by a governmental authority of competent jurisdiction to restrain the
consummation of the Exchange Offer, the Subscription Agreement or other material
action contemplated by the Transaction in any material respect; (ii) the number
of Consented Subscribers (as defined in the Subscription Agreement) shall be not
less than 90% of Estimated Exchange Date Basic Subscribers (as defined in the
Implementation Agreement); (iii) no order, stay, judgment or decree shall have
been issued by any court and be in effect restraining or prohibiting the
consummation of the Transaction in any material respect; (iv) Viacom shall be
satisfied with the treatment of the Transaction for federal income tax purposes
(as determined in the Letter Agreement (as defined herein)); (v) the
Subscription Agreement shall remain in full force and effect and there shall be
no condition to TCI's, TCI Cable's or Viacom International's obligations
thereunder that is incapable of being satisfied on the Expiration Date; (vi) the
documentation for the Loan shall have been duly executed and delivered by all
parties thereto and shall remain in full force and effect and Viacom shall have
received confirmation, in form and substance satisfactory to it, that Viacom
International shall be able to draw down the Aggregate Loan Amount thereunder on
the Expiration Date and (subject only to Viacom being required to give notice
that it will consummate the Exchange Offer and that all Exchange Offer
conditions set forth in the Parents Agreement have been satisfied or waived)
such Aggregate Loan Amount shall be available for transfer as a contribution to
Viacom Services without condition; (vii) certain cable-related consents of the
FCC and all non-cable related authorizations of the FCC shall have been obtained
and shall remain in full force and effect; and (viii) the Registration Statement
and, if the TCI Registration Statement is required by applicable law or the
Commission to be effective prior to the consummation of the Exchange Offer, the
TCI Registration Statement, shall have been declared effective, and no stop
order suspending the effectiveness of the Registration Statement or, if the TCI
Registration Statement is required by applicable law or the Commission to be
effective prior to the consummation of the Exchange Offer, the TCI Registration
Statement, shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission. The obligation of Viacom to
recapitalize VII Cable is subject to the further condition that Viacom shall
have accepted shares of Viacom Common Stock for exchange in the Exchange Offer.
TERMINATION
The Parents Agreement may be terminated at any time prior to the
Expiration Time: (a) by written consent of Viacom, TCI and TCI Cable; (b) by
TCI or TCI Cable, if any of certain conditions precedent contained in the
Subscription Agreement (see "Agreements Among Viacom, Viacom International, TCI
and TCI Cable--Terms of the Subscription Agreement--Conditions to the
Obligations of TCI and TCI Cable") has become incapable of satisfaction (other
than by the action or omission of TCI or TCI Cable in contravention of the terms
and conditions of the Transaction); (c) by Viacom, if any of the conditions
precedent contained in the Parents Agreement or certain conditions precedent in
the Subscription Agreement has become incapable of satisfaction (other than by
the action or omission of Viacom or its affiliates in contravention of the terms
and conditions of the Transaction); (d) by TCI or TCI Cable, (x) if the
Expiration Date has not occurred on or prior to July 24, 1996 (other than as a
result of any action or omission of TCI or TCI Cable that is in contravention of
the terms and conditions of the Transaction) or (y) if the Exchange Offer has
not commenced on or prior to June 24, 1996 (other than as a result of the
failure of certain conditions precedent to the Parents Agreement resulting from
an action or omission of TCI or TCI Cable that is in contravention of the terms
and conditions of
67
the Transaction); (e) by Viacom, (x) if the Expiration Date has not occurred on
or prior to July 24, 1996 (other than as a result of any action or omission of
Viacom that is in contravention of the terms and conditions of the Transaction)
or (y) if the Exchange Offer has not commenced on or prior to June 24, 1996
(other than as a result of the failure of certain conditions precedent to the
Parents Agreement resulting from an action or omission of Viacom that is in
contravention of the terms and conditions of the Transaction); or (f) by TCI,
TCI Cable or Viacom if the Exchange Offer terminates or finally expires after
one extension thereof without any shares of Viacom Common Stock having been
accepted for exchange by Viacom. In addition, in the event that the Minimum
Condition is not met after an extension of the Exchange Offer made in accordance
with the terms of the Parents Agreement, TCI and Viacom each have the right to
terminate the Transaction.
In the event of termination of the Parents Agreement by TCI, TCI Cable or
Viacom, (i) the Parents Agreement will become null and void, (ii) such
termination will be the sole remedy with respect to any breach of any
representation, warranty, covenant or agreement contained therein and (iii)
there will be no liability or obligation on the part of TCI, TCI Cable or Viacom
other than under certain provisions of the Parents Agreement relating to any
breach of the Parents Agreement, the information provided for this Offering
Circular -Prospectus, the fees and expenses of the investment bankers engaged in
connection with the Transaction, including the Tiebreaker Investment Bank (as
defined in the Parents Agreement) and the right of first offer. See "--Terms of
the Parents Agreement--Certain Other Agreements--Right of First Offer."
EXPENSES
Under the Parents Agreement, except as expressly set forth therein, the
fees and expenses (including the fees of any lawyers, accountants, investment
bankers or others engaged by a party thereto) incurred in connection with the
Parents Agreement and the transactions contemplated thereby, whether or not the
Transaction is consummated, will be paid by the party incurring such expenses.
AMENDMENT
Subject to applicable law, the Parents Agreement may be amended or
modified only by a writing signed by the party against whom enforcement of any
such amendment or modification is being sought. In addition, any party to the
Parents Agreement may, by written instrument, waive compliance with any term or
provision of the Parents Agreement on the part of such other party thereto.
TERMS OF THE IMPLEMENTATION AGREEMENT
CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES
Pursuant to the Implementation Agreement, Viacom International and Viacom
Services have agreed to execute and deliver (and to cause the Cable Division
Subsidiaries to execute and deliver) the Bill of Sale, Instrument of Assumption
and Provision of Benefits Agreement (the "Bill of Sale"), pursuant to which
Viacom International and the Cable Division Subsidiaries shall convey to Viacom
Services ownership of the assets relating to the Non-Cable Businesses, the Loan
Proceeds and certain nonmaterial assets (including certain equity investments
and marketable securities) which have historically been reported as part of
Viacom's Cable Television segment and which from and after the First
Distribution are deemed included in the definition of Non-Cable Businesses (the
"Conveyance of Assets"), and Viacom Services will assume and agree to perform
substantially all of Viacom International's liabilities (including its existing
public debt, bank debt and the existing intercompany debt owed by Viacom
International to Viacom), other than the Loan and liabilities relating to the
Cable Business other than certain specified liabilities (the "Assumption of
Liabilities"). Prior to the exchange of shares pursuant to the Exchange Offer,
but after the occurrence of the Conveyance of Assets and the Assumption of
Liabilities, Viacom International will distribute to Viacom all of the
outstanding capital stock of Viacom Services so that after such distribution
Viacom Services will be a direct wholly owned subsidiary of Viacom. VII Cable
has further agreed, prior to the exchange of shares pursuant to
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the Exchange Offer, to amend and restate its certificate of incorporation in
order to effectuate the Recapitalization.
Such obligations of Viacom International relating to the Conveyance of
Assets and Assumption of Liabilities are subject to the fulfillment of each of
the following conditions: (i) the conditions precedent to Viacom's obligations
in the Parents Agreement shall have been satisfied (see "--Terms of the Parents
Agreement--Conditions Precedent"), (ii) Viacom International shall have received
loan proceeds at least equal to the Aggregate Loan Amount, and (subject only to
Viacom being required to give notice that it will consummate the Exchange Offer
and that all Exchange Offer conditions set forth in the Parents Agreement have
been satisfied or waived) such proceeds shall be available for transfer without
condition as a contribution to Viacom Services pursuant to the Conveyance of
Assets and (iii) Viacom shall have accepted shares of Viacom Common Stock for
exchange in the Exchange Offer.
CONSENTS AND APPROVALS
If the Transaction requires regulatory approval or any other consent with
respect to a contract or cable franchise that is intended to remain with VII
Cable, and such approval or other consent has not been obtained prior to the
Exchange Time, VII Cable will use its best efforts to assign legal ownership of
such contract or franchise to Viacom Services, together with the related
equipment and other property, if necessary, under the applicable approval
procedure. Viacom Services will hold such assets for the benefit of VII Cable,
will enter into security arrangements with respect to such assets if requested
by VII Cable's lenders, and will retransfer, without additional consideration,
such assets to VII Cable promptly upon receipt of such approval or consent.
Viacom does not expect that there will be significant contracts (other than
certain franchises) for which consents are required. As of November 10, 1995,
local authorities for franchises representing 501,026 subscribers had approved
the Transaction or were deemed to have approved because their consent was not
required. In the case of franchises where approval or consent is ultimately
denied pursuant to a final, unappealable order or ruling, or at the election of
VII Cable or Viacom Services if such approval or consent is not obtained within
two years after the Exchange Date, beneficial ownership of the cable system will
be transferred in full to Viacom Services upon payment by Viacom Services to VII
Cable of an amount equal to the appraised value of such cable system, which
appraised value will be determined by multiplying the cash flow of such cable
system for the previous 12 months by 10, and adding capital expenditures made
following the Exchange Date. In the event that a local cable authority exercises
a right of first refusal to purchase a particular cable system after the
Exchange Date, Viacom Services will pay to VII Cable an amount equal to the
excess, if any, of the appraised value of such cable system (determined in
accordance with the preceding sentence) over the price paid by the local
authority. In the event of a natural disaster prior to the Exchange Date causing
more than 11,340 Basic Subscribers (as defined in the Implementation Agreement)
to be unable to receive service at the Exchange Time, Viacom Services shall
reimburse VII Cable for (i) VII Cable's reasonable out-of-pocket cost to repair
damage to the extent necessary to reconnect service to such subscribers and (ii)
the lost cash flow from such subscribers up to a specified amount per subscriber
(subject to adjustment as provided in the Implementation Agreement).
NAME CHANGE
In connection with the Exchange Offer, Viacom International will change
its name to TCI Pacific Communications, Inc. and Viacom Services will change its
name to Viacom International Inc.
POST-CLOSING ADJUSTMENTS
In accordance with the provisions of the Implementation Agreement, prior
to the commencement of the Exchange Offer, Viacom International estimated
various asset and liability amounts related to the Cable Business (the
"Estimated Asset Value") including: (i) a capital expenditure amount based on
certain capital expenditures by VII Cable, (ii) an inventory amount derived from
book value, (iii) a "Telecom Amount" (as
69
defined in the Implementation Agreement) based on capital contributions and
capital expenditures made with respect to the TCG San Francisco Partnership, the
TCG Seattle Partnership and the AVR Partnership (as such terms are defined in
the Implementation Agreement), (iv) its working capital, and (v) a fixed amount,
which decreases proportionally from $2 billion to the extent that the number of
Basic Subscribers to Viacom International's cable systems is expected to fall
below 1,122,660 on the Exchange Date (such amounts being referred to
collectively as the "Adjustment Amounts"). VII Cable is obligated to deliver to
Viacom Services within 60 days after the Exchange Date VII Cable's calculation
of the actual values for the Adjustment Amounts as of the Exchange Date (the
"Asset Value"). To the extent that the Asset Value as finally determined minus
the amount of Loan Proceeds actually transferred to Viacom Services pursuant to
the Conveyance of Assets (the "Net Asset Value") is greater than the Estimated
Asset Value minus $1.7 billion (the "Estimated Net Asset Value"), VII Cable will
pay to Viacom Services an amount in cash equal to such excess, plus an amount
equal to interest thereon from the Exchange Date. If the Net Asset Value is
less than the Estimated Net Asset Value, Viacom Services will pay to VII Cable
an amount in cash equal to such deficiency plus an amount equal to interest
thereon from the Exchange Date. Viacom International also made certain
representations and warranties with respect to certain of the Adjustment
Amounts.
REPRESENTATIONS AND WARRANTIES
The Implementation Agreement contains various representations and
warranties of Viacom Services relating to, among other things, the following
matters (which representations and warranties are subject, in certain cases, to
specified exceptions): (i) the due organization, existence and good standing
of, and similar corporate matters with respect to, each of Viacom International,
Viacom Services and the Cable Division Subsidiaries (as defined in the
Implementation Agreement), (ii) corporate and governmental authorization on
behalf of each of Viacom International, Viacom Services and the Cable Division
Subsidiaries of the Implementation Agreement and the Transaction, (iii) Viacom
International's capital structure and ownership of each of the Cable Division
Subsidiaries, (iv) the binding effect of the Implementation Agreement on Viacom
International and Viacom Services, (v) third-party consents, (vi) the absence of
violations of, among other things, certificates of incorporation, bylaws and
certain contracts and laws, (vii) the accuracy of certain information, including
financial statements, provided in the Implementation Agreement, (viii) the
absence of certain changes having a material adverse effect on the Cable
Business of Viacom International, (ix) the marketability of Viacom
International's title to certain assets, (x) the absence of infringement by
Viacom International's Cable Business upon any patents, trademarks, tradenames
or other intellectual property rights that could cause a material adverse
effect, (xi) the absence of pending and threatened litigation having a material
adverse effect on the Cable Business of Viacom International, (xii) compliance
with applicable laws, (xiii) employee matters and employee benefits, (xiv) the
absence of any brokers, finders or other intermediaries retained on behalf of
Viacom International or any Cable Division Subsidiary in connection with the
Implementation Agreement and the Transaction, (xv) material compliance with
environmental laws and other environmental matters, (xvi) compliance with
certain requirements of the FCC and United States Copyright Office, and (xvii)
the absence of covenants not to compete, other than those enumerated in the
Implementation Agreement.
Viacom Services' obligations to make certain payments to VII Cable
pursuant to the terms of the Implementation Agreement shall rank no lower than
pari passu in right of payment with Viacom Services' obligations to repay its
senior unsecured bank debt.
The representations, warranties, covenants and agreements contained in the
Implementation Agreement shall terminate and be of no further force on and as of
April 30, 1997, except for certain representations and warranties made by Viacom
Services with respect to capitalization, assets, employee benefit plans,
environmental matters and covenants not to compete, which representations and
warranties shall survive indefinitely.
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RELEASE OF VII CABLE FROM DEBT
Viacom Services will obtain the release of VII Cable from, or substitution
of Viacom Services as obligor under (so that VII Cable will have no obligation
under), all of Viacom International's obligations to repay any indebtedness of
Viacom International for borrowed money incurred prior to the Exchange Time
(other than the Loan), or shall cause the indenture pursuant to which such debt
was issued to be amended or supplemented so that VII Cable will no longer be an
obligor (so that VII Cable will have no obligation) thereunder, in each case
concurrently with the transfer of the Loan Proceeds to Viacom Services pursuant
to the Conveyance of Assets. See "--Terms of Subscription Agreement--Certain
Borrowings."
NONCOMPETITION
If the closing contemplated in the Subscription Agreement occurs, so long
as VII Cable, TCI, TCI Cable or any person to whom VII Cable initially transfers
the cable system in Nashville, Tennessee, or Dayton, Ohio, in accordance with
the Subscription Agreement (a "Specified Party") owns and operates a cable
television system in a Franchise Area (as defined in the Implementation
Agreement), Viacom Services has agreed that, with respect to each such Franchise
Area, following the Exchange Date until the earlier of (i) the third anniversary
of the Exchange Date or (ii) the date such Specified Party no longer owns and
operates such Franchise Area, Viacom Services, its subsidiaries and any
subsidiaries of Viacom shall not (x) directly engage in the cable television
distribution business in such Franchise Area or (y) indirectly engage in the
cable television distribution business in such Franchise Area through ownership
of an equity interest in any person 25% or more of whose revenues are derived
from the cable television distribution business within certain territories or
whose cable television business has an active plant passing 100,000 or more of
the homes in the Franchise Areas in certain territories, taken as a whole.
TERMINATION
The Implementation Agreement shall automatically terminate upon any
termination of the Parents Agreement in accordance with its terms. Upon
termination of the Implementation Agreement, (i) the Implementation Agreement
will become null and void, (ii) termination will be the sole remedy with respect
to any breach of any representation, warranty, covenant or agreement contained
therein and (iii) there will be no liability or obligation on the part of VII
Cable or Viacom Services thereunder.
INDEMNIFICATION
If the Exchange Offer is consummated, Viacom Services shall indemnify and
hold harmless VII Cable against and in respect of any and all losses (x)
constituting or arising out of certain liens attaching after the Exchange Date
on any franchise assets transferred to Viacom Services or any contract relating
to the Cable Business assigned to Viacom Services, in each case while title to
such franchise asset or contract is held by Viacom Services, (y) which may be
incurred by VII Cable by reason of (i) the breach of any representation and
warranty of Viacom Services contained in the Implementation Agreement as if such
representations and warranties were made as of the Exchange Date (except to the
extent a different date is specified therein in which case such representation
and warranty shall be deemed to be made as of such date), or (ii) the breach of
any covenant or agreement of Viacom Services contained in the Implementation
Agreement (other than with respect to tax matters) or the Bill of Sale, or (iii)
the breach at or prior to the Exchange Date of any covenant or agreement of
Viacom International contained in the Implementation Agreement (other than with
respect to tax matters) or (z) constituting liabilities relating to the Non-
Cable Businesses.
If the Exchange Offer is consummated, VII Cable shall indemnify and hold
harmless Viacom Services against any and all losses (w) constituting or arising
out of certain liens attaching after the Exchange Date on any non-cable asset
while it cannot be transferred to Viacom Services, (x) which may be incurred by
Viacom Services by reason of a breach after the Exchange Date of a covenant or
agreement of VII Cable
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contained in the Implementation Agreement (other than with respect to tax
matters) or the Bill of Sale, (y) constituting Cable Business liabilities or (z)
constituting accounts payable, certain current liabilities or the new
borrowings. See "--Terms of the Subscription Agreement--Certain Borrowings."
The aggregate liability of an indemnifying party pursuant to the
Implementation Agreement (together with any liability of such indemnifying party
and its affiliates for breaches of other agreements relating to the Transaction,
other than with respect to (i) information provided for this Offering Circular -
Prospectus, (ii) indemnification of Viacom and its affiliates following the
Exchange Date with respect to any liability related to the Commitments to Lend,
the Loan or the Loan Proceeds and (iii) indemnification by Viacom Services for
liabilities relating to the Non-Cable Business) shall not exceed the Asset
Value, and no party shall be entitled to recover consequential damages. Certain
claims for indemnification are recoverable only after the losses that would be
recoverable under such claims aggregate in excess of 1/2 of 1% of the Asset
Value, and then only to the extent of such excess.
CERTAIN OTHER AGREEMENTS
Prohibited Transactions. The Implementation Agreement prohibits Viacom
Services from consummating any transaction in which all or a majority in value
of its assets are distributed without fair consideration to its direct or
indirect stockholders unless (x) the transferee of such assets or, if such
assets represent principally an equity interest in an entity, such entity,
assumes Viacom Services' indemnification obligations under the Implementation
Agreement and (y) the equity of such transferee or entity has a fair market
value immediately following such transaction of at least $1.5 billion.
Employee Matters. Viacom International has agreed to terminate the
employment, prior to the Exchange Date, of each employee not intended to remain
as an employee of VII Cable. Many of the continuing employees of VII Cable who
are actively employed at the Exchange Date will be paid compensation at the
same, or substantially similar, rates as their compensation prior to the
Exchange Date, subject generally to terms and conditions substantially similar
to those of similarly situated employees of TCI, and no interruption in
employment shall be deemed to have occurred by virtue of the Transaction. The
Implementation Agreement includes equitable arrangements generally for employee
benefits, pension plans, 401(k) plans, sick leave, vacation and welfare plans
for continuing employees, and provides that VII Cable will have no liability for
severance obligations to non-continuing employees.
Tax Matters. Pursuant to the Implementation Agreement, Viacom Services
has agreed to assume, become liable for, and indemnify and hold harmless VII
Cable and its subsidiaries from and against, all tax liability of Viacom and its
affiliates for taxable years or portions thereof ending on or prior to the
Exchange Date on an after-tax basis, including any tax arising as a result of
the failure of the Transaction to qualify for tax-free treatment (except to the
extent that TCI and TCI Cable have agreed to indemnify Viacom pursuant to the
Tax Indemnity Letter (as defined herein)). VII Cable will pay all taxes of the
Cable Business for which Viacom Services does not have an indemnification
obligation pursuant to the Implementation Agreement, and VII Cable will be
liable for, and shall indemnify and hold harmless Viacom and its affiliates from
and against, all such liabilities on an after-tax basis.
The Implementation Agreement provides that any refunds of taxes or any
credit against taxes, to the extent actually used, of VII Cable or any of its
subsidiaries with respect to taxable years or portions thereof ending on or
prior to the Exchange Date will be for the account of Viacom Services, and any
other refunds of taxes or credits against taxes, to the extent actually used, of
VII Cable or any of its subsidiaries will be for the account of VII Cable. In
either case, the party entitled to such refund or credit will reimburse the
other party to the extent of any net tax cost imposed on such other party in
connection with the receipt of such refund or credit.
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EXPENSES
Under the Implementation Agreement, except as expressly set forth therein,
the fees and expenses (including the fees of any lawyers, accountants,
investment bankers or others engaged by a party thereto) incurred in connection
with the Implementation Agreement and the transactions contemplated thereby,
whether or not the transactions contemplated thereby are consummated, will be
paid by the party incurring such expenses.
AMENDMENT
Subject to applicable law and (in the case of amendments prior to the
Exchange Time) to TCI's consent, the Implementation Agreement may be amended or
modified only by a writing signed by the party against whom enforcement of any
such amendment or modification is being sought. Any party to the Implementation
Agreement also may, by written instrument, waive compliance with any term or
provision of the Implementation Agreement on the part of such other party
thereto.
TERMS OF THE SUBSCRIPTION AGREEMENT
SUBSCRIPTION AND PURCHASE OF STOCK
On the terms and subject to the conditions set forth in the Subscription
Agreement, TCI Cable has subscribed for and has agreed to purchase, and VII
Cable has agreed to issue and sell, 100 shares of VII Cable Class B Common Stock
in consideration of the payment of the Subscription Payment.
CERTAIN BORROWINGS
TCI and TCI Cable have agreed to cause to be delivered to Viacom
International commitments of commercial banks or other lending institutions or
other institutional investors reasonably acceptable to TCI Cable (the "Lenders")
to make the Loan to Viacom International on the Expiration Date (the
"Commitments to Lend"). TCI and TCI Cable will be responsible for and will pay
any and all fees and expenses (including, but not limited to, commitment fees)
arising from the Commitments to Lend.
Pursuant to the Subscription Agreement, not less than ten business days
prior to the Anticipated Commencement Date (as defined in the Parents
Agreement), there are required to be executed and delivered by the Lenders all
agreements and other documentation (i) containing terms and conditions that are
reasonably acceptable to TCI Cable, (ii) which do not contain any obligation of
Viacom or its affiliates other than Viacom International or, after the Exchange
Date, a wholly owned direct or indirect subsidiary of VII Cable and (iii)
containing no Inconsistent Terms (collectively, the "Loan Documentation"). TCI
Cable will be responsible for and will pay any and all fees and expenses arising
from the Loan Documentation.
Subject to the fulfillment of the conditions precedent to the obligations
of TCI and TCI Cable (see "--Terms of the Subscription Agreement--Conditions to
the Obligations of TCI and TCI Cable"), the Loan will be made to Viacom
International on the Expiration Date prior to the Conveyance of Assets. The
Loan Proceeds will be deposited into a cash collateral account maintained by
Viacom International at The Bank of New York (the "Cash Collateral Account") in
which the Lenders shall be granted a security interest to secure the Loan, the
terms of which shall provide that upon notice from Viacom that it will
consummate the Exchange Offer and that all Exchange Offer conditions set forth
in the Parents Agreement have been satisfied or waived, all funds held in the
Cash Collateral Account will be released without condition to Viacom
International on the Exchange Date immediately prior to the Conveyance of Assets
and the Exchange Time. If the closing of the Subscription Agreement does not
occur within ten business days after the Expiration Date, at the option of the
Lenders, the Loan will be repaid in full from the Cash Collateral Account. Upon
release of the funds in the Cash Collateral Account to Viacom International, the
Loan Proceeds will be conveyed to Viacom Services pursuant to the
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Conveyance of Assets and VII Cable will retain responsibility for repayment of
and will be liable and responsible for the Loan. Following the Exchange Date,
none of Viacom, Viacom Services nor their affiliates will have any liability,
responsibility or obligation under or in connection with the Commitments to
Lend, the Loan Documentation or otherwise for or with respect to the Loan. TCI
and TCI Cable have agreed to indemnify and hold harmless Viacom Services and its
affiliates from any such liability, responsibility or obligation.
TCI and TCI Cable have further agreed that in the event the closing under
the Subscription Agreement does not occur, they will be responsible for and will
pay (or, in the case of fees already paid, reimburse Viacom International for)
any and all fees and expenses (including, but not limited to, commitment fees,
but not including principal and interest on principal) payable under or in
connection with the Commitments to Lend, the Loan Documentation, the Loan or any
action by Viacom International pursuant to the Loan or by TCI or TCI Cable
pursuant to the provisions of the Commitments to Lend. TCI and TCI Cable will
indemnify and hold harmless Viacom International from any and all such fees and
expenses. In the event that the Exchange Offer is not consummated as a result
of the failure of the condition relating to the treatment of the Transaction for
federal income tax purposes, Viacom has agreed to reimburse TCI for 50% of
commitment fees payable in connection with the Commitments to Lend, up to a
maximum reimbursement obligation of $5 million.
REPRESENTATIONS AND WARRANTIES
The Subscription Agreement contains various representations and warranties
of TCI and TCI Cable relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) corporate existence and power, (ii) corporate and
governmental authorization of the Subscription Agreement, the Transaction and
issuance of shares of TCI Stock to VII Cable upon exercise by the holders of the
VII Cable Preferred Stock of their exchange rights as specified in the terms
thereof, (iii) third-party consents, (iv) the binding effect of the Subscription
Agreement, (v) the absence of finders' fees with respect to the Subscription
Agreement, (vi) the absence of violations of, among other things, certificates
of incorporation, bylaws and certain contracts and laws and (vii) that TCI is
acquiring the shares of VII Cable Class B Common Stock for investment and not
with a present view or intention of distributing or selling the shares of VII
Cable Class B Common Stock.
The Subscription Agreement contains various representations and warranties
of Viacom International relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) corporate existence and power, (ii) corporate and
governmental authorization of the Subscription Agreement and the Transaction,
(iii) third-party consents, (iv) the binding effect of the Subscription
Agreement, (v) the absence of finders' fees with respect to the Subscription
Agreement, (vi) the absence of violations of, among other things, certificates
of incorporation, bylaws and certain contracts and laws, (vii) that the shares
of VII Cable Class B Common Stock, when paid for by and issued to TCI Cable in
accordance with the terms of the Subscription Agreement will be duly and validly
issued, fully paid and non-assessable and will constitute all of the issued and
outstanding shares of VII Cable Class B Common Stock and (viii) that Viacom
International has delivered or made available to TCI Cable or RCS Pacific, L.P.,
a California limited partnership, copies of all material contracts, certain test
tank reports and Immigration and Naturalization Service Forms I-9 for all
continuing employees.
CONDUCT OF THE BUSINESS PENDING THE EXCHANGE OFFER
Except for (u) certain actions with respect to the Telecom Partnerships
(as defined in the Implementation Agreement), (v) any increase in the Basic
Subscriber Rate (as defined in the Implementation Agreement) or any other rate
charged Viacom International's subscribers or otherwise contemplated by the
Transaction, (w) the incurrence of the Loan, (x) the amendment of Viacom
International's Certificate of Incorporation contemplated by the Transaction,
(y) certain changes permitted explicitly by the Subscription
74
Agreement or (z) compliance with Viacom's obligations under the Parents
Agreement or Viacom International's obligations under the Implementation
Agreement or any other event or action contemplated by the Transaction, from the
date of execution of the Subscription Agreement until the Exchange Date, Viacom
International has agreed to conduct the Cable Business only in the ordinary
course of business consistent with past practices. Without limiting the
generality of the foregoing, Viacom International has agreed not to do any of
the following, without the consent of TCI Cable:
(i) (w) enter into a negotiated settlement with the FCC resolving
regulated rate disputes or challenges which negotiated settlement imposes
any obligations on VII Cable after the Exchange Date, (x) materially amend
or, other than in accordance with its terms, terminate any material
contract, or enter into any material contract outside of the ordinary
course of business, (y) enter into any programming agreement with any
programming service owned or operated by Viacom or its subsidiaries or
affiliates, or (z) enter into any programming agreement that would require
carriage of programming or is not terminable at any time by VII Cable
without any out-of-pocket cost to VII Cable, in each case following the
date that is six months after the Exchange Date;
(ii) enter into any employment agreement providing for a term of
employment other than as an employee at will, except as disclosed to TCI
Cable (or RCS Pacific, L.P. or InterMedia Partners IV, L.P.) on or prior
to July 24, 1995;
(iii) increase the rate of compensation or bonus payments to any Cable
Business-related employee of Viacom International, except in the ordinary
course of business and except for bonus payments in conjunction with the
Transaction where the cost is borne by Viacom Services or Viacom;
(iv) sell or dispose of assets relating to the Cable Business (other
than certain assets to be transferred to Viacom Services pursuant to the
Conveyance of Assets) except for sales or dispositions of assets in the
ordinary course of business, provided that such assets (other than certain
assets specified in the Implementation Agreement) are replaced with other
assets in the ordinary course of business;
(v) amend the certificate of incorporation or bylaws of Viacom
International or any Cable Division Subsidiary;
(vi) issue or sell any shares of the capital stock of Viacom
International or any Cable Division Subsidiary (except for shares of the
VII Cable Class A Common Stock which will be issued in the
Recapitalization);
(vii) incur any indebtedness for borrowed money outside the ordinary
course of business (other than the Loan); and
(viii) extend the term of (or fail to exercise a right of termination
with respect to) Viacom International's programming agreement with the
Science Fiction Channel or Comedy Central.
CERTAIN OTHER AGREEMENTS
Telecom Partnerships. Viacom International has further agreed, prior to
the Exchange Date, to make or cause to be made, when due and payable, all
capital contributions required to be made under, and otherwise to comply in all
material respects with all material terms and conditions of, the Telecom
Partnership Agreements (as defined in the Implementation Agreement). In
addition, VII Cable has entered into agreements with each Telecom Partnership
covering the lease, license or use by such Telecom Partnership of the plant,
75
property and equipment of Viacom International relating to capital expenditures
covered by the definition of Telecom Capital Expenditure Amount (as defined in
the Implementation Agreement), to the extent such lease, license or use is not
otherwise covered by the Telecom Partnership Agreements. Viacom International
has agreed not to sell, transfer or assign its interest in the Telecom
Partnerships.
Approved Capital Expenditure Plan. Viacom International will make or
cause to be made the capital expenditures called for by the Approved Capital
Expenditure Plan (as defined in the Implementation Agreement) in all material
respects except that Viacom International shall not be required to make or cause
to be made (i) expenditures which were required by law at the time the Approved
Capital Expenditure Plan was approved but are no longer so required, (ii)
expenditures which TCI Cable has agreed in writing do not have to be made, (iii)
expenditures which it is commercially unreasonable to make because the
assumptions used in developing and underlying the Approved Capital Expenditure
Plan prove to be incorrect in any material respect and (iv) expenditures which
cannot be made for reasons not within Viacom International's control (including,
without limitation, unavailability of equipment, lack of access to real
property, delays in orders being filled, unavailability of pole attachment
agreements and force majeure). In the event clause (iii) above is applicable,
Viacom International and TCI Cable will cooperate and negotiate in good faith to
amend the Approved Capital Expenditure Plan to preserve the economic benefits
originally intended to be afforded by such expenditures.
Reimbursement of Capital Expenditures. If the Subscription Agreement
terminates without the exchange of shares having occurred, TCI Cable will
reimburse Viacom International for the amount of additional capital expenditures
made after January 20, 1995, as a result of complying with RCS Pacific, L.P.'s
or TCI Cable's rebuild standards as determined pursuant to the Approved Capital
Expenditure Plan and the Subscription Agreement. TCI Cable will promptly pay to
Viacom International the amount of all such expenditures as to which Viacom
International has provided to TCI Cable documentation establishing that such
expenditures were made, provided that no such payment shall be required earlier
than the fifth business day after the date of such termination, and the
aggregate amount of such payments shall not exceed $6,215,000 if the Exchange
Date occurs on or prior to December 31, 1995 or $11,495,000 if the Exchange Date
occurs after December 31, 1995, unless TCI Cable shall have approved the capital
expenditures to which such reimbursements in excess of such amount relate.
Viacom International shall not be required to make any capital expenditure in
order to comply with RCS Pacific, L.P.'s or TCI Cable's rebuild standards if it
would not be reimbursed for the incremental cost upon the termination of the
Subscription Agreement without the exchange of shares having occurred pursuant
to the Exchange Offer.
Sale of Dayton and Nashville Systems. Viacom International will cooperate
with TCI Cable to facilitate the sale or exchange by VII Cable of the Dayton and
Nashville Systems on or after the day following the Exchange Date other than to
the extent such cooperation involves any out-of-pocket expenditure by Viacom
International or could reasonably be expected to delay the Exchange Date.
1996 Capital Expenditure Plan. Viacom International and TCI Cable have
agreed to negotiate a capital expenditure plan for the Cable Business of Viacom
International for 1996 (the "1996 Capital Expenditure Plan"). If Viacom
International and TCI Cable cannot agree on a 1996 Capital Expenditure Plan by
December 31, 1995, the 1996 Capital Expenditure Plan will be prepared by Viacom
International and shall provide for quarterly aggregate capital expenditures not
in excess of the amount required to be spent pursuant to the capital expenditure
plan attached to the Implementation Agreement (the "1995 Plan") plus an amount
equal to the percentage growth in the consumer price index for 1995 multiplied
by such amount, provided that such amount shall be allocated among different
categories of expenditures in a manner consistent with the 1995 Plan with such
changes as are consistent with the progress of rebuilds and other projects
reflected therein.
Preferred Stock Exchange. TCI will contribute to VII Cable or otherwise
cause VII Cable to have available sufficient shares to enable VII Cable to issue
to holders of the VII Cable Preferred Stock, shares of TCI Stock upon exercise
by the holders of the VII Cable Preferred Stock of their exchange rights as
specified in
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the terms of the VII Cable Preferred Stock. TCI has agreed to reserve and keep
available at all times, out of its authorized and unissued stock, sufficient
shares of TCI Stock to satisfy its obligations to VII Cable in connection with
such exchange of the VII Cable Preferred Stock. TCI has agreed that any such
TCI Stock, when issued, will be registered under the 1933 Act, and all state
securities and blue sky laws applicable to such issuance shall have been
complied with in respect thereto.
CONDITIONS TO THE OBLIGATIONS OF TCI AND TCI CABLE
The obligations of TCI and TCI Cable to take the action required to be
taken by them with respect to the Loan (see "--Certain Borrowings") shall be
subject to the satisfaction of each of the following conditions: (i) any
applicable waiting period (and any extension thereof) under the HSR Act shall
have expired or been terminated without the commencement or threat of any
litigation by a governmental authority to restrain the consummation of the
Transaction in any material respect; (ii) the number of Consented Subscribers
shall be not less than 90% of Estimated Exchange Date Basic Subscribers (as such
terms are defined in the Subscription Agreement); (iii) no order, stay, judgment
or decree shall have been issued by any court and be in effect restraining or
prohibiting the consummation of the Transaction in any material respect; (iv)
all conditions to the Exchange Offer (other than the Minimum Condition and the
bank borrowing condition) (see "The Exchange Offer--Certain Conditions of the
Exchange Offer") shall have been satisfied or waived; (v) no condition of TCI
and TCI Cable with respect to the closing of the Subscription Agreement shall
have become incapable of satisfaction; and (vi) Viacom International shall have
delivered to TCI Cable a certificate in which it certifies that to its knowledge
the conditions to the obligations of TCI and TCI Cable with respect to the
closing of the Subscription Agreement are reasonably likely to be satisfied.
The obligations of TCI Cable required to be performed by it at the closing
of the Subscription Agreement are subject to the satisfaction, on or prior to
the Exchange Date, of the following conditions:
(i) (a) each representation and warranty of Viacom International
contained in the Subscription Agreement and each representation and
warranty of Viacom Services contained in the Implementation Agreement
shall (x) if qualified by a reference therein to "material adverse
effect," be true and correct as of the Expiration Date as though such
representation and warranty was made at and as of such date (except to the
extent a different date is specified therein, in which case such
representation and warranty will be true and correct as of such date), or
(y) if not so qualified, be true and correct as of the Expiration Date as
though such representation and warranty were made at and as of such date
(except to the extent a different date is specified therein, in which case
such representation and warranty will be true and correct as of such
date), with such exceptions that do not, individually or in the aggregate,
result in a material adverse effect, and except in the case of both
clauses (x) and (y) for changes occurring after July 24, 1995 (A) pursuant
to the terms of the Transaction, (B) not prohibited with respect to the
operation of the Cable Business pending consummation of the Exchange Offer
(see "--Conduct of the Business Pending the Exchange Offer") or (C)
consented to by RCS Pacific L.P. prior to July 24, 1995, or by TCI Cable
at any time;
(b) each material covenant and obligation of Viacom International and
Viacom Services required by the Subscription Agreement or the
Implementation Agreement to be performed by it at or prior to the
Expiration Date will have been duly performed and complied with in all
material respects as of the Expiration Date;
(c) VII Cable shall have delivered the stock certificate for 100 shares
of VII Cable Class B Common Stock to TCI Cable;
(d) TCI Cable shall have received a certificate to the effect that the
conditions with respect to the representations, warranties and material
covenants and obligations of Viacom International and Viacom Services have
been satisfied;
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(ii) any applicable waiting period (and any extension thereof) under
the HSR Act will have expired or been terminated without the commencement
or threat of any litigation by a governmental authority of competent
jurisdiction to restrain the consummation of the transactions contemplated
by the Subscription Agreement in any material respect;
(iii) the number of Consented Subscribers shall be not less than 90%
of Estimated Exchange Date Basic Subscribers;
(iv) all consents required to be obtained by Viacom or Viacom
International in connection with the transactions contemplated by the
Subscription Agreement shall have been obtained and remain in full force
and effect, with such exceptions as would not have a material adverse
effect;
(v) no order, stay, judgment or decree shall have been issued by any
court and be in effect restraining or prohibiting the consummation of the
Transaction in any material respect;
(vi) certain legal opinions of counsel to Viacom International shall
have been delivered to TCI Cable;
(vii) the Exchange Time shall have occurred; and
(viii) Viacom International shall have delivered to TCI Cable the
resignation of each of its directors and corporate officers, effective as
of the closing of the Subscription Agreement.
CONDITIONS TO THE OBLIGATIONS OF VII CABLE
The obligations of VII Cable to be performed by it at the closing of the
Subscription Agreement are subject to the satisfaction, on or prior to the
Expiration Date (or in the case of the conditions relating to payment of the
Subscription Payment and the consummation of the Exchange Offer, the closing of
the Subscription Agreement) of each of the following conditions:
(i) (a) each representation and warranty of TCI and TCI Cable
contained in the Subscription Agreement will be true and correct in all
material respects as of the Expiration Date as though such representation
and warranty was made at and as of such date (except to the extent that a
different date is specified therein, in which case such representation and
warranty will be true and correct as of such date);
(b) each material covenant and obligation of each of TCI and TCI Cable
required by the Subscription Agreement to be performed by it on or prior
to the Expiration Date will have been duly performed and complied with in
all material respects as of the Expiration Date;
(c) TCI Cable shall have paid the Subscription Payment to VII Cable;
(d) VII Cable will have received a certificate to the effect that the
conditions relating to the representations, warranties and material
covenants and obligations of TCI Cable have been satisfied;
(ii) any applicable waiting period under the HSR Act (and any extension
thereof), shall have expired or been terminated without the commencement
or threat of any litigation by a governmental authority of competent
jurisdiction to restrain the consummation of the transactions contemplated
by the Subscription Agreement in any material respect;
(iii) the number of Consented Subscribers shall not be less than 90%
of Estimated Exchange Date Basic Subscribers;
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(iv) a certain legal opinion of counsel to TCI and TCI Cable shall be
delivered to VII Cable;
(v) all consents required to be obtained by TCI and TCI Cable in
connection with the transactions contemplated by the Subscription
Agreement shall have been obtained and remain in full force and effect,
with such exceptions as do not result in a material adverse effect on
TCI's and TCI Cable's ability to consummate such transactions;
(vi) no order, stay, judgment or decree will have been issued by any
court and be in effect restraining or prohibiting the consummation of the
Transaction in any material respect; and
(vii) the Exchange Time shall have occurred.
TERMINATION
The Subscription Agreement shall automatically terminate upon any
termination of the Parents Agreement in accordance with its terms. Upon
termination of the Subscription Agreement, (i) the Subscription Agreement will
become null and void, (ii) such termination will be the sole remedy with respect
to any breach of any representation, warranty, covenant or agreement contained
therein and (iii) there will be no liability or obligation on the part of TCI,
TCI Cable or VII Cable other than under certain provisions of the Subscription
Agreement relating to certain breaches of the Subscription Agreement, payment of
the fees and expenses relating to the Commitments to Lend, the Loan
Documentation, the Loan, confidentiality and the reimbursement of certain
capital expenditures.
EXPENSES
Under the Subscription Agreement, except as expressly set forth therein,
the fees and expenses (including the fees of any lawyers, accountants,
investment bankers or others engaged by a party thereto) incurred in connection
with the Subscription Agreement and the transactions contemplated thereby,
whether or not the transactions contemplated thereby are consummated, will be
paid by the party incurring such expenses.
AMENDMENT
Subject to applicable law, the Subscription Agreement may be amended or
modified only by a writing signed by the party against whom enforcement of any
such amendment or modification is being sought. Any party to the Subscription
Agreement also may, by written instrument, waive compliance with any term or
provision of the Subscription Agreement on the part of such other party thereto.
SURVIVAL
The representations and warranties contained in the Subscription Agreement
shall terminate and be of no further force on and as of April 30, 1997, except
that the representations and warranties relating to finders' fees, the shares of
VII Cable Class B Common Stock and the liability of TCI and TCI Cable for fees
and expenses arising from the Commitments to Lend shall survive indefinitely.
TERMS OF CERTAIN ANCILLARY AGREEMENTS
Contemporaneously with the execution of the Parents Agreement, the
Implementation Agreement and the Subscription Agreement, Viacom, Viacom
International, Viacom Services and certain other Viacom affiliates entered into
certain other agreements with TCI, TCI Cable and certain other TCI affiliates,
including a letter agreement governing certain ancillary elements of the
Transaction (the "Letter Agreement"), a letter providing for indemnification
against certain tax liabilities (the "Tax Indemnity Agreement"), and amendments
to certain
79
agreements entered into in connection with the settlement of certain litigation
among such parties (the "Settlement Agreements") (collectively, the "Ancillary
Agreements").
LETTER AGREEMENT
The Letter Agreement contains a number of provisions clarifying the
Parents Agreement, Implementation Agreement and Subscription Agreement. In
particular, the Letter Agreement provides that the satisfactory tax treatment
condition to closing the Parents Agreement will be fulfilled by receipt of the
Ruling Letter (as described below under "Certain Federal Income Tax
Consequences"). The Letter Agreement also provides that, in the event any of
the cable systems is required, pursuant to a refund order of a local authority,
the FCC or a court of competent jurisdiction, to refund to subscribers (a
"Refund") any overpayment or excess charge paid during the period between
September 1, 1993 and the Exchange Date (the "Applicable Period") for any basic
service or related equipment, any other regulated tier of service or related
equipment or any other charge for service or equipment, Viacom Services shall be
obligated to reimburse VII Cable an amount (the "Refund Amount"), computed on an
after-tax basis, equal to (x) the portion of the Refund required to be paid to
such subscribers that is attributable to the Applicable Period (after taking
into account any available offsets or credits actually realized by VII Cable) to
the extent actually paid, including any penalties, interest, forfeiture or other
payment ordered by such refund order and any other associated reasonable costs
(in each case, to the extent actually paid), net of the present value of any
refund, rebate or offset of franchise fees, copyright fees, savings in taxes or
other benefits to VII Cable and its affiliates actually realized as a result of
such Refund, less (y) an amount equal to the aggregate amount (on a net after-
tax basis) of any increases in revenue resulting from any rate increases granted
after the Exchange Date with respect to such subscribers, to the extent that VII
Cable is permitted to increase rates in order specifically to recoup any amount
previously refunded as described under (x) above to the extent that such
increases are actually realized by VII Cable net of any accompanying increase in
franchise, copyright or other fees actually paid by VII Cable and have not been
previously applied under (x) above to reduce the Refund or pursuant to this (y).
The Letter Agreement further provides that Viacom Services shall have the right
to assume control of the defense of and settlement of any regulatory proceeding
relating to rates charged to subscribers during the applicable period which
could result in a refund order as to which the Refund Amount could exceed 50% of
the Refund.
TAX INDEMNITY LETTER
The Tax Indemnity Letter provides for indemnification on an after-tax
basis by TCI and TCI Cable, jointly and severally, of each member of the Viacom
consolidated group of companies in the event that any or all of the Ruling
Letter is withdrawn or otherwise not followed by the IRS and the Transaction or
any of the component steps of the Transaction gives rise to federal, state or
local income or franchise tax liability as a result of any misstatements or
omissions of material fact in certain representations made by TCI and TCI Cable
with regard to VII Cable and its subsidiaries.
SETTLEMENT AGREEMENTS
Pursuant to the Settlement Agreements, Viacom and its affiliates and TCI
and its affiliates have provisionally agreed to settle and dismiss certain
antitrust litigation instituted by Viacom International. This settlement is
subject to certain conditions, including the consummation of the Transaction.
The Settlement Agreements relate to, among other things, the carriage by
Satellite Services, Inc., a TCI affiliate ("SSI"), and VII Cable (after the
Exchange Date) of SHOWTIME(R) and THE MOVIE CHANNEL(TM), which are commercial-
free premium subscription services owned by Viacom's subsidiary Showtime
Networks Inc. ("SNI").
Pursuant to the Settlement Agreements, SSI and other TCI affiliates are
required to continue to carry SHOWTIME and THE MOVIE CHANNEL through (at a
minimum) the year 2000 in each of their systems currently carrying each such
service and in each of the VII Cable cable systems. SSI is further required to
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engage in certain marketing relating to SHOWTIME and THE MOVIE CHANNEL. SSI is
also provided with certain incentives to increase the number of SHOWTIME and THE
MOVIE CHANNEL subscribers.
The Settlement Agreements were originally entered into in January 1995.
They were amended on July 24, 1995 to become effective in accordance with their
terms only and immediately upon the consummation of the Stock Issuance.
DESCRIPTION OF CERTAIN INDEBTEDNESS OF VII CABLE
Viacom International anticipates that the Loan will be comprised of a
combination of term and revolving credit facilities and will be repayable in
part on the date of receipt by VII Cable of the Subscription Payment. Certain
terms of the Loan are currently under negotiation. Pursuant to the Parents
Agreement, TCI and TCI Cable have agreed that the Loan Documentation will not
contain any Inconsistent Terms. The execution and delivery of the Loan
Documentation and the ability of Viacom International to draw down the Aggregate
Loan Amount thereunder on the Expiration Date and transfer such amount as a
contribution to Viacom Services are conditions to commencement of the Exchange
Offer. See "Arrangements Among Viacom, Viacom International, TCI and TCI Cable-
- -Terms of the Subscription Agreement--Certain Borrowings."
DESCRIPTION OF VII CABLE CAPITAL STOCK
Set forth below is a general summary of the capital stock of VII Cable in
the form effective immediately after the Recapitalization. See "Business of VII
Cable--Recapitalization." The following summary does not purport to be a
complete description of such capital stock and is qualified in its entirety by
reference to the Amended and Restated Certificate of Incorporation, the form of
which has been filed as an exhibit to the Registration Statement of which this
Offering Circular - Prospectus is a part. The definitive Amended and Restated
Certificate of Incorporation shall be filed by VII Cable with the Secretary of
State of the State of Delaware immediately prior to the Recapitalization.
GENERAL
Following the Recapitalization, the authorized capital stock of VII Cable
will consist of shares, of which shares shall be common stock and
shares shall be preferred stock (the "Preferred Stock"). The shares of common
stock shall be divided into two classes, of which shares shall be VII
Cable Class A Common Stock, and 100 shares shall be of a class designated as VII
Cable Class B Common Stock. Of the preferred stock, shares shall be
of a class designated as "Series A Senior Cumulative Exchangeable Preferred
Stock" and shares shall be of a class issuable from time to time in
series with such voting rights, if any, designations, powers, preferences and
other rights and such qualifications, limitations and restrictions as may be
determined by the VII Cable Board.
COMMON STOCK -- GENERAL
Except as otherwise described below, shares of VII Cable Class A Common
Stock and VII Cable Class B Common Stock shall be identical in all respects and
shall have equal rights and privileges.
Holders of VII Cable Class A Common Stock and holders of VII Cable Class B
Common Stock shall be entitled to one vote for each share of such stock held on
all matters presented to holders of common stock. Except as may otherwise be
required by the laws of the State of Delaware, the holders of shares of VII
Cable Class A Common Stock and the holders of shares of VII Cable Class B Common
Stock shall vote as one class
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with respect to the election of directors and with respect to all other matters
to be voted on by stockholders of VII Cable.
The holders of common stock shall be entitled to receive dividends only as
and when declared by the Board of Directors of VII Cable out of funds legally
available therefor, subject to the rights of any preferred stock then
outstanding.
In the event of a liquidation, dissolution or winding up of VII Cable,
after payment or provision for payment of the debts and liabilities of VII Cable
and subject to the prior payment in full of the preferential amounts to which
any Preferred Stock is entitled, the holders of VII Cable Class A Common Stock
and VII Cable Class B Common Stock shall share equally, on a share for share
basis, in the assets of VII Cable remaining for distribution to its holders of
common stock.
VII CABLE CLASS A COMMON STOCK
Upon the issuance of shares of VII Cable Class B Common Stock to TCI Cable
pursuant to the terms of the Subscription Agreement, each outstanding share of
VII Cable Class A Common Stock shall automatically convert into one share of VII
Cable Preferred Stock, without any action on the part of the holder thereof.
Holders of shares of Viacom Common Stock electing to tender such shares in the
Exchange Offer should not expect to take physical delivery of shares of VII
Cable Class A Common Stock which they will have the right to receive in exchange
for shares of Viacom Common Stock after the consummation of the Stock Issuance.
See "Arrangements Among Viacom, Viacom International, TCI and TCI Cable--Terms
of the Subscription Agreement." Effective as of such date, the shares of VII
Cable Class A Common Stock shall no longer be deemed to be outstanding and all
rights with respect to such shares shall thereupon terminate, except the right
of the holders thereof to receive the VII Cable Preferred Stock issuable upon
such automatic conversion of the VII Cable Class A Common Stock.
VII CABLE CLASS B COMMON STOCK
Subject to the terms and conditions stated in the Subscription Agreement,
all of the authorized shares of VII Cable Class B Common Stock will be issued to
TCI Cable immediately following consummation of the Exchange Offer in
consideration of the payment of the Subscription Payment. See "Arrangements
Among Viacom, Viacom International, TCI and TCI Cable--Terms of the Subscription
Agreement."
VII CABLE PREFERRED STOCK
The shares of VII Cable Class A Common Stock received by Viacom
stockholders in exchange for their shares of Viacom Common Stock will
automatically convert into shares of VII Cable Preferred Stock upon the issuance
to TCI Cable of VII Cable Class B Common Stock pursuant to the Subscription
Agreement. Application will be made for quotation of the VII Cable Preferred
Stock on Nasdaq under the symbol " ."
RANKING
Each share of VII Cable Preferred Stock will have a par value of $100 (the
"Par Value") and will have a liquidation preference equal to the Par Value plus
an amount equal to all dividends (whether or not earned or declared) accrued and
unpaid thereon to the date of payment of the liquidation preference (the
"Liquidation Preference"), and no more. VII Cable Preferred Stock will rank
senior to VII Cable common stock with respect to the payment of dividends and
payments of amounts distributable upon dissolution, liquidation or winding up of
VII Cable. While any shares of VII Cable Preferred Stock are outstanding, VII
Cable may not create, and the VII Cable Board may not authorize, any class or
series of Senior Stock without the prior affirmative vote of the holders of at
least 66 2/3% of the then outstanding shares of VII Cable Preferred
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Stock, voting as a separate class. See "Voting Rights" below. Immediately
following the Exchange Date, the only capital stock of VII Cable issued and
outstanding will be VII Cable Class B Common Stock and VII Cable Preferred
Stock; no shares of Parity Stock or Senior Stock will be authorized, issued or
outstanding.
DIVIDENDS
Payments of Dividends; Method of Payment. Holders of shares of VII Cable
Preferred Stock will be entitled to receive, when, as and if declared by the VII
Cable Board out of funds legally available therefor, cumulative accrued
dividends from the date (the "Issue Date") of initial issuance of the shares of
VII Cable Preferred Stock (upon conversion of the VII Cable Class A Common Stock
immediately following the Stock Issuance) at the rate per annum of % of the
Par Value per share, or $ per share of VII Cable Preferred Stock annually.
The dividend rate was determined by two investment banking firms as the rate
that, in the opinion of such firms, will cause the VII Cable Preferred Stock to
trade at its initial Liquidation Preference of $100 per share immediately
following the Exchange Date. Dividends on VII Cable Preferred Stock will be
payable quarterly in arrears on each , ,
and (or, if any such date is not a business day, on the next
succeeding business day (each a "Dividend Payment Date")), commencing ,
1996 (and, in the case of any accrued but unpaid dividends, at such additional
times and for such interim periods, if any, as may be determined by VII Cable
Board). Dividends payable on any Dividend Payment Date will be paid to holders
of record as they appear on the stock register of VII Cable at the close of
business on such record dates (each a "Record Date"), which shall not be more
than 60 days or less than 10 days preceding the Dividend Payment Dates
corresponding thereto, as shall be fixed by the VII Cable Board. Dividends on
shares of VII Cable Preferred Stock will accrue on a daily basis (without
interest or compounding) whether or not there are unrestricted funds legally
available for the payment of such dividends and whether or not such dividends
are earned or declared.
Whenever a Redemption Date (as defined below) occurs during a dividend
period, the VII Cable Board may, at its option, declare accrued dividends to,
and pay such dividends on, such Redemption Date, in which case such dividends
will be payable on such Redemption Date to the holders of shares of VII Cable
Preferred Stock as of a special record date to be designated by the VII Cable
Board for such dividend payment.
Any dividends may be paid, at the election of VII Cable, (i) out of funds
legally available therefor, (ii) through the delivery of shares of TCI Stock or
(iii) through any combination of the foregoing forms of consideration elected by
VII Cable. If VII Cable elects to pay any dividend payment, in whole or in
part, by delivery of shares of TCI Stock, the amount of such dividend payment to
be paid per share of VII Cable Preferred Stock in shares of TCI Stock (the
"Stock Dividend Amount") will be paid through the delivery to the holders of
record of such shares of VII Cable Preferred Stock on the Record Date for such
dividend payment of a number of shares of TCI Stock determined by dividing the
Stock Dividend Amount by an amount (the "Cash Equivalent Amount") equal to 95%
of the Average Market Price (as defined below) per share of TCI Stock
(determined as of the Record Date for such dividend payment). No fractional
shares of TCI Stock will be delivered to a holder of shares of VII Cable
Preferred Stock, but VII Cable shall instead pay a cash adjustment determined as
described under "Adjustment for Fractional Shares" below. If the VII Cable Board
determines to pay a dividend and VII Cable is prohibited from paying cash
dividends pursuant to the Loan or if VII Cable otherwise decides to pay
dividends in TCI Stock, TCI Cable has agreed to make available to VII Cable (i)
funds in the form of an equity contribution or a subordinated loan or (ii)
sufficient shares of TCI Stock, in each case to pay such dividends in cash, TCI
Stock or a combination thereof, with respect to any dividend payment.
The "Average Market Price" per share of TCI Stock on any date of
determination means the average of the daily closing sale prices of the TCI
Stock on Nasdaq for the ten consecutive dates on which Nasdaq is open for the
transaction of business (each a "Trading Date") ending on the third business
day preceding the date of determination (appropriately adjusted to take into
account the actual occurrence, during the period following the first of such
ten consecutive Trading Dates and ending on the business day immediately
preceding the date of determination, of any event of a type described under
"Exchange at Option of Holder--Exchange Adjustments" below).
83
The market price of the TCI Stock may vary from the Average Market Price
between the date of determination of such Average Market Price and the
subsequent delivery of shares of TCI Stock, in payment of a dividend, to holders
of VII Cable Preferred Stock. If such Average Market Price is more than 5.26%
higher than the market value of such shares on the Dividend Payment Date and the
holder sells such shares of TCI Stock at such lower price, the holder's actual
dividend yield for the dividend period in respect of which such dividend was
paid would be lower than the stated dividend yield on the VII Cable Preferred
Stock. In addition, in connection with any such sale the holder is likely to
incur commissions and other transaction costs.
If VII Cable elects to make any dividend payment, in whole or in part,
through the delivery of shares of TCI Stock, it will give notice of such
determination (which shall include the number of shares of TCI Stock and cash,
if any, to be delivered in respect of each share of VII Cable Preferred Stock)
by publication, on the Record Date for such dividend payment, of such election
in a daily newspaper of national circulation.
Certain Limitations. As long as any shares of VII Cable Preferred Stock
are outstanding, (i) no dividends shall be paid or declared in cash or
otherwise, nor will any other distribution be made, on any stock of VII Cable
ranking junior to the VII Cable Preferred Stock as to dividend rights, payments
on redemption and payments of amounts distributable upon the dissolution,
liquidation or winding up of VII Cable ("Junior Stock") and (ii) no shares of
any Junior Stock may be purchased, redeemed, or otherwise acquired by VII Cable
or any Subsidiary (as defined below), nor may any funds be set aside or made
available for any sinking fund for the purchase or redemption of any Junior
Stock, unless: (a) full dividends on all outstanding shares of VII Cable
Preferred Stock and any Parity Stock have been paid, or declared and set aside
for payment, for all dividend periods terminating on or prior to the date of
such Junior Stock dividend or distribution payment, to the extent such dividends
are cumulative; (b) VII Cable has paid or set aside all amounts, if any, then or
theretofore required to be paid or set aside for all purchase, retirement, and
sinking funds, if any, for any Parity Stock; and (c) VII Cable is not in default
on any of its obligations to redeem any VII Cable Preferred Stock or any Parity
Stock. Immediately following the Exchange Date, VII Cable will not have issued
or outstanding any Parity Stock and VII Cable's common stock will represent the
only Junior Stock of VII Cable.
As long as any shares of VII Cable Preferred Stock are outstanding,
dividends or other distributions may not be declared or paid on the VII Cable
Preferred Stock or on any Parity Stock, and VII Cable may not purchase, redeem
or otherwise acquire any VII Cable Preferred Stock or Parity Stock, unless
either: (a) (i) full dividends on the VII Cable Preferred Stock and any Parity
Stock have been paid, or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such VII Cable Preferred Stock or
Parity Stock dividend, distribution, purchase, redemption or other acquisition
payment, to the extent such dividends are cumulative; (ii) VII Cable has paid or
set aside all amounts, if any, then or theretofore required to be paid or set
aside for all purchase, retirement, and sinking funds, if any, for any Parity
Stock; and (iii) VII Cable is not in default on any of its obligations to redeem
any VII Cable Preferred Stock or Parity Stock; or (b) with respect to the
payment of dividends only, any such dividends are declared and paid pro rata so
that the amounts of any dividends declared and paid per share on shares of VII
Cable Preferred Stock and shares of any Parity Stock will in all cases bear to
each other the same ratio that accrued and unpaid dividends (including any
accumulation with respect to unpaid dividends for prior dividend periods, if
such dividends are cumulative) per share on shares of VII Cable Preferred Stock
and shares of Parity Stock bear to each other.
Notwithstanding the foregoing, nothing will prevent (i) the payment of
dividends on any Junior Stock, Parity Stock or VII Cable Preferred Stock solely
in shares of Junior Stock and/or warrants, rights or options exercisable for or
convertible into Junior Stock or the redemption, purchase or other acquisition
of Junior Stock, Parity Stock or VII Cable Preferred Stock solely in exchange
for (together with a cash adjustment for fractional shares, if any), or through
the application of the proceeds from the sale of, shares of Junior Stock and/or
warrants, rights or options exercisable for or convertible into Junior Stock or
(ii) the conversion, exchange or redemption of Parity Stock or VII Cable
Preferred Stock at the option of the holders into shares of
84
any capital stock (other than Senior Stock) in accordance with the terms of the
instruments creating such securities (together with a cash adjustment for
fractional shares, if any).
In addition, as long as any shares of VII Cable Preferred Stock are
outstanding, VII Cable shall not, nor shall VII Cable permit any of its
Subsidiaries to, (i) pay or declare dividends, in cash or otherwise, or make any
other distribution on any Subsidiary Equity Interest (as defined blow) or (ii)
purchase, redeem, or otherwise acquire any Subsidiary Equity Interest, or set
aside any funds for any sinking fund for the purchase or redemption of any
Subsidiary Equity Interest, unless: (i) full dividends on all VII Cable
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Subsidiary Equity
Interest dividend or distribution payment and (ii) VII Cable is not in default
on any of its obligations to redeem or exchange any shares of VII Cable
Preferred Stock pursuant to the terms of the VII Cable Preferred Stock.
Notwithstanding the foregoing, nothing will prevent (i) the payment of
dividends on any Subsidiary Equity Interest of a Subsidiary solely in shares of
the same class of Subsidiary Equity Interest ("Parity Subsidiary Equity
Interest") of such Subsidiary and/or warrants, rights or options exercisable for
or convertible into such Parity Subsidiary Equity Interest or the redemption,
purchase or other acquisition of any Subsidiary Equity Interest solely in
exchange for (together with a cash adjustment for fractional shares, if any), or
through the application of the proceeds from the sale of, shares of any Parity
Subsidiary Equity Interest and/or warrants, rights or options exercisable for or
convertible into such Parity Subsidiary Equity Interest; (ii) paying dividends
or other distributions on any Subsidiary Equity Interest if such dividends are
required to be made (there being no right of deferral) pursuant to the terms of
any charter document or any partnership, joint venture, stockholder, acquisition
or other agreement in effect on the Exchange Date, or (iii) purchasing,
redeeming or otherwise acquiring any Subsidiary Equity Interest if required to
do so pursuant to the terms of any charter document or any partnership, joint
venture, stockholder, acquisition or other agreement in effect on the Exchange
Date.
A "Subsidiary" means (i) a corporation a majority of the capital stock of
which, having voting power under ordinary circumstances to elect directors, is
at the time, directly or indirectly, owned by VII Cable and (ii) any other
entity (other than a corporation) in which VII Cable, directly or indirectly,
has the power to elect or direct the election of a majority of the members of
the governing body of such entity. A "Subsidiary Equity Interest" means (x)
capital stock of Subsidiary (other than a wholly owned Subsidiary) that is a
corporation or (y) a partnership or other ownership interest of a Subsidiary
that is not a corporation.
Payment of dividends or other distributions to the holders of VII Cable
Preferred Stock shall be subject to the prior preferences and other rights of
any future class or series of Senior Stock. See "Ranking" above.
EXCHANGE AT OPTION OF HOLDER
Exchange Privilege. Each share of VII Cable Preferred Stock will be
exchangeable, in whole or in part, at the option of the holder thereof, at any
time after the fifth anniversary of the Issue Date, unless previously redeemed,
at an exchange rate (the "Exchange Rate"), to be determined by dividing (i)
$80.00 by (ii) the weighted average of the sales prices for all trades of TCI
Stock as reported on Nasdaq on each of the twenty consecutive Trade Dates ending
on the second business day prior to the Exchange Date, including any extension
thereof. The Exchange Rate will be subject to adjustment as described under
"Exchange Adjustments" below. VII Cable will announce the initial Exchange Rate
by 5:00 p.m., New York City time, on the second business day prior to the
Exchange Date by issuing a press release to the Dow Jones News Service. Holders
of Viacom Common Stock will also be able to obtain the initial Exchange Date,
following such press release, from the Information Agent and the Dealer Manager
at their respective telephone numbers appearing on the back cover of this
Offering Circular--Prospectus.
85
The exchange of shares of VII Cable Preferred Stock at the option of the
holder for shares of TCI Stock may be effected by delivering (i) the
certificates evidencing such holder's shares of VII Cable Preferred Stock,
together with written notice of exchange specifying the number of shares of VII
Cable Preferred Stock to be exchanged and specifying the name or names (with
addresses) in which the certificate or certificates representing the TCI Stock
deliverable on such exchange are to be registered, and (ii) a proper assignment
of such certificates to VII Cable (or in blank) of the certificates for the
shares of VII Cable Preferred Stock surrendered for exchange, to the office or
agency to be maintained by VII Cable for that purpose and otherwise in
accordance with exchange procedures established by VII Cable. Initially such
office will be the principal corporate trust office of the Transfer Agent (as
hereinafter defined). Each notice of exchange will be irrevocable and each
exchange will be deemed to be effective immediately before the close of business
on the date (the "TCI Stock Exchange Date") on which all of the requirements
for such exchange have been satisfied. The exchange will be at the Exchange
Rate in effect immediately prior to the close of business on the TCI Stock
Exchange Date.
As promptly as practicable after the surrender by a holder of certificates
for shares of VII Cable Preferred Stock for exchange, together with any other
required documentation, VII Cable shall cause to be delivered at said office or
agency to such holder, or on his or her written order, a certificate or
certificates for the number of full shares of TCI Stock to which such holder is
entitled, together with a cash adjustment for any fractional shares determined
as described under "Adjustment for Fractional Shares" below.
Holders of shares of VII Cable Preferred Stock at the close of business on
a Record Date for any payment of declared dividends will be entitled to
receive the dividend payable on such shares of VII Cable Preferred Stock on the
corresponding Dividend Payment Date notwithstanding the effective exchange of
such shares following such Record Date and prior to the corresponding Dividend
Payment Date. However, shares of VII Cable Preferred Stock surrendered for
exchange after the close of business on a Record Date for any payment of
dividends and before the opening of business on the next succeeding Dividend
Payment Date must be accompanied by payment in cash of an amount equal to the
dividend thereon attributable to the current quarterly dividend period which is
to be paid on such Dividend Payment Date (unless such shares of VII Cable
Preferred Stock are subject to redemption on a Redemption Date falling between
such Record Date and such Dividend Payment Date). A holder of shares of VII
Cable Preferred Stock called for redemption on any Dividend Payment Date will
(if such holder is the registered holder on the applicable Record Date) receive
the dividend on such shares payable on that date and will be able to exchange
such shares after the Record Date for such dividend without paying an amount
equal to such dividend to VII Cable upon exchange. Except as provided above,
upon any exchange of shares of VII Cable Preferred Stock for shares of TCI Stock
VII Cable will not make any payment or allowance for unpaid dividends, whether
or not in arrears, on exchanged shares of VII Cable Preferred Stock or for
previously declared dividends or distributions on the shares of TCI Stock
issued upon such exchange.
If the shares of VII Cable Preferred Stock represented by a certificate
surrendered for exchange are exchanged in part only, VII Cable will cause to be
issued and delivered to the holder, without charge therefor, a new certificate
or certificates representing in the aggregate the number of unexchanged shares.
The right to exchange shares of VII Cable Preferred Stock called for
redemption will terminate immediately before the close of business on the
related Redemption Date. See "Redemption" below.
Exchange Adjustments. The Exchange Rate is subject to adjustment upon the
occurrence of certain events involving TCI including, without limitation: (i)
the payment by TCI of dividends (and other distributions) on outstanding shares
of TCI Stock in shares of TCI Stock; (ii) subdivisions or combinations of TCI
Stock; (iii) the issuance by TCI, in reclassification of its outstanding shares
of TCI Stock, of any other shares of common stock of TCI; (iv) the issuance by
TCI to all holders of TCI Stock of rights, warrants or options entitling holders
of such rights, warrants or options (for a period not exceeding forty-five days)
to
86
purchase shares of TCI Stock at a price per share less than the Average Market
Price (determined as of the record date for such rights, warrants or options);
and (v) the payment by TCI of dividends (or other distributions) consisting of
capital stock, evidences of its indebtedness or other assets of TCI (other than
those dividends, rights, warrants, options and distributions referred to above
and excluding cash dividends or distributions other than Extraordinary Cash
Distributions (as defined below)) to all holders of outstanding shares of TCI
Stock. "Extraordinary Cash Distributions" means, with respect to any
consecutive 12-month period, all cash dividends and cash distributions on the
outstanding shares of TCI Stock during such period to the extent such dividends
or distributions exceed, on a per share of TCI Stock basis, 10% of the average
daily closing sale price of the TCI Stock during such period (other than cash
dividends or cash distributions for which a prior adjustment to the Exchange
Rate was made). VII Cable reserves the right, in lieu of making an adjustment
to the Exchange Rate, to distribute to the holders of VII Cable Preferred Stock,
or reserve for delivery with shares of TCI Stock upon surrender of shares of VII
Cable Preferred Stock in exchange therefor, any dividend or distribution
described above. All adjustments to the Exchange Rate will be calculated to the
nearest 1/1000th of a share of TCI Stock. No adjustment in the Exchange Rate
will be required unless such adjustment would require an increase or decrease of
at least one percent therein; provided, however, that any adjustment which is
not required to be made will be carried forward and taken into account in any
subsequent adjustment. In addition to the foregoing adjustments, VII Cable may
make increases in the Exchange Rate that are necessary or advisable in order
that any event treated for federal income tax purposes as a dividend of stock or
stock rights will not be taxable to the holders of TCI Stock.
If an adjustment is required to be made in the Exchange Rate, VII Cable
may, in its sole discretion, elect to defer the following until after the
occurrence of the event requiring such adjustment: (i) delivering to the holder
of any VII Cable Preferred Stock surrendered for exchange the additional shares
of TCI Stock deliverable upon such exchange over the shares of TCI Stock
deliverable before giving effect to such adjustment and (ii) paying to such
holder any amount in cash in lieu of a fractional share of TCI Stock. In
addition, no adjustment need be made for rights to purchase shares of TCI Stock
or for sales of shares of TCI Stock which in either case are made pursuant to a
plan providing for reinvestment of dividends or interest or pursuant to a bona
fide employee stock option or stock purchase plan of TCI or any of its direct or
indirect wholly owned subsidiaries (including VII Cable).
Whenever the Exchange Rate is required to be adjusted, VII Cable will
forthwith compute such adjusted Exchange Rate and file with the transfer
agent(s) for the VII Cable Preferred Stock and the TCI Stock a certificate with
respect to such adjustment, and mail a notice to holders of VII Cable Preferred
Stock providing information with respect to such adjustment. At least 10 days
before the record date or other date set for definitive action, VII Cable will
notify holders of VII Cable Preferred Stock of (i) any action which would
require an adjustment to the Exchange Rate, (ii) certain mergers or combinations
involving TCI or (iii) the dissolution, liquidation or winding up of TCI.
Adjustment for Consolidation or Merger of TCI. In case of (i) any
consolidation or merger to which TCI is a party, (ii) any sale or transfer to
another corporation of the property of TCI as an entirety or substantially as an
entirety or (iii) any statutory exchange of securities by TCI with another
corporation (other than in connection with a merger or acquisition), in each
case as a result of which shares of TCI Stock shall be converted into the right
to receive stock, securities or other property (including cash or any
combination thereof), each share of VII Cable Preferred Stock which is not
converted into the right to receive stock, securities or other property in
connection with such transaction will, after consummation of such transaction,
be subject to exchange at the option of the holder into the kind and amount of
securities, cash or other property receivable upon consummation of such
transaction by a holder of the number of shares of TCI Stock into which such
share of VII Cable Preferred Stock might have been exchanged immediately prior
to consummation of such transaction and assuming in each case that such holder
of TCI Stock failed to exercise rights of election, if any, as to the kind or
amount of securities, cash or other property receivable upon consummation of
such transaction (provided that if the kind or amount of securities, cash or
other property receivable upon consummation of such
87
transaction is not the same for each non-electing share, then the kind and
amount of securities, cash or other property receivable upon consummation of
such transaction for each non-electing share will be deemed to be the kind and
amount so receivable per share by a plurality of the non-electing shares). The
kind and amount of securities into which shares of VII Cable Preferred Stock
will be exchangeable after consummation of such transaction will be subject to
adjustment, as nearly as may be practicable, as described under "Exchange
Adjustments" above following the date of consummation of such transaction. TCI
will agree not to become a party to any such transaction unless the terms
thereof are consistent with the foregoing.
REDEMPTION
Mandatory Redemption. Each share of VII Cable Preferred Stock (if not
earlier exchanged or redeemed) will be subject to mandatory redemption by VII
Cable on the tenth anniversary of the Issue Date (the "Mandatory Redemption
Date"), at a redemption price (the "Mandatory Redemption Price") equal to the
Liquidation Preference.
Optional Redemption. Shares of VII Cable Preferred Stock are not
redeemable prior to 15 days after the fifth anniversary of the Issue Date (the
"Initial Redemption Date"). At any time and from time to time on or after the
Initial Redemption Date and until the Mandatory Redemption Date, VII Cable will
have the right to redeem, in whole or in part, the outstanding shares of VII
Cable Preferred Stock at the following per share redemption prices, together
with accrued but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption (each an "Optional Redemption Price," such price and
the Mandatory Redemption Price being sometimes referred to collectively herein
as a "Redemption Price"), if redeemed during the twelve-month periods beginning
on the anniversary of the Issue Date in the years shown below.
Year Redemption Price
---- ----------------
2001.................................
2002.................................
2003.................................
2004 and thereafter..................
If fewer than all the outstanding shares of VII Cable Preferred Stock are
to be redeemed as of any date (an "Optional Redemption Date," such date and the
Mandatory Redemption Date being sometimes referred to collectively herein as a
"Redemption Date"), the shares of VII Cable Preferred Stock to be redeemed will
be selected by VII Cable from outstanding shares of VII Cable Preferred Stock by
lot or pro rata (as nearly as may be practicable) or by any other method
determined by the VII Cable Board to be equitable.
Manner of Payment of Redemption Price. VII Cable may effect the
redemption of shares of VII Cable Preferred Stock upon the mandatory or optional
redemption thereof, at the election of VII Cable, (i) out of funds legally
available therefor, (ii) through the delivery of shares of TCI Stock or (iii)
through any combination of the foregoing forms of consideration elected by VII
Cable. If VII Cable elects to pay, in whole or in part, the Redemption Price in
respect of shares of VII Cable Preferred Stock through the delivery of shares of
TCI Stock, then VII Cable shall deliver to each holder of shares of VII Cable
Preferred Stock to be redeemed on the applicable Redemption Date a number of
shares of TCI Stock equal to the amount determined by dividing (i) the aggregate
Redemption Price (or designated portion thereof) of such shares of VII Cable
Preferred Stock by (ii) the Cash Equivalent Amount (determined as of such
Redemption Date). The market price of the TCI Stock may vary from the Average
Market Price between the date of determination of such
88
Average Market Price (for purposes of determining the Cash Equivalent Amount)
and the subsequent delivery of shares of TCI Stock, in payment of the Redemption
Price, to holders in respect of shares of VII Cable Preferred Stock called for
redemption. If such Average Market Price is more than 5.26% higher than the
market value of the TCI Stock on the Redemption Date and the holder sells such
shares of TCI Stock at such lower price, the holder's actual proceeds from the
sale of such shares would be lower that the stated Redemption Price for shares
of VII Cable Preferred Stock. In addition, in connection with any such sale the
holder is likely to incur commissions and other transaction costs.
No fractional shares of TCI Stock will be delivered to a holder upon
redemption of his shares of VII Cable Preferred Stock, but VII Cable will
instead pay a cash adjustment determined as described under "Adjustment for
Fractional Shares" below.
Dividends on shares of VII Cable Preferred Stock selected for redemption
will cease to accrue, and the right of the holders of such shares to exercise
their right to exchange such shares for TCI Stock will terminate immediately
prior to the close of business, on the related Redemption Date.
Notice of Redemption. VII Cable will provide notice (a "Redemption
Notice") of any redemption of shares of VII Cable Preferred Stock to holders of
record of VII Cable Preferred Stock to be called for redemption not less than 15
nor more than 60 days prior to the applicable Redemption Date. The Redemption
Notice will be provided by mail sent to each holder of record of shares of VII
Cable Preferred Stock to be redeemed, at such holder's address as it appears on
the stock register of VII Cable; provided, however, that neither failure to give
such notice nor any defect therein will affect the validity of the proceeding
for the redemption of any shares of VII Cable Preferred Stock to be redeemed
except as to the holders to whom VII Cable has failed to give said notice or
whose notice was defective.
Each Redemption Notice sent to a holder will include, without limitation,
the following information: (i) the Redemption Date; (ii) if less than all
outstanding shares of VII Cable Preferred Stock are to be redeemed, the number
of shares held by such holder to be redeemed; (iii) the Redemption Price and the
form or forms of consideration that VII Cable has elected to pay and/or deliver
upon such redemption and, if more than one form of consideration has been
elected by VII Cable, the designated portions of the Redemption Price to be paid
in each form of consideration so elected; (iv) if VII Cable has elected to
deliver shares of TCI Stock in payment of the Redemption Price (or a designated
portion thereof), the method of determining the number of shares of TCI Stock so
deliverable; (v) the place or places where certificates for VII Cable Preferred
Stock to be redeemed are to be surrendered for payment of the Redemption Price;
(vi) that dividends on the shares of VII Cable Preferred Stock to be redeemed
shall cease to accrue on the Redemption Date; and (vii) the then current
Exchange Rate and that the exchange privilege will terminate immediately prior
to the close of business on the Redemption Date.
On or after the Redemption Date, each holder of shares of VII Cable
Preferred Stock to be redeemed must present and surrender his certificate or
certificates for such shares to VII Cable at the place designated in the
Redemption Notice and thereupon the Redemption Price of such shares will be paid
to or on the order of the person whose name appears on such certificate or
certificates as the record owner thereof, and each surrendered certificate will
be cancelled. Should fewer than all the shares represented by a certificate be
redeemed, a new certificate will be issued representing the unredeemed shares.
If a Redemption Notice with respect to shares of VII Cable Preferred Stock
to be redeemed pursuant to a mandatory or optional redemption has been timely
given by VII Cable, and if on or before the applicable Redemption Date VII Cable
has deposited with the redemption agent for VII Cable Preferred Stock (or, if
there is no redemption agent, shall have set apart so as to be available for
such purpose and only such purpose) cash (including cash for any adjustment in
lieu of delivering fractional securities) and/or shares of TCI Stock, as
applicable, sufficient to pay in full the aggregate Redemption Price for such
shares of VII Cable Preferred Stock
89
on such Redemption Date, then effective as of the close of business on such
Redemption Date the shares of VII Cable Preferred Stock to be so redeemed will
no longer be deemed outstanding (notwithstanding that any certificate therefor
may not have been surrendered for cancellation), dividends with respect to the
shares so called for redemption shall cease to accrue on the Redemption Date
(except that holders of shares of VII Cable Preferred Stock at the close of
business on a Record Date for any payment of dividends shall be entitled to
receive the dividend payable on such shares on the corresponding Dividend
Payment Date notwithstanding the redemption of such shares following such Record
Date and prior to such Dividend Payment Date) and all rights with respect to the
shares so called for redemption will forthwith after such date cease and
terminate, except the right of such holders, upon the surrender of certificates
evidencing the shares of VII Cable Preferred Stock so redeemed, to receive the
cash and/or TCI Stock, as applicable, payable or deliverable in payment of the
Redemption Price and the applicable cash adjustment, if any, in lieu of
fractional shares, without interest. Any cash and/or shares of TCI Stock so
deposited or set apart and unclaimed at the end of one year from such Redemption
Date will be repaid and released to VII Cable, after which the holder or holders
of such shares of VII Cable Preferred Stock so called for redemption will look
only to VII Cable for delivery of such cash and/or shares of TCI Stock.
The ability of VII Cable to redeem VII Cable Preferred Stock shall be
subject to the prior preferences and rights of any future class or series of
Senior Stock. See "Ranking" above.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of VII Cable, the holders of shares of VII Cable Preferred Stock then
outstanding will be entitled to receive, after payment or provision for payment
of the debts and other liabilities of VII Cable and payment or provision for
payment of any distribution on shares of any Senior Stock, an amount per share
equal to the Liquidation Preference, before any distribution of assets is made
to the holders of Junior Stock or any other capital stock of VII Cable ranking
junior to the VII Cable Preferred Stock upon liquidation, dissolution or winding
up. After payment of the Liquidation Preference, holders of shares of VII Cable
Preferred Stock will not be entitled to any further participation in any
distribution of assets of VII Cable.
If, upon any dissolution, liquidation or winding up of VII Cable, the
assets of VII Cable available for distribution to the holders of the shares of
VII Cable Preferred Stock shall be insufficient to pay in full (i) the aggregate
Liquidation Preference payable to holders of VII Cable Preferred Stock and (ii)
the liquidation preference payable to holders of shares of all outstanding
classes and series of Parity Stock (as set forth in the instrument or
instruments creating such Parity Stock), the holders of shares of VII Cable
Preferred Stock and such Parity Stock shall share ratably in such distribution
of assets in proportion to the amount which would be payable on such
distribution if the amounts to which the holders of outstanding shares of VII
Cable Preferred Stock and the holders of outstanding shares of such Parity Stock
were paid in full. The sale, lease, transfer or exchange of all or
substantially all of the assets of VII Cable, the consolidation or merger of VII
Cable with one or more other corporations (whether or not VII Cable is the
corporation surviving such consolidation or merger), and the consummation of a
statutory binding share exchange involving VII Cable will not be deemed a
liquidation, dissolution or winding up of VII Cable.
CONDITIONS TO DELIVERY OF SHARES OF TCI STOCK
FOR DIVIDEND AND REDEMPTION PAYMENTS
VII Cable's right to elect to make any dividend or redemption payment (or
designated portions thereof) through the delivery of shares of TCI Stock will be
conditioned upon: (i) the shares of TCI Stock to be so delivered being fully
paid and nonassessable and free from any preemptive rights, liens or adverse
claims; (ii) the delivery of such shares being exempt from the registration or
qualification requirements of the Securities Act and applicable state securities
laws or, if no such exemption is available, the delivery of such shares having
been duly registered or qualified under the Securities Act and applicable state
securities laws; and (iii) the shares
90
of TCI Stock to be so delivered being listed, and upon delivery being eligible
for trading, on Nasdaq or on a national securities exchange. If such conditions
have not been satisfied prior to or on the date of any such dividend or
redemption payment, such payment shall be made solely in cash.
ADJUSTMENT FOR FRACTIONAL SHARES
No fractional shares or scrip representing fractional shares of TCI Stock
will be delivered upon the redemption or exchange of any shares of VII Cable
Preferred Stock or in connection with any dividend payment. Whether or not a
fractional share would be delivered to a holder of VII Cable Preferred Stock
shall be based upon (i), in the case of an exchange, on the total number of
shares of VII Cable Preferred Stock such holder is at the time exchanging into
TCI Stock and the total number of shares of TCI Stock otherwise deliverable upon
such exchange and (ii), in the case of the payment, in whole or in part, of a
dividend or redemption payment through the delivery of shares of TCI Stock, on
the total number of shares of VII Cable Preferred Stock at the time held by such
holder and the total number of shares of TCI Stock otherwise deliverable in
respect thereof. In lieu of the issuance of a fraction of a share of TCI Stock
or scrip, VII Cable shall pay instead an amount in cash by its check equal to
the same fraction of (i), in the case of an exchange, the Average Market Price
(determined as of the TCI Stock Exchange Date) and (ii), in the case of a
dividend or redemption payment, the Cash Equivalent Amount (determined as of the
record date of such dividend or the date of such redemption payment).
VOTING RIGHTS
The holders of shares of VII Cable Preferred Stock will have no voting
rights, except as otherwise required by law and except as set forth below. When
and if the holders of VII Cable Preferred Stock are entitled to vote, each
holder will be entitled to one vote per share.
If at any time accrued dividends payable on the shares of VII Cable
Preferred Stock are in arrears and unpaid in an aggregate amount equal to or
exceeding the aggregate amount of dividends payable thereon for six quarterly
dividend periods, the holders of the shares of VII Cable Preferred Stock, voting
separately as a class (with the holders of all other shares of Parity Stock upon
which like voting rights have been conferred and are exercisable), will have the
right to vote for the election of two directors (the "Preferred Stock
Directors") to the VII Cable Board, such directors to be in addition to the
number of directors constituting the VII Cable Board immediately prior to the
accrual of such right. Such right of the holders of shares of VII Cable
Preferred Stock to vote for the election of two Preferred Stock Directors will
continue until all dividends in arrears on the shares of VII Cable Preferred
Stock have been paid in full. The term of office of each Preferred Stock
Director shall terminate on the earlier of (i) the next annual meeting of
stockholders of VII Cable at which a successor shall have been elected and
qualified (irrespective of whether the VII Cable Board is divided into staggered
classes) or (ii) the termination of the right of the holders of shares of VII
Cable Preferred Stock (and any such other shares of Parity Stock and Senior
Stock) to vote for Preferred Stock Directors.
For as long as any shares of VII Cable Preferred Stock remain outstanding,
the affirmative vote of the holders of at least 66 2/3% of such outstanding
shares (voting separately as a class) will be necessary: (i) before VII Cable
may amend, alter or repeal any of the provisions of VII Cable's Restated
Certificate of Incorporation which would adversely affect the powers,
preferences or rights of the holders of the shares of VII Cable Preferred Stock
then outstanding; provided, however, that (x) any such amendment, alteration or
repeal that would authorize, create or increase the authorized amount of any
Junior Stock or Parity Stock and (y) any such amendment that would increase the
number of authorized shares of Preferred Stock (other than VII Cable Preferred
Stock) or that would decrease (but not below the number of authorized shares
then outstanding) the number of authorized shares of Preferred Stock (other than
VII Cable Preferred Stock), will be deemed not to adversely affect such powers,
preferences or rights and shall not be subject to approval by the holders of
shares of VII Cable Preferred Stock; (ii) before VII Cable or the VII Cable
Board may
91
create or issue any class or series of Senior Stock; or (iii) before VII Cable
may effect any reclassification of VII Cable Preferred Stock (other than a
reclassification that solely seeks to change the designation of the VII Cable
Preferred Stock and does not adversely affect the powers, preferences or rights
of the holders of shares of VII Cable Preferred Stock outstanding immediately
prior to such reclassification). No vote of the holders of VII Cable Preferred
Stock in respect of an amendment, alteration or repeal of any provision of VII
Cable's Restated Certificate of Incorporation or the creation or issue of any
class or series of Senior Stock will be required if, at or prior to the time
when such amendment, alteration or repeal or creation or issue is to take
effect, as the case may be, provision is made for the redemption of all shares
of VII Cable Preferred Stock at the time outstanding (except that no such
provision may be made prior to the Initial Redemption Date); provided, however,
-------- -------
notwithstanding the foregoing, in the event that VII Cable does not pay the
Redemption Price to holders of VII Cable Preferred Stock on the applicable
Redemption Date, such holders will be entitled to vote in respect of the matters
described above on which such holders would have been entitled to so vote but
for the provision for redemption which was made and any vote taken in respect of
such matters shall be void.
Except as required by law, the holders of VII Cable Preferred Stock will
not be entitled to vote on any merger or consolidation involving VII Cable or a
sale of all or substantially all of the assets of VII Cable.
CERTAIN COVENANTS
Transactions with Affiliates. As long as any shares of VII Cable
Preferred Stock are outstanding, VII Cable will not, and will not permit any
Subsidiary to, enter into any transaction with an Affiliate unless such
transaction is on terms that are no less favorable to VII Cable or such
Subsidiary than those that would have been obtained in a comparable transaction
with a person that is not an Affiliate; provided, however, that transactions
between VII Cable and its Subsidiaries or among such Subsidiaries shall not be
subject to this covenant. An "Affiliate" of VII Cable or any Subsidiary is
defined as any person or entity that directly or indirectly controls, is
controlled by, or is under common control with VII Cable or such Subsidiary.
SEC Reports. As long as any shares of VII Cable Preferred Stock are
outstanding, VII Cable shall timely file with the Commission copies of the
annual reports, quarterly reports and other reports, information and documents
which VII Cable is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act and, within 15 days after such filing is required
to be made with the Commission, mail copies of such reports, information or
other documents to the holders of the VII Cable Preferred Stock. If at any time
while shares of VII Cable Preferred Stock are outstanding VII Cable is not
required to, and does not, have, any class of securities registered under the
Exchange Act, then VII Cable shall prepare comparable reports, information and
documents and mail the same to holders of the VII Cable Preferred Stock within
15 days after the date it would have been required to file such reports,
information or documents with the Commission if it had continued to have
securities registered under the Exchange Act.
TRANSFER AGENT AND REGISTRAR
(the "Transfer Agent") will act as paying, exchange and redemption
agent and registrar for the shares of VII Cable Preferred Stock.
MISCELLANEOUS
Upon issuance, the shares of VII Cable Preferred Stock will be fully paid
and nonassessable. Holders of shares of VII Cable Preferred Stock will have no
preemptive rights. TCI has agreed to at all times reserve and keep available
out of its authorized and unissued TCI Stock, solely for issuance upon the
exchange of shares of VII Cable Preferred Stock, such number of shares of TCI
Stock as will from time to time be deliverable upon the exchange of all shares
of VII Cable Preferred Stock then outstanding (assuming for this purpose that
all of the shares of VII Cable Preferred Stock are held by one person). Shares
of VII Cable Preferred Stock redeemed by VII Cable will be retired and resume
the status of authorized and unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated as part of
a particular series of Preferred Stock by the VII Cable Board.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OF VIACOM AND VII CABLE
The following is a summary of material differences between the rights of
holders of Viacom Common Stock and the rights of holders of VII Cable Class A
Common Stock and VII Cable Preferred Stock (after giving effect to the
Recapitalization). Because each of Viacom and VII Cable is organized under the
laws of Delaware, such differences arise principally from provisions of the
charter of each of Viacom and VII Cable. Assuming that the Stock Issuance
occurs in accordance with the terms and conditions of the Subscription
Agreement, shares of VII Cable Class A Common Stock issued to holders of shares
of Viacom Common Stock whose shares are accepted for exchange will automatically
convert into shares of VII Cable Preferred Stock on the Exchange Date
immediately after the consummation of the Stock Issuance. Accordingly, holders
of shares of Viacom Common Stock tendering such shares in the Exchange Offer
should expect to receive shares of VII Cable Preferred Stock in exchange after
the consummation of the Stock Issuance.
The following summaries do not purport to be complete statements of the
rights of Viacom stockholders under Viacom's Restated Certificate of
Incorporation as compared with the rights of VII Cable stockholders under VII
Cable's Restated Certificate of Incorporation and By-laws or a complete
description of the specific provisions referred to herein. The identification
of specific differences is not meant to indicate that other equal or more
significant differences do not exist. These summaries are qualified in their
entirety by reference to the Delaware General Corporation Law ("DGCL") and
governing corporate instruments of Viacom and VII Cable, to which stockholders
are referred. The terms of VII Cable's capital stock are described in greater
detail under "Description of VII Cable Capital Stock."
VOTING RIGHTS
Viacom Common Stock. Except as otherwise expressly provided below, all
issued and outstanding shares of Viacom Class A Common Stock and Viacom Class B
Common Stock are identical and entitle the holders to the same rights and
privileges. With respect to all matters upon which stockholders are entitled to
vote, holders of outstanding shares of Viacom Class A Common Stock vote together
with the holders of any other outstanding shares of capital stock of Viacom
entitled to vote, without regard to class, and every holder of outstanding
shares of Viacom Class A Common Stock is entitled to cast one vote in person or
by proxy for each share of Viacom Class A Common Stock outstanding in such
stockholder's name. Except as otherwise required by the DGCL, the holders of
outstanding shares of Viacom Class B Common Stock are not entitled to any votes
upon any questions presented to stockholders of Viacom.
VII Cable Class A Common Stock. VII Cable Class A Common Stock entitles
holders thereof to one vote for each share on each matter upon which
stockholders have the right to vote.
VII Cable Preferred Stock. VII Cable Preferred Stock does not entitle its
holders to voting rights with respect to general corporate matters, except as
provided by law and except (i) if dividends on the VII Cable Preferred Stock are
in arrears and unpaid for at least six quarterly dividend periods, in which case
the number of directors constituting the VII Cable Board will, without further
action, be increased by two to permit the holders of the shares of VII Cable
Preferred Stock, voting separately as a class (with the holders of all other
shares of Parity Stock upon which like voting rights have been conferred and are
exercisable), to elect by a plurality vote two directors, until such time as all
dividends in arrears on the VII Cable Preferred Stock are paid in full or (ii)
if VII Cable seeks to (a) amend, alter or repeal (by merger or otherwise) any
provision of the Amended and Restated Certificate of Incorporation so as to
affect adversely the specified rights, preferences, privileges or voting rights
of holders of shares of the VII Cable Preferred Stock, (b) create or issue any
class or series of Senior Stock or (c) effect any reclassification of the VII
Cable Preferred Stock (other than a reclassification that solely seeks to change
the designation of the VII Cable Preferred Stock and does not adversely affect
the powers, preferences or rights of the holders of shares or VII Cable
Preferred Stock outstanding immediately
93
prior to such reclassification), in each of which events specified in this
clause (ii) the affirmative vote or consent of at least 66 2/3% of the shares of
VII Cable Preferred Stock then outstanding, voting or consenting, as the case
may be, separately as one class, would be required.
DIVIDENDS
Viacom Common Stock. Viacom has not declared cash dividends on its common
equity and has no present intention of so doing.
VII Cable Class A Common Stock. The VII Cable Class A Common Stock is not
expected to be outstanding for any significant period of time, if at all, after
the consummation of the Stock Issuance. Accordingly, it is not anticipated that
any dividends will be declared or paid with respect to such stock.
VII Cable Preferred Stock. Holders of VII Cable Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, dividends on the Preferred Stock at a rate per
annum equal to % of the Initial Liquidation Preference of $100 per share of
VII Cable Preferred Stock, payable quarterly, and no more. All dividends will
be fully cumulative whether or not earned or declared and shall accrue on a
daily basis from the date of issuance of the VII Cable Preferred Stock and will
be payable quarterly in arrears on , ,
and of each year to holders of record as they appear on the
stock transfer books of VII Cable on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates for such dividends, as are
fixed by the VII Cable Board.
All dividends may be paid, at VII Cable's option, in cash or in TCI Stock,
or in a combination of the foregoing forms of consideration. See "Description
of VII Cable Capital Stock--VII Cable Preferred Stock--Dividends."
LIQUIDATION PREFERENCE
None of the holders of Viacom Common Stock or VII Cable Class A Common
Stock are entitled to be paid any liquidation preference.
Upon any voluntary or involuntary liquidation, dissolution or winding-up
of VII Cable, holders of VII Cable Preferred Stock will be entitled to be paid,
out of the assets of VII Cable available for distribution, $100.00 per share,
plus an amount in cash equal to accumulated and unpaid dividends thereon to the
date fixed for liquidation, dissolution or winding-up, and no more, before any
payment shall be made or any assets distributed to the holders of any class or
series of Junior Stock, including, without limitation, any class or series of
common stock of VII Cable. If, upon any voluntary or involuntary liquidation,
dissolution or winding-up of VII Cable, the amounts payable with respect to the
VII Cable Preferred Stock and all other Parity Stock are not paid in full, the
holders of the VII Cable Preferred Stock and the Parity Stock will share equally
and ratably in any distribution of assets of VII Cable in proportion to the full
liquidation preference and accumulated and unpaid dividends to which each is
entitled. See "Description of VII Cable Capital Stock--VII Cable Preferred
Stock--Liquidation Preference."
RELATIONSHIP BETWEEN VIACOM AND VII CABLE
Viacom has provided VII Cable with certain administrative services,
including risk management, legal, financial and other corporate functions for
which an expense has been allocated in VII Cable's financial
94
statements. In addition, VII Cable, through the normal course of business, is
involved in transactions with Viacom and its affiliated companies. VII Cable
has affiliation arrangements to distribute television program services of
companies owned by or affiliated with Viacom, including Showtime, MTV,
Nickelodeon, VH1, Comedy Central, USA Network, The Sci-Fi Channel, The Movie
Channel, Flix and Lifetime (in which Viacom had an equity participation until
April 1, 1994). These affiliation arrangements require VII Cable to pay license
fees based upon the number of subscribers receiving the programming. Aggregate
license fees incurred under such affiliation arrangements with Viacom affiliates
were $28.6 million in 1994, $23.8 million in 1993 and $24.6 million in 1992.
See Note 6 of the Notes to Combined Financial Statements of VII Cable.
RELATIONSHIP BETWEEN VII CABLE AND TCI AFTER THE EXCHANGE OFFER
OWNERSHIP OF CLASS B COMMON STOCK
Immediately following the Stock Issuance, TCI Cable will own 100 shares of
VII Cable Class B Common Stock, which at that time, will represent 100% of the
outstanding common equity securities of VII Cable. Consequently, TCI Cable will
have significant influence over the policies and affairs of VII Cable and,
subject only to the rights of holders of VII Cable Preferred Stock set forth in
VII Cable's Restated Certificate of Incorporation, will have the power to
control all matters (including the election of directors) requiring the approval
of stockholders of VII Cable. See "RISK FACTORS--Controlling Stockholder" and
"DESCRIPTION OF VII CABLE CAPITAL STOCK--VII Cable Preferred Stock--Voting
Rights."
SERVICES AGREEMENT
Upon consummation of the Stock Issuance, TCI and TCI Cable will provide
certain facilities, services and personnel to VII Cable. The scope of the
facilities, personnel and services to VII Cable and the respective charges
payable in respect thereof are set forth in a services agreement to be entered
into among TCI, TCI Cable and VII Cable (the "Services Agreement"). Pursuant to
the Services Agreement, TCI will provide to VII Cable administrative and
operational services necessary for the conduct of its business, including, but
not limited to, such services as are generally performed by TCI's accounting,
finance, corporate, legal and tax departments. In addition, TCI and TCI Cable
will make available to VII Cable such general overall management services and
strategic planning services as TCI, TCI Cable and VII Cable shall agree, and
shall provide VII Cable with such access to and assistance from TCI Cable's
engineering and construction groups and TCI's programming and technology/venture
personnel as VII Cable may from time to time request.
The Services Agreement will also provide that TCI, for so long as TCI
continues to beneficially own shares of VII Cable Common Stock representing at
least a majority in voting power of the outstanding shares of capital stock of
VII Cable entitled to vote generally in the election of directors, will continue
to provide in the same manner, and on the same basis as generally provided from
time to time to other participating TCI subsidiaries, benefits and
administrative services to VII Cable's employees. In this regard, VII Cable
will be allocated that portion of TCI's compensation expense attributable to
benefits extended to employees of VII Cable.
Pursuant to the Services Agreement, VII Cable will from time to time
reimburse TCI and TCI Cable for all direct expenses incurred by them in
providing such services and a pro rata share of all indirect expenses incurred
by them in connection with the rendering of such services, including a pro rata
share of the salary and other compensation of TCI and TCI Cable employees
performing services for VII Cable and general overhead expenses. The
obligations of TCI and TCI Cable to provide services under the Services
Agreement (other than TCI's obligation to allow the Company's employees to
participate in TCI's employee benefit plans) will continue in effect until
terminated by any party to the Services Agreement at any time on not less than
60 days' notice.
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PROGRAMMING
SSI, an indirect wholly owned subsidiary of TCI Cable, purchases
programming services from program suppliers and then makes such services
available to TCI Cable's subsidiaries and certain of its affiliates at SSI's
cost and, in some circumstances, an administrative fee. Following the Stock
Issuance, it is anticipated that the cable systems owned and operated by VII
Cable will purchase programming from SSI at SSI's cost.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income
tax consequences relating to the Transaction and the ownership and disposition
of VII Cable Preferred Stock. The discussion contained in this Offering
Circular -- Prospectus is based on the law in effect as of the date of this
Offering Circular--Prospectus. Viacom stockholders are urged to consult their
own tax advisors as to the particular tax consequences to them of the
Transaction.
THE TRANSACTION
On , 199 , Viacom received a Ruling Letter from the IRS to
the effect that, for federal tax purposes, the Transaction will qualify as a
tax-free distribution to Viacom's stockholders under Sections 355 and 368 of the
Code (except with respect to cash received in lieu of fractional shares) and, in
general, is tax-free to Viacom. The Ruling Letter, while generally binding on
the IRS, is subject to certain factual representations and assumptions. If any
such factual representations or assumptions are incorrect or untrue in any
material respect, Viacom will not be able to rely on the Ruling Letter. Viacom
is not aware of any facts or circumstances which would cause any such
representations or assumptions to be incorrect or untrue in any material
respect. Nevertheless, if the Transaction is subsequently held to be taxable,
both Viacom and its stockholders could be subject to tax on the Transaction
(subject to the obligation of TCI and TCI Cable to indemnify Viacom under
certain circumstances pursuant to the Tax Indemnity Letter), which tax could be
material.
OWNERSHIP AND DISPOSITION OF VII CABLE PREFERRED STOCK
Dividends. Dividends paid on the VII Cable Preferred Stock out of VII
Cable's current or accumulated earnings and profits (if any) will be taxable as
ordinary income and should qualify for the 70% intercorporate dividends-received
deduction subject to the minimum holding period (generally at least 46 days) and
other applicable requirements. The amount of any such dividends will be the
amount of cash distributed or, in the case of dividends paid in shares of TCI
Stock, the fair market value of such TCI Stock on the date it is distributed.
Dividends in excess of VII Cable's current and accumulated earnings and profits
will be taxed first as a tax-free return of capital to the extent of the
holder's basis in its VII Cable Preferred Stock, and thereafter as capital gain
from the sale or exchange of the VII Cable Preferred Stock. Such gain will be
long-term or short-term capital gain depending on the holder's holding period
for the VII Cable Preferred Stock.
Constructive Dividends. Under Section 305 of the Code and related
Treasury Regulations, if the redemption price of redeemable preferred stock
exceeds its issue price, and such redemption premium is not considered
reasonable, such premium may in certain circumstances be taxable as a
constructive dividend taken into account by the holder each year generally in
the same manner as original issue discount would be taken into account were the
preferred stock treated as a debt instrument for federal income tax purposes.
Any such constructive dividends would be subject to the same rules applicable to
the stated quarterly dividends, as described above. In the case where preferred
stock is subject to mandatory redemption or is puttable by the holder to the
issuer, a premium payable on such redemption or put will be considered
reasonable only if such premium does not exceed 0.25% of the redemption price
multiplied by the number of complete years to
96
maturity or the time at which the stock is assumed to be put, as the case may be
(in either case, the "de minimis amount").
For purposes of these provisions, the issue price of the VII Cable
Preferred Stock should be its fair market value at the time of issuance. If
this amount is less than the mandatory redemption price by at least the de
minimis amount, the foregoing constructive dividend rules will be applicable
with respect to such premium. In addition, the VII Cable Preferred Stock will
also be considered puttable because of the holder's ability to exchange such
shares for TCI Stock. As a result, it is possible that the holder could be
required to take into account as a constructive dividend any additional
redemption premium resulting from such put right. Because the premium payable
as a result of such an exchange for TCI Stock will depend on the fair market
value of the TCI Stock received, the amount of any such premium is unclear.
Moreover, it is also unclear how any such constructive dividends as a result of
any such premium should be taken into account where the amount of such premium
could vary over time.
Sale or Exchange. Except as discussed below with respect to "section 306
stock", a holder will generally recognize gain or loss upon a sale or exchange
of VII Cable Preferred Stock measured by the difference (if any) between the
amount realized upon such sale or exchange and the holder's tax basis in the VII
Cable Preferred Stock. An exchange of VII Cable Preferred Stock for TCI Stock
will be treated as such a taxable exchange, and the amount realized upon such
exchange will equal the fair market value of such TCI Stock. Any such gain or
loss recognized upon a sale or exchange will be long-term or short-term capital
gain or loss depending on the holder's holding period for the VII Cable
Preferred Stock so sold or exchanged.
Under certain circumstances, a stockholder that receives "section 306
stock" within the meaning of Section 306(c) of the Code is required to recognize
as ordinary income, in the case of a taxable disposition of such stock, or as
dividend income, in the case of a redemption of such stock, all or a portion of
the proceeds received by such stockholder from such disposition or redemption,
without regard to the stockholder's tax basis in its shares, and may not
recognize any loss therefrom. The VII Cable Preferred Stock received by
tendering holders is likely to be considered "section 306 stock" if, immediately
prior to the consummation of the Transaction, the receipt by such holder of cash
(in an amount equal to the fair market value of such VII Cable Preferred Stock)
in a redemption of the number of such holder's shares of Viacom Common Stock
exchanged in the Exchange Offer would have been treated as a dividend under
Section 302 of the Code. Under the circumstances, a redemption for cash
generally would not have been treated as a dividend with respect to a holder
under Section 302 if the redemption (i) results in a "complete termination" of
the holder's interest in Viacom, (ii) is "substantially disproportionate" with
respect to such holder, or (iii) is "not essentially equivalent" to a dividend
with respect to such holder. The determination of whether these tests will be
met will depend on the facts and circumstances in each case, including the
proportion of the Viacom Common Stock exchanged by such holder in the Exchange
Offer, and the constructive stock ownership of such holder in Viacom under
Section 318 of the Code. An exception to the disposition and redemption rules
described in the first sentence of this paragraph is provided for a disposition
or redemption in complete termination of the stockholder's interest (subject to
certain ownership attribution rules); however, it is not clear whether such
exception would apply if the stockholder continued to own (directly or through
attribution) any stock of Viacom. Holders should consult their tax advisors
regarding the consequences of the acquisition and ownership of the VII Cable
Preferred Stock under Section 306 of the Code.
Adjustments to Exchange Ratio. In general, any adjustments to the
exchange ratio for the exchange of VII Cable Preferred Stock into TCI Stock
should not be taxable to the holders thereof. However, adjustments to the
exchange ratio to take into account distributions of indebtedness, cash or other
property with respect to the TCI Stock will be taxable to the holder of the VII
Cable Preferred Stock. Such an adjustment will be treated as a constructive
dividend and will be taxable in the manner described above.
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BACKUP WITHHOLDING
A holder of VII Cable Preferred Stock may, under certain circumstances, be
subject to backup withholding at the rate of 31% with respect to dividends or
the proceeds of sale, exchange or redemption of such shares unless such holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (ii) provides a correct taxpayer
identification number, certifies that such holder is not subject to backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Any amount withheld under these rules will be creditable
against the holder's federal income tax liability. A holder who does not
provide a correct taxpayer identification number may be subject to penalties
imposed by the IRS.
THE SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
BASED ON THE CODE, THE REGULATIONS PROMULGATED THEREUNDER BY THE UNITED STATES
TREASURY DEPARTMENT AND THE INTERPRETATIONS OF THE CODE AND REGULATIONS BY THE
COURTS AND THE IRS, ALL AS THEY EXIST AS OF THE DATE OF THIS OFFERING CIRCULAR -
- - PROSPECTUS. THIS SUMMARY IS FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS
ALL TAX CONSIDERATIONS THAT MAY BE RELEVANT TO VIACOM STOCKHOLDERS IN LIGHT OF
THEIR PARTICULAR CIRCUMSTANCES, NOR DOES IT ADDRESS THE CONSEQUENCES TO CERTAIN
VIACOM STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE UNITED STATES FEDERAL
INCOME TAX LAWS (SUCH AS TAX-EXEMPT ENTITIES, NON-RESIDENT ALIEN INDIVIDUALS AND
FOREIGN CORPORATIONS). IN ADDITION, THIS SUMMARY DOES NOT ADDRESS THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES TO VIACOM STOCKHOLDERS WHO DO NOT HOLD
THEIR VIACOM COMMON STOCK AS A CAPITAL ASSET. THIS SUMMARY DOES NOT ADDRESS ANY
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES. VIACOM STOCKHOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
TRANSACTION AND THE OWNERSHIP AND DISPOSITION OF VII CABLE PREFERRED STOCK,
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS AND ANY CHANGES
IN FEDERAL TAX LAWS THAT OCCUR AFTER THE DATE OF THIS OFFERING CIRCULAR--
PROSPECTUS.
For a description of an agreement pursuant to which Viacom and Viacom
International have provided for certain tax sharing and other tax-related
matters, see "Arrangements among Viacom, Viacom International, TCI and TCI Sub--
Terms of Certain Ancillary Agreements--Tax Indemnity Letter."
LEGAL MATTERS
The validity of the shares of VII Cable Class A Common Stock and the
shares of VII Cable Preferred Stock will be passed upon by Shearman & Sterling.
EXPERTS
The combined financial statements of VII Cable as of December 31, 1994 and
1993 and for each of the three years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The (i) consolidated financial statements of Viacom incorporated in this
Offering Circular --Prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 1994 and (ii) consolidated financial statements
of Paramount Communications Inc. ("Paramount") as of March 31, 1994 and
98
for the eleven months ended March 31, 1994 incorporated by reference from the
Current Report on Form 8-K of Viacom filed on April 14, 1995 (the "Viacom Form
8-K") have been so incorporated in reliance on the reports of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Paramount at April 30, 1993 and
at October 31, 1992, and for the six-month period ended April 30, 1993, and for
each of the two years in the period ended October 31, 1992 incorporated by
reference in this Offering Circular - Prospectus from the Viacom Form 8-K have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein, and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements and schedules of Blockbuster
Entertainment Corporation and subsidiaries as of December 31, 1993 and 1992, and
for each of the three years in the period ended December 31, 1993 incorporated
by reference in this Offering Circular - Prospectus have been audited by Arthur
Andersen LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
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VII CABLE
INDEX TO COMBINED FINANCIAL STATEMENTS
Report of Independent Accountants................................................................... F-2
Audited Combined Financial Statements:
Combined Statements of Operations for the years ended December 31, 1992, 1993 and 1994............. F-3
Combined Balance Sheets as of December 31, 1993 and 1994........................................... F-4
Combined Statements of Cash Flows for the years ended December 31, 1992, 1993 and 1994............. F-5
Notes to Combined Financial Statements............................................................. F-6
Unaudited Interim Combined Financial Statements:
Combined Statements of Operations for the three months and nine months ended
September 30, 1994 and 1995...................................................................... F-15
Combined Balance Sheets as of December 31, 1994 and September 30, 1995............................. F-16
Combined Statements of Cash Flows for the nine months ended September 30, 1994 and 1995............ F-17
Notes to Combined Financial Statements............................................................. F-18
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
September 11, 1995
To the Board of Directors and
Stockholders of Viacom International Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, and of cash flows present fairly, in all
material respects, the financial position of Viacom International Inc. (as
defined in Note 1 to the financial statements) at December 31, 1994 and 1993,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Viacom International Inc.'s management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.
As discussed in the notes to the combined financial statements, effective
January 1, 1993, Viacom International Inc. adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Effective January
1, 1994, Viacom International Inc. adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
PRICE WATERHOUSE LLP
150 Almaden Boulevard
San Jose, CA 95113
F-2
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
---- ---- ----
Revenues................................................... $404,499 $414,786 $410,129
Expenses:
Operating.............................................. 170,779 156,270 152,764
Selling, general and administrative.................... 99,935 101,347 92,629
Depreciation and amortization.......................... 76,343 73,354 67,218
-------- -------- --------
Total expenses...................................... 347,057 330,971 312,611
-------- -------- --------
Earnings from operations................................... 57,442 83,815 97,518
Other income (expense):
Interest expense....................................... (38,050) (33,417) (49,768)
Other items, net....................................... 6,982 77,736 5,361
-------- -------- --------
Earnings from operations before income taxes............... 26,374 128,134 53,111
Provision for income taxes............................. (17,680) (45,276) (28,077)
Equity in earnings of affiliated companies, net of tax. 452 997 759
-------- -------- --------
Net earnings before cumulative effect of change in
accounting principle................................... 9,146 83,855 25,793
Cumulative effect of change in accounting principle.... -- 13,536 --
-------- -------- --------
Net earnings............................................... $ 9,146 $ 97,391 $ 25,793
======== ======== ========
See notes to combined financial statements.
F-3
VII CABLE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
-------------------
1994 1993
---- ----
ASSETS
Current assets:
Cash............................................................. $ 3,011 $ 1,852
Receivables, less allowances of $1,251 (1994) and $1,791 (1993).. 12,655 8,422
Marketable securities available-for-sale......................... 24,730 99
Other current assets............................................. 3,065 2,116
---------- --------
Total current assets........................................... 43,461 12,489
---------- --------
Property and equipment:
Land............................................................. 5,447 5,348
Buildings........................................................ 19,479 17,657
Distribution systems............................................. 472,938 418,142
Equipment and other.............................................. 147,680 124,119
---------- --------
645,544 565,266
Less accumulated depreciation.................................... 280,511 239,186
---------- --------
Net property and equipment..................................... 365,033 326,080
---------- --------
Intangibles, at amortized cost.................................... 578,072 593,749
Other assets...................................................... 53,868 33,930
---------- --------
$1,040,434 $966,248
========== ========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable and accrued expenses........................... $ 57,598 $ 64,686
Accrued compensation............................................ 10,154 7,440
Deferred taxes.................................................. 19,904 6,357
Other current liabilities....................................... 1,112 205
---------- --------
Total current liabilities...................................... 88,768 78,688
---------- --------
Deferred taxes.................................................... 59,750 55,020
Long-term debt.................................................... 57,000 57,000
Other liabilities................................................. 10,976 10,009
Commitments and contingencies (Note 8)
Viacom equity investment.......................................... 823,940 765,531
---------- --------
$1,040,434 $966,248
========== ========
See notes to combined financial statements.
F-4
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
---- ---- -----
Operating activities:
Net earnings.............................................. $ 9,146 $ 97,391 $ 25,793
Adjustments to reconcile net earnings to net cash flow
from operating activities:
Depreciation and amortization............................ 76,343 73,354 67,218
Gain on sale of Viacom Cablevision of Wisconsin, Inc..... -- (55,007) --
Gain on sale of investment held at cost.................. -- (17,437) --
Cumulative effect of change in accounting principle...... -- (13,536) --
Decrease (increase) in receivables....................... (4,315) (3,005) 2,376
Increase (decrease) in accounts payable and
accrued expenses......................................... (1,085) 14,895 (2,780)
Utilization of investment tax credit..................... -- -- 13,141
Other, net............................................... (2,197) 2,134 (11,098)
--------- --------- --------
Net cash flow from operating activities................... 77,892 98,789 94,650
--------- --------- --------
Investing activities:
Capital expenditures...................................... (99,198) (79,341) (54,778)
Proceeds from dispositions................................ 1,430 112,569 --
Investments in and advances to affiliated companies....... (12,765) -- (248)
Other, net................................................ (315) 158 (17)
--------- --------- --------
Net cash flow from investing activities................... (110,848) 33,386 (55,043)
--------- --------- --------
Financing activities:
Net distributions from (to) Viacom Inc.................... 34,115 (85,789) (39,579)
Principal repayment of long-term debt..................... -- (49,018) (18)
--------- --------- --------
Net cash flow from financing activities................... 34,115 (134,807) (39,597)
--------- --------- --------
Net increase (decrease) in cash............................. 1,159 (2,632) 10
Cash at beginning of period................................. 1,852 4,484 4,474
--------- --------- --------
Cash at end of period....................................... $ 3,011 $ 1,852 $ 4,484
========= ========= ========
See notes to combined financial statements.
F-5
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 - BASIS OF PRESENTATION
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution as defined below, "VII Cable"), a wholly
owned subsidiary of Viacom, and Viacom International Services Inc. ("New VII"),
a wholly owned subsidiary of VII Cable, entered into certain agreements (the
"Transaction Agreements") with Tele-Communications, Inc. ("TCI") and a
subsidiary of TCI ("TCI Sub"), providing for, among other things, the conveyance
of Viacom International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom (the "First
Distribution"), the Exchange Offer (as defined below) and the issuance to TCI
Sub of all of the Class B Common Stock of VII Cable. Viacom will commence an
exchange offer (the "Exchange Offer") pursuant to which Viacom stockholders may
exchange shares of Viacom Class A or Class B Common Stock for shares of VII
Cable Class A Common Stock.
Prior to the consummation of the Exchange Offer, Viacom International Inc. will
enter into a $1.7 billion credit agreement. Proceeds from such credit agreement
will be transferred by Viacom International Inc. to New VII as part of the First
Distribution. Viacom also entered into a definitive agreement with TCI under
which TCI Sub, through a capital contribution of $350 million in cash, will
purchase all of the shares of Class B Common Stock of VII Cable immediately
following the consummation of the Exchange Offer. At that time, the shares of
Class A Common Stock of VII Cable will convert into shares of cumulative
redeemable exchangeable preferred stock (the "Preferred Stock"). The Preferred
Stock will be exchangeable after the fifth anniversary of issuance at the
holders' option for TCI Class A Common Stock.
National Amusements, Inc. ("NAI"), which owns approximately 26% of Viacom Inc.
Class A and Class B Common Stock on a combined basis, will not participate in
the Exchange Offer. The Exchange Offer and related transactions are subject to
several conditions, including regulatory approvals, receipt of a tax ruling and
consummation of the Exchange Offer.
The accompanying financial statements and related notes reflect the carve-out
historical results of operations and financial position of the cable television
business of Viacom. These financial statements are not necessarily indicative
of results that would have occurred if VII Cable had been a separate stand-alone
entity during the periods presented or of future results of VII Cable.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The combined financial statements include the accounts of VII Cable and all
investments of more than 50% in subsidiaries. All significant intercompany
transactions with combined entities have been eliminated. Investments in
affiliated companies over which VII Cable has significant influence or ownership
of more than 20% but less than or equal to 50% are accounted for under the
equity method. Investments of 20% or less are accounted for under the cost
method.
F-6
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
Property and Equipment
Property and equipment, including construction in progress, is stated at cost.
Inventory, which consists primarily of construction material, is recorded at the
lower of weighted average cost or market. Construction in progress and inventory
are included in "Equipment and other." VII Cable capitalizes interest costs
associated with certain qualifying assets. The total amount of interest costs
capitalized was $839 (1994), $372 (1993) and $502 (1992). Repairs and
maintenance are charged to operations, and renewals and additions are
capitalized. Upon the normal retirement of distribution system components, the
cost is charged to accumulated depreciation with no effect on net earnings. For
all other retirements, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized.
Depreciation expense is computed principally on a straight-line method over
estimated useful lives of 9-15 years for distribution systems, 4-10 years for
machinery and equipment and 28-30 years for buildings. Depreciation expense was
$57,826 (1994), $54,754 (1993) and $49,107 (1992).
Intangibles
Intangible assets primarily consist of the cost of acquired businesses in excess
of the fair value of tangible assets and liabilities acquired attributable to
the NAI leveraged buyout of Viacom International Inc. in June 1987. Such assets
are amortized on a straight-line method over estimated useful lives of up to 40
years. In addition, VII Cable has franchise rights to operate cable television
systems in various towns and political subdivisions within its service areas.
The cost of successful franchise applications are capitalized and amortized over
the life of the related franchise agreement. Franchise lives generally range
from 10 to 25 years with various dates of expiration. VII Cable evaluates the
realizability of intangibles on an ongoing basis in light of changes in business
conditions, events or circumstances that may indicate the potential impairment
of intangible assets. Accumulated amortization of intangible assets at
December 31 was $138,739 (1994) and $120,222 (1993).
Revenue Recognition
Subscriber fees are recognized in the period the service is provided.
Provision for Doubtful Accounts
The provision for doubtful accounts charged to expense was $6,428 (1994), $7,250
(1993) and $6,178 (1992).
Financial Instruments
VII Cable's carrying value of financial instruments approximates fair value. The
most significant financial instruments are debt and marketable securities
available-for-sale.
During the first quarter of 1994, VII Cable adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Under SFAS 115, investments classified as
available-for-sale are carried at fair value and unrealized holding gains and
losses during the period are recorded as a component of equity. The cumulative
effect of the change in accounting principle is recorded, net of tax, as a
component of equity. Prior to the adoption of SFAS 115, marketable equity
securities held by VII Cable were reported at the lower of cost or market.
During February 1995, VII Cable sold its marketable securities available-for-
sale, resulting in a pre-tax gain of $27 million.
F-7
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 3 - EQUITY IN EARNINGS OF AFFILIATED COMPANIES
Equity in earnings of affiliated companies is primarily comprised of VII Cable's
general partnership interests in Northwest Cable Advertising (50% owned), Bay
Cable Advertising (33 1/3% owned), TCG San Francisco ("TCGSF") (23% owned), TCG
Seattle ("TCGS") (22% owned) and Prime Sports Northwest Network ("Prime Sports")
(40% owned).
The principal business of Northwest Cable Advertising and Bay Cable Advertising
(the "Advertising Affiliates") is the sale of advertising on cable television
systems owned by VII Cable, its general partners and other cable television
operators. In exchange for providing advertising airtime, the Advertising
Affiliates pay VII Cable affiliate fees, calculated in accordance with
affiliation agreements. Revenues from Advertising Affiliates were $6,302 (1994),
$5,225 (1993) and $4,343 (1992). Affiliate fees receivable were $1,293 and
$1,033 at December 31, 1994 and 1993, respectively.
TCGSF and TCGS were formed on January 1, 1994 for the purpose of investing in
and operating communication facilities. Both TCGSF and TCGS lease communication
network facilities from VII Cable, which are financed and constructed by VII
Cable.
The principal business of Prime Sports is to provide a television sports
programming service in the northwest United States. In exchange for programming,
Prime Sports receives subscriber revenue from cable television operators
including its general partners. VII Cable incurred affiliate subscriber fees of
$1,962 (1994), $1,849 (1993) and $1,795 (1992). During January 1995, VII Cable
entered into an agreement to sell its 40% partnership interest in Prime Sports
to a subsidiary of Liberty Media Corporation ("Liberty"), an affiliate of TCI,
for sales proceeds of approximately $9 million. Prime Sports is a partnership
between VII Cable and Liberty. Net assets of Prime Sports were approximately $3
million at December 31, 1994.
F-8
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
Summarized aggregated financial information for the affiliated companies
discussed above is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
------- ------- -------
Results of operations:
Revenues....................... $49,142 $36,618 $31,878
Earnings from operations....... 13,381 15,427 13,059
Net earnings................... 34 4,842 3,484
DECEMBER 31,
----------------------
1994 1993
------- -------
Financial position:
Current assets................ $34,879 $14,051
Noncurrent assets............. 54,118 7,764
Current liabilities........... 12,262 5,930
Noncurrent liabilities........ 13,219 --
Partners' equity.............. 61,464 15,885
NOTE 4 - LONG-TERM DEBT
During 1994, Viacom International Inc. and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom
Cablevision of Dayton Inc. ("Dayton"), which is included in the combined
financial statements for VII Cable.
The Credit Agreement is an 8-year term loan maturing on July 1, 2002. Dayton is
required to pay interest on the borrowings based upon Citibank, N.A.'s base rate
or the London Interbank Offered Rate ("LIBOR") and is affected by Viacom's
credit rating. At December 31, 1994 and 1993, LIBOR (upon which the subsidiary
borrowing rate was based) was 6.25% and 3.3125%, respectively. Viacom guarantees
obligations under the Credit Agreement.
The Credit Agreement contains certain covenants which, among other things,
require that the Subsidiary Borrowers maintain certain financial ratios and
impose on the Subsidiary Borrowers certain limitations on substantial asset
sales and mergers with any other company in which an affiliate of Viacom is not
the surviving entity. The Credit Agreement contains certain customary events of
default and provides that it is an event of default if NAI fails to own at least
51% of the outstanding voting stock of Viacom. The Company is in compliance with
all debt covenants.
In the event that Dayton ceases to be a wholly owned subsidiary of Viacom or VII
Cable, the $57 million of borrowings shall be due and payable on the date on
which Dayton ceases to be such a wholly owned subsidiary. As a result of the
transactions described in Note 1, New VII will assume Dayton's obligation under
the Credit Agreement.
F-9
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
Under a prior credit agreement with Viacom, $49 million of debt was entered into
by Viacom Cablevision of Wisconsin, Inc. This amount was repaid in connection
with the sale of this cable system on January 1, 1993.
NOTE 5 - VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
-------- --------- ---------
Balance as of the beginning of
the period.................................... $765,531 $753,929 $767,715
Net earnings.................................... 9,146 97,391 25,793
Net distributions from (to) Viacom.............. 34,115 (85,789) (39,579)
Unrealized holding gains on marketable
securities available-for-sale, net of tax..... 15,148 -- --
-------- -------- --------
Balance as of the end of the period............. $823,940 $765,531 $753,929
======== ======== ========
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to from Viacom
resulting from cash transfers.
NOTE 6 - RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including insurance,
legal, financial and other corporate functions. Charges for these services have
been made based on the average of certain specified ratios of revenues, earnings
from operations and net assets. Management believes that the methodologies used
to allocate these charges are reasonable. The charges for such services were
$14,007 (1994), $18,068 (1993) and $19,486 (1992).
In addition to the interest expense recorded by VII Cable on the borrowings
under the credit agreements described in Note 4, Viacom allocated interest
expense of $35,681 (1994), $31,191 (1993) and $44,646 (1992) related to the
Viacom corporate debt. The additional interest is allocated based on a
percentage of VII Cable's average net assets to Viacom's average net assets.
VII Cable, through the normal course of business, is involved in transactions
with companies owned by or affiliated with Viacom. VII Cable has agreements to
distribute television programs of such companies, including Showtime Networks
Inc., MTV Networks, Comedy Central, USA Networks and Lifetime (prior to its sale
by Viacom on April 1, 1994). The agreements require VII Cable to pay license
fees based upon the number of customers receiving the service. Affiliate license
fees incurred under these agreements were $28,582 (1994), $23,785 (1993) and
$24,565 (1992). In addition, cooperative advertising expenses charged to
affiliated companies
F-10
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
were $1,181 (1994), $597 (1993) and $559 (1992). Related party accounts
receivable were $562 and $320 at December 31, 1994 and 1993, respectively.
Related party accounts payable were $3,636 and $2,838 at December 31, 1994 and
1993, respectively.
NOTE 7 - INCOME TAXES
Viacom International Inc. has been included in consolidated federal, state and
local income tax returns filed by Viacom. However, the tax expense reflected in
the Combined Statement of Operations and tax liabilities reflected in the
Combined Balance Sheets have been prepared on a separate return basis as though
VII Cable had filed stand-alone income tax returns. The current income tax
liabilities for the periods presented have been satisfied by Viacom. These
amounts have been reflected in Viacom equity investment in the Combined Balance
Sheet. In connection with the transactions described in Note 1, Viacom has
agreed to indemnify VII Cable against income tax assessments, if any, arising
from federal or state tax audits for periods in which VII Cable was a member of
Viacom's consolidated tax group.
During the first quarter of 1993, VII Cable adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") on a
prospective basis and recognized an increase to earnings of $13,536 in 1993 as
the cumulative effect of a change in accounting principle. SFAS 109 mandates the
liability method for computing deferred income taxes.
Earnings accounted for under the equity method of accounting are shown net of
tax on the Combined Statement of Operations.
Components of the provision (benefit) for income taxes are as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
--------- --------- ----------
Federal:
Current...................... $ 6,018 $31,381 $27,649
Deferred..................... 8,534 8,366 (3,460)
State and local:
Current...................... 2,868 4,975 4,236
Deferred..................... 260 554 (348)
------- ------- -------
Provision for income taxes on
earnings from operations........ 17,680 45,276 28,077
Provision for income taxes on
earnings of affiliated
companies.................... 301 664 506
------- ------- -------
Total provision for
income taxes.............. $17,981 $45,940 $28,583
======= ======= =======
F-11
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
A reconciliation of the U.S. Federal statutory tax rate to VII Cable's effective
tax rate on earnings from operations before income taxes is as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
Statutory U.S. tax rate............................... 35.0% 35.0% 34.0%
Amortization of goodwill.............................. 23.3 4.8 10.7
State and local taxes, net of federal tax benefit..... 8.1 3.0 4.7
Basis differential on assets sold..................... -- (8.7) --
Effect of change in tax rate.......................... -- 1.1 --
Property and equipment basis difference............... -- -- 3.2
Other................................................. .6 .1 .3
---- ---- ----
Effective tax rate................................. 67.0% 35.3% 52.9%
==== ==== ====
The following is a summary of the deferred tax accounts in accordance with SFAS
109 for the years ended December 31, 1994 and 1993:
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993
------------ -----------
Current deferred tax (assets) liabilities:
Property taxes................................. $10,576 $ 7,283
Marketable securities available-for-sale....... 9,483 --
Other.......................................... (155) (926)
------- -------
Net current deferred tax liabilities........... 19,904 6,357
------- -------
Noncurrent deferred tax (assets) liabilities:
Fixed asset basis differences.................. 59,902 60,848
Investment tax credits......................... -- (5,735)
Other.......................................... (152) (93)
------- -------
Net noncurrent deferred tax liabilities.......... 59,750 55,020
------- -------
Deferred tax liabilities......................... $79,654 $61,377
======= =======
The following table identifies the deferred tax items which were part of VII
Cable's tax provision (benefit) under previously applicable accounting
principles for the year ended December 31, 1992:
Depreciation......................... $ 1,430
Property taxes....................... 1,967
Deferred revenue..................... (6,800)
Other, net........................... (405)
-------
Total deferred tax benefit......... $(3,808)
=======
F-12
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments at December 31, 1994 under noncancellable
operating leases for office space and equipment are as follows:
1995....................................... $ 4,402
1996....................................... 3,856
1997....................................... 3,013
1998....................................... 2,660
1999....................................... 2,222
Thereafter................................. 2,948
-------
Total minimum lease payments............... $19,101
=======
Rent expense was $7,670 (1994), $7,299 (1993) and $7,548 (1992).
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and 1995 the
Federal Communication Commission (the "FCC") issued and subsequently clarified
regulations implementing the rate regulation provisions of the Cable Act. As a
result of the Cable Act, VII Cable'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 set utilizing either FCC benchmarks and increase formulas, or
cost of service methodologies; equipment and installation charges are based on
actual costs.
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local franchise authorities or, if a
complaint is filed, the FCC. If as a result of such review a cable television
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund a portion of the excess
rates received. Management believes the amount of refund, if any, would not have
a material effect on VII Cable's combined financial position or results of
operations.
During July 1991, VII Cable received reassessments from ten California counties
of its real and personal property, related to the June 1987 acquisition by NAI,
which could result in substantially higher California property tax liabilities.
VII Cable is appealing the reassessments. At December 31, 1994 and 1993, VII
Cable had paid $36,581 and $29,049, respectively, of real and personal property
taxes which have been recorded as an excess property tax receivable included in
"Other Assets."
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position or results of
operations.
In the ordinary course of business, VII Cable enters into long-term affiliation
agreements with programming services which require that VII Cable continues to
carry and pay for programming and meet certain performance requirements.
F-13
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 9 - PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of VII Cable. Retirement benefits are based
principally on years of service and salary. Viacom has allocated charges for
pension expense of $1,574 (1994), $1,392 (l993) and $1,150 (1992). Information
on the amount of actuarial present value of benefit obligations, fair value of
plan assets and pension costs is not provided as such information is not
maintained separately for employees of VII Cable. Further, the obligation for
pension benefits earned prior to the consummation of the Exchange Offer will be
retained by Viacom. All employees of VII Cable will be fully vested upon the
Exchange Offer.
Viacom also provides other employee benefits to VII Cable's employees, including
certain medical and dental insurance costs and contributions to a 401(K) savings
plan, at an allocated cost of $4,364 (1994), $4,387 (1993) and $5,140 (1992). In
addition, certain executives of VII Cable participate in non-compensatory stock
option plans of Viacom.
NOTE 10 - OTHER ITEMS, NET
As part of the settlement of the antitrust lawsuit filed by Viacom against Time
Warner, Viacom sold all the stock of Viacom Cablevision of Wisconsin, Inc. to
Warner Communications Inc. ("Warner"). This transaction was effective on January
1, 1993. As consideration for the stock, Warner paid the sum of $46 million plus
repayment of debt under the then current Viacom credit agreement in the amount
of $49 million, resulting in a pre-tax gain of approximately $55.0 million
reflected in "Other items, net." Also reflected in this line item is the net
gain of $17.4 million on the sale of a portion of an investment held at cost in
1993.
F-14
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED; DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenues........................................... $112,990 $100,117 $328,564 $303,595
Expenses:
Operating........................................ 47,960 43,189 142,109 127,217
Selling, general and administrative.............. 23,333 24,314 65,608 76,050
Depreciation and amortization.................... 20,591 19,219 61,040 57,643
-------- -------- -------- --------
Total expenses................................. 91,884 86,722 268,757 260,910
-------- -------- -------- --------
Earnings from operations........................... 21,106 13,395 59,807 42,685
Other income (expense):
Interest expense................................. (12,996) (9,080) (37,928) (27,951)
Other items, net................................. 1,702 1,506 32,234 5,441
-------- -------- -------- --------
Earnings from operations before income taxes....... 9,812 5,821 54,113 20,175
Provision for income taxes....................... (5,449) (3,862) (25,902) (13,517)
Equity in earnings (loss) of affiliated
companies, net of tax........................... (120) (35) (357) 49
-------- -------- -------- --------
Net earnings....................................... $ 4,243 $ 1,924 $ 27,854 $ 6,707
======== ======== ======== ========
See notes to combined financial statements.
F-15
VII CABLE
COMBINED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
------------- ------------
ASSETS 1995 1994
---- ----
Current Assets:
Cash.................................................................. $ 2,275 $ 3,011
Receivables, less allowances of $1,714 (1995) and $1,251 (1994)....... 13,545 12,655
Marketable securities available-for-sale.............................. -- 24,730
Other current assets.................................................. 4,362 3,065
---------- ----------
Total current assets.............................................. 20,182 43,461
---------- ----------
Property and equipment:
Land.................................................................. 5,447 5,447
Buildings............................................................. 19,977 19,479
Distribution systems.................................................. 526,917 472,938
Equipment and other................................................... 173,153 147,680
---------- ----------
725,494 645,544
Less accumulated depreciation......................................... 321,849 280,511
---------- ----------
Net property and equipment........................................ 403,645 365,033
---------- ----------
Intangibles, at amortized cost........................................... 565,658 578,072
Other assets............................................................. 64,409 53,868
---------- ----------
$1,053,894 $1,040,434
========== ==========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable and accrued expenses................................. $ 58,517 $ 57,598
Accrued compensation.................................................. 11,489 10,154
Deferred taxes........................................................ 12,238 19,904
Other current liabilities............................................. 659 1,112
---------- ----------
Total current liabilities......................................... 82,903 88,768
---------- ----------
Deferred taxes........................................................... 60,843 59,750
Long-term debt........................................................... 57,000 57,000
Other liabilities........................................................ 10,428 10,976
Commitments and contingencies (Note 5)
Viacom equity investment................................................. 842,720 823,940
---------- ----------
$1,053,894 $1,040,434
========== ==========
See notes to combined financial statements.
F-16
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1994
-------- --------
Operating activities:
Net earnings................................................................... $ 27,854 $ 6,707
Adjustments to reconcile net earnings to net cash flow from
operating activities:
Depreciation and amortization................................................ 61,040 57,643
Gain on sale of marketable securities available-for-sale..................... (26,902) --
Decrease (increase) in receivables........................................... (890) 1,107
Increase (decrease) in accounts payable and accrued
expenses................................................................... 1,801 (1,932)
Other, net................................................................... (5,013) (6,638)
-------- --------
Net cash flow from operating activities......................................... 57,890 56,887
-------- --------
Investing activities:
Capital expenditures......................................................... (85,824) (78,129)
Proceeds from dispositions................................................... 27,001 1,430
Investments in and advances to affiliated companies.......................... (5,166) (10,701)
Other, net................................................................... (711) (845)
-------- --------
Net cash flow from investing activities...................................... (64,700) (88,245)
-------- --------
Financing activities:
Net distributions from Viacom Inc............................................ 6,074 31,624
-------- --------
Net cash flow from financing activities...................................... 6,074 31,624
-------- --------
Net increase (decrease) in cash................................................. (736) 266
Cash at beginning of period..................................................... 3,011 1,852
-------- --------
Cash at end of period........................................................... $ 2,275 $ 2,118
======== ========
See notes to combined financial statements.
F-17
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited; Dollars in thousands)
NOTE 1 - BASIS OF PRESENTATION
On July 24,1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after giving
effect to the First Distribution as defined below, "VII Cable"), a wholly owned
subsidiary of Viacom, and Viacom International Services Inc. ("New VII"), a
wholly owned subsidiary of VII Cable, entered into certain agreements (the
"Transaction Agreements") with Tele-Communications, Inc. ("TCI") and a
subsidiary of TCI ("TCI Sub"), providing for, among other things, the conveyance
of Viacom International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom (the "First
Distribution"), the Exchange Offer (as defined below) and the issuance to TCI
Sub of all of the Class B Common Stock of VII Cable. Viacom will commence an
exchange offer (the "Exchange Offer") pursuant to which Viacom stockholders may
exchange shares of Viacom Class A or Class B Common Stock for shares of VII
Cable Class A Common Stock.
Prior to the consummation of the Exchange Offer, Viacom International Inc. will
enter into a $1.7 billion credit agreement. Proceeds from such credit agreement
will be transferred by Viacom International Inc. to New VII as part of the First
Distribution. Viacom also entered into a definitive agreement with TCI under
which TCI Sub, through a capital contribution of $350 million in cash, will
purchase all of the shares of Class B Common Stock of VII Cable immediately
following the consummation of the Exchange Offer. At that time, the shares of
Class A Common Stock of VII Cable will convert into shares of cumulative
redeemable exchangeable preferred stock (the "Preferred Stock"). The Preferred
Stock will be exchangeable after the fifth anniversary of issuance at the
holders' option for TCI Class A Common Stock.
National Amusements, Inc., ("NAI") which owns approximately 25% of Viacom Inc.
Class A and Class B Common Stock on a combined basis as of September 30. 1995,
will not participate in the Exchange Offer. The Exchange Offer and related
transactions are subject to several conditions, including regulatory approvals,
receipt of a tax ruling and consummation of the Exchange Offer.
The accompanying combined financial statements and related notes reflect the
carve-out historical results of operations and financial position of the cable
television business of Viacom. These combined financial statements are not
necessarily indicative of results that would have occurred if VII Cable had been
a separate stand-alone entity during the periods presented or of future results
of VII Cable.
NOTE 2 - VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
Balance as of December 31, 1994....................................... $823,940
Net earnings.......................................................... 27,854
Unrealized holding gains on marketable securities available-for-sale.. (15,148)
Net distribution from Viacom.......................................... 6,074
--------
Balance as of September 30, 1995...................................... $842,720
========
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to/from Viacom
resulting from cash transfers.
NOTE 3 - LONG-TERM DEBT
During 1994, Viacom International Inc. and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom Cablevision
of Dayton Inc. ("Dayton"), which is included in the combined financial
statements for VII Cable. In the event that Dayton ceases to be a wholly owned
subsidiary of Viacom or VII Cable, the $57 million of borrowings shall be due
and payable on the date on which Dayton ceases to be such a wholly owned
subsidiary. As a result of the transactions described in Note 1, New VII will
assume Dayton's obligation under the credit agreement.
F-18
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited; Dollars in thousands)
NOTE 4 - RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including insurance,
legal, financial and other corporate functions. Charges for these services have
been made based on the average of certain specified ratios of revenues, earnings
from operations and net assets. Management believes that the methodologies used
to allocate these charges are reasonable. The charges for such services were
$5,996 (1995) and $11,992 (1994).
In addition to the interest expense recorded by VII Cable on borrowings under
the credit agreement described in Note 3, Viacom has allocated interest expense
of $36,322 (1995) and $26,299 (1994) related to Viacom corporate debt to VII
Cable on the basis of a percentage of VII Cable's average net assets to Viacom's
average net assets.
VII Cable, through the normal course of business, is involved in transactions
with companies owned by or affiliated with Viacom. VII Cable has agreements to
distribute television programs of such companies, including Showtime Networks
Inc., MTV Networks, Comedy Central, USA Networks and Lifetime (prior to its sale
by Viacom on April 1, 1994). The agreements require VII Cable to pay license
fees based upon the number of customers receiving the service. Affiliate
license fees incurred under these agreements were $25,401 (1995) and $22,757
(1994). In addition, cooperative advertising expenses charged to affiliated
companies were $779 (1995) and $806 (1994). Related party accounts receivable
were $366 and $562 at September 30, 1995 and December 31, 1994, respectively.
Related party accounts payable were $4,927 and $3,636 at September 30, 1995 and
December 31, 1994, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and 1995 the
Federal Communication Commission (the "FCC") issued and subsequently clarified
regulations implementing the rate regulation provisions of the Cable Act. As a
result of the Cable Act, VII Cable'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 set utilizing either FCC benchmarks and increase formulas, or
cost of service methodologies; equipment and installation charges are based on
actual costs.
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local franchise authorities or, if a
complaint is filed, the FCC. If as a result of such review a cable television
system can not substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund a portion of the excess
rates received. Management believes the amount of refund, if any, would not
have a material effect on VII Cable's combined financial position or results of
operations.
During July 1991, VII Cable received reassessments from ten California counties
of its real and personal property, related to the June 1987 acquisition by NAI,
which could result in substantially higher California property tax liabilities.
VII Cable is appealing the reassessments. At September 30, 1995 and December
31, 1994, VII Cable had paid $43,249 and $36,581, respectively, of real and
personal property taxes which have been recorded as an excess property tax
receivable included in "Other Assets."
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position or results of
operations.
In the ordinary course of business, VII Cable enters into long-term affiliation
agreements with programming services which require that VII Cable continues to
carry and pay for programming and meet certain performance requirements.
F-19
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. The Letter of Transmittal, certificates for shares of Viacom Common
Stock and any other required documents should be sent or delivered by each
stockholder of Viacom or his or her broker, dealer, commercial bank, trust
company or other nominee to the Exchange Agent at one of the addresses set forth
below:
[NAME OF EXCHANGE AGENT]
By Mail: Facsimile Transmission: By Hand or Overnight Courier:
Confirmation of Facsimile
Transmission ONLY:
Questions and requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
set forth below. Additional copies of this Offering Circular -Prospectus, the
Letter of Transmittal and other Exchange Offer material may be obtained from the
Information Agent or the Dealer Manager as set forth below. You may also
contact your broker, dealer, commercial bank, trust company or other nominee for
assistance concerning the Exchange Offer.
The Information Agent for the Exchange Offer is:
GEORGESON
& COMPANY INC.
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
The Dealer Manager for the Exchange Offer is:
WASSERSTEIN PERELLA & CO., INC.
31 West 52nd Street
New York, NY 10019
(212) 969-2700 (call collect)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is, or is threatened to
be made, a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation) by reason of the fact that
such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe his conduct was
unlawful. A Delaware corporation may indemnify such persons against expenses
(including attorneys' fees) in actions brought by or in the right of the
corporation to procure a judgment in its favor under the same conditions, except
that no indemnification is permitted in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and to the extent the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought shall determine upon application
that, in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the Court of Chancery or
other such court shall deem proper. To the extent such person has been
successful on the merits or otherwise in defense of any action referred to
above, or in defense of any claim, issue or matter therein, the corporation must
indemnify such person against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith. The indemnification
and advancement of expenses provided for in, or granted pursuant to, Section 145
is not exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. Section 145 also provides
that a corporation may maintain insurance against liabilities for which
indemnification is not expressly provided by the statute.
Article VI of Viacom International's Certificate of Incorporation provides
for indemnification of the directors, officers, employees and agents of Viacom
International, to the full extent currently permitted by the DGCL.
In addition, Viacom International's Certificate of Incorporation, as
permitted by Section 102(b) of the DGCL, limits directors' liability to Viacom
International and its stockholders by eliminating liability in damages for
breach of fiduciary duty. Article VII of Viacom International's Certificate of
Incorporation provides that neither Viacom International nor its stockholders
may recover damages from Viacom International's directors for breach of their
fiduciary duties in the performance of their duties as directors of Viacom
International. As limited by Section 102(b), this provision cannot, however,
have the effect of indemnifying any director of Viacom International in the case
of liability (i) for a breach of the director's duty of loyalty, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payment of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL, or (iv)
for any transactions for which the director derived an improper personal
benefit.
Viacom International has in effect liability insurance policies covering
certain claims against any of its respective officers or directors by reason of
certain breaches of duty, neglect, error, misstatement, omission or other act
committed by such person in his capacity as officer or director.
VII Cable will enter into indemnification agreements with each person who
will serve as a director of VII Cable immediately following the Stock Issuance.
The indemnification agreements will generally provide (i) for the prompt
indemnification to the fullest extent permitted by law against (a) any and all
expenses including attorneys' fees and all other costs paid or incurred in
connection with investigating, preparing to defend, defending or otherwise
participating in any threatened, pending or completed action, suit or proceeding
related to the fact that such indemnitee is or was a director, officer,
employee, agent or fiduciary of VII Cable or is or was serving at VII Cable's
request as a director, officer, employee, agent or fiduciary of another entity,
or by reason
II-1
of anything done or not done by such indemnitee in any such capacity and (b) any
and all judgments, fines, penalties and amounts paid in settlement of any claim,
unless the "Reviewing Party" (defined as one or more members of the VII Cable
Board or appointee(s) of the VII Cable Board who are not parties to the
particular claim, or independent legal counsel) determines that such
indemnification is not permitted under applicable law and (ii) for the prompt
advancement of expenses to an indemnitee as well as the reimbursement by such
indemnitee of such advancement to VII Cable if the Reviewing Party determines
that the indemnitee is not entitled to such indemnification under applicable
law. In addition, the indemnification agreements will provide (i) a mechanism
through which an indemnitee may seek court relief in the event the Reviewing
Party determines that the indemnitee would not be permitted to be indemnified
under applicable law (and would therefore not be entitled to indemnification or
expense advancement under the indemnification agreement) and (ii)
indemnification against all expenses (including attorneys' fees), and the
advancement thereof, if requested, incurred by the indemnitee in any action
brought by the indemnitee to enforce an indemnity claim or to collect an
advancement of expenses or to recover under a directors' and officers' liability
insurance policy, regardless of whether such action is ultimately successful or
not. Furthermore, the indemnification agreements will provide that after there
has been a "change in control" in VII Cable (as defined in the indemnification
agreements), other than a change in control approved by a majority of directors
who were directors prior to such change, then, with respect to all
determinations regarding rights to indemnification and the advancement of
expenses, VII Cable will seek legal advice as to the right of the indemnitee to
indemnification under applicable law only from independent legal counsel
selected by the indemnitee and approved by VII Cable.
The indemnification agreements will impose upon VII Cable the burden of
proving that an indemnitee is not entitled to indemnification in any particular
case and negate certain presumptions that may otherwise be drawn against an
indemnitee seeking indemnification in connection with the termination of actions
in certain circumstances. Indemnitees' rights under the indemnification
agreements are not exclusive of any other rights they may have under Delaware
law, the VII Cable Bylaws or otherwise. Although not requiring the maintenance
of directors' and officers' liability insurance, the indemnification agreements
require that indemnitees be provided with the maximum coverage available for any
VII Cable director or officer if there is such a policy.
II-2
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
4.3(a) - Certificate of Incorporation of Viacom International Inc.
4.3(b) - By-Laws of Viacom International Inc.
4.3(c) - Form of Restated Certificate of Incorporation of VII Cable*
4.4(a) - Form of Certificate of VII Cable Class A Common Stock*
4.4(b) - Form of Certificate of VII Cable Preferred Stock*
5 - Opinion of Shearman & Sterling as to the validity of the VII Cable
Class A Common Stock and VII Cable Preferred Stock*
10.1 - Parents Agreement
10.2 - Implementation Agreement
10.3 - Subscription Agreement
12 - Computation of Ratio of Earnings to Fixed Charges and Combined Fixed
Charges and Preferred Stock Dividends
21 - List of Subsidiaries of the Registrant
23.1 - Consent of Price Waterhouse LLP as to financial statements of Viacom
Inc. and Paramount Communications Inc.
23.2 - Consent of Price Waterhouse LLP as to financial statements of VII
Cable
23.3 - Consent of Ernst & Young LLP as to financial statements of Paramount
Communications Inc.
23.4 - Consent of Arthur Andersen LLP as to financial statements of
Blockbuster Entertainment Corporation
23.5 - Consent of Shearman & Sterling (included in their opinion filed as
Exhibit 5)*
24 - Powers of Attorney filed herewith
27.1 - Financial Data Schedule for Nine Months Ended September 30, 1995
27.2 - Financial Data Schedule for Year Ended December 31, 1994
99.1 - Form of Letter of Transmittal*
99.2 - Form of Notice of Guaranteed Delivery*
99.3 - Form of Letter from Wasserstein Perella & Co., Inc. to
Securities Dealers, Commercial Banks, Trust Companies and Other
Nominees*
99.4 - Form of Letter to Clients for use by Securities Dealers, Commercial
Banks, Trust Companies and Other Nominees*
- ---------------------
* To be supplied by amendment.
(b) Financial Statement Schedules.
Report of Independent Accountants
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown on the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
II-3
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of
the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the registrants of expenses incurred or paid by a
director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by them is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on , 1995.
VIACOM INTERNATIONAL INC.
By /s/ Frank J. Biondi, Jr.
----------------------------------
Frank J. Biondi, Jr.
President, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on , 1995:
NAME AND SIGNATURE TITLE
/s/ Frank J. Biondi, Jr. Director, President,
------------------------- Chief Executive Officer
(Frank J. Biondi, Jr.)
/s/ George S. Smith, Jr. Senior Vice President,
------------------------- Chief Financial Officer
(George S. Smith, Jr.)
/s/ Susan C. Gordon Vice President, Controller,
------------------------- Chief Accounting Officer
(Susan C. Gordon)
* Director
-------------------------
(George S. Abrams)
* Director
-------------------------
(Steven R. Berrard)
/s/ Philippe P. Dauman Director
-------------------------
(Philippe P. Dauman)
* Director
-------------------------
(George D. Johnson, Jr.)
II-5
* Director
-------------------------
(Ken Miller)
* Director
-------------------------
(Brent D. Redstone)
* Director
-------------------------
(Shari Redstone)
* Director
-------------------------
(Sumner M. Redstone)
* Director
-------------------------
(Frederic V. Salerno)
* Director
-------------------------
(William Schwartz)
* Director
-------------------------
(Ivan Seidenberg)
*By /s/ Philippe P. Dauman
---------------------------
Philippe P. Dauman,
Attorney-in-Fact
for the Directors
II-6
REPORT OF INDEPENDENT ACCOUNTANTS ON
THE FINANCIAL STATEMENT SCHEDULE
September 11, 1995
To the Board of Directors and
Stockholders of Viacom International, Inc.
Our audits of the consolidated financial statements of VII Cable referred to in
our report dated September 11, 1995, appearing on Page F-2 of this Registration
Statement on Form S-4 also included an audit of the Financial Statement Schedule
on page S-2. In our opinion, this Financial Statement Schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
150 Almaden Boulevard
San Jose, CA 95113
S-1
VII CABLE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
Col. A Col. B Col. C Col. D Col. E
------ ------- ------ ------ ------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions (A) Period
----------- ---------- ---------- ---------- -------------- ----------
Allowance for doubtful accounts:
Year ended December 31, 1994...... $1,791 $5,202 -- $5,742 $1,251
Year ended December 31, 1993...... $1,463 $6,303 -- $5,975 $1,791
Year ended December 31, 1992...... $1,462 $5,363 -- $5,362 $1,463
Note:
- ----
(A) Includes amounts written off.
S-2
EXHIBIT INDEX
PAGE
EXHIBIT NO.
------- ----
4.3(a)- Certificate of Incorporation of Viacom International Inc.
4.3(b)- By-Laws of Viacom International Inc.
4.3(c)- Form of Restated Certificate of Incorporation of VII Cable*
4.4(a)- Form of Certificate of VII Cable Class A Common Stock*
4.4(b)- Form of Certificate of VII Cable Preferred Stock*
5 - Opinion of Shearman & Sterling as to the validity of the VII
Cable Class A Common Stock and VII Cable Preferred Stock*
10.1 - Parents Agreement
10.2 - Implementation Agreement
10.3 - Subscription Agreement
12 - Computation of Ratio of Earnings to Fixed Charges and Combined Fixed
Charges and Preferred Stock Dividends
21 - List of Subsidiaries of the Registrant
23.1 - Consent of Price Waterhouse LLP as to financial statements of
Viacom Inc. and Paramount Communications Inc.
23.2 - Consent of Price Waterhouse LLP as to financial statements of VII Cable
23.3 - Consent of Ernst & Young LLP as to financial statements of Paramount
Communications Inc.
23.4 - Consent of Arthur Andersen LLP as to financial statements of
Blockbuster Entertainment Corporation
23.5 - Consent of Shearman & Sterling (included in their opinion filed
as Exhibit 5)*
24 - Powers of Attorney filed herewith
27.1 - Financial Data Schedule for Nine Months Ended September 30, 1995
27.2 - Financial Data Schedule for Year Ended December 31, 1994
99.1 - Form of Letter of Transmittal*
99.2 - Form of Notice of Guaranteed Delivery*
99.3 - Form of Letter from Wasserstein Perella & Co., Inc. to
Securities Dealers, Commercial Banks, Trust Companies and Other
Nominees*
99.4 - Form of Letter to Clients for use by Securities Dealers,
Commercial Banks, Trust Companies and Other Nominees*
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* To be supplied by amendment.